Separation Pay - Tax-Exempt

December 23, 1993 BIR RULING NO. 517-93 SEPARATION PAY TAX-EXEMPT 28 (b) (7) (B) 197-92 517-93 The International Corporate Bank Interbank Building 111 Paseo de Roxas, Legaspi Village Makati, Metro Manila This refers to your request for a ruling that the separation benefits to be paid to your officers who are named hereunder by reason of redundancy are exempt from all taxes pursuant to Section 28 (b) (7) (B) of the Tax Code, as amended. casia Document submitted shows that a Special Redundancy Program was adopted and incorporated by the Board of Directors in a resolution No. VI(S)-93-01 passed on June 8, 1993 for those officers who would be affected by merger or sale of the Bank's controlling interest; that you will pay each officer separation benefits equivalent to two (2) months of his gross pay for every year of service; that due to the sale or merger with Union Bank, the following officers' positions were declared redundant, namely: 1. Jovencio F. Cinco President and Chief Operating Officer 2. Victorio Y. Lim Senior Vice President and Head, Branch Banking Group 3. Vincent B. Salgado First Vice President, Supervising Group Head (for FMG and IBG) and Treasurer 4. Claro P. Leon First Vice President, Internal Legal and Security Division and Corporate Secretary 5. Victorio T. Gomez First Vice President and Head, Funds Management Group 6. Deciel N. Yuhico First Vice President & Head, Institutional Banking Group 7. Albert K. Suarez First Vice President & Head Operations & Administration Group 8. Edgardo R. Soriano Vice President and Head, Human Resources Division; and 9. Alexander C. Escucha Vice President and Head, Corporate Planning/MIS. 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 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 or initiated by him. The abovementioned law requires the presence of these two (2) 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 any 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 their separation is due to redundancy and, therefore, beyond their control, any and all amounts received by them as a result thereof, are exempt from all taxes and subsequently 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. aisadc The payment of their salaries, however, is subject to the withholding tax. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue