BIR Ruling [DA-162-02]

September 16, 2002 BIR RULING [DA-162-02] Philippine Heart Center East Avenue, Quezon City Attention: Ms . Corazon M. Perez Chief, Accounting Division Gentlemen : This refers to your follow-up letter dated January 4, 2002 relative to your letter dated August 3, 2000 requesting for a ruling as to whether or not the terminal leave pay received by Dr. Gregorio Patacsil (Dr. Patacsil) is subject to income tax and consequently to withholding tax. It is represented that as Chief Accountant of the Philippine Heart Center (PHC), you are in a dilemma as to whether the employee who retires from the service below the compulsory retirement age of 65 is subject to withholding tax since this is considered voluntary separation; that however, on one occasion the Commission on Audit (COA), in the case of Borromeo vs. CSC, 199 SCRA 911, decided in favor of the claim of one of the Center's employees who opted for an early retirement and recommended the refund of the tax withheld from his terminal leave benefits; that on October 31, 1995, Dr. Patacsil retired from the government service as assistant director of the PHC; that upon retirement, Dr. Patacsil received his salary for October 16-31, 1995 and money value of his leave credits for which the PHC withheld the sum of P30,109.80 as withholding tax; that on April 10, 2000, Dr. Patacsil filed a claim for refund from COA approximately four (4) years after the payment of the tax; and that COA decided in his favor and recommended for the refund of such amount. Based on the foregoing representations, you now request a ruling on the following: "(1) Are you going to consider the money value of the accumulated leave credits/terminal pay as not taxable regardless of whether or not the employee retires at the compulsory age of 65 or opted for an early retirement; "(2) Is Dr. Patacsil entitled to a refund of the amount withheld in view of Section 229 of the Tax Code of 1997; and, "(3) If the answer in question number 2 is affirmative, can PHC refund the amount after verifying the computation of his income tax return for the calendar year 1996 and claim it as a tax credit." In reply thereto, please be informed as follows: (1) The Supreme Court has ruled that terminal leave pay received by a government official or employee is not subject to withholding (income) tax. In citing the case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al ., G.R. No. 96032 dated July 31, 1991, the Court explained the rationale behind the employee's entitlement to an exemption from withholding (income) tax on his terminal leave pay as follows: ". . . 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. (Mutual on Leave Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17). ( Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 96016, October 17, 1991 ) Thus, based on the decision of the Supreme Court government employee who retires at the compulsory age of 65 or opted for an early retirement is exempt from the withholding tax on the terminal leave pay received by him. (2) Section 299 of the Tax Code of 1997 provides "No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. "In any case, no suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, that the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid." It is clear from the above-cited section that a claim for refund should be commenced within two years counted from the date of payment of the tax, regardless of any supervening cause. Thus, failure to comply with the requirement regarding the institution of the action or proceeding in court within two years after the payment of the tax is a bar to the recovery of the same. Accordingly, we regret to inform you that Dr. Patacsil is no longer entitled to the refund of the amount of P30,109.80 representing erroneously withheld tax. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group