BIR Ruling No. 242-12

April 10, 2012 BIR RULING NO. 242-12 R.R. Nos. 2-98, 8-2000, 10-2000, 10-2008 and 005-11; BIR Ruling No. 428-2011 Shirley O. Abbang, et al. Local Government Unit of Capul, Northern Samar Madam : This refers to your letter dated August 9, 2011 duly endorsed by Revenue Region No. 14-Tacloban City requesting for a refund of the withholding tax on the monetized value of transferred leave credits. It is represented that you are devolved employees 1 of the Local Government Unit of Capul, Northern Samar; that you applied for monetization of your transferred vacation and sick leave credits, and that however, the Local Government Unit deducted the withholding tax. In reply, please be informed that pursuant to Section 1 of Executive Order (EO) No. 291, abrogating Section 2.78.1 (A) (7) of Revenue Regulations (RR) No. 2-98, and other BIR Rulings which subject the monetization of vacation leave credits in excess of ten (10) days and sick leave credits to income tax, "the monetized leave credits of government officials and employees shall continue to be exempted from income tax". LLphil Under Memorandum Circular No. 31, S. 1991 implementing Joint Civil Service Commission-Department of Budget and Management, Circular No. 1, S. of 1991, as amended by Joint CSC-DBM Circular No. 2-97, S. of 1997 which is the basis of EO 291, both vacation and sick leave credits are allowed to be monetized. Section 2.78.1 of RR No. 2-98 as amended by RR Nos. 8-2000, 10-2000, 10-2008 and 005-11 clarifies that the monetized (vacation or sick) leave credits of government employees are de minimis benefits not subject to income tax and withholding tax, viz. : "Sec. 2.78.1. Withholding of Income Tax on Compensation Income. (A) ... (1) ... xxx xxx xxx (3) Facilities and privileges of relatively small value. ... xxx xxx xxx The following shall be considered as "de minimis" benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees: xxx xxx xxx (b) Monetized value of vacation and sick leave credits paid to government officials and employees; xxx xxx xxx It is clear, therefore, that monetized unused vacation and sick leave credits of government officials and employees are not subject to income tax and consequently to the withholding tax. (BIR Ruling No. 428-2011 dated November 4, 2011) It is the responsibility of the employer to withhold, pay, or refund the tax and furnish the statements required under these Regulations. 2 Accordingly, the withholding tax on the monetized value of leave credits should be refunded by the Municipal Government of Capul, Northern Samar. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. THAECc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Shirley O. Abbang, Yolanda C. Cabatingan, Ma. Cleofe P. Cabili, Marlon P. Cabatingan, Nancy L. Perez, Rosalie B. Manaoag, Lita C. Pearanda and Ely C. Moya. 2. Revenue Regulations No. 2-98.