Tax Exemption of the Monetized Leave Credits Given to Employees by Reason of Involuntary Separation or Compulsory Retirement

March 25, 1992 BIR RULING NO. 103-92 21 (a) 72 173-91 103-92 San Miguel Corporation 40 San Miguel Avenue, Mandaluyong, Metro Manila Attention: Mr . Nazario L . Avendano Senior Vice-President and Comptroller Gentlemen : This refers to your letter dated February 24, 1992 stating that San Miguel Corporation pursuant to existing collective bargaining agreements with the different unions (about 35) and its time-honored practice is granting 15 days vacation leave with full pay each year of satisfactory and continuous service to regular employees; that although the employee has already earned vacation leave credits in the first year, these credits can only be enjoyed in the second year; that at the start of the third year, any accumulated and unenjoyed vacation leave credits is commuted to cash paid to the employees; that for the purpose of crediting, the year period shall be considered from April 1 to March 31 of the following year; that if an employee dies or his services are terminated for any cause, the money value of whatever earned but unenjoyed vacation leave he may have to his credit the time of termination of his employment shall be paid to him or to his heirs as the case may be; that on the assumption that during his entire employment, the employee did not avail or made use of vacation leave credits earned, he would have accumulated vacation leave credits equivalent to a maximum of thirty (30) days at the time of his death or involuntary separation; that San Miguel Corporation in accordance with its existing Health and Welfare Program, is granting thirty (30) days sick leave with full pay to all regular employees for every year of service; that unused sick leave credits may be accumulated up to a maximum of 180 days; that accrued and unused sick leave in excess of 180 days as of March 31 of each year shall be commuted to cash computed at current basic salary and being paid on the succeeding May 1; and that upon compulsory retirement (65) or termination of employment for reasons not attributable to the fault of the employee, regardless of age or length of service, said employee shall be paid the cash equivalent of his accumulated and unused sick leave based on his last basic monthly salary or last basic daily wage as the case may be. In connection therewith, you now request confirmation of your opinion to the effect "(A) That the cash equivalent of vacation leave credits given to employees by reason of involuntary separation or compulsory retirement is not taxable income, hence, not subject to withholding tax; "(B) That the cash equivalent of accumulated sick leave credits given by reason of compulsory retirement or termination of employment for cause beyond the control of the employee is not taxable income and therefore not subject to withholding tax; and "(C) That the monetized unused vacation leave credits (up to a maximum of 15 days) and sick leave credits in excess of 180 days (up to a maximum of 30 days) of employees earned during the year are not likewise subject to income tax, hence, exempt from withholding tax." In reply, thereto, I have the honor to inform you that the cash equivalent of vacation leave credits as well as the accumulated sick leave credits given by reason of compulsory retirement or termination of employment for cause beyond the control of the employee are not subject to income tax and consequently to the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. (BIR Ruling No. 238-91 dated November 8, 1991; BIR Ruling No. 031-92 dated January 23, 1992) Moreover, the monetized unused vacation leave credits shall also be exempt from withholding tax provided the same shall not exceed ten (10) days during the year. (BIR Ruling No. 173-91 dated September 6, 1991; BIR Ruling No. 031-92 dated January 17, 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 shall not therefore 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) adc Very truly yours, JOSE U. ONG Commissioner of Internal Revenue