Taxing Power of the Barangay Over Hog Raisers/Poultry Farmers, Computer Shops and a Newly Opened Resort

December 5, 1988 BIR RULING NO. 572-88 28 (b) (7) (B) 534-88 572-88 S i r : This refers to your letter dated September 14, 1988 which was referred to this Office by Mrs. Diana K. Legaspi of "Someone's on your Side", a public service action line column in the Philippine Daily Globe, inquiring as to whether or not retrenched employee's separation pay or retirement pay is subject to withholding tax. cdt It is represented that your Company which is a medium size private domestic non-life insurance with over four decades of continuous service to the public has recently retrenched or retired 40% of its employees due to a major change in the composition of its stockholders; that the change in ownership was the result of the government's requirements about increased capitalization of non-life insurance Companies; that retrenched employees were given separation or retirement pays minus withholding tax; that management told the employees that it will refund the withholding tax deducted from them as soon as it has clarified with this Office that the separation/retirement pay is not subject to tax; and that five and a half months had passed the employees had not received their refunds. 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 his employer as a consequence of separation by 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 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 the aforesaid employees from the service of their Company 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 X, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by 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 Company's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner