New Guidelines: Tax on Separation Pay

An official or employee separated from his employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall be exempted from income tax and withholding tax on the amount received thereof, regardless of age or length of service.

Instead of requesting for rulings confirming that the separation pay received by an employee or by his heirs because of death, sickness or other physical disability are tax exempt, a Certificate of Tax Exemption shall be issued by the Regional Director of the BIR. However, if the reason of separation from the employer is for any other causes beyond the control of the official or employee, a request for ruling confirming tax exemption shall be processed at the Law Division in the National Office.

A letter request from the Official/Employee or by his heirs or the employer for the exemption of separation benefits from income tax and withholding tax must be submitted to the Revenue District Office where the employer is originally registered, together with a certified true copy of Death Certificate or Sworn Affidavits executed by the attending physician and the employer’s representative, clinical record or laboratory examination confirming the illness suffered by such official/employee or medical certificate confirming the physical disability of the official/employee, whichever is applicable. Other documents may also be required by the BIR to prove entitlement to the exemption.

(Revenue Memorandum Order No. 26-2011, June 13, 2011)

Tax Exempt Separation Pay

Q: Are separation benefits to be paid by an employer by reason of the employee’s health condition exempt from income tax and consequently from withholding tax?

A: Yes. Pursuant to Section 32 (B) (6) (b) of the Tax Code, 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. 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.

This requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, namely:

(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.

(BIR Ruling No. 131-10, December 1, 2010)