BIR Ruling [DA-251-04]

May 12, 2004 BIR RULING [DA-251-04] Rev. Reg. No. 2-98; UN-043-2001; DA-068-2001 Fitrite Incorporated 145 Gen. Evangelista Extn., Caloocan City Attention: Ms. Anita Laureano Treasurer Gentlemen : This refers to your letter dated January 23, 2003, which was indorsed to this Office by way of 1st Indorsement dated January 24, 2003 by the Assistant Chief, Withholding Tax Division, requesting for a clarification on the taxability of the following issues: Sick leaves, used or unused but converted to cash at the end of the year; vacation leaves in excess of 10 days; ECOLA under Wage Order No. 9. It is represented that the Implementing Rules and Regulations by the National Wage Board did not clearly state whether the ECOLA is taxable or not; and that your union has claimed that the said ECOLA is not taxable as verified from one of our local offices. In reply, please be informed of the following: 1. Revenue Regulations No. 1-2000 was promulgated on December 14, 2000 amending Revenue Regulations No. 2-98 and 3-98, as last amended by Revenue Regulations No. 8-2000 with respect to the exemption of Monetized Leave Credits of Government Officials and Employees under Executive Order No. 291. Pertinent portions of said Revenue Regulations are hereby quoted as follows: CDaTAI "(7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which is paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which are paid to private employees during the year and the monetized value of leave credits paid to government officials and employees shall not be subject to income tax and consequently to withholding tax." 2. "Compensation Income" means all remuneration for services performed by an employee for his employer under any employer-employee relationship, unless specifically excluded by this Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions ( e.g., transportation, representation, entertainment and the like), fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefit tax under Section 33 of the Tax Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. Remuneration for services constitutes compensation income even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them. (Sec. 2.78.1 (A), Revenue Regulations No. 2-98) CHDTEA Please note that the withholding tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent. (Section 2.78. Ibid. ) In applying the above-cited regulations to the case at bar, the COLA to be received by the employees of FITRITE INCORPORATED form part of their compensation income subject to withholding tax. Thus, it is the liability of the employer, FITRITE INCORPORATED, to withhold and remit the corresponding tax due on the said allowances to the BIR. It is to be emphasized, however, that every employer or other person who is required to deduct and withhold the tax on compensation shall furnish every employee from whose compensation taxes have been withheld the Certificate of Income Tax Withheld on Compensation (Form No. 2316, formerly Form No. W-2) on or before January 31 of the succeeding calendar year. (Sec. 2.83.1, supra ) 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 and Inspection Group