Separation Pay Received by Employees Under an Early Retirement Program is Exempt from Taxation

September 10, 1991 BIR RULING NO. 175-91 28 (b) (7) (B) 226-90 175-91 Gentlemen : This refers to your letter dated July 8, 1991 requesting for a ruling as to whether the benefits to be received by the employees who would avail of the early retirement program of your client, HongKong & Shanghai Banking Corporation Limited (HSBCL) are exempt from tax pursuant to Section 28 (b) (7) (B) of the Tax Code, as amended. cdt It is represented that late last year and until the first semester of 1991, representatives from HSBCL's home office in HongKong and local management conducted studies of its local operation; that as a result of such studies, the group found that there are several positions in the bank's organization which are redundant positions; that it is planning to implement an Early Retirement Program wherein employees who have rendered at least twenty (20) years of service and are at least forty-five (45) years of age could avail; that the program will be limited to the exact number of positions declared redundant by the study; that the bank intends to give to the affected employees an amount to provide financial security to them which is over and above that which is provided under the bank's normal retirement program or that provided for under the Labor Code for separation due to redundancy. In reply thereto, I have the honor to inform you that under 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 the 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 service of the official or employee must not be asked for or initiated by him. Since the separation of the HSCBL Employees under the Early Retirement Program is beyond their control, any and all amounts to be received by them are exempt from all taxes and consequently from the withholding tax prescribed by Section 72, Chapter X, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended. However, the tax exemption does not include the company's payment for salary and cash equivalent of accumulated vacation and sick leave credits of its employees. cdtech Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge