Tax Treatment of the Monetization of Employees Earned and Unused Vacation and Sick Leave Credits

September 16, 1992 BIR RULING NO. 262-92 21 (a) 71 029-92 262-92 Marsman & Company, Inc. Marsman Pharma Building 2246 Chino Roces Avenue Makati, Metro Manila Attention: Mr . Efren M . Cruz Employee Relations Manager Human Resources Group Gentlemen : This refers to your letter dated June 4, 1992 in effect requesting a ruling as to the tax treatment of the monetization of your employees earned and unused vacation and sick leave credits. LexLib It is represented that you are engaged in the distribution of various pharmaceutical and consumer products; that your company employs about 1,200 personnel which include about 750 rank and file employees covered by a Collective Bargaining Agreement; that the company as a policy provides fifteen (15) working days vacation leave with pay for its regular employees; that a 3-day vacation leave bonus is granted for every five (5) years of service but the total number of leave credits should not exceed thirty (30) days; that vacation leave credits that were previously scheduled (and rescheduled) for availment during the year but remained unused until the year end may be converted to cash; that the company grants also fifteen (15) working days sick leave with pay for every year of continuous service; that employees who have completed five (5) years of service is granted sixteen (16) working days sick leave with pay; that all unused sick leave credits shall be converted into their cash equivalent within the month of the employee's employment anniversary and based on his prevailing equivalent daily rate; and that sick leave can be granted to those employees who are actually sick and only upon recommendation of a company designated physician. In reply, please be informed that based on the foregoing facts wherein the vacation leave credits of your employees who are unable to go on leave due to the exigencies of the service are monetized, you in effect, have provided a facility or privilege as a means of promoting the health, goodwill and contentment of your employees as contemplated under Section 2 of Revenue Regulations No. 12-86. Such being the case, the monetized earned and unused vacation leave credits of your employees do not constitute additional compensation to them, and, are therefore exempt from the withholding tax on wages provided that same shall not exceed ten (10) days during the year. However, considering that monetization of leave credits is the payment of the money value of the accumulated vacation leave credits without actually going on leave of absence, the monetization of leave credits shall not apply to sick leave credits because the employee who avails of the sick leave credits has to go on sick leave. (BIR Ruling No. 103-92). Very truly yours, JOSE U. ONG Commissioner of Internal Revenue