Tax notes: Tax treatment of separation pay due to retrenchment-A A +A
Monday, August 26, 2013
SEPARATION or termination from the service as part of the company’s retrenchment program is 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 Bureau of Internal Revenue (BIR) has ruled in a recent ruling that 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 Revenue Regulations (RR) No. 2-98, as amended (BIR Ruling No. 227-2013, June 20, 2013).
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.
(Source: Punongbayan & Araullo)
Published in the Sun.Star Cebu newspaper on August 27, 2013.