Exemption of Special Separation Program from Withholding Tax

December 4, 1990 BIR RULING NO. 226-90 28 (b) (7) (B) 259-89 226-90 Gentlemen : This refers to your letter dated October 10, 1990 requesting, in behalf of your client, AMI (Philippines) Inc. for a ruling as to whether the benefits to be received by their employees as a result of its Special Separation Program are exempt from the withholding tax. cd It is represented that because of a continuing slump in the semi-conductor market, your client had to adopt a cost-saving measure by reducing its workweek from six days to five days; that such move lowered the employees' morale that it is compelled to restore its six-day operations but has to streamline and rationalize it by minimizing its overhead expenses and reducing its staff to seventy (70) persons, managerial and rank-and-file; that it has developed a Special Separation Program to cover employees who are holding redundant positions and consented to be separated from employment; that the selection of the employees to be separated from the service depends upon the reserved right, sole will, judgment and discretion of the company; and, that these employees will be paid separation pay and incentive benefits. 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. 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 Tax 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.) VICTOR A. DEOFERIO, JR. Deputy Commissioner