Tax Exemption on the Amount Received from a Company as a Result of Re-Organization and Retrenchment

December 2, 1988 BIR RULING NO. 570-88 28 (b) (7) (B) 534-88 570-88 Gentlemen : This refers to your letter dated February 18, 1987 requesting a ruling as to whether all amounts which the following employees, namely, Abel Simeon Velasquez, Leroy G. Angeles, Pedro C. Dumana, Vianze B. Casanova and Elizabeth D. Del Rosario will receive from your company as a result of re-organization and retrenchment is subject to income tax. It is represented that your company pursuant to its continuing reorganization and retrenchment policy mainly due to economic and financial difficulties aside from management conditions imposed by your principal financier, PNB, has terminated the services of the aforesaid employees as of February 28, 1987. In reply, I have the honor to inform you 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 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 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. In other words, the separation must not be of his own making or choice. Since the separation of Abel Simeon Velasquez, Elizabeth D. Del Rosario, Leroy G. Angeles, Pedro C. Dumana, and Vianze B. Casanova from the service of that company due to retrenchment is beyond their control, any and all amounts to be received by them from the company as a result thereof, are exempt from all taxes and consequently from the withholding tax prescribed by Section 71 of the Tax Code, as amended by Executive Order No. 37 and implemented by Revenue Regulations No. 12-86 dated August 1, 1986 amending Revenue Regulations No. 6-82. It must be understood, however, that any benefits given under the abovementioned circumstances must be in accordance with the terms of an existing plan or one that falls under the law, i.e., one-half month for every year of service. (Section 14, Rule I, Book VI, Labor Code) Finally, the tax exemption does not include the company's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any, of its employees. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner