Mr. Franco P. Mallare

February 6, 2008 BIR RULING [DA-073-08] Mr. Franco P. Mallare No. 058 Upper Irisan Baguio City S i r : This refers to your letter dated April 16, 2007 requesting for legal opinion on the taxability of the backwages and separation pay you received from Philex Mines, Tuba, Benguet, as a result of a decision promulgated by the Supreme Court in your favor dated August 9, 2005. As a backdrop, the basis of the Decision promulgated by the Supreme Court stemmed from your appeal on the Decision of the Court of Appeals by raising the issues as to whether you and other petitioners retired are dismissed from service and whether said dismissal was illegal. The merits of the case had been clearly and lengthily discussed in the Supreme Court's Decision hence, this Office is inclined to focus on the tax consequence of the separation pay and backwages you received from the Philex Mines as a result of the Supreme Court decision. The dispositive portion of the Supreme Court's Decision provides as follows: "WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated 7 September 2000 and the Resolution dated 3 April 2001 of the Court of Appeals. We ENTER another judgment finding petitioners to have been illegally dismissed and ordering respondent Philex Mining Corporation to reinstate petitioners with full backwages, provided that the amounts petitioners received as net separation pay shall be deducted from their backwages. If reinstatement is no longer possible because the positions petitioners held no longer exist, respondent Philex Mining Corporation shall pay backwages as computed above plus, in lieu of reinstatement, separation pay equal to one-half month pay for every year of service." TaSEHD In reply, having been found by the Court that you were illegally dismissed from service and opted to be separated rather than be reinstated, Section 32 (B) (6) (b) of the Tax Code of 1997 as amended, provides that 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 due to death, sickness or other physical disability or for any cause beyond the control of said official or employee is exempt from the taxes regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. Additionally, any and all amounts received by an official or employee as a result of involuntary separation consisting of the separation package and other benefits, are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter X, Title II of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 2-98, as amended. As regards to the amount received as your backwages with the corresponding withholding tax made thereof, it is considered as remuneration for services that are deemed to have been performed by you for your company prior to or during the period of your illegal dismissal from the service as decided by the Supreme Court. Such being the case, said backwages are subject to income tax and consequently to the withholding tax on wages pursuant to Section 79, Chapter XIII, Title II of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 2-98, as amended. In BIR Ruling No. DA-154-03, a portion reads as follows: "In the case of "Commissioner of Internal Revenue v. Joseph G. R. Robillard & Margaret H. Robillard" (C.A. 308 F. 2d 518, 519) it was held that income received by a taxpayer in 1957 as "back pay" or additional pay for services rendered to his employer for the period from July 1, 1955 through December 1956 which, indubitably, would have been paid prior to 1957 except for the intervention of an event similar in nature to a dispute as to the liability of the employer to pay the remuneration in question, is entitled to a special treatment and was properly allocable to the taxable years 1955 and 1956. Thus considering that the backwages to be received by your employee, Mr. Honorio Dagui, as a consequence of separation from office constitute remunerations for services that would have been performed by the said employee to the year when actually received, or during the period of their suspension from the service, it is felt that a liberal construction of the statute is called for in this particular case if only to protect said employee who, in fact, had been deprived of the payment of his wages and other forms of remuneration, from the payment of tax heavier than what should have been imposed if his employer had promptly met its obligation. CITcSH In view of the foregoing considerations, this Office is of the opinion as it hereby hold that Mr. Honorio Dagui should report as income and pay its corresponding income taxes thereon by allocating or spreading his back wages, allowances and benefits through the years from his separation up to the final decision of the Court awarding the backwages. Said backwages, are subject to withholding tax on wages (BIR Ruling No. DA-290-99 dated May 13, 1999)". (Emphasis supplied) From the above-quoted BIR-Ruling, it can be surmised that a glaring similarity of situations is present in your case, such that the backwages you received as remunerations for services that would have been performed during the period of your suspension from the service should be dealt with liberal construction of the statute so as to afford you protection, having been deprived of the payment of wages and other forms of remuneration, from the payment of heavier tax than what should have been imposed at the time of the illegal suspension or dismissal. In view of the foregoing observations, it is the opinion of this Office as it hereby holds that the amount you received from Philex Mines, Inc., as a consequence of your involuntary separation from said employer, is exempt from income tax pursuant to Section 32 (B) (6) (b) of the Tax Code, as amended. Furthermore, the backwages you received should be reported as income and the corresponding taxes paid thereon by allocating your backwages, allowances and benefits, if there be, through the years of your separation up to the final decision of the Court. Said backwages are subject to withholding tax on wages on the corresponding year supposedly earned. Such being the case, the 32% imposed on your backwages representing withholding tax has no basis in fact. Please be advised accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service