BIR Ruling [DA-185-02]

October 15, 2002 BIR RULING [DA-185-02] 047-92 Commission On Audit Commonwealth Avenue Quezon City Attention: Lourdes B . Dimapilis Director Planning, Financial and Management Office Gentlemen : This refers to your letter dated November 29, 2000 seeking the opinion of this Office on the proper treatment of the service incentive fees earned by you personnel during the period July 1, 1989 to February 28, 1993, but paid only in CY 2000. It is represented that for the period July 1, 1989 to February 28, 1993, you had personnel assigned at the Department of Education, Culture and Sports (DECS); that on May 16, 2000, the Commission on Audit granted said personnel's request for service incentive fees (SIF for brevity) equivalent to fifty percent (50%) of their salary for the period mentioned above; that said personnel collected said fees only in calendar year 2000; that you considered said fees as part of said personnel's compensation income for calendar year 2000, thus, you withheld the income taxes due thereon pursuant to Section 2.78 of Revenue Regulations 2-98; and that said personnel contended that said fees constitute backwages and should be allocated or spread over the pertinent period pursuant to BIR Ruling 234-90, to wit: DcTSHa "The backwages of dismissed employees who voluntarily waived the reinstatement aspect of the NLRC decision are subject to income tax and consequently, to the withholding tax under Section 72 of the Tax Code. Said employees should allocate or spread the backwages over the years concerned, and credit the corresponding income tax withheld therefrom." It is your position that BIR Ruling No. 234-90 does not apply to the case of the said personnel as it refers to backwages of dismissed employees who voluntarily waived the order of reinstatement in their favor. In reply, please be informed that we agree with your position that said SIF are not the backwages as contemplated in BIR Ruling 234-90 since what is referred to therein are the backwages of employees who had waived the order of reinstatement in their favor. The COA personnel concerned were granted the SIF not because they had waived the order of reinstatement in their favor but because they had helped in the audit of the salaries of the teachers and employees of the DECS (COA Decision No. 2000-131 dated May 16, 2000). Accordingly, you were correct in withholding the income tax due on the service incentive fees following Section 2.78 of Revenue Regulations 2-98. The service incentive fees form part of the gross income of the said employees for the taxable year in which these were received pursuant to BIR Ruling No. 047-92 dated February 1992, to wit: ". . . under Section 38 of the Tax Code, as amended, pertinent portion of which reads: "Sec. 38. Period in which Items of Gross Income Included The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section thirty-seven, any such amounts are to be properly accounted for as of a different period . . ." (Emphasis supplied) income is reportable in the year received unless, under methods of accounting allowed under the Tax Code (i.e. Section 37), any such amounts can be properly accounted for as of a different period. Therefore, it does not matter when the income was earned but when it was received by the taxpayer. 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, US Master Tax Guide (1969)] . . . ." This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, the facts are found to be different, this ruling is considered void. cCaATD Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group