Exemption of the Separation Pay Benefits from Tax

November 21, 1990 BIR RULING NO. 214-90 28 (b) (7) (B) 258-89 214-90 Gentlemen : This refers to your letter dated September 14, 1990 requesting in behalf of your client, Bank of America NT & SA, opinion as to whether the separation benefits to be received by certain employees under a contemplated staff reduction program resulting from the cessation of operation of the Manila-based Systems Groups of the Bank is exempt from tax under Section 28 (b)(7)(B) of the Tax Code, as amended. cdt It is represented that the Bank of America, NT & SA is a multinational company organized and existing under the laws of the State of California, U.S.A. with license to operate a regional or area headquarters in the Philippines pursuant to Presidential Decree No. 218, which license was issued by the Securities and Exchange Commission on July 26, 1974; that two (2) of the units or groups belonging to the regional headquarters established under said license are the Global Banking Systems, Asia-Manila and the Manila Data Processing Center; that these units or groups currently employ a total of 31 officers and staff; that the main responsibility of these units/groups is to support the systems requirements of all units of the Bank's Asia Division which covers 11 countries including the foreign commercial branch of the Bank in the Philippines Manila Branch; that the number of employees of these 2 groups belonging to the regional headquarters has decreased because of the decline in workload; that with this much reduced, and eventually non-existent workload, the Bank has no option but to immediately reduce and eventually remove the workforce of these 2 groups from their employ; that the Bank intends to provide all employees who will be involuntarily terminated a separation package consisting of the following cash payments: "1. Basic separation payment equivalent to two months' salary per year of service for those with 8 or more years of service and one month salary for those with less than 8 years of service; 2. Additional separation equivalent to six months' salary first to be applied against any outstanding employee real estate loan balance or paid in full if the employee does not have any loan outstanding; 3. Payment of vested amounts in the company retirement plan," and that in addition, other non-cash concessions will be granted such as extension of medical coverage for six (6) months and preferred interest rates on remaining balance of real estate loans for a period of one (1) year from the date of separation. In reply, 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. Since the separation of your client's employees 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 Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended. However, 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. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner