Separation Pay Received by Employees Under a Special Redundancy Program is Exempt from Income Tax and Consequently from Withholding Tax

August 23, 1991 BIR RULING NO. 164-91 28 (b) 7 (B) 071-00 164-91 Gentlemen : This refers to your letter dated August 8, 1991, requesting for a ruling as to whether the separation pay which the employees of Maya Farms and Maya Realty will receive under your Special Redundancy Program is exempt from income tax and consequently from the withholding tax. cdt It is represented that your agri-business division composed of Maya Farms and Maya Realty located at Angono and Teresa, Rizal, are having business difficulties; and that as a cost-cutting measure, reduction of personnel is imperative to avert incurring further losses. In reply, 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 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 said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The abovementioned law requires the presence of those two (2) 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 employees or his heirs as a consequence of such separation. Since the separation of your employees under the Special Redundancy Program 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. Finally, the tax exemption does not include company's payment for the prorated 13th month pay and cash equivalent of accumulated vacation and sick leaves, if any. cdti Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge