Money Value of Accumulated Vacation and Sick Leaves of Government and Private Employees Subject to Income Tax

August 8, 1985 BIR RULING NO. 121-85 29-c-7 053-85 121-85 Gentlemen : This refers to your letter dated May 8, 1985 requesting clarification on the applicability to retiring employees from private firms/employers of Opinion No. 99, Series of 1985 of the Office of the President that the cash equivalent of the accumulated vacation and sick leave credits of retiring government employees is not subject to income tax. cdti In reply, please be informed that this Office still maintains and believes in the correctness of its ruling that the money value of accumulated vacation and sick leaves of government as well as private employees, are part of compensation for service rendered subject to income tax and consequently, to the withholding tax on wages provisions of Chapter XI, Title II of the Tax Code as implemented by Revenue Regulations No. 6-82. For this reason, this Office has requested the reconsideration of the above opinion of the Office of the President. Unless the said request for reconsideration is denied, the aforesaid ruling of this Office will be followed. Social security benefits, retirement gratuities, pensions and other similar benefits received by retiring employees and workers, whether received from Philippine or foreign government agencies and other institutions, private or public, were unqualifiedly exempt from income tax pursuant to P.D. No. 220 which took effect on June 20, 1973. However, on June 3, 1977, P.D. No. 1158-A was passed amending certain sections of the National Informal Revenue Code of 1939 for incorporation in the consolidation and codification of all existing revenue laws, i.e., as of June 3, 1977 under P.D. No. 1158. Thus, effective June 3, 1977, subparagraph (b) of Section 29 of the National Internal Revenue Code of 1939 was amended by Section 2 of P.D. No. 1158-A by incorporating in the National Internal Revenue Code of 1977, the provisions of Section 1 of Republic Act No. 4917 and of P.D. No. 220 as Section 29(b) (7)(A), (B), (C), (D), (E) and (F) (now Section 29(c)(7)(A), (B), (C), (D), (E) and (F) thereof. In fact, Section 29(c)(7), (A), (B), (C), (D), (E) and (F) of the Tax Code of 1977, as amended, cover the whole subject of P.D. No. 220. Under the principle of "Ejusdem generis" where general terms follow the designation of particular things or classes of persons or subjects, the general terms will be construed to include those things or persons of the same class or of the same nature as those specifically enumerated. (Crawford, Statutory Construction, p. 191). Thus, the phrase "other similar benefits" in P.D. No. 220 following an enumeration of social security benefits, gratuities, pensions includes only such benefits which are of the same nature of like character as those particularly mentioned or enumerated which consist of payment of benefits on account of complete separation from the service of the employer thereby excluding from the ambit of the statute, payment of benefits which are actually part of the compensation/salary earned, payable and accumulated throughout the years, e.g., accumulated vacation and sick leave credits, while the employee is still in the employ of the employer and therefore, part of the taxable compensation of said employee. Such being the case, the ruling of this Office subjecting the money value of accumulated vacation and sick leaves to income tax is still in force and is not in any way superseded by P.D. No. 220. Finally a leave privilege is an accessory to an individual's right to hold office. Vacation and sick leaves are privileges arising out of employment. A vacation leave is granted to give employees opportunity to replenish worn-out energy and acquire new vitality to perform duties efficiently (Sun-Ripe Coconut Products, Inc. vs. The National Labor Union, No. L-7964, prom. Oct. 18, 1985) while a sick leave is intended to improve the health during employment for better work performance (Rocio vs. Auditor General, G.R. No. L-11557, prom. April 11, 1959). Accordingly, as a privilege enjoyed by an employee and in fact, payable to him even while he is still in the service or employ of his employer as part of his compensation for services rendered, the money value of accumulated vacation and sick leave credits of retiring government or private officials and employees is subject to income tax and consequently, to the withholding tax on wages provisions of Chapter XI, Title II of the Tax Code as implemented by Revenue Regulations No. 6-82. cdta Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner