BIR Ruling [DA-178-06]

March 27, 2006 BIR RULING [DA-178-06] 043-2001; Sec 2.78.1 (A) (6) (a), R.R. 2-98; Sec 2, R.R. 8-00; Sec 1, R.R. 10-00 Robert M. Visbal Bulwagan ng Katarungan Tacloban City S i r : This refers to your letter dated August 23, 2005 concerning your inquiry as to the rule of taxation on allowances received by government employees. In reply, please be informed that under Section 2.78.1 (A) (6) (a) of Revenue Regulations (RR) No. 2-98, in general, fixed or variable transportation, representation and other allowances which are received by a public officer or employee or of a private entity, in addition to the regular compensation fixed for his position or office, are compensation subject to withholding tax. To this effect, this Office ruled that COLA and amelioration allowances form part of employees' compensation income subject to withholding tax. (BIR Ruling No. 043-2001 dated September 21, 2001). However, please take into account Section 2 of RR No. 8-00 which amended the above section of RR No. 2-98. The pertinent portion of this section provides that: cIHCST "(6) Fixed or variable transportation, representation and other allowances. "(a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a public officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding. PROVIDED, HOWEVER, THAT REPRESENTATION AND TRANSPORTATION ALLOWANCE (RATA) GRANTED TO PUBLIC OFFICERS AND EMPLOYEES UNDER THE GENERAL APPROPRIATIONS ACT AND THE PERSONNEL ECONOMIC RELIEF ALLOWANCE (PERA) WHICH ESSENTIALLY CONSTITUTE REIMBURSEMENT FOR EXPENSES INCURRED IN THE PERFORMANCE OF GOVERNMENT PERSONNEL'S OFFICIAL DUTIES SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX. PROVIDED FURTHER, THAT PURSUANT TO E.O. 219 WHICH TOOK EFFECT ON JANUARY 1, 2000, ADDITIONAL COMPENSATION ALLOWANCE (ACA) GIVEN TO GOVERNMENT PERSONNEL SHALL NOT BE SUBJECT TO WITHHOLDING TAX PENDING ITS FORMAL INTEGRATION INTO THE BASIC PAY. CONSEQUENTLY, AND EFFECTIVE FOR THE TAXABLE YEAR 2000, ACA SHALL BE CLASSIFIED AS PART OF THE "OTHER BENEFITS" UNDER SECTION 32(B)(7)(e) OF THE CODE WHICH ARE EXCLUDED FROM GROSS COMPENSATION INCOME PROVIDED THE TOTAL AMOUNT OF SUCH BENEFITS DOES NOT EXCEED P30,000.00." In addition, Section 1 of RR No. 10-00 provides that the monetized value of vacation and sick leave allowances paid to government officials and employees shall not be subject to income tax and subsequently, withholding tax. HICSTa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service