Tax Consequences of Payment in Rice of Employees’ Differential in Backwages

January 7, 2000 BIR RULING NO. 014-00 RR 2-98 000-00 014-2000 National Food Authority 101 E. Rodriguez Sr., Ave. Quezon City Attention: Mr . Eduardo B . Gomez Deputy Administrator for Finance and Administration Gentlemen : This refers to your letter dated October 4, 1999 stating that the National Food Authority (NFA) will grant its employees differential in backwages for a total of 120 months covering the period July 1989 to June 1999; that payment shall, however, be in rice form, thus instead of cash, the entitled employees will be issued equivalent bags of rice valued at a price approved for the purpose; that the same would be released in tranches up to year 2000, in quantities to be decided by management depending on the Authority's capabilities; that NFA acknowledges the fact that whatever the mode of payment is, said differential will form part of the employees' gross compensation for the taxable period; that you are also going to enforce the withholding of taxes equivalent to the number of bags of rice and the monetization thereof for remittances to the BIR; that to ensure that collections and remittance of taxes due from individual employees will be applied consistently all through out the different NFA Regional/Provincial offices, you deemed it proper that prior to its implementation, consultation with the BIR officials be made first to thresh out the following issues: 1. Application of the yearly tax rates; 2. Centralize withholding tax collection and remittance of taxes due; 3. Waiver of the filing of amended ITRs on taxes due for the prior years differential by the employees; and 4. Waiver of the "10th of the following month" filing period on withholding tax remittances. In reply, please be informed as follows 1. In BIR Ruling No. 234-90 dated December 14, 1990, this office ruled that backwages are subject to income tax and consequently to withholding tax on wages pursuant to Section 72, Ch. 10, Title II of the Tax Code, as implemented by Revenue Regulations No. 6-82, as amended (now Section 79(A), Tax Code of 1997, as implemented by Revenue Regulations No. 2-98) Though not exactly in point, that portion of said BIR Ruling which states that the persons concerned "should report as income and pay their respective income taxes by allocating their backwages for the years 1987, 1988 and 1990 and crediting the corresponding income tax withheld from said wage payments" can be applied to the instant case. Accordingly, this Office interposes no objection to the manner by which you computed the salary and deductions received by each employee which clearly shows the tax withheld from them during the years in questions, as shown in Annex "A" which you submitted in support of your request. It must be emphasized however, that claims for refund of excess withholding tax/es during the prior year/s of NFA employees which are still pending with this Office for processing shall be deducted from the withholding tax collectible from the said differential of the employee concerned . 2. Section 81 of the Tax Code of 1997, expressly provides that "Except as the Commissioner otherwise permits, taxes deducted and withheld by the employer on wages of employee shall be covered by a return and paid to an authorized agent bank, Collection Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation, where the principal office is located." Considering your allegation that the processing and payment of the salary differential of your employees will be done at the NFA Central Office while the stock withdrawals by the buyers will be taken from your Metro Manila warehouses, which appears to be meritorious, your request is hereby granted. Accordingly, you are hereby authorized to remit to the Revenue District Officer, Revenue District Office No. 39 - South Quezon City, the taxes withheld by you from the employees entitled to the salary differential corresponding to the years 1989 to 1999 estimated to amount to P95,530,164.29. It is of course understood that NFA Central Office shall be responsible for furnishing each employee both for Central and field offices, the Employees Withholding Statements (BIR Form No. 2316) pursuant to Section 2.83.1 of Revenue Regulations No. 2-98. 3. After due consideration of the fact that the filing of amended returns for the taxable periods 1989-1999 for an estimated 4,000 NFA personnel will result to an estimated 40,000 amended ITRs and the administrative cost that the government will entail in processing the same, not to mention the non-availability of prior years data, this Office hereby resolves that, in lieu of said amended ITRs, NFA should instead file with the concerned Revenue District Office an Alphabetical List of Employees who were given salary differential for 1989 to 1998 on a per year basis, using the attached format marked as "Annex B". This is for monitoring purposes to enable this Office to check if the withholding tax due from each employee tallies with what was actually remitted by you. (4) Under Sec. 2.81 of Revenue Regulations No. 2-98, implementing the withholding tax provision of the Tax Code, "every person required to deduct and withhold the tax on compensation shall make a return and pay such tax on or before the 10th day of the month following the month in which the withholding was made to an authorized agent bank within the Revenue District Office (RDO) or in places where there is no agent bank, to the Revenue District Officer of the City or Municipality where the withholding agent/employers' legal residence or place of business or office is located; provided, however, that taxes withheld from the last compensation (December) for the calendar year shall be paid not later than January 25 of the succeeding year; . . ." Considering that the period within which to remit the taxes withheld is fixed by law, your request for the waiver of said period can not be granted for lack of legal basis. We therefore, seek your cooperation for the immediate remittance of the withholding tax due on said salary differential before the end of the year to meet our task of increasing revenue collections. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue