BIR Ruling [DA-290-99]

May 13, 1999 BIR RULING [DA-290-99] Atty. Carlo A. Domingo 97-B Mindanao Avenue Proj. 6, Quezon City S i r : This refers to your letters dated November 10, 1997 and December 10, 1997 requesting for a ruling, on behalf of your client Mr. Ramon Dalangin, as to whether or not an award for back wages and separation pay to be received by him shall be exempt from income tax, as well as the withholding tax, pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. Documents submitted show that on August 19, 1991, your client, Mr. Ramon Dalangin was employed by Philippine Electric Corporation (PHILEC), as its Design Engineer; that sometime in 1989, PHILEC discovered that Dalangin was involved in the management of RG Trans Electric Corporation (RGTEC), a business entity engaged in the repair of distribution and power transformers; that PHILEC confronted your client with his involvement in the said corporation wherein your client promised that he will divest himself of any participation and interest thereat; that with the said assurance, Dalangin was allowed to continue working with PHILEC; that nonetheless, PHILEC terminated the services of your client on June 8, 1995 for committing acts which constitute conflict of interest and violation of PHILEC rules and regulations; that your client questioned the dismissal before the National Conciliation and Mediation Board, Regional Branch No. IV of the Department of Labor and Employment; that the voluntary arbitrator rendered a decision dated July 10, 1997 in his favor by declaring the dismissal as illegal and ordered the payment of full back wages and separation pay in lieu of reinstatement; and that according to you, an entry of judgment is no longer needed because on November 25, 1997, the award (back wages and separation pay) had already been paid to your client but his employer deducted/imposed a withholding tax. In reply thereto, please be informed that under Section 44 of the Tax Code of 1997, if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year. All items of income shall be included in gross income or gross compensation income, as the case may be, for the taxable year in which received by the taxpayer except those expressly excluded and already subjected to the final income tax, and exemptions as well as deductions taken accordingly, pursuant to Sections 24, 33 and 34, in relation to Section 45 all of the Tax Code of 1997. cTACIa Salaries, commissions, tips, directors fees, and other forms of compensation are income in the year received, and not in the year earned. (par. 717, p. 231, U.S. Master Tax Guide (1969) Thus, a taxpayer whose income is from salary or the like is required to file his income tax return on the cash basis. However, considering that such back wages, allowances and benefits constitute remunerations for services that would have been performed by the said employee to the year when actually received, or during the period of his dismissal from the service which the National Conciliation and Mediation Board, Regional Branch No. IV of the Department of Labor and Employment has ruled to be illegal, it is felt that a liberal construction of the statute is called for in this particular case if only to protect said employee who, in fact, had been deprived of the payment of his wages and other forms of remuneration, from the payment of a tax heavier than what should have been imposed if his employer had promptly met its obligation. In the case of " Commissioner of Internal Revenue v. Joseph G. R. Robillard Margaret H. Robillard " (C.A. 308 F. 2d 518, 519) it was held that income received by a taxpayer in 1957 as "back pay" or additional pay for services rendered to his employer for the period from July 1, 1955 through December 1956 which, indubitably, would have been paid prior to 1957 except for the intervention of an event similar in nature to a dispute as to the liability of the employer to pay the remuneration in question, is entitled to a special treatment and was properly allocable to the taxable years 1955 and 1956. Accordingly, having been denied payment of his wages when they were due because of circumstances not of his own making and, therefore, beyond his control, the aforementioned employee comes within the scope of the inequity for which this ruling is precisely designed to remedy. cHCSDa In view of the foregoing considerations, this Office is of the opinion as it hereby holds that said employee should report as income and pay its corresponding income taxes thereon by allocating or spreading his back wages, allowances and benefits through the years from his illegal dismissal to his actual reinstatement. Said backwages are subject to withholding tax on wages (BIR Ruling No. 057-83 dated April 12, 1983). However, considering that the separation of Mr. Dalangin is due the aforecited labor dispute and is beyond his control, the same connotes involuntariness, hence, any and all amounts received by him as separation benefits are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)