Pastelero Law Office

June 18, 2009 BIR RULING [DA-(I-020) 307-09] 79; 417-93; 003-04 Pastelero Law Office E-1503B Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Atty. Alvin Jose B. Felizardo Counsel for A Brown Co., Inc. Gentlemen : This refers to your letter dated May 12, 2009 stating that Mr. Jorge M. Yulo (Mr. Yulo), former President of A Brown Co., Inc., filed a case for collection of sum of money for services rendered while still in the employ of the said company entitled "Jorge M. Yulo vs. A Brown Co., Inc." Docketed as Civil Case No. 68796, Branch 267, Regional Trial Court-Taguig City; that the basis of the suit is the letter-agreement executed by the parties which reads as follows: "April 12, 1999 Dr. Walter W. Brown Chairman, A Brown Co., Inc. Dear Walter, This is to summarize our discussion regarding my compensation for the potential sale and/or capital infusion to any of the Brown Group of Companies. As agreed, I will continue to pursue the search of a potential investor (either for a minority stake or total buy-out) of the chemical business (ABCC), the marketing and distribution operation (WBCI), and/or ABCI. Should we succeed in selling one of the operations, we also agreed in principle to stop any further divestment. As discussed, despite the on-going exercise to merge ABCC into ABCI, and my impending departure from my official post in ABCI after the merger, I will continue to be compensated for my efforts in securing an investor if the transaction is finalized within twelve (12) months from my departure from ABCI as long as I continue to be directly involved in the process. Any extension will be subject to the kind approval of your good office. For the chemical operation, since its sale will directly benefit the ABCI P&L on the fiscal year the transaction is recorded, my compensation will come in the form of the previously agreed pre-tax profit-sharing arrangement as President of ABCI for the year the transaction is recorded. As discussed, I am agreeable that the compensation be capped at 2% of the transaction value whichever is lower. For WBCI, since I will continue to manage the business unit, any divestment thereof can adversely impact my future income flow, I will be given a 2% commission on the transaction (net of all expenses paid to external investment houses/agents) to compensate me for my efforts in securing the investor as well as the on-going thrust to increase the value of the company in my capacity as President. Once again, I thank you for the support as well as the challenges and opportunities you continue to provide me." that after trial and appeal proceedings, the Court of Appeals rendered the judgment which is now being sought to be executed by Mr. Yulo, the dispositive portion of which reads as follows: "WHEREFORE, the foregoing considered, the Motion for Reconsideration is PARTIALLY GRANTED and our Decision is AMENDED in that appellees are instead ordered to pay appellant Yulo the amount of Seventeen Million Two Hundred Sixty Five Thousand Pesos (P17,265,000.00) with legal interest of 12% per annum to be computed from default until judgment is fully satisfied." that after Mr. Yulo filed a Motion for Writ of Execution, A Brown Co., Inc., the party-defendant held liable for the judgment award, negotiated for the settlement thereof; that however, the negotiation failed because of the parties' disagreement on whether or not the judgment award shall be subject to withholding income taxes; and that Defendant, A Brown Co., Inc., is of the position that the judgment award and the interest thereon shall be subject to withholding income taxes while Plaintiff is of the contrary opinion. Based on the foregoing representations, you now request on behalf of your client, A Brown Co., Inc., for a ruling as to whether or not the judgment award, inclusive of the interest accruing thereon, to be paid to Mr. Yulo is subject to income tax and consequently to withholding tax on compensation income as prescribed in Revenue Regulations No. 2-98, in relation to Revenue Regulations No. 10-2008. In reply thereto, please be informed that the commission and interest thereon adjudged in favour of Mr. Yulo is subject to withholding tax on compensation income as prescribed in Section 2.78.1 (A) of Revenue Regulations No. 2-98 which reads as follows: "(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 pension 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. IcHEaA Remuneration for services constitutes compensation 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." The term "employee" refers to any individual who is the recipient of wages and includes an officer, employee or elected official of the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term "employee" also includes an officer of a corporation. (Sec. 78 (C), supra ) On the other hand, the term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, . . . . (Sec. 78 (D), ibid ) Prescinding from the above-cited provisions, it is undisputed that the judgment award and the interest thereon are classified as income, having been derived as compensation for services or commissions rendered as an officer of A Brown Co., Inc. in pursuance of the above-mentioned Agreement. This notwithstanding that Mr. Yulo is no longer an employee or officer of the said Company at the time the decision was rendered requiring A Brown Co., Inc., to pay the 2% commission. Accordingly, pursuant to Section 79 of the Tax Code of 1997, as implemented by Section 2.79 (B) (5) (b) of Revenue Regulations No. 2-98, as amended, in relation to Revenue Regulations No. 10-2008, A Brown Co., Inc., is obliged to withhold the withholding tax on compensation income from the total amount to be received by Mr. Yulo. The pertinent portion of which provide EcAISC "SEC. 79. Income Tax Collected at Source. (A) Requirement of Withholding. Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or Five thousand pesos (P5,000.00) per month, whichever is higher. (B) Tax Paid by Recipient. If the employer, in violation of the provisions of this Chapter, fails to deduct and withhold the tax as required under this Chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but this Subsection shall in no case relieve the employer from liability for any penalty or addition to the tax otherwise applicable in respect of such failure to deduct and withheld." This is fortified in BIR Ruling No. 003-04 dated January 19, 2004 , where this Office ruled that "However, the amount received corresponding to your back wages and the amount representing your unpaid salary plus the illegal deduction made thereof . . . cannot be considered as benefits paid as a consequence of your involuntary separation from the service of your employer within the contemplation of Section 32(B)(6)(b) of the Tax Code of 1997; instead they are remuneration for services that are deemed to have been performed by you for your company prior to or during the period of your illegal dismissal for the service as affirmed by the NLRC. Such being the case, said back wages and the amount representing your unpaid salary plus the illegal deduction made therefrom are subject to income tax and consequently to withholding tax on wages pursuant to Section 79, Chapter XIII, Title II of the Tax Code of 1997. In other words, URRDC shall have the obligation and liability to withhold the corresponding taxes with respect to such wage payments and the amount paid to you for unpaid salary plus the amount it illegally deducted from your salary." WHEREFORE, in view of the foregoing , this Office holds that judgment award inclusive of the interest accruing thereon in favour of Mr. Yulo, which is in the nature of a compensation income, is SUBJECT to income tax and consequently to withholding tax on compensation income pursuant to Section 79 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended, in relation to Revenue Regulations No. 10-2008. Accordingly, you are hereby directed to withhold the tax prescribed in the withholding tax table for compensation income under the pertinent Revenue Regulations mentioned, before making the payment to Mr. Yulo. 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. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service