BIR Ruling [DA-087-06]

March 6, 2006 BIR RULING [DA-087-06] Sections 32 (B), 34 (M) & 204 (C); BIR Ruling No. 002-99 Mr . Francisco M . Reyes c/o Philippine Science High School Agham Road, Diliman Quezon City S i r : This refers to your letter dated October 13, 2004 requesting for a clarificatory ruling on whether or not the following are exempted from withholding tax on compensation: 1) Pag-ibig contribution in excess of the mandatory PhP100.00/month contribution; 2) GSIS UOLI premium contribution; 3) SSS contribution (as self-employed); 4) life insurance premium with health insurance rider from private insurance firms; and 5) other pre-need plans from private pre-need firms like memorial, educational, pension, etc.; when such tax exemptions were implemented; if tax credit certificate/s (TCC) can be issued; and the procedures, requirements and the appropriate BIR office who has jurisdiction to issue the TCC/s. HcSaTI It is represented that you are an employee of the Philippine Science High School (PSHS); that PSHS only exempts from withholding tax on compensation GSIS mandatory social insurance contribution (SIC), PhilHealth contribution, PhP100.00 Pag-ibig contribution, and PhP2,400.00 health insurance premium. In reply, please be informed that Section 32(B)(7)(f) of the Tax Code of 1997 as implemented by Section 2.78.1(B)(12) of Revenue Regulations No. 2-98, which took effect on January 1, 1999, explicitly exempts from withholding tax GSIS, SSS, Medicare, Pag-ibig contributions and union dues of employees. Since the law and implementing regulations do not categorically state that the exemption covers only the regular GSIS and Pag-ibig contributions, it is safe to conclude that Pag-ibig contributions in excess of the mandatory PhP100.00/month, and GSIS UOLI premium contributions are likewise excludible from gross income of the taxpayer and hence, exempt from income tax. This is so, because the provisions of law in question do not make any distinction between regular GSIS insurance and optional GSIS insurance as well as Pag-ibig contributions. Well-settled is the rule that when the law does not distinguish, we should not distinguish. In the case of an individual receiving a combination of compensation and business/professional (mixed) income, SSS contribution on top of GSIS contribution is exempt from withholding tax provided only the GSIS contribution can be deducted from compensation income. SSS contribution can be deducted from business or professional income (Section 2.79.1, Rev. Reg. No. 2-98, as amended). Under Section 34(M) of the Tax Code of 1997, only premium payments for health and/or hospitalization insurance not exceeding PhP2,400.00 per family or PhP200.00 a month paid during the taxable year by the taxpayer himself, including his family, is allowed as deduction from the gross income. Accordingly, life insurance premiums with health insurance rider from private insurance firms and other pre-need plans from private pre-need firms like memorial, educational, pension, etc. are not deductible from the gross income of the employee. On the issue of whether a TCC can be issued, this Office answers in the affirmative. Section 2 of Revenue Regulations No. 5-2000 provides "SEC. 2. SOURCES OF TAX CREDIT. A tax credit is being granted for the following: (a) At the option of the taxpayer, excess quarterly income taxes paid reflected in the final adjustment return. (b) At the option of the taxpayer, over withholding at source of income taxes to the extent that the amount of such overpayment was not deducted or applied against income tax due . (c) Input taxes as follows: i. Attributed to zero-rated sales made by VAT-registered taxpayer including export sales by a VAT-registered taxpayer including export sales by a VAT-registered exporter; ii. Attributed to effectively zero-rated sales made by VAT-registered taxpayer; and iii. On capital goods imported or locally-purchased by a VAT-registered taxable person. (d) Unused input taxes resulting from cancellation of VAT registration due to retirement from or cessation of business, or due to changes in or cessation of status as a VAT taxable taxpayer under Section 106(C) of the Tax Code. (e) Excise taxes paid on: i. Petroleum products sold to tax-exempt entities and international carriers; ii. Goods locally produced or manufactured and actually exported without returning to the Philippines; (f) Taxes erroneously or illegally paid or penalties imposed without authority. Any taxpayer who is erroneously registered as a VAT person will not be covered by paragraphs (c) and (d) of this Section. In no case shall a tax refund or tax credit certificate be given resulting from availment of incentives granted pursuant to special laws for which no actual tax payment was made." (Emphasis supplied.) A tax credit is defined as a type of offset in which the taxpayer is allowed a deduction from his tax for other taxes paid (Black's Dictionary, Fifth Edition). Under Section 204(C) of the Tax Code of 1997, tax credits are issued in favor of taxpayers to recompense or restore to the aggrieved taxpayer the amounts paid for erroneous, illegal unauthorized, and excessive assessment and collection of taxes by the government and its agents. In this case, the BIR issues a TCC in favor of the taxpayer reflecting the amount erroneously and illegally collected or paid. The amount of creditable tax withheld shall be allowed as a tax credit against the income tax liability of the payee in the quarter of the taxable year in which income was earned or received. Claims for tax credit or refund of any creditable income tax which was deducted and withheld on income payments shall be given due course only when it is shown that the income payment has been declared as part of the gross income and the fact of withholding is established by a copy of the withholding tax statement duly issued by the payer to the payee showing the amount paid and the amount of tax withheld therefrom (Section 2.58.3 of Revenue Regulations No. 2-98, as amended). TAIESD Pursuant to Section 204(C) of the Tax Code of 1997, the Commissioner may credit or refund taxes erroneously or illegally received provided that the taxpayer files in writing with the Commissioner (through the Appellate Division) a claim for credit or refund within two (2) years after the payment of the tax. Provided, however, that a return filed showing an overpayment shall be considered as a written claim or refund. SDcITH 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, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue