Taxability of the Separation Pay Benefits

June 20, 1990 BIR RULING NO. 119-90 28 (b) (7) (B) 214-89 119-90 Gentlemen : This refers to your letter dated June 1, 1990 requesting on behalf of your client, the San Miguel Corporation, a ruling on the taxability of the separation pay benefits under a special separation program the company intends to implement. It is represented that the program is designed to help employees affected by the streamlining of the company's operations due to automation as well as merger and decentralization of some functions; that under the program, the Separation Pay Benefits shall consist of his/her full retirement benefits under the Company's Retirement and Death Benefits Plan plus the following additional separation pay premiums: aisadc (1) For those with at least fifteen (15) years of service, he/she shall receive a separation pay premium equivalent to 75% of his/her monthly basic pay x no. of years of service; (2) For those whose length of service is over ten (10) years but less than fifteen (15) years, he/she shall receive a separation pay premium equivalent to 50% of monthly basic pay x no. of years of service; and (3) For those with length of service of less than (10) years, he/she shall receive separation pay premium equivalent to 50% of monthly basic pay x no. of years of service or P25,000.00 whichever is higher. In reply thereto, I have the honor to inform you that under Section 28(b)(7)(B) of the Tax Code, as amended, any amount received by an official or employee or by 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 or for any cause beyond the control of the said official or employee is exempt from tax regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. In other words, the separation must not be of his own making or choice. Since the separation of the employees of your client is beyond their control, any and all amounts to be received by them from the company as a result thereof, are exempt from all taxes and consequently from the withholding tax prescribed by Section 72, Chapter X, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended. Finally, the tax exemption does not include the company's payment for salary and cash equivalent of accumulated vacation and sick leave credits of its employees. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner