Monetized Unused Leave Credits Not Subject to Income Tax and Consequently to Withholding Tax

January 17, 1992 BIR RULING NO. 029-92 21 (a) 72 173-91 029-92 Punongbayan & Araullo 6th Floor, Vernida IV Bldg. Alfaro St., Salcedo Village 1200 Makati, Metro Manila Attention: Ms . Rosario S . Bernaldo Tax Partner Gentlemen : This refers to your letter dated November 21, 1991 requesting confirmation of your opinion that the monetization of unused leave credits of the employees of your client, Electronic Telephone Systems Industries, Inc. (ETSI), in accordance with company policy is not subject to income tax and consequently, to the withholding tax on compensation. It appears that your client has adopted a policy to pay the cash equivalent of earned but unused leave credits; that in the past, there was no fixed date for payment of unused leave credits; instead, payments were being made by your client depending on the availability of funds; that in the latest Collective Bargaining Agreement, payment date of unused leave credits is fixed at December 15; that leave credits are earned by all employees including probationary employees on a monthly basis at the rate generally of 1.25 each for sick and vacation leaves; that the use of leave credits earned during probationary period starts only upon confirmation of regular employment status; that vacation leaves earned if not used are generally forfeited; that in exceptional circumstances when the employee cannot go on vacation leave because of the demand/exigencies of his/her work, vacation leaves may be monetized upon recommendation of the Manager and approval of the authorized Officer; and that, in support your request for an affirmative confirmation, you invoked BIR Ruling No. 173-91 which holds that the monetized leave credits of government employees does not constitute additional compensation to the government employees and consequently, not subject to income tax and to the withholding tax on compensation pursuant to Section 2 of Revenue Regulations No. 12-86. In reply, I have the honor to inform you that based on the foregoing facts wherein the vacation leave credits of your client's employees who are unable to go on leave due to the exigencies of the service are monetized, the employer in effect, has provided a facility or privilege as a means of promoting the health, goodwill, contentment of its employees as contemplated under Section 2 of Revenue Regulations No. 12-86. Such being the case, to effect, uniform and reasonable treatment of what constitutes facility for government and private employees, the monetized unused vacation leave credits of your client's employees not exceeding ten (10) days also during the year, shall likewise be exempt from withholding tax. Very truly yours, (SGD.) JOSE U. ONG Commissioner of Internal Revenue