Tax treatment of separation pay due to retrenchment

Separation or termination from the service as part of the company’s retrenchment program are considered separation that is beyond the control of the separated official or employee.

As such, any amount received by such officials or employees as a consequence of their separation shall not be included in gross income and shall be exempt from taxation pursuant to Section 32 (B) (6) (b) of the Tax Code, as amended.

However, the tax exemption does not cover the payment of the separated employee’s salaries and the payment of 13th month pay and other benefits in excess of the P30,000 threshold under Section 2.78.1(A)(3)(a) and (A)(7) of RR 2-98, as amended.

As regards monetization of sick and vacation leave credits, only the cash equivalent of vacation leaves not exceeding 10 days shall be exempt from tax, while the monetized value of all sick leave credits of separated employees shall be subject to income tax.

(BIR Ruling No. 227-2013, June 20, 2013)

Tax Brief – July 2013

Punongbayan and Araullo