BIR Ruling [DA-630-99]

November 9, 1999 BIR RULING [DA-630-99] Philippine Deposit Insurance Corporation 2228 Pasong Tamo Street Makati City Attention: Mr . Geronimo V . Ambe Manager, Accounting Center Gentlemen : This refers to your letter dated March 10, 1999 requesting for a ruling on the propriety of granting tax refund previously withheld by the Philippine Deposit Insurance Corporation (PDIC) from the terminal leave pay of a PDIC Vice President who availed optional retirement from the government service under Republic Act No. 1616 and who is below 50 years old at the time of retirement. It is represented that the retiring Vice President contested PDIC's decision to tax her terminal leave pay and demanded a refund citing as basis two Supreme Court decisions on the matter, viz: 1. Zialcita case, 219 SCRA 851 which ruled that terminal leave pay may, in broad sense, partake the nature of gratuity, which is an exclusion from gross income as provided for under Section 32 (B)(6)(f) of the Tax Code of 1999; and 2. Borromeo vs. CSC, 199 SCRA 911 which explained 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 (Manual on Leave Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17). In the exercise of sound personnel policy, the government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. . . . Since terminal leave is applied for by an officer or employee who has already severed his connection with his employer and who is no longer working, then it follows that the terminal leave pay, which is the cash value of accumulated leave credits, should not be treated as compensation for services rendered at that time . . . . In reply, please be informed 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. (Manual on Leave Administration Course for Effectiveness published by the "Civil Service Commission, pages 16-17). The terminal leave pay received by a government official or employee is not part of his gross salary or income but a retirement benefit which is not subject to income tax and consequently to the withholding tax on wages prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997 and as implemented by Revenue Regulations No. 6-82, as amended. The rationale behind the employee's entitlement to an exemption from withholding (income) tax on his terminal leave pay is that the Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits." (Jesus N. Borromeo vs. The Hon. Civil Service Commission, et. al., G.R. No. 96032, 31 July 1991). In view thereof, this Office is of the opinion as it hereby holds that the terminal leave pay received by a government official or employee who availed of the optional retirement not being part of the gross salary or income of a government official or employee but a retirement benefit, is exempt from the withholding tax. (BIR Ruling No. DA-311-98 dated July 7, 1998) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group