Denial of Request to Refund Taxes Withheld from Employees' Monetized Leave Credits

May 3, 2002 BIR RULING NO. 018-02 RR 2-98 000-00 Department of Social Welfare and Development Batasan Pambansa Complex, Constitution Hills Quezon City Attention: Belinda C. Manahan Undersecretary for Management Gentlemen : This refers to your letter dated November 13, 2000 requesting for authority to refund to your employees the taxes you withheld from their monetized leave credits in excess of ten (10) days in the aggregate amount of P653,962.79 for the calendar year 1999. It is represented that in the calendar year 1999, you withheld from your employees' monetized leave credits in excess of ten (10) days the income tax due thereon in the aggregate amount of P653,962.79 pursuant to Section 2.78(A)(7) of Revenue Regulations 2-98 dated April 17, 1998; and that said Section 2.78.1 (A) (7) of RR 2-98 was subsequently abrogated by Executive Order 291 (MONETIZATION OF LEAVE CREDITS OF GOVERNMENT OFFICIALS AND EMPLOYEES) dated September 27, 2000, viz .: "SEC. 2. Abrogation of BIR Ruling on Monetized Leave Credits . Hence, pursuant to Section 17, Article VII of the Constitution, I hereby abrogate all previous rulings, including Section 2.78.1(A)(7), p. 27 of Revenue Regulation No. 2-98 dated April 17, 1998 issued by the Bureau of Internal Revenue which subjected the monetization of leave credits to income tax, which I have noticed to be inconsistent with the provision of Republic Act (R.A.) No. 8424, the "Tax Reform Act of 1997", as well as the intention on the grant of such benefits." It is your position that the abrogation of Section 2.78 (A) (7) of Revenue Regulations 2-98 by Section 2 of Executive Order 291 renders erroneous the withholding of the income tax on your employees' monetized leave credits in excess of ten (10) days entitling said employees to the refund thereof under Section 229 of the NIRC of 1997. In reply, please be informed that after consideration of the facts and the applicable law thereto, we cannot grant you the authority to refund to your employees the income tax withheld from their monetized leave credits in excess of ten days. Section 229 of the NIRC of 1997 allows the refund of erroneously or illegally collected taxes. The withholding tax in the amount of P653,962.79 was not erroneously nor illegally collected. Section 2.78(A)(7) of Revenue Regulations 2-98 specifically provided that the monetized leave credits in excess of ten days is subject to income tax, to wit: "Sec. 2.78. Withholding Tax on Compensation. xxx xxx xxx (7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or sick leave, which are paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of the 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." There is no dispute that at the time said amount was collected, Section 2.78 (A) (7) of Revenue Regulations 2-98 was a valid regulation implementing an existing law. It was promulgated by the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, by virtue of the power vested in him under Section 244 of the NIRC of 1997. It is a well-settled rule in administrative law that administrative regulations and policies enacted by administrative bodies to interpret the law which they are entrusted to enforce have the force and effect of law ( Sierra Madre Trust vs. Secretary of Agriculture and Natural Resources, 121 SCRA 384 [1983]; Asturias Sugar Central Inc. vs. Commissioner of Customs, 29 SCRA 617 [1969]; Antique Sawmill Inc. vs. Zayco, et al. ,17 SCRA 316 [1966]. The fact that Section 2.78 (A) (7) of Revenue Regulations 2-98 was subsequently abrogated by his Excellency President Joseph E. Estrada under Executive Order No. 291 does not render erroneous the withholding of income tax on your employees' monetized leave credits in excess of ten days as, at the time it was collected, a valid regulation implementing an existing law mandated its collection. Accordingly, we regret to deny your aforesaid request for lack of legal basis. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue