Office of the City Accountant

September 12, 2008 BIR RULING [DA-(LGU-001) 213-08] Rev. Regs. No. 2; DA-204-2004 Office of the City Accountant City Government of Cadiz Cadiz City Attention: Delilah P. Fernandez City Accountant Gentlemen : This refers to your letter dated March 24, 2008 requesting for a ruling on the computation of withholding tax on backwages/salaries, 13th month pay and other benefits be spread out/allocated to prior years. TSacAE It is represented that on September 22, 1998 the Sanggunian Panlungsod of the City Government of Cadiz passed Resolution No. 98-112, series of 1998, calling for and authorizing the reorganization of the city government and appropriating the necessary funds; that the said resolution provided for a new staffing pattern under the reorganized city government structure and that it provides for 649 personnel for 17 offices; that all positions in the city government were declared vacant, except those which were elective and those of the city and assistant city treasurer; that the said resolution was approved the same day the City Mayor submitted his "Proposed Reorganizational Structure and Staffing Pattern of the City Government of Cadiz" and the same was signed by the mayor on October 15, 1998; that on November 10, 1998, the city mayor began implementation of the said resolution by giving individual notices of termination of employment to all employees of the city government with the exception of those earlier mentioned; that the notices sent informed all personnel concerned that their employment would cease at the close of business hours on December 31, 1998; that all employees affected by the reorganization registered their vigorous opposition by writing to the mayor and the vice-mayor calling their attention to the illegality and unconstitutionality of Resolution No. 98-112; and that by virtue of a decision rendered by the Regional Trial Court of Negros Occidental, Branch 60, Cadiz City, under Civil Case No. 547-C, to wit: 1) Declaring Resolution No. 99-112, series of 1998, of the Sanggunian Panlungsod of City Government of Cadiz, null and void; 2) Ordering the immediate reinstatement of the employees of the City Government of Cadiz to their employment in the said city with payment of backwages from January 1, 1999 until fully reinstated to their former positions or their equivalent without loss of seniority rights and benefits, under existing laws; 3) Ordering the payment of separation and other benefits for employees who opted to retire or cannot be reinstated; xxx xxx xxx In reply, please be informed that an employer making payment of wages or compensation shall deduct and withhold from such compensation a tax determined in accordance with the prescribed new withholding tax tables under Revenue Memorandum Circular No. 4-99 (Section 79 of the 1997 Tax Code, as implemented by Section 2.58.6 of Revenue Regulations No. 2-98, as amended). 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 Tax Code (BIR Ruling No. DA-205-02 dated November 14, 2002). Section 38 of Revenue Regulations No. 2, as amended, provides: "Section 38. Bases of computation. Approved standard methods of accounting will be ordinarily regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. . . . A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. . . ." Thus, the correct basis in imposing the tax is the taxable income actually received at the end of the taxable year. The back wages paid to reinstated employees are remuneration for services that would have been performed by them for the City Government of Cadiz prior to the year when they actually received them. A liberal construction of the statute is called for in this particular case if only to protect them from the payment of a tax heavier than what should have been imposed (BIR Ruling No. 346-88 dated July 21, 1988). Accordingly, if each employee's total compensation in addition to their back benefits received during the taxable years 1999, 2000 and 2001 do not exceed the statutory minimum wage of Php60,000.00 a year, no withholding tax shall be deducted by the Office of the City Accountant. Conversely, if their annual taxable income including their back benefits exceeds Php60,000.00 a year, they shall be subject to the payment of individual income tax and consequently, to the withholding tax prescribed under Revenue Regulations No. 2-98, as amended (BIR Ruling No. DA-193-2000 dated March 30, 2000). In filing their income tax returns, reinstated employees should report as income and pay income taxes by allocating or spreading their back wages for the years 1999, 2000 and 2001, the years in which they were supposed to receive the said back wages (BIR Ruling No. 043-2001 dated September 21, 2001). CSTHca 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service