Separation Pay Due to Retrenchment - Tax-Exempt

October 1, 1993 BIR RULING NO. 391-93 SEPARATION PAY DUE TO RETRENCHMENT TAX-EXEMPT 28 (b) (7) (B) 163-92 391-93 Pepsi-Cola Products Philippines, Inc. P.O. Box 3018 MCPO 1270 Makati, Metro Manila Attention: Atty . Marianita P . Zarsadias VP-Corporate and Legal Affairs This refers to your letter dated August 24, 1993 requesting for a ruling on the taxability of the separation pay/benefits that your employees will receive as a result of their separation from your company. It is represented that your company is embarking on a corporate-wide retrenchment/redundancy program involving several hundreds regular employees and that you are extending the following benefits to those who will be affected: 1. Retrenchment or redundancy benefits of one and one-half (1 1/2) months for every year of service with the company; 2. The cash equivalents for proportionate 13th month pay/vacation and sick leaves; and, 3. One-month full basic pay after the employee is notified of his separation. 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 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 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 your corporate-wide retrenchment/redundancy program 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. In view of the foregoing, the benefits enumerated above which you will give your retrenched employees are exempt from tax. It is however, understood that the separated employees' basic salary and 13th month pay are subject to income tax. cdt LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue