Separation Pay Given to Employee Who was Separated from Service Due to Retrenchment is Exempt from Income Tax

July 29, 1987 BIR RULING NO. 221-87 29 (b) (7) (B) 144-86 221-87 S i r : This refers to your letter dated July 17, 1987 requesting a ruling in behalf of your Undersecretary, Mr. Victor O. Ramos to the effect that the separation pay he will receive from the Phimco Industries, Inc. as a result of his retrenchment is exempt from income tax. It is represented that recently, the President of the Philippines extended an appointment as Undersecretary of the Department of Environment and Natural Resources to Mr. Victor O. Ramos; that prior to his appointment, he was Division General Manager of Phimco Industries, Inc.; and that Phimco management upon learning of his appointment in the government service, decided to retrench him rather than grant his request for a three (3) year leave of absence without pay to avoid getting involved in any legal controversy regarding the prohibition in Sec. 13, Art. VII of the New Constitution on conflict of interest and on Cabinet Secretaries and Undersecretaries holding any other office or employment during their tenure. iatdc In reply thereto, please be informed that pursuant to Section 29 (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 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 benefit 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 any 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 Mr. Victor O. Ramos from the service of Phimco Industries, Inc. due to retrenchment is beyond his control, any and all amounts to be received by him as a result thereof, are exempt from all taxes and consequently from the withholding tax prescribed by Section 81, Chapter X, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82 dated October 1, 1982. It is however, understood that the tax exemption does not include company's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner