Separation Pay - Tax-Exempt

October 13, 1993 BIR RULING NO. 402-93 SEPARATION PAY TAX-EXEMPT 28 (b) (7) (B) 023-93 402-93 Chemphil-LMG, Inc. Chemphil Building 851 Pasay Road, Legaspi Village Makati, Metro Manila This refers to your request for clarification on the following conditions stated in BIR Ruling No. 013-93 addressed to you viz. : cdta 1. "The separation from the service of the official or employee must not be asked for or initiated by him; and 2. ". . . that the aforesaid tax exemption does not include your payment of salaries to the employees separated under your Special Early Retirement Program." In reply, 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 the 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, which means that the official or employee being separated from the service did not request for his separation. In this case, the separation of your employees was brought about by the reduction of your work force to keep the company viable, and even if initiated by the employees, the decision to accept the request for retirement under the SERP Program, lies with the Company. Since it is the Company that decides whether an employee will be separated from the service or not, it is considered beyond the control of the official or employee. (See BIR Ruling No. 058-89 dated April 15, 1989). On the other hand, Condition No. 2 simply means that the payment of the salaries of the official or employee being separated, if any, is still subject to income tax and, consequently, to withholding tax. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue