Separation Pay of Employees Under a Retrenchment Program is Exempt from Income Tax

August 30, 1991 BIR RULING NO. 166-91 28 (b) (7) (B) 113-91 166-91 Gentlemen : This refers to your letter dated August 2, 1991 requesting for a ruling on whether the separation pay of employees under your retrenchment program is subject to tax. It is represented that the Philippine Shipyard and Engineering Corporation's (PHILSECO) shipyard facilities in Subic, Zambales were damaged by the eruption of Mt. Pinatubo; that in this connection, the PHILSECO's Board of Directors agreed, on July 12, 1991, to: (1) continue operations which shall be limited to hull repairs and some machinery shop equipment; (2) retrench 33% of the workforce, the mode of which shall be done first on a voluntary basis, but if the percentage set is not met then said retrenchment shall become compulsory. In reply, please be informed that Section 28 (b) (7) (B) of the Tax Code, as amended, exempts from income tax and the corresponding withholding tax "any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer for any cause beyond the control of the said official or employee". On the basis of the foregoing, any separation pay received by an employee of PHILSECO as a consequence of the company's retrenchment program is exempt from income tax, including the withholding tax related thereto. Such tax exemption is understood not to include the company's payment of salaries, prorated 13th month pay and cash equivalent of accumulated vacation or sick leaves, if any. aisadc Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner (Officer-in-Charge)