Tax Exemption of Monetized Unused Vacation Leave Credits of Employees

December 22, 1992 BIR RULING NO. 368-92 21 50 029-92 368-92 AVON Products Mfg., Inc. 4th Floor, Fortune Building, 160 Legaspi St., Legaspi Village Makati, Metro Manila Attention: Mr . Angelo D . Bernaldo Corporate Planning/Finance Director Gentlemen : This refers to your letter dated 7 September 1992 requesting a ruling on whether the monetized unused vacation leave credits of your employees given on a yearly basis or upon cessation of employment are not subject to income tax and consequently, to the withholding tax on compensation. cdpr It appears that you adopted a policy to pay the cash equivalent of earned but unused leave credits every second week of December each year on the basis of your employees' present salary; that upon termination of employment whether voluntary or involuntary, you pay the cash equivalent of their accumulated vacation and sick leave credits. In reply, please be informed that the monetized unused vacation leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently, to the withholding tax. 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 therefore shall not apply to sick leave credits because the employee who avails of the sick leave credits has to go on sick leave. (See Joint Civil Service Commission and the Department of Budget and Management Circular No. 1, S. of 1991) Moreover, a terminal leave pay (money value of accumulated unused vacation and sick leave credits), to a retiring employee who is separated from the service of his/her employer either (1) involuntarily for causes such as death, sickness or other physical disability or for any cause beyond the control of the said official or employee, or (2) in accordance with a BIR approved Private Retirement Benefit Plan shall be exempt from both income and withholding taxes pursuant to Section 28 (b) (7) (A) and (B) of the Tax Code as amended. (Please see also Commissioner of Internal Revenue vs. The Court of Appeals and Efren Castaeda, G.R. No. 96016, 17 October 1991. prcd Very truly yours, JOSE U. ONG Commissioner of Internal Revenue