BIR Ruling [DA-185-04]

April 6, 2004 BIR RULING [DA-185-04] 24; 11-2000 Mr. Pepito A. Gonzales 2895 Benita St., Tondo Manila S i r : This refers to your letter dated February 5, 2002 requesting for a reconsideration of BIR Ruling No. 011-2000, dated January 5, 2000 which ruled that the computation based on consolidated taxable income compensation (school 2) is the correct procedure for computing the final tax of a person with mixed income. It is your opinion that ". . . there is no clear-cut statement or phrase that implies or suggests that compensation income must be consolidated or mixed with business/professional income in computing taxable income of individual with mixed income. On the contrary, what seems to be crystal clear is that the said provision (Section 2.79.1(A)(9) of Revenue Regulations No. 2-98 implementing Republic Act No. 8424) intends to separate compensation income from professional or business income in the computation of individual income tax taking into consideration the following: "1. The statement in the provision " An individual receiving a combination of compensation and business/professional income shall first deduct allowable personal and additional exemptions from compensation income only the excess therefrom can be deducted from business/professional income " can be deduced that it intends to separate compensation income from business/professional income in computing the income tax due, without violating the provision of Section 24(A)(1)(c) of the Tax Code, as amended by R.A. 8424. "2. Compensation income is separately subjected to withholding tax under Section 79(A) and year-end adjustments under Sec. 79(H), the purpose of which is precisely to up-date the taxability of compensation income. To my mind, compensation income after having been updated in accordance with said Section 79(H), its taxability becomes final; otherwise, the very purpose of this provision of the Tax Code is uselessly negated. "3. . . . to combine compensation income with business and/or professional income in computing the final income tax due is very repressive and would result to double taxation on compensation income. It is undoubtedly unfair for low-salaried taxpayer who simply tries to supplement his income to meet both ends." In reply, please be informed as follows: 1. The Tax Code provides for the proper computation of tax of individuals and corporations but failed to specifically provide for the proper computation of tax of persons with mixed income. Section 2.79.1(A)(9) of Revenue Regulations No. 2-98 implementing Republic Act No. 8424 provides us with the remedy. Contrary to your opinion, the said provision combined both compensation and business/professional income in computing the tax of persons with mixed income rather than allowing for a separate computation of compensation and business/professional income. Under the said provision, the allowable personal and additional exemptions should first be deducted from compensation income to arrive at the net taxable compensation income (excess exemption) before adding the taxable business/professional income as reflected in Form 1701 AIF-1 (Account Information Form for Self-employed and Professionals)/AIF-2 (Account Information Form for Estates and Trusts Engaged in Trade or Business). TaDCEc 2. Sections 79 (A) and (H) refer to the withholding of final tax on compensation/wages of individuals earning purely compensation income and not of persons with mixed income. Precisely, there are separate BIR forms: BIR Form 1604 filed by the employer for income tax withheld on compensation, expanded and final withholding taxes; BIR Form No. 1700 filed by individuals earning purely compensation income; and BIR Form 1701 filed by self-employed, professionals, estates and trusts including persons with mixed income. 3. Our present individual income tax system, in the main, is progressive in nature, by providing for graduated rates of income tax, i.e ., the tax rates increase as the tax base increases. (Compendium of Tax Law and Jurisprudence, Jose C. Vitug, 3rd ed., p. 54) The progressive scheme of income taxation has been introduced in our tax system as a measure of raising more revenues to meet adequately the increased needs of the Government and at the same time to correct inequalities in taxation by equitably distributing the tax burden based upon the principle of ability to pay. ( Code, Exec. vs. Comm ., 81 F845/CCA 9th 1935/, Law of Federal Income Taxation, Mertens, Vol. I, p. 29) Progressive income taxes are the most effective means of removing such inequalities in the distribution of wealth and income as are incompatible with the highest welfare of a democratic people. (Vol. II, Report of the Tax Commission of the Philippines on National Internal Revenue Laws, 1939, p. 12) You stated that ". . . there is no clear-cut statement or phrase that implies or suggests that compensation income must be consolidated or mixed with business/professional income in computing taxable income of individual with mixed income." In the interpretation of tax statutes, it is the established rule not to extend their provisions by implication beyond the clear import of the language employed or to enlarge their scope as to include matters not specifically pointed out. Tax laws are entitled to a fair and reasonable construction with a view to carrying out their objectives. With the view of raising more revenues to meet adequately the increased needs of the Government and at the same time to correct inequalities in taxation by equitably distributing the tax burden based upon the principle of ability to pay, the Bureau of Internal Revenue, as implementing arm of the government in its collection of taxes, has adopted school 2 (the consolidated taxable income compensation) over that of school 1 (based on separate computation for compensation and business income) for computing the final tax of a person with mixed income as shown by BIR Form 1701. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group