Tax on Separation Pay Equivalent to His Earnings for 1 Year on Top of Accumulated Vacation and Sick Leaves

June 8, 1989 BIR RULING NO. 122-89 28 (b) (7) (A) 000-00 122-89 Gentlemen : This refers to your letter dated May 24, 1989 stating as follows: "Mr. Petronio F. Jamero is an employee of ASEA BROWN BOVERI, INC. since December 31, 1968. Per company records, he will turn 60 years old this May 30, 1989, so the management decided to hire new employee for his replacement. When all was set for his scheduled retirement, Mr. Jamero found out that there was a discrepancy in his birth year . His baptismal certificate and SSS records shows that he was born May 30, 1930 while in his application for employment in the company 21 years ago, it's May 30, 1929. Actually, he is turning 59 this coming 30th of May. However, the management and Mr. Jamero agreed in a compromise settlement for his separation pay, paying him his earnings for 1 year on top of his accumulated vacation and sick leave." cdta In connection therewith, you now request a ruling as to whether the separation pay you will give to Mr. Petronio F. Jamero equivalent to his earnings for 1 year on top of his accumulated vacation and sick leaves in accordance with your compromise settlement with Mr. Jamero is taxable. In reply thereto, please be informed as follows: (1) Pursuant to Section 6 of Revenue Regulations No. 1-68 implementing Republic Act No. 4917 [now Section 28(b)(7)(A)] of the Tax Code, as amended, before availing of the privileges accorded by pension, gratuity, profit-sharing or stock bonus plans which, among others, is exemption from all taxes of the retirement benefits to be received by the member-employees, the employer must secure a prior determination of the qualification of the plan by submitting to the Commissioner of Internal Revenue, BIR Form No. 17.60 duly filled out and accompanied by the written program constituting the plan and the trust agreement. However, since per records of this Office, your company does not maintain an employee's retirement plan duly approved by this Office as a reasonable retirement benefit plan within the contemplation of Section 28(b)(7)(A) of the Tax Code, as amended, the retirement benefit as well as the separation pay you will give to Mr. Jamero equivalent to his earnings for one (1) year on top of his accumulated vacation and sick leaves are subject to income tax. Moreover, the money value of the accumulated vacation and sick leaves is likewise subject to income tax. (2) BIR Ruling Nos. 230-86 and 236-86 dated November 5, and November 10, 1986 exempting from all taxes any and all amounts received by an official or employee or by his heirs from his employer as a consequence of separation by 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 regardless of age or length of service will not apply in the instant case since the separation of Mr. Jamero from the service of the company is not beyond his control. cd Very truly yours, (SGD.) JOSE U. ONG Commissioner