Separation pay is the amount due to employees who have been terminated from service/employment due to reasons allowed by law and not due to the wrongdoings of the employees.
Below are some of the reasons in which the law entitles the terminated employees for a separation pay:
- Installation of labor-saving devices
- Retrenchment to prevent losses
- Closing or cessation of operation of the establishment or undertaking
- Disease of the employee
- Termination of employee is illegal but reinstatement to his former position is no longer feasible for some valid reasons
- Pre-termination of contract in job-contracting arrangement
Section 32 (B)(6)(b) of the Philippine Tax Code provides the following as an exclusion from the gross income and shall be exempted from income tax regardless of age or length of service:
“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.”
This means that separation pay would only be exempted from tax if these two (2) conditions are present:
- Separation of employee is due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee; and
- The official or employee or his heir(s) is paid by the employer with a separation pay due to such separation.
The official/employee/heir or requesting employer shall apply for a Certificate of Tax Exemption with the RDO where the employer is originally registered in order to avail the tax exemption of the separation pay. To support the request for the issuance of Certificate of Tax Exemption, the following documentary requirements shall be submitted by the applicant to the RDO where the employer is originally registered:
- Letter request from the official/employee/heir(s) or the employer for the exemption of separation benefits from income tax and withholding tax;
- Death- Certified true copy of Death Certificate
- Sickness/Physical Disability
- Sworn Affidavits to be executed by the employer’s physician or the employee’s attending physician and the Head of Office/Entity or his representative, attesting that the separated official/employee has an illness or disability which affects the performance of his duties and endangers his life, if he continues working;
- Clinical Record of the official/employee concerned indicating the history of illness/physical disability and initial diagnosis; and
- Laboratory examination confirming the illness suffered by such official/employee or medical certificate confirming the physical disability.
After the evaluation of the Legal Division Chief of the Regional Office, the application for taxation will be re-evaluated and approved by the Regional Director.
This article is intended to equip the taxpayers or their bookkeepers in complying with the Bureau of Internal Revenue’s (BIR) and other Government rules and regulations. It is not intended to teach the taxpayers the details of tax planning and avoidance or to commit tax evasion or any fraudulent tax activities. Certain advice, comments and opinions expressed in this article are based on specific situations, limited available definitive tax and other government rulings and the actual experience of the authors, and may not apply to the reader’s specific tax or business concern and should not be used to avoid tax under the National Internal Revenue Code (NIRC) or applicable tax laws and other government regulations without consulting an accountant or lawyer or secure a BIR ruling before using any suggested advice or strategy.
Article 283 of the Labor Code of the Philippines
Section 32 (B)(6)(b) of the Tax Code of the Philippines