Additional Compensation Allowance Subject to Income Tax But Not to Withholding Tax Deduction

August 16, 2002 BIR RULING NO. 034-02 A.O. 53 E.O. 219 Engr. Amor P. Liban Municipal Engineer Paracelis, Mt. Province Gentlemen : This refers to your letter dated March 6, 2002 requesting a ruling on the taxability of the Additional Compensation Allowance (ACA) of all government employees which was given as a benefit under Administrative Order (A.O.) No. 53. It is represented that on July 30, 1997 you wrote the Regional Director inquiring on whether or not ACA is taxable due to conflicting legal opinions; that in reply to your inquiry, you received an opinion dated November 12, 1997 stating that "ACA is exempt from taxes provided for under AO No. 53 on the condition that such allowance was not integrated in the basic pay". Based on the opinion dated November 12, 1997, it is your opinion that ACA is not subject to income tax despite the issuance of BIR Ruling No. 179-99 dated November 22, 1999. In support of your position you argue that: a. Ruling No. 179-99 which says that ACA is embraced within the term taxable compensation income is grossly contradicting the provision of AO No. 53 that the P500.00 partakes of an ALLOWANCE not subject to deduction pending its formal integration into the basic pay; and b. Records of government offices will show that the P500.00 allowance was never integrated in the basic pay of employees, which fact was admitted in the ruling when it stated that "It was ruled that the only time that it will be subject to the withholding tax deduction is upon its formal integration to the basic pay of the said government personnel as provided for under paragraph 1(1.2) of AO No. 53. The reason therefore, for the non-withholding of the said P500.00 Additional Compensation Allowance was clearly provided for under said Administrative Order No. 53, i.e., it is not yet subject to withholding tax pending its formal integration into the basic pay of government personnel." In reply, please be informed that with respect to ACA given under AO No. 53, this Office finds no reason to depart from its position, as embodied in several BIR Rulings, that the P500.00 compensation allowance is subject to income tax although it is not yet subject to the withholding tax prescribed under now Section 79 (then Section 72) of the Tax Code of 1997, and that the only time it will be subjected to the withholding tax deduction is upon its formal integration into the basic pay of the said Government personnel as provided for under paragraph 1(1.2) of AO No. 53 which reads: "This Administrative Order is issued to extend the same privilege to the rest of the personnel of the government, which shall partake of an allowance and not subject to GSIS, HDMF fund premiums and income tax deductions pending its formal integration into the basic pay of the subject Government personnel ."(Emphasis supplied) The term " additional compensation allowance ",as its name connotes, is indeed " compensation " embraced within the term " taxable compensation income " which is defined as " all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded under now Secs. 31, 32(B) and 78 of the Tax Code of 1997 . " The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, commissions, ALLOWANCES (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 fringe benefits tax under Section 33 of the Code; taxable pensions and retirement pay, and other income of similar nature constitute taxable compensation income (Sec. 2.78.1, Revenue Regulations No. 2-98) Furthermore, the term " income tax deductions " mentioned under AO No. 53 refers to " withholding tax deductions " and does not in any manner refer to income tax exemption. On the other hand, the phrase " not subject to income tax deductions " means that ACA is not yet subject to withholding tax deductions pending its formal integration into the basic pay of the subject government personnel. Hence, it does not mean that ACA is not at all subject to income tax or that it is exempt from income tax. It should be emphasized at this point that the familiar rule in statutory construction is that exemption in tax statutes is strictly construed against the taxpayer and liberally in favor of the taxing authority. Thus, we cannot expand our construction and write into the law an exemption not therein set forth. Accordingly, and in view of the fact that the AO No. 53 simply states that ACA is not subject to INCOME TAX DEDUCTIONS, rather than stating that it is exempt from income tax, we would like to reiterate our opinion in our previous rulings that the said allowance is not subject to withholding tax deductions on compensation income under Section 79 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, and the only time that it will be subjected to the withholding tax deduction is upon its formal integration into the basic pay of the subject government personnel. In other words, although it is not subject to withholding tax deduction, it is, however, subject to income tax. However, with respect to ACA for the taxable year 2000 and onwards, Executive Order 219, and the following amendment to Sec. 2.78(A)(6) of Revenue Regulations 2-98 as found under Revenue Regulations No. 8-2000 ,shall apply: HCaDIS "(6) Fixed or variable transportation, representation and other allowances . "(a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a public officer or employee of a private entity in addition to the regular compensation fixed for his position or office, is compensation subject to withholding: PROVIDED, HOWEVER, THAT REPRESENTATION AND TRANSPORTATION ALLOWANCE (RATA) GRANTED TO PUBLIC OFFICERS AND EMPLOYEES UNDER THE GENERAL APPROPRIATIONS ACT AND THE PERSONNEL ECONOMIC RELIEF ALLOWANCE (PERA) WHICH ESSENTIALLY CONSTITUTE REIMBURSEMENT FOR EXPENSES INCURRED IN THEIR PERFORMANCE OF GOVERNMENT PERSONNEL'S OFFICIAL. DUTIES SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX. PROVIDED FURTHER, THAT PURSUANT TO E.O. 219 WHICH TOOK EFFECT ON JANUARY 1, 2000, ADDITIONAL COMPENSATION ALLOWANCE (ACA) GIVEN TO GOVERNMENT PERSONNEL SHALL NOT BE SUBJECT TO WITHHOLDING TAX PENDING ITS FORMAL INTEGRATION INTO THE BASIC PAY. CONSEQUENTLY, AND EFFECTIVE FOR THE TAXABLE YEAR 2000, ACA SHALL BE CLASSIFIED AS PART OF THE "OTHER BENEFITS" UNDER SECTION 32(B)(7)(e) OF THE CODE WHICH ARE EXCLUDED FROM GROSS COMPENSATION INCOME PROVIDED THE TOTAL AMOUNT OF SUCH BENEFITS DOES NOT EXCEED P30,000.00 ." (Emphasis supplied) "xxx xxx xxx" Hence ACA given to government employees pursuant to EO 219, shall not be subject to withholding tax pending its formal integration into the basic pay. While its nature shall continue to be that of "compensation" in Section 2.78.1 of Revenue Regulations 2-98, as amended, it shall, however, be treated as part of the "other benefits" under Section 32(b)(7)(e) of the Tax Code of 1997 which are excluded from gross compensation income, provided the total amount of such benefits does not exceed P30,000.00, starting January 1, 2000. This modifies BIR Ruling No. 179-99 dated November 22, 1999. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue