BIR Ruling [DA-122-03]

April 21, 2003 BIR RULING [DA-122-03] RR 2-98 DA-198-2002 Eurotiles Industrial Corporation 2250 Chino Roces Avenue, Pasong Tamo Makati City Attention: Ms. Maureen So Gentlemen : This refers to your letter dated January 2, 2003 requesting for a ruling on the taxability of E-COLA. In reply, please be informed that the term "compensation income" 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 the 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 does not exist any longer at the time when the payment is made between the person in whose employ the services had been performed and the individual who performed them. ( Sec. 2.78.1 (A), Revenue Regulations No. 2-98, as amended ) 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 your query, ECOLA mandated under Wage Order No. NCR-09 to be received by employees form part of their compensation income subject to the withholding tax. Thus, it is the liability of the employer to withhold and remit the corresponding tax due on the said allowances to the BIR. ( BIR Ruling No. DA-198-2002 dated November 8, 2002 ) 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 2316, formerly Form No. W-2) on or before January 31 of the succeeding calendar year. ( Sec. 2.83.1, supra ) THDIaC 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 ECOLA to be received by employees 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 ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group