BIR Ruling [DA-155-99]

March 15, 1999 BIR RULING [DA-155-99] Mr. Arnulfo Mirafuente c/o Room 111, South Wing House of Representatives Batasang Pambansa Complex Quezon City S i r : This refers to your letter dated May 13, 1997 requesting for legal opinion as to whether or not "terminal pay" or simply unused leave credits is subject to withholding tax. You stated that you were a co-terminus employee of the Senate under the Office of then Senator Wigberto E. Taada; that upon the expiration of his term of office, you received your "terminal pay" or simply unused leave credits which was slapped a withholding tax; and that you believed that such terminal pay is not subject to tax as held by the Supreme Court in Castaeda case, stating that "Commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own" and that "not being part of gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income tax". Further, in the same case, compulsory retirement is considered "a cause beyond the control of said official or employee even if the person involved knew fully well that such an event will surely transpire." In reply, please be informed that under Section 32(B)(6)(b) of the Tax Code of 1997 (then Section 28(b)(7)(B) of the Tax Code of 1977, as amended) any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall not be included in gross income and shall be exempt from taxation under Title II of the Tax Code. The Supreme Court in the case of Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016, October 17, 1991, held that the terminal leave pay received by a government official, or employee is not part of compensation but a retirement benefit exempt from income tax, and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by B . P . Blg . 135, and as implemented by Revenue Regulations No . 6-82, as amended . Accordingly, although the termination of your employment with the Senate, particularly at the Office of then Senator Wigberto Taada was an event which you knew fully well would surely transpire upon the expiration of the term of office of the Senator, the said circumstance would still fall within the phrase "cause beyond the control of an employee". Such being the case, the terminal pay which you received as a result thereof, shall be exempt from income tax, and consequently from the withholding tax. (BIR Ruling No. 117-92 dated 2, 1992) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be null and void. LLphil Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group