Taxability of the Separation Pay Benefits that Employees Will Receive Due to the Termination of Their Services on the Ground of Redundancy

December 22, 1992 BIR RULING NO. 367-92 28 (b)(7) (B) 063-92 367-92 Edward Keller (Philippines), Inc. 2723 Pasong Tamo, 1200 Makati Metro, Manila Attention: Mr . Avelino S . Mangahas, Jr . Vice-President Finance and Administration Gentlemen : This refers to your letter dated April 6, 1992 requesting for a ruling on the taxability of the Separation Pay Benefits that some employees of your Company will receive due to the termination of their services on the ground of redundancy which will take effect April 30, 1992. cdta It is represented that the redundancies were brought about by the following reasons: (a) Cancellation by a foreign principal of your Company's appointment as said principal's agent in the Philippines, directly resulting to the closure or phase-out of the entire division directly involved in the business covered by the agency agreement between your Company and said foreign principal; and (b) Streamlining and other organizational changes which your Company adopted to enhance efficiency and increase productivity; and that the separation pay package of the employees whose positions have been declared redundant or in excess of the requirements of the Company, consists of: (1) Separation Pay corresponding to one and one-half months' salary for every year of service, a fraction of at least six months being considered as one full year, based on the latest salary; tax free; (2) Cash conversion of all unused and accumulated vacation and sick leave credits, tax free; and (3) Proportionate thirteenth-month pay, subject to income tax and consequently to withholding tax. In reply thereto, 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 the 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 is beyond the control of the concerned employees, any and all amounts to be received by them from their employer as a result thereof, i.e., items (1) and (2) above 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. Finally, the tax exemption does not include the payment of the concerned employees' salary and proportionate thirteenth (13) month pay. This ruling is being issued based on the factual representation that there is involuntary separation. However, if upon subsequent verification it is found that involuntariness is wanting, this ruling shall be considered void ab initio . Very truly yours, JOSE U. ONG Commissioner of Internal Revenue