Application for tax exemption of separation benefits for a cause beyond the control of an employee under BRI RMO 66-2016.
What are the tax implications of separation benefits received by an official or employee on account of separation by reason of death, sickness or physical disability, or for any cause beyond the control of said official or employee?
The separation benefits shall not be included in gross income and shall be exempt from taxation. It shall also be exempt from withholding tax.
What are the conditions in order that employee benefits on account of separation may be granted tax exemption?
1. The official or employee is separated from the service of the employer due to death, sickness or other physical disability, or for any cause beyond the control of the said official or employee, such as, but not limited to, retrenchment, redundancy, installation of labor-saving devices and closure of business; and
2. The official or employee or his heirs receive any amount from the employer on account of such separation.
What is the general process of getting the benefit of tax exemption?
A Certificate of Tax Exemption must be secured by the employee who was separated from employment. The employee submits to his employer the issued certificate to prove that his separation benefits are exempt from income tax and that no withholding taxes should be deducted therefrom.
What is the effect of not obtaining a Certificate of Tax Exemption?
Without a Certificate of Tax Exemption, the employer deducts withholding taxes and remits the same to the BIR to avoid the possibility of being assessed. The employee may then recover the withheld taxes only through a tax refund.
To which office do employees requesting tax exemption must submit the request?
The request must be submitted to the Revenue District Office or appropriate Large Taxpayer (LT) Office where the employer is registered.
What are the general documents required to be submitted to support such a request?
1) Application letter stating the factual and legal basis for tax exemption tax;
2) In case of death: Certified true copy of Death Certificate;
3) In case of sickness/physical disability:
a) 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 to the fact that:
i) the retiring/separated official or employee is suffering from a serious illness or physical disability
ii) such serious illness or physical disability affects the performance of his duties and endangers his life, if he continues working;
b) Clinical Record of the official/employee concerned indicating the history of illness/physical disability and initial diagnosis; and
c) Laboratory examination confirming the illness suffered by such official/employee or medical certificate confirming the physical disability of the official/employee.
4) In case of installation of labor-saving devices:
a) Written notice to the employee and the appropriate Regional Office of the Department of Labor and Employment (DOLE) at least thirty (30) days before the effectivity of termination, specifying the ground for termination;
b) Board Resolution, in case of a juridical entity, or sworn affidavit to be executed by the owner, in case of a sole proprietor, stating that:
i) There has been an introduction of machinery, equipment or other devices, with brief description of the use of said machinery, equipment or device;
ii) The introduction of the machinery, equipment or other device has been done in good faith and for valid reason;
iii) There is no other option available to the employer than the introduction of machinery, equipment or other device; and
iv) The selection of employees to be terminated has been made in accordance with a fair and reasonable criteria.
5) In case of redundancy:
a) Written notice to the employee and the appropriate Regional Office of the Department of Labor and Employment (DOLE) at least thirty (30) days before the effectivity of termination, specifying the ground for termination;
b) Board Resolution, in case of a juridical entity, or sworn affidavit to be executed by the owner, in case of a sole proprietor, stating that:
i) There has been superfluous positions or services of employees;
ii) The positions or services are in excess of what is reasonably demanded by the actual requirements of the enterprise to operate in an economical and efficient manner;
iii) The redundant positions have been abolished in good faith; and
iv) The selection of employees to be terminated has been made in accordance with a fair and reasonable criteria.
c) Adequate proof of redundancy such as but not limited to the new staffing pattern, feasibility studies/proposal, on the viability of the newly created positions, job description and the approval by the management of the restructuring
6) In case of retrenchment:
a) Written notice to the employee and the appropriate Regional Office of the Department of Labor and Employment (DOLE) at least thirty (30) days before the effectivity of termination, specifying the ground for termination.
b) Board Resolution, in case of a juridical entity, or sworn affidavit to be executed by the owner, in case of a sole proprietor, stating that:
i) The retrenchment is reasonably necessary and likely to prevent business losses;
ii) The losses, if already incurred, are not merely de minimis, but substantial, serious, actual and real, or if only expected, are reasonably imminent, with appropriate supporting evidence of said losses;
iii) The retrenchment is made in good faith for the advancement of its interest and not to defeat or circumvent the employees’ right to security of tenure; and
iv) The selection of employees to be terminated has been made in accordance with a fair and reasonable criteria.
7) In case of closure or cessation of operation
a) Written notice to the employee and the appropriate Regional Office of the Department of Labor and Employment (DOLE) at least thirty (30) days before the effectivity of termination, specifying the ground for termination.
b) Board Resolution, in case of a juridical entity, or sworn affidavit to be executed by the owner, in case of a sole proprietor, stating that:
i) The management has decided to close or cease operation of the company;
ii) The closure or cessation of operation has been made in good faith; and
iii) There is no other option available to the employer except to close or cease operation.