BIR Ruling [DA-204-04]

April 12, 2004 BIR RULING [DA-204-04] Section 79 BIR Ruling No. 014-00; 43-01; DA-205-02 Office of the Municipal Accountant Municipality of Catbalogan Catbalogan, Samar Attention: Ms. Peachy Y. Daguman Municipal Accountant Gentlemen : This refers to your letter dated November 20, 2002 indorsed to this Office by Regional Director Alfredo V. Misajon requesting for a ruling on whether the amount received representing backwages should be taken as income earned in the year of receipt for purposes of withholding of the corresponding income tax. It is represented that by virtue of a court order, Alda Cobero was paid her backwages in the total amount of P200,285.54 of which the total deductions for GSIS amounted to PhP11,274.12, PAG-IBIG premiums in the amount of PhP2,505.66 and PHIC in the amount of PhP1,350.00 and PhP24,756.00 was deducted representing withholding tax on compensation or a net proceeds in the amount of PhP160,399.76 representing salary from January 16, 1999 to June 2001; and that Alda Cobero through her counsel contends that the amount she received represents her salary for three (3) years which is exempt from payment of tax on account that her salary is below PhP5,000.00 per month and that she is married with dependents. In reply, please be informed that an employer making payment of wages or compensation shall deduct and withhold from such compensation a tax determined in accordance with the prescribed new withholding tax tables under Revenue Memorandum Circular No. 4-99 (Section 79 of the 1997 Tax Code, as implemented by Section 2.58.6 of Revenue Regulations No. 2-98, as amended). The term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Tax Code ( BIR Ruling No. DA-205-02 dated November 14, 2002 ). Section 38 of Revenue Regulations No. 2, as amended, provides: "Section 38. Bases of computation . Approved standard methods of accounting will be ordinarily regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period . . . . A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. . . ." Thus, the correct basis in imposing the tax his the taxable income actually received at the end of the taxable year. The back wages paid to Alda Cobero are remuneration for services that would have been performed by her for the Municipality of Catbalogan prior to the year when she actually received them. A liberal construction of the statute is called for in this particular case if only to protect her from the payment of a tax heavier than what should have been imposed ( BIR Ruling No. 346-88 dated July 21, 1988 ). Accordingly, if Alda Cobero's total compensation in addition to her back benefits received during the taxable years 1999, 2000 and 2001 do not exceed the statutory minimum wage of Php60,000.00 a year, no withholding tax shall be made by the Office of the Municipal Accountant. Conversely, if her annual taxable income including her back benefits exceeds Php60,000.00 a year, she shall be subject to the payment of individual income tax and consequently, to the withholding tax prescribed under Revenue Regulations No. 2-98, as amended ( BIR Ruling No. DA-193-2000 dated March 30, 2000 ). TSADaI In filing her income tax returns, Alda Cobero should report as income and pay income taxes by allocating or spreading her back wages for the years 1999, 2000 and 2001, the years in which she was supposed to receive the said back wages ( BIR Ruling No. 043-2001 dated September 21, 2001 ). 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, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group