Eligibility for Tax Exemption of the Benefits Payable under the Special Redundancy Program

September 13, 1989 BIR RULING NO. 201-89 28 (b) (7) (B) 058-89 201-89 Gentlemen : This refers to your letter dated September 11, 1989 requesting in behalf of your client, Warner-Lambert Philippines, Inc. a ruling on the eligibility for tax exemption of the benefits that will be payable under your client's Special Redundancy Program pursuant to Section 28(b)(7)(B) of the Tax Code. It is represented that it was recently established by your client that the function inherent in several job positions in the company can either be dispensed with or performed by employees occupying other positions, resulting in redundancy; that this finding will naturally require the elimination of those 25 to 30 redundant positions (15 to 18 are rank and file positions, while 10 to 12 are administration positions) to prevent further incurrence of unnecessary overhead expenses; that in this regard, your client has developed a Special Redundancy Program which would initially cover employees who, after being informed by your client of its decision to eliminate redundant positions, consents to be separated from employment; and that these employees will be paid separation pay and incentive benefits. 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 by 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 the 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 employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of the aforesaid employees from the service of your client 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. It must be understood, however, that any benefits given under the abovementioned circumstances must be in accordance with the terms of an existing plan or one that falls under the law, i.e., one-half month for every year of service. (Section 14, Rule 1, Book VI, Labor Code) Finally, the tax exemption does not include company's payment for salary and cash equivalent of accumulated vacation or sick leaves, if any. cdt Very truly yours, (SGD.) JOSE U. ONG Commissioner