BIR Ruling [DA-009-04]

January 7, 2004 BIR RULING [DA-009-04] Sec. 2.78.1 (A) RR 2-98 043-01 Public Estate Authority 7th Floor Legaspi Towers 200 Paseo de Roxas Makati City Attention: Mr. Teodorico C. Taguinod General Manager/CEO Gentlemen : This refers to your letter dated October 3, 2003 requesting for a ruling on the tax consequences relative to the back benefits to be received by the Public Estates Authority (PEA) employees covering Cost of Living Allowance (COLA) and Amelioration Allowance for the periods July 1, 1989 to July 16, 1999; and that you also presented the following issues for our determination: "1. Application of the yearly tax rates only on the COLA and Amelioration Allowance to be received using the computation format shown in Annex "A"; "2. Centralized withholding tax collection and remittance of taxes due; "3. Waiver of the filing of individual amended ITRs on taxes due for the prior years by the employees; and "4. Remittance of the total withholding tax 30 days after receipt of the BIR Resolution." In reply thereto, please be informed that the term "Compensation Income" means all remuneration for services performed by an employee for his employer under an employee-employer relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria , allowances, commissions (e.g., transportation, representation, entertainment and the like), fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Section 33 of the Tax Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed there. (Sec. 2.78.1(A), Revenue Regulations No. 2-98) Please note that the withholding tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent. (Sec. 2.78. Ibid) In applying the above-cited regulations to the case at bar, the COLA and Amelioration Allowances to be received by the PEA employees form part of their compensation income subject to withholding tax. Thus, it is the liability of the employer, PEA, to withhold and remit the corresponding tax due on the said allowances to the BIR. Considering that such back benefits, i.e. , COLA and Amelioration Allowances, constitute remunerations prior to the year 1989 when actually received by such employees, a liberal construction of the statute is called for in this particular case if only to protect employees from the payment of a tax heavier than what should have been imposed if the employer had promptly met its obligation. (BIR Ruling No. 346-88 dated July 21, 1988) Accordingly, in filing their annual income tax returns, they should report as income and pay their respective income taxes by allocating or spreading their back benefits for the years 1989 to 1999 or equivalent to a period of ten (10) years. ASIETa With regard to the application of the yearly tax rates on COLA and Amelioration Allowances, this Office interposes no objection to the manner by which PEA will compute the benefits to be received by the employees which clearly shows the tax withheld from them during the years in question, as shown in Annex "A" attached herewith. (BIR Ruling No. 014-2000 dated January 7, 2000) On the issue of centralizing the withholding tax collection and remittance of taxes due, Section 81 of the Tax Code of 1997 provides that except as the Commissioner otherwise permits, taxes deducted and withheld by the employer on wages of employees shall be covered by a return and paid to an authorized agent bank, Collection Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation, where the principal office is located. (Sec. 2.81, Revenue Regulations No. 2-98, as amended) It is to be emphasized, however, that every employer or other person who is required to deduct and withhold the tax on compensation, . . . shall furnish every employee from whose compensation taxes have been withheld the Certificate of Income Tax Withheld on Compensation (Form No. 2316, formerly Form No. W-2) on or before January 31 of the succeeding calendar year. (Sec. 2.83.1, supra) Considering that the processing and payment of the back benefits of the employees will be done at the PEA Central Office, your request to centralize the collection and remittance of the withholding tax is hereby granted. Thus, you are hereby authorized to remit to the Revenue District Office No. 47-East Makati, the withholding tax due from the employees entitled to the back benefits corresponding to the years 1989 to 1999. Your request for the waiver of the filing of amended returns on taxes due for prior years covering the COLA and Amelioration Allowances is hereby granted. This Office has already occasioned to rule that, in lieu of said amended returns, PEA should instead file with the concerned Revenue District Office an Alphabetical List of Employees who were given back benefits for 1989 to 1999 on a per year basis. This is for monitoring purposes to enable this Office to check if the income tax due from each employee tallies with what was actually remitted by them. (BIR Ruling No. 043-01 dated September 21, 2001) Finally, taxes constitute the lifeblood of the nation and are greatly needed to support the government and its widely expanding services to the people. Thus, the collection and remittance of the withholding tax due on the back benefits to be received by the employees of PEA should never depend on the resolution of this Office but should instead arise at the time an income is paid or payable, whichever comes first. (Sec. 2.57.4, Revenue Regulations No. 2-98, as amended) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group