Tax Exemption of Monetized Leave Credits Paid to Employees

March 20, 1992 BIR RULING NO. 099-92 21 (a) 72 173-91 099-92 Sycip Gorres Velayo & Co. P.O. Box 256, Makati Central Post Office Makati, Metro Manila Attention: Atty . T . A . Tejada Tax Division Gentlemen : This refers to your letter dated January 29, 1992 requesting confirmation of your opinion to the effect that the cash equivalent of unused sick leave (SL) and vacation leave (VL) credits to be paid to the employees of your client, the Far East Bank and Trust Company, (FEBTC) is not considered additional compensation, hence exempt from income tax and consequently from the withholding tax on wages. It is represented that FEBTC employees are entitled to 15 days VL and 15 days SL credits annually; that company policy requires the employees to use a minimum of five days VL; that the unused VL may be commuted to cash; that in the case of SL, the unused SL credits shall likewise be converted into cash; and that pursuant to company policy, the maximum leave credits that can be converted into cash annually are 10 days VL and 15 days SL. In reply thereto, I have the honor to inform you that the monetized unused vacation leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently to the withholding tax. (BIR Ruling No. 031-92 dated January 23, 1992). However, considering that monetization of leave credits is the payment of the money value of the accumulated vacation leave credits without actually going on leave of absence, the monetization of leave credits therefore shall not apply to sick leave credits because the employee who avails of the sick leave credits has to go on sick leave. (See Joint Civil Service Commission and the Department of Budget and Management Circular No. 1, S. of 1991). Very truly yours, JOSE U. ONG Commissioner of Internal Revenue