Exemption of Retirement Benefits from Income Tax

June 21, 1990 BIR RULING NO. 120-90 28 (b) (7) (B) 168-88 120-90 S i r : This refers to your letter dated May 14, 1990 requesting exemption from withholding tax of the amount you will receive as separation benefits as a consequence of the winding up of the affairs of your employer, Mafinco Trading Corporation, 1012 Pepin St., Sampaloc, Manila. cdt It is represented that on April 17, 1990, you received a letter from your abovenamed employer stating that it is shortly winding up its affairs; that as a consequence, you were advised that your services will be terminated as of the close of business on April 30, 1990; that the amount you will receive as a result thereof is P65,400.00 pursuant to the provision of Article 282 of the Labor Code which will be taken from the following: (1) Company's provided fund/Retirement Plan P38,839.16 with a note that you have not served the minimum number of years and have not reached age 50, therefore, not entitled to the full coverage; (2) Company's general fund P26,560.84; and that you were further informed in the aforesaid letter that the amount due you may be taxable, therefore it is withholding the sum of P7,971.75 which it will remit to this Office unless you can present a BIR tax exemption for the said amount. In reply, 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 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 taxes regardless of age or length of service. The abovementioned 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 any 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 your separation from the service of Mafinco Trading Corporation is beyond your control, any and all amounts to be received by you 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. casia It is however, understood that the tax exemption does not include company's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any. Very truly yours, (SGD.) JOSE U. ONG Commissioner