Agustin, Judi

6:00
De Jesus, Fe
2016
Jimena, Pam

S, 3:00April

2,

IV-BSBAM

Commissioner of Internal Revenue vs. Court of Appeal and

Castaneda
Write-Up for Report on Case A
I.

Facts
Efren Castaneda retired from government service as Revenue
Attach in the Philippine Embassy, London, England. Upon
retirement, he received benefits such as the terminal leave pay. The
Commissioner of Internal Revenue withheld P12, 557 allegedly
representing that it was tax income. Castaneda filed for a refund,
contending that the cash equivalent of his terminal leave is exempt
from income tax.

II.

Issue
The issue is whether or not terminal leave pay received by a
government official or employee on the occasion of his compulsory
retirement from the government service is subject to withholding
(income) tax.

III.

Held
The Solicitor General contends that the terminal leave is based
from an employer-employee relationship. That as part of the
services rendered by the terminal leave pay is part of the gross
income of the recipient.
Cited the Section 28 of the National Internal Revenue Code:
". . It (terminal leave pay) cannot be viewed as salary for purposes
which would reduce it. . . . there can thus be no commutation of
salary when a government retiree applies for terminal leave
-because he is not receiving it as salary. What he applies for is a
commutation of leave credits. It is an accumulation of credits
intended for old age or separation from service...."
The Court of Tax Appeals ruled in favor of Castaneda and
ordered the refund while the Court of Appeals affirmed decision of
CTA.
The Court has already ruled that the terminal leave pay received by
a government official or employee is not subject to withholding
(income) tax.

". . . commutation of leave credits, more commonly known as

terminal leave, is applied for by an officer or employee who retires,
resigns or is separated from the service through no fault of his own.
(Manual on Leave Administration Course for Effectiveness published
by the Civil Service Commission, pages 16-17). In the exercise of
sound personnel policy, the Government encourages unused leaves
to be accumulated. The Government recognizes that for most
public servants, retirement pay is always less than generous if not
meager and scrimpy. A modest nest egg which the senior citizen
may look forward to is thus avoided. Terminal leave payments are
given not only at the same time but also for the same policy
considerations governing retirement benefits."
IV.

ACCORDINGLY, the petition for review is hereby DENIED.

Why the Petition was Denied
A. Definition of Terminal Leave
Terminal Leave is filed by a government employee who retires,
resigns, or separates from the service for whatever cause.
Terminal leave benefits can be released even if the employee
claiming it:
a. (1) has a pending administrative or criminal case; or
b. (2) has been convicted of a case which includes the
penalty of forfeiture of retirement benefits.
Under existing rules, the terminal leave benefit is based on the
highest monthly salary received by the employee at any time
during his employment. The formula to be used is:
c. TLB = S x D x CF
d. Where: TLB = Terminal leave benefits
e. S
= Highest monthly salary
f. D
= No. Of accumulated vacation and sick leave
credits
g. CF
= Constant Factor of .0481927
the request for payment of terminal leave benefits must be
made within TEN years from the effective date of retirement,
resignation or separation.
B. Background
Section 32 (B)(6)(b) of the 1997 Tax Code, as amended, provides
for exemption of separation pay:
Any amount received by an official or employee or by his heirs
from the employer as a consequence of separation of such
official or employee from the service of the employer because of
death sickness or other physical disability or for any cause
beyond the control of the said official or employee.

But it requires two conditions before separation benefits are

granted
tax
exemption,
namely:
1. The official or employee is separated from 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;
and
2. The official or employee or his heirs receive any amount from
the employer on account of such separation.
On several occasions, the Bureau of Internal Revenue
(BIR) held that any and all amounts received by employees as a
consequence of separation from employment for any causes
beyond the control of the said employee are exempt from
income tax and, consequently, from withholding tax on
compensation. This exemption includes the commutation of
unused leave credits due to involuntary separation from
employment, more popularly known as "terminal leave pay,"
regardless of the number of days.
In BIR Ruling No. 199-2011, dated last July 29, the bureau
ruled that commutation and payment of monetized unused
vacation leave credits as a result of involuntary separation of
employees from service is not subject to income tax, and
consequently to withholding tax on compensation, but only for
up to days of vacation leave. Hence, cash equivalent of vacation
leave credits in excess of 10 days is subject to tax.

Sources:
http://thepinoycivilservant.com/2014/09/12/terminal-leave-benefit/
http://www.chanrobles.com/legal6nationalinternalrevenuecodeof1997.html#.Vs7F2YcG03
http://www.chanrobles.com/cralaw/1991octoberdecisions.php?id=797