Whether Terminal Leave Pay of Co-terminous Employees is Subject to Income Tax

September 30, 1998 BIR RULING NO. 143-98 32 (B)-000-00-143-98 Hon. Ernesto F. Herrera Representative, 1st District Bohol S i r : This refers to your faxed letter dated August 6. 1998 requesting for a ruling as to whether or not the terminal leave pay of your co-terminous employees is subject to income tax and consequently, to withholding tax. It is stated that your second term in the Senate ended on June 30, 1998; that your staff who are holding duly-attested co-terminous appointment by the Civil Service Commission are now applying for the commutation of the their leave credits; and that you want to be informed of the consequences of the terminal leave pay of co-terminous employees in the government in view of the fact that you may not be able to accommodate most of your former start in your new post as Congressman. LexLib In reply please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, any amount received by an official or employee from as a consequence of separation such official or employee from the service of the employer because of death, or sickness or other physical disability or for any cause beyond the control of the said official employee shall not be included in gross income and shall be exempt from taxation. The basic issue to be resolved in this case is whether or not employees of the government holding co-terminous employment who have lost their employment on account of the expiration of the term of office of the said appointing authority is embraced within the meaning of the phrase "for any cause beyond the control of the said official or employee" as to entitle them to tax exemption, as regards terminal leave pay and all amounts received in consequence of such separation. In the case concerning the tax treatment of terminal leave pay, the Supreme Court, in the case of Borromeo v. CSC, 199 SCRA 911, held that: ". . . commutation of leave credits , more commonly known as terminal leave pay , is applied for an officer or employee who retires, resigns or is separated from the service through no fault of his own. (Manual on Leave Administration Course for Effectiveness, published by the Civil Service Commission, pages 16-17). In the exercise of sound policy the Government encourages unused leaves to be accumulated. The government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest new egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy consideration governing retirement benefits ."(Emphasis supplied). Thus, following the above rationale, the Supreme Court categorically ruled in CIR vs. CA, 203 SCRA 72, that the terminal leave pay received by a government official or employee is not subject to withholding (income) tax. Reference may also be made through pertinent rules and guidelines of the Civil Service Commission (CSC). Pursuant to II.4.a.4 of Memorandum Circular No. 38, s. 1993 (Omnibus Guidelines on Appointments and Other Personnel Actions) of the CSC, viz: "II. COMMON REQUIREMENTS AND PROCEDURES FOR REGULAR APPOINTMENTS xxx xxx xxx "4. Employment Status "a. . . . "4) Co-terminous issued to a person whose entrance and continuity in the service is based on the trust and confidence of the appointing authority or that which is subject to his pleasure or co-existent with his tenure or limited by the duration of a project or subject to the availability of funds or issued for a position which is co-existent with the appointee as provided for by law." In the Philippine Civil Service Employee Handbook as published by the CSC, the grounds by which government employees can be separated from service are therein outlined. On the subject of involuntary separation, it is stated, thus: " Involuntary Separation "You can also be forced to leave the civil service. The grounds for this include: xxx xxx xxx the expiration or termination of your appointment or service contract ." Accordingly, the separation of your staff at the expiration of your second term in the Senate on June 30, 1998 can be properly considered as involuntary separation and therefore falls within the purview of the phrase "for any cause beyond the control of said official or employee" under Sec. 32 (B)(6)(b) of the Tax Code of 1997. Definitely, it cannot be said that the element of voluntariness is present in this case. Cessation of employment by operation of law or by expiration of one's term of office is always involuntary on the part of the employee concerned for it is consistent with the experience of man not to want losing that which gives him economic sustenance and livelihood. This is further bolstered by Sec. 32 of the Tax Code, where it said, thus: ". . . the phrase for any cause beyond the control of the said official or employee connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The separation was not of his own making." In view hereof, this Office holds that the terminal leave pay and all amounts received by co-terminous employees of the government on the occasion of their involuntary separation from the service are exempt from the income tax and consequently from the withholding tax. This tax exemption does not of course include the payment of your staff's salary, if any, which is subject to income tax and consequently to the withholding tax. dctai This ruling is issued based on the foregoing facts as represented. However, if it shall be found that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue