Guidelines on the Computation of Salary Differential of Female Workers during Her Maternity Leave and Its Criteria for Exemption Pursuant to Republic Act No. 11210 and Its IRR

September 29, 1999 BIR RULING [DA-559-99] Siguion Reyna, Montecillo & Ongsiako PHILCOM Building, 8755 Paseo de Roxas Makati City Attention: Atty . Ferdinand M . Hidalgo Gentlemen : This refers to your letter dated July 21, 1999 requesting on behalf of your client, ABB Industry, Inc., for a ruling as to the taxability of the separation pay package that its employees will receive as a result of their separation due to redundancy. prcd It is represented that ABB Industry, Inc. is engaged in the business of selling and manufacturing of wares, goods and merchandise for electrical power generation and allied trades; that it will implement a retrenchment/redundancy program affecting more or less twenty three (23) of its employees; and that a separation package will be extended to these employees which will include the following: 1) Separation pay of one (1) month for every year of service; 2) Pro-rated 13 th month pay; 3) Commutation of leave credits; and 4) Cash equivalent of their commission. In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, 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 because of 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 . (Emphasis supplied) 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. The above-mentioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions: (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 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 employees of your client is beyond their control, any and all amounts that they will receive as a result thereof, is exempt from income tax and consequently, from withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. In view thereof, the separation pay of one (1) month for every year of service and the terminal leave pay, i.e., the accumulated vacation and sick leave credits and the pro-rated 13 th month pay to the extent of P30,000.00 are exempt from income tax. (see Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. October 17, 1991) Finally, the cash equivalent of their commissions and the payment of their salaries are subject to income tax and consequently to withholding tax. (BIR Ruling No. 035-93 dated January 15, 1993) llcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)