Tax Exempt Employee Separation Fees in the Philippines

Under the Tax Code of the Philippines, separation fees and benefits in the Philippines are exempted from income tax, and consequently, withholding taxes on compensation for separations from employment because of death, sickness or other physical disability or any other causes beyond employee’s control.

No one may not really like it being separated from work in any of those circumstances but at times, it comes unexpectedly. This is normally an unfortunate event in one’s employment as this would mean finding new employment to support one’s financial needs to himself and to the family, if any. The Labor Code of the Philippines provides for separation benefits for these unfortunate employees separated from employment. The amount of separation fees in the Philippines would depend on the following factors:

1. The amount of salary prior to separation;
2. The cause of separation – death, sickness, physical disability or other causes;
3. Length of service which must be

Separation fees under the above factors are either based on a one-month salary for every year of service or on-half month for every year of service covering the time of employees engagement up to the time of separation, and a fraction of at least six months is considered as on year. Aside from the amount of separation fees, the more important consideration is the taxability of separation fees in the Philippines.

Section 32(B)(6)(b) of the National Internal Revenue Code of the Philippines (NIRC) provides as follows:

“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 causes beyond control of the said official or employee”

The above tax exemptions provide the following requirements:

1. Separation from service due to death, sickness or other physical disability, or for causes beyond the control of said employee; and,
2. The official or employee or his heirs receives any amount from employer on account of such separation.

In availing the exemptions, the Bureau of Internal Revenue (BIR) provides under Revenue Memorandum Order No. 26-2011 dated 13 June 2011 the following relative to the availment of such tax exemptions on separation fees in the Philippines

A. Certificate of Tax Exemption

Certificate of Tax Exemption is issued by the Regional Director of employer’s BIR registration for separation because of death, sickness, or other physical disability. The following basic requirements will be filed with the Revenue District Office of BIR Registration who will evaluate the same and submit recommendation to the Regional Director:

1. Letter Request for Certificate of Exemption of separation benefits from income tax and withholding tax on compensation;
2. For separation because of death – Certified True Copy of the Death Certificate;
3. For separation because of sickness/physical disability:

•  Sworn affidavits of employer’s physician or employees attending physician and the Head of Office or representative;
• Clinical record of the employee indicating history of illness/physical disability and initial diagnosis; and,
• Laboratory examination confirming the illness suffered by the employee or medical certificate confirming physical disability

B. BIR Ruling from the Law Division

BIR Ruling from the Law Division of BIR National Office for causes beyond the control of the employee such as the following:

1. Retrenchment
2. Redundancy
3. Cessation of business

The process of the above requirements may take a little while but it is worth the wait for a tax exempt separation fees in the Philippines.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at info@taxacctgcenter.org.