Don’t miss out on potential tax exemptions for your separation pay. Get the details you need to secure your financial future.
The COVID-19 pandemic has reshaped the landscape of business operations worldwide, and the Philippines is no exception. While some businesses have managed to weather the storm, others faced the tough decision of reducing operational costs or laying off employees to stay afloat in the new normal.
As a result, many employees found themselves involuntarily separated from their employers. In parallel, the rise of remote work to ensure business continuity has brought its own set of challenges, particularly related to mental health and burnout.
Let us explore the tax implications of separation pay for employees who have been retrenched due to circumstances beyond their control and those who have chosen to resign for the sake of their mental well-being. Let’s delve into the complexities of tax treatment in these scenarios.
Involuntary Separation due to Retrenchment
Retrenchment, as defined by the Supreme Court, is the termination of employment initiated by the employer through no fault of and without prejudice to the employees. It typically occurs during times of economic downturns, recessions, or when businesses face losses.
What Retrenched Employees Should Expect
The Labor Code outlines that separation pay should be provided if the employee’s termination is due to various reasons, including closure or cessation of the business, redundancy, or retrenchment.
Tax Treatment of Separation Pay
The Tax Code, as amended, exempts from taxes any amount received by an employee or their heirs from the employer due to separation because of specific reasons such as death, sickness or ,other physical disability, or for any cause beyond the control of the said official or employee, including retrenchment.
However, this exemption is not automatic. To prove eligibility for tax exemption, the employer or employee must secure a Certificate of Tax Exemption (CTE) of separation benefits from Income Tax and Withholding Tax.
To secure the CTE, the following documents as prescribed in Revenue Memorandum Order (RMO) No. 66-2016 shall be submitted to the Bureau of Internal Revenue (BIR):
Letter of Request: The process begins with the official/employee or the employer (or the heirs, if applicable) submitting a formal letter requesting the exemption of separation benefits from income tax and withholding tax. This letter should be detailed and clear in its intent.
Written Notice: At least thirty (30) days before the termination becomes effective, the employer is required to provide written notice to the employee. This notice should also be sent to the appropriate Regional Office of the Department of Labor and Employment. In this notice, the grounds for termination must be specified clearly.
Board Resolution or Affidavit: Depending on the legal structure of the employer (juridical entity or sole proprietor), the appropriate document needs to be prepared:
Board Resolution (For Juridical Entity): If the employer is a juridical entity (such as a corporation or partnership), a board resolution must be drafted. This resolution should address the necessity of retrenchment to prevent business losses.
Affidavit (For Sole Proprietor): In the case of a sole proprietorship, the owner should prepare an affidavit. This affidavit should include the following important points:
- State that the retrenchment is reasonably necessary and likely to prevent business losses.
- Provide evidence that the losses, if already incurred, are substantial, serious, actual, and real. If the losses are expected, there should be reasonable evidence to show that they are imminent.
- Emphasize that the retrenchment is conducted in good faith, with the genuine intent of advancing the business’s interests, and not as an attempt to bypass or violate employees’ rights to job security.
- Explain that the selection of employees to be terminated has been carried out using fair and reasonable criteria. It’s crucial to maintain transparency in the selection process.
Voluntary Resignation due to Mental Health
While many employees have chosen to resign due to mental health issues, there is no specific guidance from the Bureau of Internal Revenue (BIR) regarding the tax implications of such resignations.
Tax Treatment of Final Salary in Resignations
As resignations are initiated by the employee, existing BIR rulings state that the payment of the final salary is still subject to tax. This is because the salary earned during employment is considered taxable income, regardless of the reason for resignation.
Different Boats, Unique Challenges
The COVID-19 pandemic has reshaped the employment landscape, leading to both involuntary separations and voluntary resignations. The tax treatment of separation pay in these scenarios varies, with retrenched employees having the potential for tax exemption if they meet specific criteria while resigning employees are generally subject to tax.
As we navigate these challenging times, both employers and employees need to understand the tax implications of separation pay. This knowledge can help individuals make informed decisions and ensure compliance with tax regulations.
In these uncertain times, we are all in different boats, facing unique challenges. Layoffs and resignations have become prevalent, underscoring the importance of addressing not only our physical but also our mental and financial well-being.
As we move forward, let’s hope for a brighter future where job security is more stable, and businesses thrive once again, and remember that our health—whether physical, financial, or mental—is paramount above all else.