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

September 13, 1985 BIR RULING NO. 158-85 29-c-7-F 053-85 158-85 S i r : Reference is made to your Opinion No. 114, Series of 1985 which affirmed and reiterated your Opinion No. 99, Series of 1985 holding that the rulings of this Office to the effect that the money value of the accumulated vacation and sick leave credits of retiring government officials and employees is subject to income tax, has been superseded by Presidential Decree No. 220. In connection therewith, I have the honor to request further reconsideration on the matter for the following reasons, viz: 1. The money value of accumulated vacation and sick leave credits of government officials and employees is not a tax-exempt benefit within the contemplation of P.D. No. 220 (now Section 29 (c)(7)(A), (B), (C), (D), (E) and (F), Tax Code as amended) even if received upon their retirement. The pertinent regulation which has the force and effect of law states that amounts of so-called "vacation allowances" or "sick leave credits" paid to an employee constitute compensation. Thus, the salary of an employee on vacation, or in sick leave, paid notwithstanding his absence from work constitute compensation and, therefore, subject to the withholding tax. (Sec. 2(d), Revenue Regulations No. 6-82 dated October 1, 1982) Vacation and sick leaves are privileges to be enjoyed by an employee in fact, payable to him even while he is still in the service or employ of his employer in addition to and as part of his compensation for services rendered. The purpose of vacation and sick leave privileges is to give the employee a much needed rest, and not merely an additional salary . (Paras' Civil Code of the Philippines Annotated, Vol. I, 11th ed. (1984) citing Phil. Air Lines, Inc. v. Balanguit et al., L-8715, June 30, 1956; Sun-Ripe Coconut Products, Inc. vs. National Labor Union (NLU) L-7964, 97 Phil. 691; 51 O.G. 5133) In general, all officers, employees and laborers in the government service, including those in government-owned or controlled corporations, whether permanent, provisional or temporary, after six months of continuous, faithful and satisfactory service, are entitled to 15 days vacation and 15 days sick leaves with pay for every year of service rendered, exclusive of Saturdays, Sundays and public holidays. Computation of vacation and sick leaves shall be made on the basis of one (1) day vacation leave and one (1) day sick leave for every twenty four (24) days of actual service. Vacation and sick leaves shall be cumulative and any part thereof which may not be taken within the year in which earned may be carried over to the succeeding years, and when the employee voluntarily resigns, retires, or is separated from the service through no fault of his own, he shall be entitled to the commutation of all his accumulated vacation and/or sick leaves to his credit which, in no case, shall exceed three hundred (300) days, exclusive of Saturdays, Sundays and public holidays. (CSR Rule XVI, (A) Secs. 1 and 2 (a)) The Supreme Court in deciding the claim for benefits of the heirs of the late Mario V. Chanliongco, a government employee (Adm. Matter No. 190-Ret. October 18, 1977, 79 SCRA 364) held that the money value of the unused vacation and sick leave , unpaid salary and 10% adjustment due to the employee as of his death form part of his conjugal estate because vacation with pay is not a gratuity but is compensation for services rendered . (citing Ramey vs. State, 296 N.W. 323, 296 Mich. 449) It is to be noted that while for income tax purposes, the employee's monthly compensation is immediately subjected to the withholding tax on wages in accordance with Revenue Regulations No. 6-82, the said two (2) days vacation and sick leave allowances, when not utilized or availed of by the employee within any month or year while the employee is still in the service but accumulated and their cash equivalent received only upon said employee's complete separation from the service, e.g., retirement, death of employee, etc., are not yet subjected to the corresponding withholding tax. Consequently, the fact that they are cumulative and commutative do not change their true nature, those of being untaxed and unused additional wages of an employee that have accumulated throughout the years and, therefore, not the tax-exempt retirement benefit within the contemplation of P.D. No. 220 (now Section 29(c)(7) of the Tax Code as amended) even if received upon his retirement or separation from the service. Moreover, Section 286 of the Revised Administration Code reading: "286. When vacation leave and sick leave may be taken . Vacation leave and sick leave shall be cumulative and any part thereof which may not be taken within the calendar year in which earned may be carried over to the succeeding years, but whenever any officer, employee, or laborer of the Government of the Philippines shall voluntarily resign or be separated from the service through no fault of his own, he shall be entitled to the commutation of all accumulated vacation and/or sick leave to his credit: Provided, That the total vacation leave and sick leave that can accumulate to the credit of any officer or employee shall in no case, exceed ten months: Provided, further, That the proper Department Head may in his discretion authorize the commutation of the salary that would be received during the period of vacation and sick leave of any appointed officer or employee or teacher or laborer of the Philippine Government and direct its payment on or before the beginning of such leave from the fund out of which the salary would have been paid : Provided, furthermore , That no person whose leave has been commuted following his separation from the service shall be reappointed or reemployed under the Government of the Philippines before the expiration of the leave commuted unless he first refunds the money value of the unexpired portion of the leave commuted." (Italization ours, see also Sec. 2(b), Rule XVI, Civil Service Law) and cited in your Opinion No. 114 negates your stand that the money value of the accumulated vacation and sick leaves constitutes retirement benefits as envisaged by P.D. No. 220 because under the aforequoted provision of law the cash value of vacation and sick leaves are actually earned during the period of employment of the employee concerned such that he can even get a commutation of such leaves or get the cash equivalent thereof while still in the employ of his employer, the Philippine Government. In other words, the accumulation or receipt of the cash value of such leaves is merely an option which may or may not be exercised by the employee upon retirement. Hence, for being an accumulated compensation for services rendered (In re: Mario V. Chanliongco supra ), the money value of such unused vacation and sick leaves when received by the employee upon his retirement or separation from the service is subject to the withholding tax on wages. Such being the case, the ruling of this Office subjecting the money value of accumulated vacation and sick leaves 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 is still in force and is not in any way superseded by P.D. No. 220. 2. The present issue is now pending resolution in court. The question at issue, in this case, is now pending in the Court of Tax Appeals, CTA Case No. 3809 entitled "Efren P. Castaeda vs. Commissioner of Internal Revenue" involving refund of income tax withheld on the money value of said petitioner's accumulated vacation and sick leave which he received upon retirement from the government service. The issue may reach the Supreme Court if the party adversely affected is not satisfied with the decision of the Court of Tax Appeals. 3. Opinions and rulings of the Commissioner of Internal Revenue are reviewable by the Court of Tax Appeals and, thereafter, by the Supreme Court . The Court of Tax Appeals has exclusive appellate jurisdiction to review by appeal decisions of the Commissioner of Internal Revenue in cases involving disputed assessments and refund of internal revenue taxes. (Sec. 7, R.A. No. 1125) Hence, if a protest against an assessment involving internal revenue taxes is denied in whole or in part, the party adversely affected may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the decision. (Sec. 319-A, Tax Code) And any party adversely affected by the decision of the Court of Tax Appeals may appeal to the Supreme Court (Sec. 18, R.A. No. 1125). In other words, it can safely be stated that only the judicial branch of the Government reviews the opinions or rulings of the Commissioner of Internal Revenue on tax matters, as in the instant case. In the light of the foregoing considerations, it is informed, with due respect to that Office, that our present stand on the matter will be continuously pursued unless the same is reversed by final judgment of the Supreme Court in the aforesaid Castaeda case. cdta Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner