Income Tax Exemption on Retrenchment Benefits Paid to Retrenched Employees of NSPI

May 14, 1987 BIR RULING NO. 130-87 29 (b) 144-86 130-87 Gentlemen : This refers to your letter dated May 5, 1987 requesting on behalf of your client, National Semiconductor (Philippines) Inc. (NSPI) confirmation of your opinion to the effect that retrenchment benefits to be paid to retrenched employees of NSPI, as a consequence of either the sale of the entire business to another company or the cessation of business operations are exempt from income tax. It is represented that due to continuing business softness in the Philippines, NSPI has considered selling the entire business to interested parties; that if there are no potential purchasers, NSPI will completely cease its business operations, that if the company is sold, the terminated employees may be hired by the new owner, however, they will assume the status of newly-hired employees, and that in either case, all employees will be terminated and NSPI will pay the terminated employees, separation benefits. In reply, please be informed that pursuant to Section 29(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 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 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 the contemplated separation of the employees from the service of NSPI are beyond their control, any and all amounts to be received by them as a result thereof, are exempt from all taxes and consequently from the withholding tax prescribed by Section 82, Chapter XI, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82. 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.) EUFRACIO D. SANTOS Deputy Commissioner