Whether Separation Benefits are Exempt from Income Tax and Consequently from the Withholding Tax

May 8, 1992 BIR RULING NO. 144-92 28 (b) (7) (B) 238-91 144-92 Mr. Benjamin M. Bayhon 126 13th Avenue, Cubao, Quezon City S i r : This refers to your letter dated 3 April 1992 requesting confirmation of your opinion that your separation benefits are exempt from income tax and consequently from the withholding tax. It appears that your company, the East Asiatic Co., Ltd., offered a retrenchment program, captioned as "Voluntary Retirement Program", due to the reduced activities of its transport division arising from the break up of the Scandutch Consortium wherein it resulted to the termination of Nedlloyd Agency, as well as a reduction in the market coverage; that in order to cut cost and to streamline the staff by reorganizing their function, your employer was constrained to adopt a retrenchment program for its transport division employees; that pursuant to said program, your company issued a Memorandum of Agreement, which states among others, that all union members should submit to the company their applications for voluntary retirement; that union members whose applications are accepted and approved shall receive the corresponding benefits; that you and your other six (6) co-employees namely: Susan Mamboyo, Tomas Yazon, Rodolfo Rendora, Danny Quilondrino, Ella Mirasol and Eufracio Baltazar were among the 26 employees who originally availed of the said program but only 19 applications were accepted by the company; that pursuant to the Memorandum of Agreement, pertinent portion of which states that, all union members who would really like to be retired but whose applications were not accepted by the company shall be allowed to file a request for reconsideration within three (3) days from the date of notice, you and your co-employees filed your requests for reconsideration within the said three (3) day period, which were later on approved and accepted by the company; that through the auditing firm of your company, Joaquin Cunanan & Co., BIR Ruling No. 082-92 dated March 17, 1992 was issued exempting the retrenched employees' separation pay from income tax including the withholding tax related thereto; that despite such ruling, you together with your six (6) co-employees were denied the same exemption on your separation benefits. In reply thereto, 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 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 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 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 you and your other co-employees' separation still falls within the retrenchment program offered by your employer, any and all amounts you will receive 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. It is however, understood that this exemption does not include your employer's payment of your salary. Very truly yours, EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge