Philippines: Accompanying tax burden of separation benefits
One of the most difficult situations an employee faces is the possibility of being laid off from work, especially during his productive years, due to circumstances that are beyond his control. Unlike retirement, which some people look forward to and prepare for, separation can be a source of anxiety as employees face the prospect of suddenly losing their job.
To ease such burden, it is common for employers to provide separation benefits to tide employees over while they look for another job.
In accordance with Section 32 (B) (6) (b) of the Philippine Tax Code of 1997, the separation benefits received by an employee or by his heirs from the employer due to death, sickness, or other physical disability, or for any cause beyond the control of the employee, are exempt from tax, and consequently from withholding tax.
There is some confusion, however, on whether securing a ruling is required to avail of the tax exemption provided under Section 32 (B) (6) (b) of the Philippine Tax Code.
It may be recalled that in 2003, the Bureau of Internal Revenue (BIR) issued Revenue Bulletin (RB) No. 1-2003, which provides that tax treatment of separation benefits under Section 32 (B) (6) (b) of the Philippine Tax Code is considered a no-ruling area, which means that the BIR office will not accept any request for ruling on this matter. Despite this specific declaration, however, several tax exemption confirmatory rulings on separation benefits have been issued by the tax office.
To add to the confusion, the BIR issued Revenue Memorandum Order (RMO) No. 26-2011, dated 13 June 2011, as amended by RMO 36-2011, which provides that, in lieu of the confirmatory ruling, a requesting employee or employer shall now be issued a Certificate of Tax Exemption, approved and signed by the Regional Director or Assistant Commissioner of Internal Revenue (ACIR), Large Taxpayers Service, in order to avail of the tax exemption on separation benefits received by employees on account of death, sickness, or other physical disability.
The disconnect lies in the processing of requests for tax exemption rulings on the amounts received by an employee from his employer for causes beyond the control of the said employee, such as, but not limited to, retrenchment, redundancy, installation of labor-saving devices, and closure of business. Based on RMO No.
26-2011, the application for tax exemption rulings shall continue to be processed at the Law Division in the National Office. This gives the impression that the request for a tax exemption ruling is a requirement, even though it has already been declared a no-ruling area as prescribed by RB No. 1-2003.
Another puzzling issuance of the BIR is Revenue Memorandum Circular No. 8-2014, dated 6 February 2014. It states that concerned withholding agents shall require all individuals and entities claiming such exemption to provide a copy of a valid, current and subsisting tax exemption certificate or ruling. Failure on the part of the taxpayer to present the said tax exemption and certificate or ruling shall subject him to the payment of the appropriate withholding taxes due on the transaction. This was contradicted by RMO No. 9-2014, which was issued on the same date, and which reiterated that the BIR will not rule on matters declared as “No-Ruling Areas” as provided in RB No. 1-2003, including separation benefits.
In view of the contradicting issuances of the tax office, it is still unclear if a tax ruling is in fact required.
In a recent development, the BIR issued RMO No. 66-2016, dated Dec. 6, 2016, which transfers the processing of requests for tax exemption certificate from the National Office to the Revenue District Office (RDO), or appropriate Large Taxpayers (LT) Office where the employer is registered.
Considering that the processing of the said application has been transferred from the Law Division to the RDO or LT Office, does this imply that securing a ruling is required before the issuance of RMO No. 66-2016? How about those employers and employees who were not able to secure a ruling since they relied on the provisions on RB No. 1-2003 — will they be assessed for this unclear interpretations of the BIR issuances?
The new RMO is a welcome development since taxpayers no longer have to secure a ruling from the Law Division; a Certificate of Tax Exemption, which is supposedly easier to secure, will suffice as proof of tax exemption. The said RMO also provides specific requirements for each ground of application. It would expedite the request, thereby lessening the burden on and anxiety of the taxpayers.
The author is an assistant manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd., a member firm of Deloitte Touche Tohmatsu Limited—comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.