BIR Ruling No. 030-13

January 22, 2013 BIR RULING NO. 030-13 Sec. 33 (C) (4) NIRC of 1997; RR 2-98, as amended; RR 10-00; RR 5-2011 Calamba Water District Lakeview Subdivision, Halang, Calamba City, Laguna Attention: Engr. Alberto M. Cervancia General Manager Gentlemen : This refers to your letter dated May 20, 2011, indorsed by Revenue Region No. 9 San Pablo City on July 18, 2011 requesting legal opinion on whether or not monetization of leave credits in excess of 10 days is subject to income tax and withholding tax. Documents submitted disclosed that Calamba Water District (CWD) (TIN 001-222-423-000) is a government-owned and -controlled corporation; that as a withholding agent, it withholds income taxes for its employees; that CWD withholds taxes for monetized leave credits in excess of ten (10) days; that during the "Withholding Tax Update Seminar" led by then Chief of the Bureau of Internal Revenue's Withholding Tax Division, taxpayers were informed that monetization of unused vacation leave credits of government officials and employees are exempt from paying tax in accordance with Revenue Regulations No. 10-2008; that subsequent inquiry with the Bureau's Revenue District Office No. 56, the Office was of the position to withhold tax for the monetized unused leave credits exceeding 10 days that is both applicable to both private and government employees; that further opinion was sought from the Office of the Government Corporate Counsel (OGCC) which explained that " only vacation leave credits to a maximum of 10 vacation leave credits may be monetized per year. If the office will allow monetization of more than ten vacation leave credits when funds are available, monetization in excess of ten days would be subject to tax . . . "; and that due to the contradicting positions, legal opinion is being sought. cSHIaA In reply, please be informed that Revenue Regulations No. 010-08 1 dated July 8, 2008 , provides: "SEC. 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as follows: Sec. 2.78.1. Withholding of Income Tax on Compensation Income . (A) Compensation Income Defined. . . . xxx xxx xxx (3) Facilities and privileges of relatively small value. Ordinarily, facilities, and privileges (such as entertainment, medical services, or so-called "courtesy" discounts on purchases), otherwise known as " de minimis benefits," furnished or offered by an employer to his employees, are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his employees. The following shall be considered as "de minimis" benefits not subject to income tax, hence, not subject to withholding tax on compensation income of both managerial and rank and file employees: (a) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees ; (b) . . ." The foregoing provision was subsequently amended by Revenue Regulations No. 05-11 2 dated March 16, 2011 , which provides: "SEC. 1. Section 2.78.1 (A)(3)(c) and (d) of RR 2-98, as last amended by RR 5-2008, is hereby further amended to read as follows: "Sec. 2.78.1. Withholding of Income Tax on Compensation Income . (A) . . . TESICD (1) . . . xxx xxx xxx (3) Facilities and privileges of relatively small value. xxx xxx xxx The following shall be considered as "de minimis" benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees: (a) Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year; (b) Monetized value of vacation and sick leave credits paid to government officials and employees; (c) . . ." (Emphasis supplied) RR No. 05-11 only made clear the distinction in the treatment of monetized unused vacation leave credits paid to private and government employees that was stated in RR No. 010-08. Monetized unused vacation leave credits of private employees not exceeding 10 days during a year and monetized value of vacation and sick leave credits paid to government officials and employees are not subject to income tax, as well as withholding tax on compensation income. The monetized unused vacation leave credits of government employees may exceed 10 days during a year as the provision so states. In the case of Re: Request of Atty. Bernardo Zialcita for Reconsideration of the Action of the Financial and Budget Office , 3 the Supreme Court en banc held that: "Section 284 of the Revised Administrative Code grants to a government employee 15 days vacation leave and 15 days sick leave for every year of service. Hence, even if the government employee absents himself and exhausts his leave credits, he is still deemed to have worked and to have rendered services. His leave benefits are already imputed in, and form part of, his salary which in turn is subjected to withholding tax on income. He is taxed on the entirety of his salaries without any deductions for any leaves not utilized. It follows then that the money values corresponding to these leave benefits both the used and unused have already been taxed during the year that they were earned." EATCcI Moreover, the amount of 'de minimis' benefits conforming to the ceiling herein prescribed in the Regulations shall not be considered in determining the P30,000.00 ceiling of 'other benefits' excluded from gross income under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the 'de minimis' benefits over their respective ceilings prescribed by these regulations shall be considered as part of 'other benefits' and the employee receiving it will be subject to tax only on the excess over the P30,000.00 ceiling. (RR 2-98, as amended) In view of the foregoing, this Office is of the opinion that monetized value of vacation and sick leave credits paid to government employees, even if it exceeds 10 days, is not subject to income tax or to withholding tax on compensation income. Since CWD has been deducting withholding taxes on the monetized value of leave credits in excess of 10 days from the compensation of its employees, the latter may be entitled to refund subject to the requirements of the applicable provisions of the Tax Code of 1997, as amended. The entitlement to a refund of excess creditable withholding taxes is dependent on compliance with the following requirements: 1. That the claim for refund was filed within the two-year prescriptive period provided under Section 204 (C) in relation to Section 229 of the Tax Code of 1997, as amended; 2. That the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld therefrom; and 3. That the income upon which the taxes were withheld were included in the return of the recipient (Section 2.58, Revenue Regulations No. 2-98, as amended; Citibank N.A. vs. Court of Appeals and CIR, 280 SCRA 459; ACCRA Investment Corporation vs. CA, 204 SCRA 957) . This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts as represented are different, then this ruling shall be considered null and void. cCHITA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as The National Internal Revenue Code" Relative to the Withholding of Income Tax on Compensation and Other Concerns. 2. Further Amendments to Revenue Regulations Nos. 2-98 and 3-98, as Last amended by Revenue Regulations No. 5-2008, with respect to "De Minimis Benefits". 3. A.M. No. 90-6-015-SC October 18, 1990.