Taxes: In sickness and in health till death do us part

While the debate on divorce is on, why don’t we talk about Filipinos being separated from work due to sickness and death? Although some employers provide just separation benefits, how much of this can we take home?

The separation benefits received by an employee or by his/her beneficiaries are exempt from taxation under Section 32 B (6) (b) of the Tax Code of 1997, if resulting from the involuntary separation from employment due to death, sickness or other physical disability or for any cause beyond the employees control, i.e. retrenchment, redundancy, or cessation of business.

For the separation benefits to be granted tax exemption, two conditions must be present:

1) the 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 employee; and

2) the employee or his heirs receives benefits from the employer as a consequence of such separation.

In previous tax rulings, tax exempt separation benefits include separation pay of at least one month pay for every year of service, and unused incentive leave credits, among others. Other income received prior to separation such as salaries and bonuses prorated up to the date of termination are subject to income tax and withholding tax on compensation.

Further, benefits given to an employee who voluntarily resigns due to health reasons, provided that it must be “serious illness” which affects the employee’s performance of his duties and would endanger his life, is also tax exempt from income tax.

Since the employers can be held liable for non-withholding of taxes, it is to their intent that the tax exemption of the separation benefits be first confirmed by the tax authorities. Thus, many employers are requesting for ruling from the Bureau of Internal Revenue (BIR) to confirm the tax exemption of separation benefits.

In view of this, the BIR issued Revenue Memorandum Order (RMO) No. 26-2011 last 13 June 2011, which provides the guidelines on the processing of the issuance of Certificate of Tax Exemption. The Certificate of Tax Exemption shall be issued by the Regional Director, in lieu of confirmatory ruling, in order to avail the tax exemption on the separation benefits received by employees on account of their separation from employment due to death, sickness or other physical disability.

However, RMO No. 26-2011 does not cover separation benefits received by employees, on account of their separation from employment as a result of any other causes beyond the control of the said employee such as redundancy, retrenchment, or downsizing to prevent business losses, for which a request for ruling shall continue to be processed at the Law Division in the National Office.

Below are the requirements and procedures imposed by the BIR when a Certificate of Tax Exemption is applied for: 

1) Letter request from employee (or by his heir) or the employer for the exemption of separation benefits from income tax and withholding tax;

2) Death-certified true copy of Death certificate;

3) 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 that the employee has a serious illness or physical disability that affects the performance of his duties and endangers his life, if he continues working;

b) Clinical record of the employee concerned; and

c) Laboratory examination confirming the illness or medical certificate confirming the physical disability.

Pre-evaluation of an application for a Certificate of Exemption will be made by the Revenue District Office (RDO). The Revenue District Officer of such RDO, within five days from receipt of an application, shall endorse to the Legal Division Chief of the Regional Office concerned, the said application together with the complete set of documentary requirements. The Legal Division will further evaluate and prepare the Certificate of Tax Exemption upon final approval of the Regional Director. Procedures prescribed by the BIR are detailed in RMO No. 26-2011.

The BIR shall not be precluded from requiring additional documents to prove entitlement to tax exemption under the prevailing circumstances.

If the Certificate of Tax Exemption is issued, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the entitled separated employee or his beneficiary.

Like divorce legalizes separation from one’s spouse, this RMO legalizes the tax exemption of separation benefits from employment due to death, sickness or other physical disability. The RMO would somehow ease the burden of the families of separated employees, allowing them to enjoy the separation benefits without the burden of taxes.

(Maria Ruby E. Rea is a Supervisor for Tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected]or [email protected])