Exemption of the Separation Pay Benefits from Tax

December 14, 1990 BIR RULING NO. 234-90 28 57-83 234-90 Gentlemen : This refers to your letter dated October 1, 1990 stating that in 1986 you terminated the services of two employees, namely, Mesdames Lediminda Tiotuyco and Medelina Patling; that the two dismissed employees filed a complaint for "illegal dismissal" against you before the National Labor Relations Commission; that the Labor Arbiter, who heard the case, ruled in favor of the complainants and ordered you to pay them backwages for three years and attorney's fees, as well as to reinstate the two employees; that you appealed the case to the National Labor Relations Commission (NLRC) in re: Case No. NCR-8-4063-86 which affirmed in toto the Labor Arbiter's decision; that on September 15 and 19, 1990 in compliance with the said judgment, you paid Mrs. Tiotuyco the aggregate amounts of P507,000.00 as three year backwages and P50,700.00 as attorney's fees; that on the same dates, you likewise paid Ms. Patling the aggregate amounts of P78,975.00 and P7,897.50 as backwages and attorney's fees respectively; that all the payments were acknowledged by the payees who assumed the responsibility of paying the taxes on said payments; and that due to the strained relations still obtaining between them, the aforesaid employees and that company, in a conference on September 15, 1990 agreed on a waiver of the reinstatement aspect of the NLRC Decision. cdtech In connection therewith, you now request a ruling on the following question, viz: 1. Whether the backwages received by both Mesdames Tiotuyco and Patling can be considered as amounts received as a result of their separation from the service of their employer due to a cause beyond their control and therefore exempt from income tax pursuant to Section 28 (b)(7)(B) of the Tax Code, as amended; 2. In case the payments are taxable and therefore subject to withholding, whether the express undertaking of Mesdames Tiotuyco and Patling to pay the taxes on said payments will exempt you from liabilities for not withholding the taxes on said payments; and 3. How will the withholding tax be computed? In reply thereto, please be informed that pursuant to Section 28 (b)(7)(B) of the Tax Code, as amended, any amount received by an official or employee or by his heirs from the 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 said official or employee is exempt from taxes regardless of age or length of service. However, the backwages paid to the aforenamed employees cannot be considered as benefits paid as a consequence of an involuntary separation from the service of their employer within the contemplation of Section 28 (b)(7)(B) of the Tax Code but as remuneration for services that would have been performed by the said employees for your company prior to the year 1990 when actually received or during the period of their dismissal from the service with the NLRC affirmed to be illegal. Such being the case, said backwages are subject to income tax, and consequently to the withholding tax on wages pursuant to Section 72, Chapter 10, Title II of the Tax Code as implemented by Revenue Regulations No. 6-82 as amended. In other words, the express undertaking of Mesdames Tiotuyco and Patling that they will pay the income taxes due on said payments will not relieve you from your obligation and liability as withholding agent with respect to such wage payments. On the other hand, Mesdames Lediminda Tiotuyco and Medelina Patling in filing their annual income tax returns, should report as income and pay their respective income taxes by allocating or spreading their back wages for the years 1987, 1988 and 1990, and crediting the corresponding income tax withheld from said wage payments. Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner