Separation Pay Resulting from Re-organization and Retrenchment Exempt from Income Tax

November 10, 1986 BIR RULING NO. 236-86 29 (b) (7) (B) 144-86 236-86 Gentlemen : This refers to your letters dated August 7 and September 17, 1986 requesting a ruling as to whether the separation pay which two of your employees, Ms. Delia E. Uson and Mr. Dante O. Velasquez will receive from the Bukidnon Sugar Milling Co., Inc. as a result of re-organization and retrenchment is subject to income tax. Documentary evidence submitted shows that owing to the financial difficulties of the company and as one of the conditions imposed by the Philippine National Bank for the complete re-organization and retrenchment of your company, Ms. Delia E. Uson and Mr. Dante O. Velasquez were retrenched effective July 31 and June 30, 1986 respectively. In reply, 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 by 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 form taxes regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntaries 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 Ms. Delia E. Uson and Mr. Dante O. Velasquez from the service of that company due to retrenchment 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 82 of the Tax Code, as amended by Executive Order No. 37 and implemented by Revenue Regulations No. 12-86 dated August 1, 1986 amending Revenue Regulations No. 6-82. It is however, understood that the tax exemption does not include the company's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any, of its employees. aisadc Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue