BIR Ruling [DA-244-00]

May 19, 2000 BIR RULING [DA-244-00] Ms. Estelita N. Monleon City Council Secretary City Council of Tangub M a d a m : This refers to Resolution No. 99-02-2715 dated February 15, 1999 passed by the City Council of Tangub City, appealing to His Excellency, President Joseph Ejercito Estrada, to consider the interpretation of R.A. No. 8424 as embodied in Revenue Regulations No. 2-98. In the said Resolution, it is stated that special attention is focused on the issue that in the implementation of said revenue regulations, the remuneration received by government employee/officials such as Personal Economic Relief (PERA), Additional Compensation (ADCOM) and Representation and Traveling Allowance (RATA) are already part of compensation income; that the original purpose why said remunerations were granted tax-free to the employees in the 1990's was to offset the adverse effects of unstable economy; that at present, the economic condition of our country has not improved due to the devaluation of the peso coupled with calamities; and that making PERA, ADCOM, and RATA as part of the income subject to tax is not a relief to government workers but instead a burden. HTCaAD In reply, quoted hereunder is the pertinent portion of BIR Ruling dated March 2, 1992 which was circularized under Revenue Memorandum Circular No. 15-92 dated March 11, 1992, viz: "xxx xxx xxx "In reply, please be informed that in pursuance of the President's directive in her Memorandum Circular No. 145 government offices, agencies and instrumentalities including government-owned and controlled corporations should now stop deducting or withholding any income tax on PERA for 1992. However, pending resolution of our request for reconsideration of the Opinion of then Secretary of Justice Franklin M. Drilon stating that PERA, like RATA should not be subject to the mandatory withholding tax, the concerned employees may file in writing with the BIR, Attn.: Appellate Court, their individual claims for refund of the withholding tax on PERA for 1991 or those already paid to them, within two (2) years after the payment of the tax pursuant to Section 204 of the Tax Code, as amended. "xxx xxx xxx" It is informed herein that RMC No. 15-92 is still in force because our request for reconsideration of the Opinion of the Secretary of Justice dated July 3, 1991 has not yet been resolved by the said Office as of this date. Accordingly, the deductions of the withholding tax on PERA should still be held in abeyance notwithstanding the fact that under the Tax Code of 1997, PERA is not included among those exempt from withholding tax. Regarding the Additional Compensation Allowance (ACA) under A.O. No. 53, please be informed that the same is "compensation" embraced within the term "taxable compensation income" which is being defined as "all remuneration for services performed by an employee for his employer" under Sections 31 and 78 in relations to Section 32, both of the Tax Code, unless specifically excepted under Section 32(B) of the same Code (then Sections 27, 71 and 27(b) of the Tax Code, as amended). Thus, salaries, wages, emoluments and honoraria, bonuses, allowances (such as transportation, representation, entertainment and the like), fringe benefits (monetary and non monetary) fees including director's fees taxable pensions and retirement pay, and other income of a similar nature constitute taxable compensation income. This principle has been consistently applied in previous BIR Rulings issued on the matter, viz: 1. BIR Ruling No. 006-95 dated January 16, 1995; 2. BIR Ruling No. DA-254-97 dated July 29, 1997; 3. BIR Ruling No. 103-97 dated September 29, 1997; 4. BIR Ruling No. DA-429-97 dated December 11, 1997; 5. BIR Ruling No. DA-184-98 dated May 8, 1998; and 6. BIR Ruling No. DA-254-97 dated July 29, 1997. which categorically state that the P500 additional allowance is subject to the income tax although it is not yet subject to the withholding tax prescribed under Section 78 of the 1997 Tax Code, as implemented by Revenue Regulations No. 2-98 (then Sec. 72 of the Tax Code, as amended, and as implemented by Revenue Regulations No. 6-85, as amended). It was also ruled that the only time that it will be subject to the withholding tax deduction us upon its formal integration to the basic pay of the said government personnel as provided for under paragraph 1(1.2) of Administrative Order No. 53. The reason therefore, for the non-withholding of the said P500 additional compensation allowance was clearly provided for under said Administrative Order No. 53, i.e., it is not yet subject to withholding tax pending its formal integration into the basic pay of government personnel. Thus, it does not necessarily mean that the additional compensation allowance is not at all subject to income tax or that it is exempt from income tax . Considering therefore, that it is a taxable compensation, the same should be included in W-2 Form as part of the gross compensation income subject to schedular rate of tax under Section 24(A) of the 1997 Tax Code [then Sec. 21(a) of the Tax Code, as amended]. IDcHCS Finally, RATA is now considered compensation subject to withholding tax, pursuant to Section 2.78.1(A)(6) of Revenue Regulations No. 2-98 quoted hereunder: "Section 2.78.1 Withholding of Income Tax on Compensation Income "(A) . . . xxx xxx xxx "(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 or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding. "(b) Any amount paid specifically, either as advances or reimbursements for traveling, representation and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied: (i) It is for ordinary and necessary, travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and (ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/advances for traveling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirement of substantiation and to withholding." AaSHED Accordingly, we regret to inform you that your request to exclude PERA, ADCOM and RATA as part of the compensation income of government officials/employees cannot be granted for lack of legal basis. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner (Legal Service)