BIR Ruling [DA-136-03]

April 29, 2003 BIR RULING [DA-136-03] RR 2-98 043-2001 The National Development Company NDC Building, 116 Tordesillas Street Salcedo Village, Makati City Attention: Ms. Ofelia B. Roxas Assistant General Manager Finance Group Gentlemen : This refers to your letter dated September 18, 2000 requesting for exemption from income tax the amelioration pay of ten percent (10%) of the basic salary and Cost of Living Allowance (COLA) of P500.00 per month that the National Development Company (NDC) intends to grant to its employees for the calendar years 1989 to 1999. It is represented that, in view of the ruling of the Supreme Court in the case of Rodolfo S. De Jesus, et al. vs. Commission on Audit, et al., promulgated on August 12, 1998, it is imperative that NDC pays its employees and officers their amelioration pay and COLA for the period 1989 to 1999. In reply, please be informed that in BIR Ruling No. 043-2001 dated September 21, 2001, this Office ruled that COLA and amelioration allowances form part of employees' compensation income subject to withholding tax, to wit: "In reply thereto, 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 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 benefit 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 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 the individual who performed them. (Sec. 2.78.1(A), Revenue Regulations No. 2-98) HcSDIE "xxx xxx xxx "In applying the above-cited regulations to the case at bar, the COLA and Amelioration Allowances to be received by the PPA employees form part of their compensation income subject to withholding tax. Thus, it is the liability of the employer PPA, to withhold and remit the corresponding tax due on the allowances to the BIR. Considering that such back benefits, i.e. , COLA and Amelioration Allowances, constitute remunerations prior to the year 1989 when actually received by such employees, a liberal construction of the statute is called for in this particular case if only to protect employees from the payment of tax heavier than what should have been imposed if the employer had promptly met its obligation. (BIR Ruling No. 346-88 dated July 21, 1988) Accordingly, in filing their annual income tax returns, they should report as income and pay their respective income taxes by allocating or spreading their back benefits for the years 1989 to 1999 or equivalent to a period of ten (10) years." Accordingly, this Office regrets to inform you that your request is denied for lack of legal basis. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group