Recent Developments

The BIR issued RMO No. 66-2016 dated 6 December 2016 which delegates to the Revenue District Office or appropriate Large Taxpayer (LT) Office where the employer is registered, the processing of requests for tax exemption of separation benefits received by an official or employee as a consequence of separation from employment due to other causes beyond the control of the employee.

Previously, Revenue Memorandum Order (RMO) No. 26-2011 dated 13 June 2011, devolved to the Revenue Regional Office the processing of requests for rulings confirming that the amounts received by the employee or by his heirs due to death, sickness or other physical disability are exempt from income tax and withholding tax. The RMO also provided that instead of a confirmatory ruling, a Certificate of Tax Exemption shall be issued. In addition, the processing of requests for rulings confirming that amounts received by an employee for any other causes beyond his control shall continue to be processed at the Law Division in the National Office.

The BIR specifically laid down the guidelines, documentary requirements and procedures to follow in order to facilitate the processing and securing of the aforesaid Certificate of Tax Exemption from the Revenue Regional Office.

With the issuance of RMO No. 66-2016, the processing of requests for tax exemption of separation benefits received by an employee as a consequence of separation from employment due to other causes beyond the control of said employee, such as, but not limited to, retrenchment, redundancy, installation of labor-saving devices and closure of business is now devolved to the Revenue District Office or appropriate Large Taxpayer (LT) Office where the employer is registered.

Supporting Documents

The following supporting documents shall be submitted to support such applications for ruling:

1) Letter request from the Official/Employee (or by his heirs) or the Employer for the exemption of separation benefits from income tax and withholding tax;

2) Death — Certified true copy of Death Certificate;

3) Where separation is due to Sickness/Physical Disability:

a) Sworn Affidavit attesting that the retiring/separated official or employee is suffering from a serious illness or physical disability that affects the performance of his duties and endangers his life, if he continues working;

b) Clinical Record 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.

4) Where separation is due to 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, 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) Where separation is due to 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, 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) Where separation is due to 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, 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) Where separation is due to 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, 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.

Actions to Consider

Taxpayers should take note of this new development so that their requests for rulings are filed at the correct venue and supported by appropriate documents.