Tax Imposed on the Payments Made to the Ex-Petrophil Employees

May 4, 1988 BIR RULING NO. 180-88 28 (b) (7) (B) 026-88 180-88 Gentlemen : This refers to your letter dated February 16, 1988 requesting clarification of BIR Ruling No. 28(b)(7)(B)-333-87-026-88 dated February 5, 1988 more specifically the last paragraph thereof, viz: "It is, however, understood that the tax exemption does not include company's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any. Such being the case, payments of the total cash equivalent of accumulated vacation and sick leave credits, i.e., for forty (40) days plus additional or excess of forty (40) days, to the aforesaid separated employees are subject to income tax and consequently to the withholding tax on wages." It is represented that under Petrophil company policy, an employee separated from employment through resignation, retrenchment or redundancy is entitled to receive cash equivalent of his accrued vacation leave credits for 2 years but not to exceed a total maximum of forty (40) days; (30) days for service years between 5 to 10 years; 34 days for 11 to 19 years; (40) days for 20 years and above. However, in the case of the eight ex-Petrophil employees subject of the aforementioned ruling, they were paid all their accrued vacation leaves, including those exceeding their 2 years entitlement, such payment having been intended as special redundancy/separation benefit by Petrophil. In reply thereto, I have the honor to inform you that your payments to the ex-Petrophil employees for accrued vacation leave credits equivalent to their two (2) years entitlement are subject to income tax and consequently to the withholding tax on wages. However, the additional redundancy payments paid to the aforementioned employees measured in terms of vacation leave credits exceeding their two (2) years leave credit entitlement are exempt from income tax and consequently from the withholding tax on wages since they are actually not leave credits but additional redundancy payments. cdtech This modifies BIR Ruling No. 28(b)(7)(B)-333-87-026-88 insofar as the abovementioned additional or excess of forty (40) days payments are concerned since they are actually special redundancy payments. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner