BIR eases rule on tax exemption of dismissed workers

The Bureau of Internal Revenue is making it easier for employees who lost their jobs for reasons beyond their control—such as death, sickness or physical disability—to not pay any tax on separation packages.

The BIR issued Revenue Memorandum Order No. 26-2011, which states that such employees or their heirs can secure certificates of tax exemption (CTE) from the agency’s regional offices instead of having to go to its headquarters in Quezon City.

By law, any amount received from an employer due to separation resulting from reasons beyond the employee’s control was exempt from income tax regardless of the employee’s age or length of service.

In practice, those who lost their jobs for such reasons—or their heirs—need a ruling from the BIR national office certifying that the separation pay was in fact exempt from taxes.

Otherwise, employers would deduct withholding taxes, which are then remitted to the BIR to avoid the possibility of being assessed at a later date.

In RMO 26-2011, Internal Revenue Commissioner Kim S. Henares said this practice was detrimental to the employees.

“The recovery of the withheld taxes can only be made through tax refund,” Henares said.

She explained that the order devolved to the regional offices the processing of applications for request for rulings confirming that separation pay of such nature was tax-exempt.

However, she clarified that the regional offices would issue CTEs, which would serve to avoid the deduction of withholding tax.

In a related development, Internal Revenue Deputy Commissioner Nelson M. Aspe said that cooperatives were tax-exempt by law, but that they have to apply for and be issued a CTE before they could enjoy such status.

Aspe made the clarification after receiving complaints from some cooperatives about alleged misinterpretation by agency officials about the former’s tax exemption.

He said in a memorandum dated June 9 that the confusion related to Section 13 of the implementing rules of the Republic Act 9520 or the Cooperative Code of 2009. The provision states that cooperatives registered with the Cooperative Development Authority should apply for a CTE within 60 days from the date when its certificate of registration was issued.

The rules provide that cooperatives who filed their applications beyond the 60 days should pay taxes before the issuance of the CTE.

However, the rules also said that late applicants could file for tax credit or refund of taxes that were paid since the subject cooperative was registered up to the issuance of the CTE.