Exemption of the Separation Pay Benefits from Tax

September 25, 1990 BIR RULING NO. 193-90 28 (b) (7) (B) 051-90 193-90 Gentlemen : This refers to your letters dated July 30, 1990 and August 27, 1990 requesting a ruling that the separation pay benefits to be paid under your Employee Separation Program, be exempt from all taxes pursuant to Section 28 (b)(7)(B) of the Tax Code, as amended. aisadc It is represented that after a long and careful study, you have decided to implement an Employee Separation Program until such time that you are able to reduce the number of employees to a target size; that under the prevailing business and economic conditions, the viability of your company is at risk; that the market's performance for both your cocochemical and household products has been sluggish primarily due to very stiff competition; that another heavy burden on your finances is the high interest expense you are paying on your local loans not to mention the high level of accounts receivables and inventory your company has been experiencing; that amidst all of these, the issue of survival becomes critical; that you have adopted certain measures, one of which is a reorganization to achieve an optimum sized company; that after an extensive review of your organization, you have determined that you have to reduce your workforce; and that to achieve this, you shall implement a Separation Program. 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 office 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 abovementioned 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 employees; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of your employees affected by your Employees Separation 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. 6-87, as amended. Finally, the tax exemption does not include company's payment for salary, prorated 13th month pay and cash equivalent of accumulated vacation or sick leaves, if any. Very truly yours, (SGD.) JOSE U. ONG Commissioner