Separation Benefits for Retrenchment Tax-Exempt

September 28, 1993 BIR RULING NO. 384-93 SEPARATION BENEFITS FOR RETRENCHMENT TAX-EXEMPT 28 (b) (7) (B) 35-93 84-93 Feliciano F. Miravite, Inc. 5th Floor, Fortune Office Bldg. 160 Legaspi St., Legaspi Village Makati, Metro Manila Attention: Mr . Feliciano F . Miravite President & Actuary This refers to your letter dated May 26, 1993 stating that your client, Solidbank Corporation has come up with a reorganization plan to take effect this coming midyear of 1993 to reduce its operating expenses and as a consequence to make better use of limited resources and personnel; that the substantial lowering of interest rate for T-Bills has reduced the bank's financial resources; that as a result of power failure, many clients have folded up thereby reducing income from operations; that the bank has determined that it is overstaffed and less efficient; that as a result of the bank will set into motion a reorganization plan which will result in the reduction of manpower at the bank; that under the proposed retrenchment program, such officers and employees will be terminated from employment; that a separation pay has been packaged for the retrenched employees which shall consist of the benefits provided under the existing retirement plan if qualified under said plan and an additional lump-sum benefit of one month's pay per year of service; and that for those retrenched employees who are not yet qualified under the existing retirement plan, a separate benefit under the CBA shall also be provided including the additional lump-sum benefit of one month's pay per year of service. cdta In connection therewith, you now request a ruling as to whether or not the separation benefits to be received by the officers and employees under the aforesaid proposed retrenchment program are exempt from tax. 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 by 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 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, which means that the official or employee being separated from the service requested for such separation and not, as in this case, wherein the separation of the employees and officers of the Bank is brought about by its retrenchment program resulting in the reduction of the manpower at the Bank. The aforementioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or any cause 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 and officers of your client 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 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 terminal leave pay, i.e., the accumulated vacation and sick leave credit which is part of the tax-exempt separation pay is also exempt from tax (See Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G. R. No. 96016 prom. October 17, 1991). The tax exemption is understood not to include the Bank's payment of salaries and pro-rated 13th month pay, if any, of the concerned officials and employees. cdtech LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue