BIR Ruling [DA-329-00]

August 28, 2000 BIR RULING [DA-329-00] RR 2-98 DA-245-99 DA-329-2000 Mr . Jose C . Monzon, Jr . 13 Kahatulan St., Phase II-B-2 Karangalan Village, Manggahan, Pasig City S i r : This refers to your undated letter requesting for a reconsideration on the tax computation of your monetized leave credits. It is represented that you have been in the service of your employer for 24 years; that in December, 1999, you monetized one-half of your earned leave credits amounting to a total of P93,832.50; that it is your contention that an employee is exempt from tax on the monetization of his/her unused vacation and sick leave credits up to ten days; that based on this, you have earned ten-days tax-exempt leave credits available for monetization every year; that since you have been in the service for 24 years, you have earned a total of 240 days tax-exempt leave credits available for monetization; and that you monetized 175 days or one-half of your leave credits, which did not exceed your 240-day limit for tax-exempt monetized leave credits. cCaEDA Based on the foregoing representations, you now request for a reconsideration of the computation of your monetized leave credits. In reply, please be informed that pursuant to Section 2.78.1 (A)(7) of Revenue Regulations No. 2-98, 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. This policy on vacation leave credits is on account of conversion into money of the value of such leave credit to employees who opted not to go on leave. However, it does not apply to sick leave credits, considering that the same is earmarked on the contingency that an employee would have to actually go on leave by reason of sickness or other physical disability, in which case the choice not to avail of the same is not an option available to an employee. (BIR Ruling Nos. DA-245-99 dated April 19,1999 and 099-92 dated March 20, 1992) Accordingly, the rule contemplates that the vacation leave credits which have been monetized must not exceed ten days in the year that it was paid to the employee, in order that the exemption from income tax and consequently to the withholding tax may be availed. Such being the case, the monetization of your earned unused vacation leave credits up to ten days is exempt from income tax and consequently from the withholding tax. The excess, however, is subject to income tax. Thus, your contention that you have not exceeded the number of monetized leave credits exempt from tax, that is, 240 days based on your service record of 24 years, is not correct. Such monetization of your vacation leave credits shall only be exempt from income tax and consequently from the withholding tax, if it does not exceed ten days during the year. Thus, any monetization of said vacation leave credits during the year shall be subject to income tax and consequently to the withholding tax. Moreover, if the monetized leave credits consists of vacation and sick leaves, only the vacation leave credits which have been monetized up to ten days is exempt from income tax and consequently from the withholding tax. The monetized sick leave credits, however, is subject to income tax and consequently to the withholding tax due to the policy that the same is earmarked on the contingency that an employee would have to actually go on leave by reason of sickness or other physical disability, in which case the choice not to avail of the same is not an option available to an employee. (BIR Ruling No. DA-245-99 dated April 19, 1999) Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and inspection Group