Monetized Vacation Leaves

May 3, 1993 BIR RULING NO. 176-93 MONETIZED VACATION LEAVES 28 (b) (7) (B) 196-92 176-93 Philippine Bank of Communications 214-216 Juan Luna St., Binondo Manila Attention: Mr . Mario A . Ignacio AM-Personnel Department This refers to your letter dated June 17, 1992, requesting opinion as to whether the BIR ruling exempting from the withholding tax monetized unused vacation leave credits of ten days also applies to employees of private companies who are currently and/or presently employed and/or resigned or retired. In reply, please be informed that when the vacation leave credits of your employees who are unable to go on leave due to the exigencies of the service, are monetized, the employer, in effect, has provided a facility or privilege as means of promoting the health, goodwill and contentment of employees as contemplated under Section 2 of Revenue Regulation No. 12-86. Such being the case, monetized unused vacation leave credits, not exceeding ten (10) days during the year, of your employees who are currently and/or presently employed are not subject to income tax and consequently to the withholding tax (BIR Ruling No. 31-92). Under Section 28 (b) (7) (A) of the Tax Code, as amended, "retirement benefits received by officials and employees of private firms, whether individuals or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, that the retiring official or employee has been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of his retirement: Provided, further , that the benefits granted under this subparagraph shall be availed of by an official or employee only once . . ." shall not be included in gross income and shall be exempt from taxation under Title II of the Tax Code. Moreover, under Section 28 (b) (7) (B) of the same Code, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability, or for any cause beyond the control of the said official or employee, shall not be included in gross income and shall be exempt from taxation under Title II, of the Tax Code. The Supreme Court, in the case of Commissioner of Internal Revenue vs. The Court of Appeals and Efren P. Castaeda, G.R. No. 96016, October 17, 1991, ruled that the terminal leave pay received by a government official or employee is not part of compensation, but a retirement benefit exempt from income tax. Accordingly, terminal leave pay received by official and employees as part of a tax exempt retirement/separation benefit paid in accordance with a BIR-approved private retirement benefit plan or due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall be exempt from income tax and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by B.P. Blg. 135, as implemented by Revenue Regulations No. 6-82, as amended. However, the cash equivalent of unused vacation leave credits of employees who opted to resign from the service of his employer are subject to tax as resignation connotes voluntariness or acquiescence on the part of the separated employee or official. aisadc VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue