Exemption of Separation Benefits from Taxes

December 12, 1989 BIR RULING NO. 252-89 28 (b) (7) (B) 058-89 252-89 Gentlemen : This refers to your letter dated September 25, 1989 stating in line with your redundancy program, there will be a need to displace your employees handling the quality control functions in your company; that your new direction is to create manufacturing systems that will guarantee quality without inspection and reinspection; that in effect, you will certainly eliminate all unnecessary inspections and tests which at present are performed by the quality inspectors; that the following reasons and justification lead to your decision to make this change: (1) This is the direction chosen by your parent company as well as your competitors and customers; (2) You have improved the processes to make this change possible; and (3) The responsibility for quality should be on those who work in the production line and not to quality inspectors; that in view thereof, those quality inspectors affected by the change in your quality process systems will be terminated from their employment in your company which would, however, entitle them to the following separation pay and benefit package offered by your company: (1) Pro-rated thirteenth (13) month pay; Encashment of unused vacation leaves or earned vacation leave balances; (3) Encashment of unused sick leaves or earned sick leave credits; and (4) Separation pay equivalent to 1.75 of the current monthly salary multiplied by the length of service; and that the program is to take effect not later than October 30, 1989. Based on the foregoing representations, you now request exemption from withholding tax the separation pay and benefits package by your company that will be payable under your Redundancy Program pursuant to Section 28(b)(7)(B) of the Tax Code. In reply, 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 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 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 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 the aforesaid employees from the service of your company is beyond their control, any and all amounts received by them, therefore, 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. It must be understood, however, that any benefits given under the abovementioned circumstances must be in accordance with the terms of an existing plan or one that falls under the law, i.e., one-half month for every year of service. (Section 14, Rule I, Book VI, Labor Code) Finally, the tax exemption does not include company's payment for salary and cash equivalent of accumulated vacation or sick leaves. cdta Very truly yours, (SGD.) JOSE U. ONG Commissioner