BIR Ruling [DA-154-03]

May 13, 2003 BIR RULING [DA-154-03] 32 (B) (6) (b) 014-2000; DA-290-99; 139-95; 153-98 Atty. Don P. Porciuncula Suite 218 Trade Center Building Padre Faura St., Ermita Metro Manila S i r : This refers to your letter dated March 4, 2003 requesting on behalf of your client, Mrs. Teresita T. Quazon, for a ruling on whether backwages, 13th month pay and separation pay are taxable and therefore subject to withholding tax on compensation. It is represented that your client, Mrs. Teresita T. Quazon, a businessperson and employer, have under her employ several workers and one of them is Mr. Honorio Dagui with whom she had a long tedious legal dispute before the National Labor Relations Commission; that a decision was rendered ordering her to pay said employee the following amounts: P334,620.00 as backwages P27,885.00 13th month pay P42,120.00 separation pay TOTAL = P404,625.00 and that as an employer, your client is now concerned of her obligation to pay taxes regarding the compensation of her employees and therefore, would want to seek legal opinion as to whether the above-mentioned adjudged amount is taxable and whether she is obligated to deduct the same and make the proper remittance to the BIR In reply, please be informed as follows: 1. Under Section 44 of the Tax Code of 1997, if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year. All items of income shall be included in gross income or gross compensation income, as the case may be, for the taxable year in which received by the taxpayer except those expressly excluded and already subjected to the final income tax, and exemptions as well as deductions taken accordingly, pursuant to Sections 24, 33 and 34 in relation to Section 45 all of the Tax Code of 1997. Salaries, commissions, tips, director's fees, and other forms of compensation are income in the year received, and not in the year earned. ( par. 717, p. 231, U.S. Master Tax Guide (1969 ). Thus, a taxpayer whose income is from salary or the like is required to file his income tax return on the cash basis. 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 a tax heavier than what should have been imposed if his employer had promptly met its obligation. HCaEAT In view of the foregoing considerations, this Office is of the opinion as it hereby holds 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 ). 2. Under Section 32(b)(7)(e) of the Tax Code of 1997, other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature received by officials and employees of both Government and private offices, provided that the 13th month pay when integrated with other benefits does not exceed the aggregate of P30,000.00 shall be excluded/exempted from the gross compensation income. Thus, since the 13th month pay to be received by Mr. Honorio Dagui amounting to P27,885.00 does not exceed the ceiling above-mentioned, the same should be excluded from his taxable compensation income and, therefore exempt from the withholding tax on wages. ( BIR Ruling No. 139-95 dated September 6, 1995 ) 3. Pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, 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 income tax regardless of age or length of services. The above-mentioned law requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, namely (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation . Since, Mr. Honorio Dagui was involuntarily separated, the separation pay received by said employee as a result thereof are exempt from all taxes and consequently from the withholding tax prescribed under 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 disclosed that the facts are different from that as represented, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group