Request for Reconsideration of RR No. 3-98 on Monetization of Leave Credits

September 26, 2000 BIR RULING NO. 045-00 Civil Service Commission Constitution Hills, Batasan Complex Diliman 1126, Quezon City Attention: Ms. Corazon Alma G. de Leon Chairman Gentlemen : This refers to your letter dated May 17, 1999 requesting for a reconsideration on the policy issuance of the Bureau of Internal Revenue as contained in Revenue Regulations No. 3-98 dated May 21, 1998. It is your concern that under said Regulations, leave credits of employees not exceeding ten (10) days in a year are exempt from this tax, thereby suggesting that monetization of leave credits exceeding 10 days is already subject to tax. It is your request that the said regulations be reconsidered in the light of the new policy of the Commission that those who have enough leaves can monetize the same up to the maximum number of 30 days and even up to 50% of all earned leave credits in the case of those who are in great financial need such as those afflicted with serious illness. Moreover, it is your position that the tax must not be imposed on leaves in view of the nature of leave laws as social legislation; that monetization is simply the conversion of the leave credits to their equivalent money value; that in fact, such leave credits, when taken upon the separation of the employee as terminal leave, are tax exempt; that the time of availment, whether during employment or at retirement/separation of the employee from the service must not be considered material in the determination of whether the same is tax exempt or not, otherwise there would be two sets of standards relative to leave credits; that the Government will benefit from early commutation of leave credits because the computation shall be based on the current salary rate while in terminal leave, the basis of computation is the highest salary rate ever received by the employee. Finally, and as contained in CSC Memorandum Circular No. 31, s. 1991, it is the established policy of the Commission that the monetization of leave credits shall be exempted from income tax, such that Resolution No. 991124 was adopted by the collegial Commission specifically requesting this Office to exempt monetized leave credits from fringe benefits tax and income tax for the justifications stated therein. In reply, please be advised that the ten-day allowable monetization of leave credits for tax exemption purposes have been crafted into Revenue Regulations No. 3-98 in relation to pertinent Joint CSC-DBM Circulars governing the subject of leave credits, namely, Joint CSC-DBM Circulars No. 1, s. 1991. The said Circular defines monetization of leave credits as payment of the money value of the accumulated vacation leave credits without actually going on leave of absence. [Rule III, Section 1 (a)] Thus, officers and employees in the career and non-career service, whether permanent, provisional, temporary or causal, who have accumulated at least fifteen (15) days vacation leave/service credits shall be allowed to monetize a maximum of ten (100 working days vacation leave/service credits a year. SIDTCa The scheme for the monetization of leave credits is in the nature of a facility or privilege of relatively small value which are offered or furnished by the employer merely as a means of promoting the health, goodwill contentment, or efficiency of its employees. Thus, although the law does not expressly state that such monetized leave credit is exempt from tax, still this Office felt justified in holding for the exemption of such monetized 10-day leave credits since the recognition of exemption is anchored on leave laws being in the nature of social legislation which is to be liberally interpreted and on the concept of " de minimis ' benefits not subject to tax (BIR Ruling No. 174-91 dated September 6, 1991). However, further extending the exemption to a " maximum number of 30 days and even up to 50% of all earned leave credits " would materially depart from the " de minimis " concept and hence the exemption requested would be beyond the authority of this Office to recognize. Such being the case, we regret not being able to accede to your request. It is suggested, however, that the issue be taken up with Congress for the passage of an enabling law on the matter. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue