Taxability of the Separation Pay Benefits Paid as a Result of Separation from the Company

May 25, 1992 BIR RULING NO. 163-92 28 (b) (7) (B) 238-91 163-92 Sycip, Salazar, Hernandez & Gatmaitan 105 Paseo de Roxas, 1200 Makati, Metro Manila Attention: Ms . Maria Luisa R . Aldecoa and Mr . Ernesto S . Taio, Jr . Gentlemen : This refers to your letter dated 20 March 1992 requesting a ruling on the taxability of the separation pay benefits that the employees of your client, the Digital Equipment Filipinas, Inc. will receive as a result of their separation from the company due to the closure and sale of its Information Systems Division. It is represented that the company to cushion the effect of the closure and sale of its Information System Division, which will result in the compulsory separation of its personnel, is providing for a "Special Severance Program" that will grant separation pay as follows: "1. Three (3) months basic salary per year of service. (Length of service shall consist of period of service with the employees' former employer (i.e., Philips Electronic & Lighting, Inc. ("Philips"), and period of service with the Company). "2. One-half ()" month's basic salary per year of service based on the provisions of the "Philips Multi-Employer Retirement Plan." (Length of service shall consist of period of service with Philips and period of service with the Company). "3. Cash conversion of unused and accrued vacation and sick leaves. "4. Pro-rated 13th Month Pay for the calendar year 1992." 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 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 said official or employee is exempt from taxes regardless of age or length of service. The above mentioned 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 the separation of the employees of your client due to closure and sale of the Company's Information Systems Division making their positions unnecessary is beyond their control, any and all amounts received by them 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 client's payment of the pro-rated 13th month pay for the calendar year 1992. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue