Taxability of the Separation Pay Benefits to be Received by Your Employees as a Result of their Separation from the Company due to Organizational Changes

September 18, 1992 BIR RULING NO. 268-92 28 (b) (7) (B) 238-91 268-92 Labtech Manufacturing Industries, Inc. No. 6 21st Avenue, Cubao Quezon City Attention: Ms . Lourdes L . Fernando General Manager Gentlemen : This refers to your letter dated 6 May 1992 requesting a ruling on the taxability of the Separation Pay benefits to be received by your employees as a result of their separation from the company due to organizational changes. cdpr It is represented that the company adopted such organizational changes to enhance efficiency and increased productivity making their positions redundant and unnecessary thus necessitating their termination; that to cushion the effect of the reorganization which will result in the reduction of its personnel, the company provided for a "Special Separation Package". 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 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 your employees 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. Moreover, the commutation and payment of unused sick leave and vacation leave credits 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) It is however, understood that this exemption does not include your payment of your employees' salaries. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void and we will hold you responsible especially the employer who made the representation. prcd Very truly yours, JOSE U. ONG Commissioner of Internal Revenue