Benefits Received by Employees Separated from Service Due to Organizational Changes are Exempt from All Taxes

November 8, 1991 BIR RULING NO. 238-91 28 (b) (7) (B) 113-91 238-91 Gentlemen : This refers to your letter dated October 18, 1991 requesting a ruling on the taxability of the Separation Pay Benefits that the employees of your client, the San Miguel Corporation, will receive as a result of their separation from your company due to organizational changes which the company adopted to enhance efficiency and increased productivity such that their positions will become redundant and unnecessary thus necessitating their termination. cdti It is represented that the company to cushion the effect of the reorganization which will result in reduction of its personnel is providing for a "Special Separation Package" that will grant separation pay as follows: "1. For employees with tenure of less than 15 years equivalent to 100% of monthly basic pay multiplied by its number of years of service in accordance with the Company's Retirement and Death Benefits Plan plus the equivalent of seven (7) months pay as Displacement Assistance; "2. For employees with tenure of 15 years of service or more equivalent to 100% of monthly basic pay multiplied by the number of years of service in accordance with the company's Retirement and Death Benefits Plan plus the equivalent of fifty percent (50%) of monthly basic salary times the years of service as displacement assistance; "3. Other features; "a) Commutation and payment of unused sick leave credits not exceeding 180 days, tax free. "b) Commutation of unused vacation leave credits and proportionate 13th month pay subject to income tax. "c) Outplacement assistance: "1. Foreign placement maximum of P5,000 to cover placement fee "2. Self-employment maximum of P3,000 to cover seminar for two to three months Technological Livelihood & Resource Center/University of the Philippines Institute of Small Scale Industries." that the benefit granted under 3 (a) is being made pursuant to the existing Health and Welfare Plan of the company which provides communication of the employees accumulated unused sick leave credits up to a maximum of 180 days only; that whatever is in excess of the 180 days of sick leave credits is being taxed; and that not all employees separated from the company are entitled to the 180 tax-free unused sick leave credits as only those separated due to retirement or for causes not attributable to the employee (for involuntary causes) are granted the benefits. 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 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 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 benefits 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 causes beyond the control of 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 the employees of your client due to organizational changes making their positions redundant and unnecessary is beyond their control, any and all amounts received by them as a result thereof are exempt from all taxes and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. cdtech Moreover, the commutation and payment of unused sick leave credits not exceeding 180 days and those in excess of 180 days are likewise not subject to income tax and consequently to the withholding tax. (See Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. Oct. 17, 1991) Very truly yours, (SGD.) JOSE U. ONG Commissioner