Tax Imposed on the Money Value of Accumulated Leave Credits

July 18, 1988 BIR RULING NO. 333-88 28 (b) (7) (B) 158-85 333-88 M a d a m : This refers to your letter February 18, 1988 requesting that the money value of your accumulated leave credits be exempt from withholding tax pursuant to Section 28(b)(7)(B) of the Tax Code, as amended. It is represented that you are an employee of the Philippine Aerospace Development Corporation (PADC); that in a letter dated August 14, 1987, PADC informed you that it can no longer maintain its present workforce due to mounting operating losses; that it is for this reason that PADC was compelled to implement a retrenchment program approved by its Board of Directors in Resolution No. 20 dated August 6, 1987; that said resolution authorizes the payment of one month basic pay as gratuity for every year of service including the money value of earned leaves and the corresponding incentive pay for 1987; that upon recommendation of the PADC Retrenchment Committee, your service was terminated at the close of office hours on September 15, 1987; and that you have requested PADC for the money value of your accumulated leave credits. In reply, please be informed that your request is answered in the negative. Although any amount received by an official or employee or 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 is exempt from tax pursuant to Section 28(b)(7)(B) of the Tax Code, as amended, however, this does not include the cash equivalent of accumulated vacation and sick leaves, which 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 Philippine Air Lines, Inc. vs. Balangit et al. L-8715, June 30, 1956; Sunripe Coconut Products, Inc. vs. National Labor Union (NLU) L-7964, 97 Phil. 691; 51 e.g. 5133). Such being the case, the money value of your accumulated vacation and sick leave credits constitutes compensation for services rendered subject to income tax and consequently to the withholding tax on wages provisions of Section 71 of the Tax Code, Chapter IX, Title II of the same Code, as amended by the Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 12-86 amending Revenue Regulations No. 6-82. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner