Whether Separation Pay Received as a Result of Retrenchment Is Subject to Income Tax

August 5, 1986 BIR RULING NO. 144-86 20 (c) (7) (B) 73-85 144-86 S i r : This refers to your letter dated July 14, 1986 requesting a ruling as to whether or not the separation pay which you will receive from the Bukidnon Sugar Milling Co., Inc. as a result of your retrenchment is subject to income tax. Documentary evidence submitted show that owing to the financial difficulties of your company and as one of the conditions imposed by the Philippine National Bank for the complete reorganization and retrenchment of your company, you were retrenched effective August 31, 1986. In reply, please be informed that pursuant to Section 29(c) (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 or his heirs as a consequence of such separation. Since your separation from the service of the company due to retrenchment 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 81, Chapter X, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82 dated October 1, 1982. 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. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner