Separation Pay - Tax-Exempt

March 25, 1993 BIR RULING NO. 116-93 SEPARATION PAY TAX-EXEMPT 28 (b) (7) (B)-238-91-116-93 Siguion Reyna, Montecillo & Ongsiako 8755 Paseo de Roxas, Philcom Building Makati, Metro Manila Attention: Atty . Jose Lis C . Leagogo This refers to your letter dated March 1, 1993 stating that PCI Bank intends to terminate some of its employees to cut down on human resources and manpower costs due to (a) automation and redundancy; (b) permanent physical or mental disability certified by PCI Bank's retained/approved physician; (c) lingering illness such as cancer, hypertension and the like as certified by PCI Bank's retained/approved physician; (d) communicable diseases such as tuberculosis, venereal disease, AIDS and the like which will endanger the health of their co-employees as certified by PCI Bank's retained/approved physician; and that the employees to be affected are: (a) those with at least 20 years of service as of April 30, 1993 regardless of age; (b) those who are at least 50 years of age and with at least 10 years of service as of April 30, 1993; and (c) those suffering from the illness, disability or disease mentioned above, regardless of age or length of service with the bank. aisadc In connection therewith, you now request a ruling as to whether the separation pay which the aforementioned employees will receive consisting of gratuity pay from the Bank's Gratuity and Retirement Plan, premium of one (1) month for every year of service and cash commutation of accrued vacation and sick leaves are subject to tax. In reply thereto, please be informed that pursuant to Section 28(b) (7) (B) of the Tax Code, as amended, any amount received by an official or employee or his heirs from his employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness, or other physical disability of for any cause beyond the control of said official or employee is exempt from taxes regardless of age or length of service. The aforementioned law requires the presence of these two conditions in order that the employee benefits may be granted tax exemption: (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for cause beyond the control of the said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of the employees of your client is due to automation and redundancy; permanent physical or mental disability as certified by PCI Bank's retained/approved physician; lingering illness such as cancer, hypertension and the like as certified by PCI Bank's retained/approved physician; and communicable diseases such as tuberculosis, venereal disease, AIDS and the like which will endanger the health of their co-employees as certified by PCI Bank's retained/approved physician is beyond their control, any and all amounts received by them as a result thereof are exempt from all taxes and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. Moreover, the cash commutation of accrued vacation and sick leave credits are likewise not subject to income tax and consequently to the withholding tax. (See Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda G.R. No. 96016 prom. Oct. 17, 1991) cdta EUFRACIO D. SANTOS Deputy Commissioner of Internal Revenue