BIR Ruling [DA-061-A-99]

February 5, 1999 BIR RULING [DA-061-A-99] Yazaki-Torres Manufacturing, Inc. 1043 Zobel Roxas cor. Bautista Streets Singalong, Manila Attention: Ms . Nila T . Rafer Finance Director Gentlemen : This refers to your letter dated November 4, 1998 requesting for a ruling on the tax treatment of the monetized unutilized vacation leave credits. cdll It is represented that in order to fully adopt Revenue Regulations implementing the Tax Reform Act of 1997, your company sent representatives to various seminars conducted by different professional organizations that expounded on it; that in one of the seminars, the resource speaker imparted that the monetized value of unutilized vacation leave credits of ten (10) days or less which was paid to an employee during the year is considered supplementary wage, thus, taxable if added to other benefits sum up to more than thirty thousand pesos (P30,000.00); and that however, further inquiries revealed that the said information has been disputed by Section 2.78.1A#7 of RR 2-98. In reply, please be informed that Section 2.78.1 of Revenue Regulations No. 2-98 defined Compensation income as all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code . (emphasis supplied) In addition, the same Revenue Regulations provides, viz: "SEC. 2.78.1. Withholding of Income Tax on Compensation Income: xxx xxx xxx (7) Vacation and Sick Leave Allowances Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitutes compensation. Thus, the salary of an employee on vacation or on sick leave, which are paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the year are not subject to income tax and to the withholding tax." Therefore, the monetized vacation leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently to the withholding tax. However, if the monetized vacation leave credits exceed ten days, the excess thereof will be subject to income tax and consequently to withholding tax. (BIR Ruling No. 016-97 dated February 20, 1996) Moreover, the monetized value of the said unutilized vacation leave credits can not be treated as within the context of "other benefits" which if added, should not exceed Thirty Thousand Pesos (P30,000.00). llcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group