Ms. Sharon C. Quitzon

June 13, 2008 BIR RULING [DA-360-08] Section 32 (B) (6) (b); BIR Ruling No. DA-212-06 Ms. Sharon C. Quitzon Ms. Adelaida J. Lino c/o 70 F Sun Valley Townhomes Sta. Ana Drive, Sun Valley Paraaque City Mesdames : This refers to your letter dated May 16, 2008 requesting for tax exemption on the judgment award anent the Decision rendered by the National Labor Relations Commission (NLRC) as affirmed by the Court of Appeals (CA) in its Resolution dated August 21, 2008. Documents submitted show that on June 1, 2003, Sharon C. Quitzon was engaged by Public Safety Mutual Benefit Fund, Inc. (PSMBFI) as Manager of the Corporate Planning Department (CORPLAN) for a probationary period of one (1) year. Her Letter of Appointment provided that her regularization would be based on her performance. On the other hand, Adelaida J. Lino was hired by PSMBFI on September 1, 2003 Manager of the Internal Audit Department also for a probationary period of one (1) year. Her Letter of Appointment provided for a condition similar to that of Ms. Quitzon. On May 26, 2004, Ms. Quitzon received a letter informing her that the management decided not to renew her engagement for failure to qualify for regularization. On August 24, 2004, Ms. Lino also received a letter informing her that she had failed to meet the parameters set by the Board and that the Screening Committee was not inclined to recommend her regularization. However, she was offered the position of Assistant Manager, but she did not accept because the offer would mean a demotion in rank, diminution of salaries and benefits and loss of seniority rights and other privileges. AcCTaD Thus, both Ms. Quitzon and Ms. Lino filed a complaint for illegal dismissal before the Labor Arbiter. In a Decision dated June 22, 2005, the Labor Arbiter ruled in favor of PSMBFI stating the dismissal was valid, as both failed to meet the standards set by the company for regularization. Ms. Quitzon and Ms. Lino appealed this Decision to the NLRC. The NLRC granted their appeal and reversed the Decision of the Labor Arbiter, in its Resolution, dated February 23, 2006, thereby declaring the non-renewal of the employment of complainants as tantamount to illegal dismissal. The NLRC noted that the Letters of appointments merely contained an enumeration of their respective duties and responsibilities, and failed to provide for specific ratings. Thus, they did not meet the requirement under article 281 of the Labor Code that the reasonable standards for regularization should be made known to the employees at the time of their engagement. Due to the strained relations of the parties, the NLRC was not inclined to reinstate the complainants. It awarded them separation pays equivalent to one month pay per year of service. Both backwages and separation pays shall be computed from the time they were dismissed up to the date of the promulgation of the decision. On February 23, 2006, PSMBFI filed with the CA a petition for certiorari from the Decision of the NLRC. On August 21, 2007, the CA denied the petition. In reply, please be informed as follows: Back-wages are compensation subject to withholding tax. Backwages, being compensation, are subject to withholding tax. The employer is required to withhold the income tax corresponding to the income actually received as salaries by an employee found to be illegally dismissed, from the time he was reinstated (if he opts to be reinstated instead of separation). However, the illegally dismissed employee is accorded special treatment i.e., he is allowed to allocate or spread his backwages, allowances and benefits through the years he was suspended from service, having been denied payment of his wages when they were due because of circumstances not of his own making and, therefore, beyond his control. ATSIED Accordingly, as illegally dismissed employees, both your cases come within the scope of the inequity for which this ruling is precisely designed to remedy. Considering that your backwages, allowances and other benefits constitute remuneration for services that would have been performed by you for PSMBFI prior to the year when you actually received them, or during the period of your suspension from the service, it is felt that a liberal construction of the statute is called for in this particular case if only to protect both of you who, in fact, had been deprived of the payment of a tax heavier than what have been imposed if your employer, PSMBFI had promptly met its obligation. Section 2.57 (B) of Rev. Regs. No. 2-98, as amended provides as follows: "(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in nature". Whether an employee found to be illegally dismissed is reinstated or opts for separation, he is required to report such income (backwages) for the years he was suspended from service, as he files and pays his corresponding income tax thereon by allocating or spreading his backwages, allowances and benefits through the years from the time of his suspension to actual reinstatement or actual separation (if he opts for separation instead of reinstatement), as the case may be, crediting in the process the corresponding income tax withheld from said wage payments. Thus, in computing your net income tax, the amount deducted and withheld during calendar years you were suspended from service by PSMBFI shall be allowed as a credit against the tax imposed under Section 24 (A) of the NIRC, as amended pursuant to Section 79 (C) (2) of the same Code. Moreover, you are allowed to deduct personal and additional exemptions during the years you were suspended in accordance with Section 35 (A) and (B) also of the same Code. cAaDHT Separation benefits are exempt from taxes Section 32 (B) (6) (b) of the NIRC, as amended provides that any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The abovementioned law requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, namely: (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since your separation is due to the exercise of management's prerogative to terminate your employment although both of you were found to be illegally dismissed by the NLRC, the same connotes involuntariness for being beyond your control. Accordingly, any and all amounts received by you as a result thereof, consisting of the separation pay package and other benefits, are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter X, title II of the NIRC, as amended and as implemented by Rev. Regs. No. 2-98, as amended. However, the payment of salaries, as stated earlier, is subject to income tax and consequently, to withholding tax. 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 null and void. TACEDI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service