Separation Pay Due to Redundancy - Tax-Exempt

November 19, 1993 BIR RULING NO. 463-93 SEPARATION PAY DUE TO REDUNDANCY TAX-EXEMPT 20 (b) (7) (B) 43-92 463-93 Sycip Salazar Hernandez & Gatmaitan Attorneys-at-Law 105 Paseo de Roxas 1200 Makati, Metro Manila Attention: Atty . Wilfred S . Racadio This refers to your letter dated July 6, 1993 stating that your client, WYETH-SUACO LABORATORIES (WYETH-SUACO), is requesting a ruling that the benefits it will pay to its employees who are to be separated under a personnel reduction program necessitated by the redundancy of certain job positions are exempt from all taxes, and consequently from the withholding tax, pursuant to Section 28(b)(7)(B) of the Tax Code, as amended. LLphil It is represented that WYETH-SUACO is a manufacturer of infant dietetics and pharmaceutical products; that prior to December 1991, its manufacturing operations were conducted at its plant located at 2236 Chino Roces Avenue, Makati, Metro Manila; that in February, 1992, however, all manufacturing operations were transferred to the Corporation's new plant located in Cabuyao, Laguna which is equipped with more modern machines compared to those in the old plant; that manufacturing operations in the said new plant are automated; that this relocation and automation resulted in the redundancy of certain jobs; that approximately, fifty (50) employees from the levels of supervisors and foremen as well as from the rank and file are redundant and their services need to be terminated in order to avoid duplication of functions and positions and to prevent further incurrence of unnecessary overhead expenses; that in this regard, WYETH-SUACO intends to undertake a personnel reduction program which will cover initially employees who, after being informed by the Corporation of its decision to reduce personnel, will consent to being separated from employment; and that as a consequence of their separation, these employees will be paid separation pay and incentive benefits. In reply, please be informed 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 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, of for any cause beyond the control of the said official or employee, shall, not be included in gross income and shall be exempt from taxation under Title II of the Tax Code. In view thereof, the separation benefits to be received by WYETH-SUACO's employees who are to be separated under a personnel reduction program necessitated by the redundancy of certain job positions are not subject to income tax and consequently to the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by B.P. Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. It is, however, understood that the salary to be paid by WYETH-SUACO to the aforesaid employees shall be subject to income tax. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue