BIR Ruling [DA-214-06]

April 5, 2006 BIR RULING [DA-214-06] BIR Ruling No. 268-93 & DA-445-00 Mr. Homer A. Dacuscus 6772-B Adalla Street, Guadalupe Viejo Makati City S i r : This refers to your letter dated October 24, 2005 requesting for a ruling on whether or not "love-gifts" given to pastors are subject to withholding tax. As represented, you are an accountant by profession. You are presently employed with one of the companies in Makati City as Internal Auditor. One of your officemates referred you to a Christian church, which was looking for a part-time accountant. You applied and was able to close the deal. When you started working for the aforesaid church, you found out that the compensation that the pastors receive which they call "love-gift" is not being subjected to withholding tax. When asked about the reason why withholding was not observed, the former accountant explained that: 1) the pastors' service is for the ministry of God and not for profit; 2) the compensation they receive is not salary but "love-gift";3) the church itself is a non-profit organization, therefore, not taxable; and 4) the "love-gift" they receive come from the love offerings, tithes and donations for the church. Despite the aforementioned reasons, you still decided to subject the pastors' compensation to withholding tax on the following grounds: 1) the compensation is regularly given during the 15th and end of the month, despite the fact that this is called "love-gift";2) the amount being received by the pastors is fixed as in basic salaries given to employees; 3) the compensation is being subjected to SSS, Philhealth and Pag-ibig contributions; 4) 13th month pay is given to the pastors and is computed based on their "love-gift";5) the compensation/"love-gift" range from PhP10,000 to 20,000; and 6) the Head Pastor has control over the activities of his pastors and he can dictate the amount of compensation to be given to them, therefore, an employer-employee relationship exists. In reply, please be informed that Section 2.78.3 of Revenue Regulations (Rev. Regs.) No. 2-98, as amended, provides for the legal parameters in determining the existence of employer-employee relationship, as follows: "In general, the relationship of the employer and employee exists when the person for whom services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which the result is accomplished. An employee is subject to the will and control of the employer not only as to what shall be done, but how it shall be done. In this connection, it is not necessary that the employer actually directs or controls the manner in which the services are performed. It is sufficient that he has the right to do so. The right to dismiss an employee is also an important factor indicating that the person possessing that right is an employer. Other factors or characteristics of an employer, which may not be necessarily present in every case, are furnishing the tools and furnishing of a place to work, to the individual who performs the services. In general, an individual is not considered an employee if he is subject to the control or direction of another merely as to the result to be accomplished by the work, and not as to the means and methods for accomplishing the result. xxx xxx xxx. The measurement, method or designation of compensation is also immaterial if the relationship of employer and employee in fact exists. xxx xxx xxx". On the other hand, Section 2.78.4 of Rev. Regs. 2-98, as amended defines "employer" to mean, viz : "...any person for whom an individual performs or performed any service, of whatever nature, under an employer-employee relationship. It is not necessary that the services be continuing at the time the wages are paid in order that the status of employer may exist. Thus, for purposes of withholding, a person for whom an individual has performed past services and from whom he is still receiving compensation is an 'employer'." In BIR Ruling No. 269-93 dated July 8, 1993, the salaries of priests and nuns who were doing pastoral services in a hospital (i.e., celebration of mass and novenas, spiritual guidance to patients, blessing for the dead) were classified as donations and contributions by the hospital management since according to them no employer-employee relationship existed between the hospital and the priests/nuns. This Office ruled in the aforementioned case that "every form of compensation for personal services is taxable, regardless of how it is earned, by whom it is paid, the label of which it is designated, the basis upon which it is determined, or the form by which it is received (Michie, Federal Tax Handbook, p. 112)." Accordingly, the salaries of priests and nuns who were doing pastoral services in the hospital were classified as compensation income subject to withholding tax. In view of the foregoing, it is the opinion of this Office that the personal income ("love-gift") derived by the pastors from their pastoral ministry is compensation income subject to income tax and withholding under Section 2.79 of Rev. Regs. No. 2-98, as amended. TESICD Moreover, tax exemptions are held strictly against the taxpayer, and if not expressly mentioned in the law must be within its purview by clear legislative intent ( Commissioner of Customs vs. Philippine Acetylene Co., Inc .,39 SCRA 70).Exemptions from taxation are highly disfavored in law and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications ( Asiatic Petroleum co., vs. Llamas ,49 Phil. 466; Davao Light and Power Co., Inc. vs. Commissioner of Customs ,L-28731, 28902, March 29, 1972). 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, (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service