Monetized Vacation Leaves - Tax-Exempt

February 10, 1993 BIR RULING NO. 060-93 MONETIZED VACATION LEAVES TAX-EXEMPT 219 72 73-91 060-93 Philippine Appliance Corporation 8377 Dr. A. Santos Avenue Paraaque, Metro Manila Attention: Mr . Cesar T . Garcia Manager, Auditing Services This refers to your letter dated June 6, 1992 stating that you grant vacation leaves with pay to all your employees based on the number of years of continuous regular service (e.g. 16 days for 1 to 4 years of service, 18 days for 5 to 8 years of regular service, etc.); that you reserve the right to schedule and approve earned vacation leaves so as to ensure smooth and orderly operations; that in most instances, employees cannot use all their earned vacation leaves due to the demand of their work; and that earned vacation leaves which are unavailed of at the end of the calendar year are converted into cash, hence you posed the following queries: cdta "1. Can the monetization of unused vacation leave credits in excess of 10 days be considered as tax exempt since the employees cannot go on leave due to the demand of their work? "2. The effectivity date of such tax exemption whether applicable retroactively to the date of Revenue Regulations No. 12-86 as invoked per BIR Ruling No. 029-92 dated January 17, 1992 that is January 1, 1986." In reply, please be informed that under BIR Ruling No. 173-91 monetized vacation leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently to withholding tax. Conversely, the cash equivalent of vacation leaves exceeding ten (10) days is subject to tax. Said ruling, however, cannot be given a retroactive application; hence, it shall apply only to payments of monetized unused vacation leave credits after the issuance of said ruling on September 6, 1991, and not January 1, 1986, the effectivity date of Revenue Regulations No. 12-86. cdt JOSE U. ONG Commissioner of Internal Revenue