Exemption of Separation Benefits from Taxes

December 15, 1989 BIR RULING NO. 258-89 28 (b) (7) (B) 214-89 258-89 Gentlemen : This refers to your letter dated December 7, 1989 stating that the management of Caltex (Philippines). Inc., after a long and careful study, has decided to implement an Employee Separation Program, scheduled in at least two phases, until the company is able to reduce the number of employees to the target size next year; that management has determined that the viability of the company is at risk under the current business climate and long-term economic projections and particularly by your continued inability to recover adequate operating costs while government retains a regulation policy for the oil industry; that another heavy burden on your finances is your continued inability to recover on a timely basis, large receivable claims from a depleted OPSF as well as from certain government agencies; that thus, in the face of all these, you have adopted certain measures, among which is a reorganization for a right-size company; that you have thus determined reducing the workforce by at least 20%; that the Separation Program is being implemented in the following steps: First Stage early retirement of employees who have been in company service for at least 10 years and are at least 50 years old. Second Stage separation of employees not covered by the first stage, until the target 20% employee redundancy is achieved. that your company maintains a Retirement Plan for its employees which is subject to a BIR Letter of Exemption, dated May 16, 1986; and that to show company concern, the separation benefits given to affected employees far exceed that required by law. Based on the foregoing representations, you now request in effect a ruling that the separation benefits (equivalent to 2.5 times monthly salary times years of service) to be paid to said employees are exempt from all taxes under Section 28(b)(7)(B) and Section 71, Chapter X, Title II of the Tax Code. In reply, 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. In other words, the separation must not be of his own making or choice. Since the separation of your employees 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 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. Moreover, 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. cdt Very truly yours, (SGD.) JOSE U. ONG Commissioner