Separation Program are Exempt from Income Tax

October 18, 1989 BIR RULING NO. 214-89 28 (b) (7) (B) 207-89 214-89 Gentlemen : This refers to your letter dated October 3, 1989 requesting a ruling as to whether the benefits payable under your proposed Separation Program are exempt from income tax. cd It is represented that in line with your 5-year plan to sustain a leaner, more efficient work force, a Productivity Committee was formed for the purpose in early 1989; that the study by the committee found that it was time for you to redirect your program by strengthening the degree of collaboration, and expanding the range of responsibilities among a limited number of work force; that the direction is also felt to be primordial in the softening of the impact of the recent mandatory wage hike in your operations; that as a consequence of the study, the Productivity Committee recommended and the management decided to undertake (1) a restructuring of the corporate organization (2) a merger of functions of the support/service departments in a small plant with those of the nearest major plant within the region; and (3) a shift of work processes from manual to automated; that the reorganization is expected to result in surplus manpower incompatible with the company's operational requirements; that the Separation Program is designed to avoid the duplication of positions and functions when the corporate reorganization is effected and prevent that incurrence of unnecessary overhead expenses; that the program covers all affected employees, up to department head level; that your company will pay the covered employees separation benefits consisting of (a) gratuity pay of 1.5 months (computed on the basis of latest monthly basic salary) for every year of service; (b) applicable 13th month pay, also on the basis of latest monthly salary; (c) unused vacation and sick leave credits as of the date of separation shall be commuted to cash, in addition to whatever benefits such employees might be entitled to under the CCBPI Retirement Plan. 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 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 of your employees is beyond their control, any and all amounts to be received by them from the company as a result thereof, 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. It must be understood, however, that any benefit 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 I, Book VI, Labor Code) Finally, 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.) JOSE U. ONG Commissioner