Secretary Esperanza I. Cabral

November 4, 2009 BIR RULING [DA-(ECB-023) 642-09] Section 32 (B) (7) (e) (iv); BIR Ruling No. 001-2007 Secretary Esperanza I. Cabral Department of Social Welfare and Development Constitution Hills, Quezon City Dear Secretary Cabral : This refers to your letter dated March 3, 2009 requesting for legal opinion on whether the cash incentive granted to rank and file employees under a Collective Negotiation Agreement (CNA) is taxable income and, therefore, subject to withholding tax. aDIHTE As represented, in pursuit of the provision of DBM Circular No. 2006-1 dated February 1, 2006 and the CNA between the DSWD Management and the Department's employees association, the Social Welfare Employees Association of the Philippines (SWEAP), the Department pays CNA cash incentive to all employees annually, the last of which was in November 2008. In reply, please be informed that pursuant to Section 2.78.1 (B) (11) (b) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 8-2000 implementing Section 32 (B) (7) (e) of the Tax Code of 1997, as amended, productivity incentive bonus given to officials and employees of both government and private offices is exempt from withholding tax, viz. : "(B) Exemptions from withholding tax on compensation. The following income payments are exempted from the requirement of withholding tax on compensation: xxx xxx xxx (11) Thirteenth (13th) month pay and other benefits. xxx xxx xxx (b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year." Relative to the above law and regulations, this Office had occasion to rule in BIR Ruling No. 001-2007 dated January 10, 2007 that performance bonus can be equated to productivity incentive bonus which may be considered as "other benefits", viz. : "In view of the foregoing, the performance bonus given by PLDT to its rank and file employees as well as to supervisory employees can be equated to a productivity incentive bonus which may be considered as falling within the contemplation of 'other benefits' provided for under Section 32(B)(7)(e)(iv) of the Tax Code of 1997, and therefore, need not form part of the employees' taxable compensation income subject to withholding tax on wages under Section 79 in relation to Section 24(A) both of the Tax Code of 1997, provided, however, that such 'other benefits', inclusive of the above allowances/benefits, shall not, in the aggregate, exceed P30,000.00 when added to the 13th month pay. Any amount in excess of the P30,000.00 ceiling shall be taxable to the employee receiving the benefits. Provided, further, that any amount given by the employer as benefits to its employees, whether classified as 'de minimis' benefits or fringe benefits, shall constitute as deductible expense upon such employer pursuant to Section 2.78.1(A)(3) of Rev. Regs. No. 8-2000, as amended. SEHaDI xxx xxx xxx" However, government employees are not on equal footing with employees in the private sector. Although government employees may have the right to organize, the grant of incentives using government funds cannot be allocated for payment of such incentives without an Executive Order from the President or by way of General Appropriations Act from Congress. The Department of Budget and Management (DBM) must first approve the appropriated amount (incentives) before an incentive can qualify as benefits. In your case, the incentive was approved under DBM Circular No. 2006-1 dated February 1, 2006. A reading of the aforementioned Circular shows that the CNA incentive qualifies as "other benefits". Thus, the value of the "other benefits" when added to the thirteenth month pay must not exceed the threshold of PhP30,000 in order that it may be exempt from income tax and consequently from the withholding tax. If the value exceeds the PhP30,000 ceiling, then the excess of the "other benefits" and the thirteenth month pay is considered as part of compensation subject to income tax and consequently to the 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 as null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue