BIR Ruling [DA-031-00]

January 11, 2000 BIR RULING [DA-031-00] Hon . Primo T. Murillo, M . D . Office of the Provincial Governor Tandag, Surigao del Sur S i r : This refers to your letter dated November 5, 1999 stating that the Bureau of Internal Revenue District Office No. 106, Tandag, Surigao del Sur has deducted income tax out of the Additional Compensation from the official and employees of the Provincial Government of the Province of Surigao del Sur which in your opinion is in violation of Administrative Order No. 53 of the President of the Philippines dated May 12, 1993, which provides under paragraph 1.2 "Extend the same privilege to the rest of the personnel of the government which shall partake of an allowance and not subject to GSIS, HDMF premiums and income tax deductions pending its formal integration into the basic pay of subject government personnel"; that from the said provision, you are of the belief that the Additional Compensation Allowance (ACA) or (ADCOM) is not subject to income tax until its integration into the basic pay of the Provincial Government employees, and that you are likewise informing this Office that in other provinces and cities, ACA were not deducted from Income Tax which is the reason why the personnel of the provincial government of Surigao del Sur did not include ACA as taxable income. Based on the foregoing representations, you are now requesting for a ruling whether Administrative Order No. 53 has already been amended, so that you can inform all the personnel of the provincial government who has not paid their income tax on ACA or ADCOM to pay as soon as possible. In reply, please be informed that in several rulings issued by this Office on the same subject matter, one which is BIR Ruling No. 103-97 dated July 29, 1997 addressed to the Bicol University Union of Federated Faculty Association, we have consistently ruled that the subject additional compensation allowance is subject to income tax although it is not yet subject to the withholding tax prescribed under Section 79 of the Tax Code of 1997, as implemented by Revenue Regulations No. 6-82, as amended and the only time that it will be subjected to the withholding tax deduction is upon its formal integration to the basic pay of the said government personnel as provided for under paragraph 1(1.2) of the said Administrative Order No. 53 reading: "This Administrative Order is issued to extend the same privilege to the rest of the personnel of the government, which shall partake of an allowance and not subject to GSIS, HDMF premiums and income tax deduction pending its formal integration into the basic pay of the subject Government personnel with salary grade up to Grade 25". (Emphasis Supplied) The term "additional compensation allowance", as its name connotes, is indeed a "compensation" embraced within the term "taxable compensation income" which is defined as "all remuneration for services performed by an employee for his employer unless specifically excepted under Secs. 31, 32(B) and 78 of the Tax Code of 1997, the name by which the remuneration for services as designated is immaterial. Thus, salaries, wages, endowments and honoraria, bonuses, allowances (such as transportation), representation (entertainment and the like), fringe benefits (monetary and non-monetary), fees, including director's fees, taxable pensions and retirement pay, and other income of a similar nature constitute taxable compensation income. Moreover, the term "income tax deductions" under the said AO 53, refers to withholding tax deductions, and the phrase "not subject to income tax deductions" means that ACA is not yet subject to the withholding tax deductions pending its formal integration into the basic pay of the subject government personnel but it does not necessarily mean that it is not at all subject to income tax or that it is exempt from income tax . It simply means ACA will only be subject to the withholding tax deductions on compensation income under Sec. 79 of the Tax Code of 1997 upon its formal integration into the basic pay of the subject Government personnel. In view thereof, your query although answered in the negative or AO 53 has not yet been amended, still this Office is of the opinion as it hereby holds that ACA, although not yet subject to withholding tax pending its formal integration into the basic pay of government personnel, is nevertheless a taxable compensation income and hence, includible in the W-2 Form as part of the gross compensation income subject to the schedular rate of tax prescribed by Section 24(A) of the Tax Code of 1997. (BIR Ruling No. DA-184-98 dated May 8, 1998) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group