BIR Ruling No. 003-08

April 14, 2008 BIR RULING NO. 003-08 Hon. Angelina Sandoval-Gutierrez Associate Justice and Chairperson, Committee on the 2006 Bar Examinations Supreme Court of the Philippines Padre Faura St. Manila M a d a m : This refers to your letter dated October 15, 2007 requesting for a refund of the tax withheld from your honorarium in the amount of PhP61,940.00. As represented, you were the Chairperson of the Committee on the 2006 Bar Examinations administered by the Supreme Court last September of the same year. Shortly after the results of the examinations were published, you received an honorarium of P1,238,800.00. However, your honorarium including those of the 2006 Bar examiners, was subjected to withholding tax. As a result, you requested the Supreme Court a refund of the withheld amount. On July 31, 2007, the Supreme Court En Banc issued a Resolution in A.M. No. 07-5-4-SC (Re: Tax Due on the Honorarium which Bar Examiners are Entitled to Receive) which states: "Considering that the Fiscal Management and Budget Office had already remitted the tax withheld to Bar Examiners of the 2006 Bar Examinations, the Court Resolved to INFORM the aforesaid Bar Examiners that they can CLAIM their tax refund individually from the BIR." In reply, please be informed that Section 10 of the Article VIII of the 1987 Constitution provides "Section 10. The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of lower courts shall be fixed by law. During their continuance in office, their salary shall not be decreased." The above provision was interpreted by the Supreme Court in the case of David G. Nitafan, Wenceslao M. Polo, and Maximo A. Savellano, Jr. vs. Commissioner of Internal Revenue and the Financial Officer, Supreme Court of the Philippines (G.R. No. L-78780, July 23, 1987).The petitioners in the aforementioned case were appointed Judges of the Regional Trial Court who seek to prohibit and/or perpetually enjoin respondents, from making any deduction of withholding taxes from their salaries. The High Court in an en banc decision held as follows: "xxx xxx xxx Besides, construing Section 10, Article VIII of the Constitution, which for clarity, is again reproduced hereunder: 'The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of lower courts shall be fixed by law. During their continuance in office, their salary shall not be decreased. ' (Emphasis supplied). It is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation of Justices and Judges but such rate must be higher than that which they are receiving at the time of enactment, or if lower, it would be applicable only to those appointed after its approval. It would be a strained construction to read into the provision an exemption from taxation in the light of the discussion in the Constitutional Commission. With the foregoing interpretation, and as stated heretofore, the ruling that 'the imposition of income tax upon the salary of judges is a diminution thereof, and so violates the Constitution' in Perfecto vs. Meer, as affirmed in Endencia vs. David must be declared discarded. The framers of the fundamental law, as the alter ego of the people, have expressed in clear and unmistakable terms the meaning and import of Section 10, Article VIII of the 1987 Constitution that they have adopted. Stated otherwise, we accord due respect to the intent of the people, through the discussions and deliberations of their representatives, in the spirit that all citizens should bear their aliquot part of the cost of maintaining the government and should share the burden of general income taxation equitably. WHEREFORE, the instant petition for Prohibition is hereby dismissed." It is clear from the foregoing, that the salaries of the Justices of the Supreme Court as well as that of all other members of the judiciary are subject to income tax, and consequently, to withholding tax on compensation. The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent. (Section 2.78, Revenue Regulations No. 2-98, as amended) 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 Tax Code of 1997. Salaries, wages, emoluments and honoraria, allowances, commissions and other income of a similar nature constitute compensation income. (Section 2.78.1 (A) of Revenue Regulations 2-98, as amended) Honoraria is compensation subject to withholding tax. Since members of the judiciary are not exempt from income tax, your honorarium is subject to withholding tax. In view of the foregoing, this Office regrets to deny your request for a refund of the tax withheld from your honorarium for lack of legal basis. 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.) LILIAN B. HEFTI Commissioner of Internal Revenue