BIR Ruling [DA-453-99]

August 10, 1999 BIR RULING [DA-453-99] Office of the President of the Philippines Malacaang, Manila Attention: Mr . Florio O . Ibaez Director IV Gentlemen : This refers to your letter dated May 10, 1999 requesting in effect for a ruling as to whether or not the leave monetization authorized under the CSC-DBM Joint Circular No. 1, s. 1991, as amended, is subject to tax considering that the same is a special privilege granted to your employees in the form of amelioration. In reply, please be informed that said Joint Circular defines monetization of leave credits as the payment of the money value of the accumulated vacation leave credits without actually going on leave of absence. Rule III, Section 1(a) provides that officers and employees in the career and non-career service, whether permanent, provisional, temporary or casual, who have accumulated at least fifteen (15) days vacation leave/service credits shall be allowed to monetize a maximum of ten (10) working days vacation leave/service credits a year. prcd Moreover, pursuant to Rule I, Section 1 of the said Joint Circular, leave laws are social legislations which had been enacted to promote the physical and mental well-being of public servants and should be responsive with the times and be interpreted reasonably in favor of the employees; and that monetization of leave credits aims, among others, to: a) provide necessary additional funds to finance the education, health or other emergency expenses of the employee, or any member of his family; and b) allow the employee to continue reporting for work and be paid his salary for service actually rendered even if he chooses to monetize portion of his accumulated vacation leave credits. Gleaned from the foregoing objectives, the leave credits monetized scheme is indeed a facility or privilege of relatively small value which are offered and furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of the employee as contemplated in Section 2.78.1(A)(3) of Revenue Regulations No. 2-98. Moreover, being a social legislation, a liberal construction is justified. Such being the case, the ten-day monetized leave credits do not constitute an additional compensation to the employee; hence, the same shall be exempt from income tax, and consequently, from withholding, pursuant to the said Regulation. (undated BIR Ruling No. 173-91) However, Section 2.78.1 of Revenue Regulations No. 2-98 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." (emphasis supplied) Therefore, the 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 leave credits exceed ten (10) days, the excess thereof will be subject to income tax and consequently to withholding tax. (BIR Ruling No. DA-61-99 dated February 5, 1999) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)