NEWSLINE BIZBEAT SME PROFILE DeNNIs ChAN LeADeRs IN ...

© Sengerg | Dreamstime.com
There are two new developments
on taxation of separation benefits
that could have significant impact
on the amount of separation pay
that employees are entitled to upon
their separation from service, and
on the withholding tax obligations
of employers as withholding
agents.
Under RMO 26-2011 (June
13, 2011), the Bureau of Internal
Revenue (BIR) has relaxed the procedure
for securing confirmation
of tax exemption of separation benefits
received by employees who
are separated from the service on
account of death, sickness or physical
disability.
RMO 26-2011 passes on to the
Revenue Regions the responsibility
for processing requests for confirmation
of tax exemption of separation
benefits due to death, sickness
or physical disability; this used to
be handled by the BIR National
Office. In order to further facilitate
the processing of requests for tax
exemption of separation benefits,
the BIR now only requires a certificate
of tax exemption, instead of
confirmatory ruling.
However, with respect to separation
benefits received by employees
for other causes “beyond
the control” of the official or employee,
such as separation due to
reorganization, restructuring, and
others, which are likewise treated
as income tax exempt pursuant to
Section 32(B)(6)(b) of the Tax Code,
the BIR still requires that a confirmatory
ruling be secured and that
the Law Division - BIR National
handle it.
In another development, the
BIR has now taken the position
that payment of monetized unused
sick and vacation leave credits as
a result of involuntary separation
(i.e., separation due to health, sickness
or physical disability and for
other causes beyond the control of
the employee) shall only be exempt
to the extent of 10 days for vacation
leaves, while all monetized
sick leave credits will be taxable
[BIR Ruling No. 199-2011 (June 29,
2011)].
This is a departure from its previous
rulings [e.g., BIR Ruling No.
SB-(004) 024-09], which provide
that terminal pay -- i.e., commutation
and payment of unused sick
leave and vacation leave credits,
which form part of the tax-exempt
separation pay, is not subject to
income tax and consequently to
withholding tax regardless of the
number of monetized sick and
vacation leaves. As in previous
rulings, the BIR still, however,
maintains that the salaries, 13th
month pay, and other renumeration
received by the employee
for services rendered while still
under employ shall be subjected to
income tax and, consequently, to
withholding tax.
Both employers and employees
should be made aware of these
developments to ensure that they
understand the tax consequence
of separation pay/benefits and to
avoid conflict. These developments
are also important in helping employers
comply properly with their
withholding tax responsibilities as
withholding agents, and employees
in ensuring that they benefit from
the relaxed procedures adopted by
the BIR in securing confirmation
of tax exemption of the separation
they receive due to death, sickness
or physical disability.
The author is a Senior Manager with the Tax
Advisory & Compliance Division of Punongbayan
& Araullo. Comments or questions may be sent to
Senen.Quizon@ph.gt.com.
9