Whether the Severance Pay to Employees is Exempt from Income Tax and Consequently from the Withholding Tax

May 29, 1992 BIR RULING NO. 176-92 28 (b) (7) (B) 152-91 176-92 Carlos J. Valdes & Co. CJVC Bldg., Aguirre Street Legaspi Village, Makati Metro Manila Attention: Ms . Guia C . Viloria Partner Gentlemen : This refers to your letter dated May 15, 1992 stating that on December 5, 1991 Digital Equipment Filipinas, Inc. (Digital) entered into an agreement with Philips Electronics & Lighting, Inc. to purchase the latter's Information Systems Division (ISD) based on the net asset value as of October 27, 1991; that the agreement included the transfer of 52 ISD employees of Philips to Digital; that Digital however, intends to sell the acquired Information System Division from Philips to another company; and that the 52 employees absorbed by Digital will be terminated and a separation pay equivalent to 3 1/2 months of their salaries for every year of service will be paid by Digital. In connection therewith, you now request confirmation of your opinion to the effect that the severance pay to be paid by Digital to its aforesaid 52 employees are exempt from income tax and consequently from the withholding tax. In reply, please be informed 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 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. Since the separation of the 52 employees absorbed by Digital as a result of the sale by it of ISD 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. cdtech Very truly yours, JOSE U. ONG Commissioner of Internal Revenue