Whether the Backwages and Separation Pay of Mrs. Evelyn Malte are Subject to Tax and Consequently to the Withholding Tax

July 13, 1992 BIR RULING NO. 204-92 23, 28 063-92 204-92 Pasay Commercial Corporation 2549 Tolentino Street Pasay City, Metro Manila Attention: Mr . Emiliano V . Tagle President Gentlemen : This refers to your letter dated May 27, 1992 stating that your employee, Mrs. Evelyn Malte was terminated from the service last February 29, 1988; that as a result, she filed on March 8, 1988 an illegal dismissal case against Pasay Commercial Corp. and its President, Mr. Emiliano Tagle which was decided by Labor Arbiter Evangeline S. Lubaton in her favor on January 21, 1989; that not being satisfied with the decision of the latter, she appealed the case to the National Labor Relations Commission which rendered a decision on March 31, 1992 awarding complainant/appellant backwages from February 28, 1989 up to February 28, 1991 only, plus separation pay of one (1) month for every year of service, including the imputed three-year covered by the backwages; that as computed, complainant, Mrs. Malte was awarded by Order of the Commission, backwages and separation pay of Ninety Thousand Sixty Six Pesos and 08/100 Centavos (P90,066.08) plus ten percent (10%) attorney's fees of Nine Thousand Six Pesos and 61/100 Cent. (P9,006.61) or a total of Ninety Nine Thousand Seventy Two Pesos and 69/100 Centavos (P99,072.69). In connection therewith, you posed the query on whether the backwages and separation pay of Mrs. Evelyn Malte are subject to tax and consequently to the withholding tax. In reply, thereto, I have the honor to inform you that the aforesaid backwages paid to Mrs. Malte for the period starting February 29, 1988 up to February 28, 1991 are considered compensation for services rendered and as such shall be included in gross income pursuant to Section 28 (a) (1) of the Tax Code, as amended, subject to income tax and consequently to the withholding tax on wages prescribed by Section 72, Chapter 10, Title II of the same Code as amended by B.P. Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended. On the other hand, 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 the 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. In other words, the separation must not be of his own making or choice. Since the separation in the instant case is beyond the control of Mrs. Malte, any and all amounts to be received by her from her employer as a result thereof, i.e., the settlement amount 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. Finally, Mrs. Malte shall not be subject to income tax on the 10% attorney's fees, the same being merely a reimbursement of her expenses and the fact that the said attorney's fees had been paid to a general professional partnership pursuant to Section 23 in relation to Section 20 (b) of the Tax Code, as amended. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue