BIR Ruling [DA-458-03]

December 5, 2003 BIR RULING [DA-458-03] Section 24 (A) BIR Ruling No. 093-96 Pitargue & Associates Law Office R-310 JR Building 1520 Quezon Avenue Quezon City Attention: Atty. Eliseo P. Pitargue Counsel Gentlemen : This refers to your letter dated February 3, 2003 requesting for a ruling that overtime pay is subject to withholding tax on compensation. It is represented that a number of employees and laborers of your clients have submitted complaints to their employers alleging that the practice of withholding income tax on their overtime pay is not sanctioned by the provisions of the Tax Code; and that you have emphasized to your clients that overtime pay is not exempted by law in the imposition of the tax on gross compensatory income, and therefore, such overtime pay is subject to withholding tax. In reply, please be informed as follows: Section 2.78.1 of Revenue Regulations No. 2-98 re: Withholding Tax on Compensation Income, implementing the Tax Code of 1997 provides, viz : "Section 2.78.1. Withholding Tax on Compensation Income (A) Compensation Income Defined In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the 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 benefits tax under Section 33 of the Code; taxable pensions and retirement pay, and other income of a similar nature constitute compensation income. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. Remuneration for services constitutes 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 individual who performed them." Moreover, Section 2.79(B) of Revenue Regulations No. 2-98 categorizes taxable compensation income into regular taxable compensation income and supplementary compensation income. Under said regulation regular taxable compensation income includes basic salary, fixed allowances for representation, transportation and other allowances paid to an employee per payroll period. Supplementary compensation is defined by the same regulation as payments made to an employee in addition to the regular compensation such as commission, overtime pay , taxable retirement pay, taxable bonus and other taxable benefits, with or without regard to a payroll period. In view of the foregoing, overtime pay is subject to income tax as compensation income under Section 24(A) of the Tax Code of 1997 and consequently, to withholding tax which shall be creditable against the total income tax due of the employee (BIR Ruling No. 93-96 dated August 12, 1996) . 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. AEIHCS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group