BIR Ruling

April 17, 1975 Metropolitan Waterworks and Sewerage System Arroceros Street Manila Attention: Mr . Gregorio N . Garcia Department Head (Accounting) Gentlemen : This is in reply to your letter dated February 5, 1975 requesting information on a query, pertinent portion of which is quoted hereunder as follows: "Please be informed that this Office will be paying back salaries of employees from September 1966 to August 1974 as a result of a much-awaited court decision. The claimants involved are either incumbent employees of the System, retired and/or deceased. Gross claims are subject to 25% deduction: 20% for attorney's fees and 5% to the Union concerned. cd "In this connection, we would like to request information whether those salary differentials are subject to withholding tax, and if so, how will same be computed. While it is true that these claims have not been previously declared as income because nobody was sure this would be granted by the Court, it would be most unfair to the claimants to consider these as income for 1975 only and thus be subject to a higher tax rate. Had the claimants received these during the years these were supposed to have been earned, same could have been used to cover income deficiencies and thus, not subject to tax; or if taxable, could have been computed on a much lower rate. This is not considering the inflationary effects on said income." All items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer and exemptions as well as deductions taken accordingly pursuant to Section 39 of the Tax Code as implemented by Sections 38 and 170 of the Income tax Regulations. All compensation for personal services, no matter what the form of payment, must be included in gross income. Salaries, commissions, tips, directors' fees, and other forms of compensation are income in the year received, and not in the year earned. (par. 717, p. 231, US Master Tax Guide (1969). It is well settled that a taxpayer whose income is from salary or the like is required to file his income tax return on the cash basis. The cash method ignores the time of earning income; it is immaterial whether it has been earned in previous years. Withholding of tax on wages is a method of collecting income tax at source from individual wage earners currently upon the receipt of income. Such being the case, the total amount of back wages which will be paid to the employee-claimants who are still in the service of the Metropolitan Waterworks and Sewerage System, is subject to income tax in 1975 which is the year of actual receipt, and consequently, to the withholding tax prescribed by Revenue Regulations No. V-8 as amended by Revenue Regulations No. V-70. The withholding, however, should be made on the net back wage payments, i.e., the difference between the gross back wage payments and the 25% deduction adverted to in your inquiry. Since the gross income consisting, among others, of the back wages received in 1975, of the aforesaid recipient employees is computed with respect to a fixed period which is the calendar year 1975, only their personal and additional exemptions corresponding to 1975 may be claimed and allowed. As regards the total amount of back wages minus the 25% deduction payable to the retired employees of the System and to the heirs or beneficiaries of claimants who are already dead, the same is taxable income to such recipients. Said amount is not subject to the withholding tax provisions of the Tax Code but should be declared in their income tax returns for 1975. cdta Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."