By Marco Fernando L. Ng
DEBIT CREDIT
AS we have opened up our business two months ago, after the great lockdown of March to May of this year, a lot of establishments suffered losses beyond their control and are trying to survive this great pandemic that hounded our planet. And because of that they might choose to swallow the bitter pill of releasing employees currently under their employ.
This too will be a hard decision to make, but if it is necessary for the survival of their business, we respect those decisions. Because of this I would like to share and remind those employers that the “severance” payment of their employees may be exempted to withholding taxes provided they follow ministerial work needed to be coordinated with the Department of Labor and Employment and the Bureau of Internal Revenue. These paper documentations are easy since most notices are being given, and BIR has very easy requirements for this. Here is the excerpt for the primary exemption on those compensation of affected employees:
SECTION 2.78.1. Withholding of Income Tax on Compensation Income.
(A) xxx
(B) Exemptions from withholding tax on compensation.—The following income payments are exempted from the requirement of withholding tax on compensation:
(1) Remunerations received as an incident of employment, as follows:
(a) xxx:
(b) Any amount received by an official or 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 said official or employee, such as retrenchment, redundancy, or cessation of business.
The phrase “for any cause beyond the control of the said official or employee” connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The separation was not of his own making. Whether or not the separation is beyond the control of the official or employee, being essentially a question of fact, shall be determined on the basis of prevailing facts and circumstances. It shall be duly established by the employer by competent evidence, which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made.
Amounts received by reason of involuntary separation remain exempt from income tax even if the official or the employee, at the time of separation, had rendered less than 10 years of service and/or is below 50 years of age.
The procedures for availing of this tax exemption are prescribed in Revenue Memorandum Order 26-2011, as amended by RMO 66-2016. The procedures in these issuances are easy to follow and the documentary requirements required are readily secured. The tax exemption application shall be filed with the BIR Revenue District Office. The tax exemption certificate shall be approved by the BIR Revenue Region. It is to be noted that an essential documentation is the notice of involuntary separation of employee/s to the DOLE. With the current pandemic situation wrecking havoc on the businesses of enterprises, I wouldn’t be surprised to see the increase in numbers of notices to DOLE regarding retrenchment.
Following the guidelines will provide the much needed tax relief to retrenched employees.
Marco Fernando L. Ng is the Managing Partner of M.Ng & T.Lopez partnership firm. He previously worked with two of the largest auditing firms in the Philippines.
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