BIR Ruling [DA-031-02]

March 07, 2002 BIR RULING [DA-031-02] 24 & 32; 98-91 & 94-93 Ms. Herminia De Vera Tecson 15 Enders Street Filinvest East, Marcos Highway Antipolo City M a d a m : This refers to your letter dated July 3, 2001 requesting for tax exemption on the ex gratia you received from your employer, the Bank of Philippine Islands last June 15, 2001 in the amount of P424,410.00 which is over and above your retirement benefits. It is represented that the said ex gratia was given to you aside from the optional retirement pay you received from BPI when you applied for the Optional Retirement Plan for BPI employees on May 31, 2001; that the optional retirement pay is tax exempt pursuant to the bank policy for retiring employees whose ages are at least fifty years old; that the ex gratia is not included in this policy; that it was awarded to you by BPI when you appealed for special consideration due to your health condition; that based on the merits of your case, you were granted said ex gratia by BPI management which is subject to withholding tax in the amount of P135,361.77. In reply, please be informed that only separation benefits paid to employees by their employer due to optional retirement as contemplated under Section 32(B)(6)(a) of the Tax Code of 1997, may be exempt from income tax. This includes the company's payment for cash equivalent of accumulated vacation and sick leave credits but does not include the company's payment for salary (BIR Ruling No. 98-91 dated June 4, 1991 based on BIR vs. Castaeda and CTA, G.R. 96016, October 17, 1991), bonuses, including 13th month pay. (BIR Ruling Nos. 94-93 dated March 10, 1998 and 517-93 dated December 23, 1993) Moreover, Section 2.78.1 of Revenue Regulations No. 2-98 re: Withholding Tax on Compensation Income, implementing the Tax Code of 1997 provides, viz: "Section 2.78.1. Withholding Tax on Compensation Income . (A) Compensation Income Defined In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee 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 Code; taxable pensions and retirement pay, and other income of a similar nature constitute compensation income. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. 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 individual who performed them." Accordingly, all remuneration for services are generally included in the taxable compensation income of the employees such as but not limited to fringe benefits (monetary or non-monetary e.g. longevity pay, hazard pay and all kinds of allowances, except allowances for quarters, clothing and subsistence which are held to be exempt from income tax pursuant to Revenue Memorandum Circular No. 15-87). Ex gratia is gratuitously given as a favor and does not involve any legal right to receive on the part of the receiver nor a legal obligation to give on the part of the giver. In effect, ex gratia is given as a gift for past service. Moreover, under the Flow of Wealth Theory in Taxation wealth that flows into the hands of a taxpayer is income subject to income tax. In view of the foregoing, this Office is of the opinion as it hereby holds that ex gratia is other income of a similar nature as longevity pay, allowances and commissions considered as compensation income, hence, subject to income tax under Section 24(A) of the Tax Code of 1997, and consequently to withholding tax prescribed under Revenue Regulations No. 2-98. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group