BIR Ruling [DA-088-00]

February 10, 2000 BIR RULING [DA-088-00] Regional Field Office No . 6 Department of Health Mandurriao, Iloilo City Attention: Dr . Efren A . Kilayko, M . D ., M . H . A . Medical Office VII Officer-In-Charge Gentlemen : This refers to your letter dated January 28, 1998 requesting for consideration and corresponding BIR Ruling involving the Civil Service Commission and Department of Budget and Management Joint Circular No. 2-97 dated June 25, 1997 more particularly on the monetization of vacation leave credits of government officials and employees. It is represented that you received a letter from this Office dated December 22, 1997 informing you of the taxability of employees' benefits and allowances; that the Joint Circular of CSC and DBM allows thirty (30) days maximum monetization of vacation leave credits; and that it is your opinion that this is an amendment of BIR ruling exempting only a maximum of 10 days monetization of leave credits. In reply, please be informed that Section 2.78.1 of Revenue Regulations No. 2-98 provides, viz: "Sec. 27.78.1. 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 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." Based on the foregoing provision, it is the present stand of this Office that only leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently to withholding tax. Hence, if the monetized leave credits exceed ten (10) days, the excess thereof will be subject to income tax and consequently to withholding tax. (BIR Ruling No. DA-061-99 dated February 5, 1999 and BIR Ruling No. 016-96 dated February 20, 1996) Please be guided accordingly. llcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group