Tax Consequences Relative to Back Benefits to be Received by PPA Employees Covering COLA and Amelioration Allowance

September 21, 2001 BIR RULING NO. 043-01 RR 2-98 000-00 Philippine Ports Authority Marsman Building, 22 Muelle de San Francisco South Harbor, Manila Attention: Mr. Alfonso G. Cusi General Manager Gentlemen : This refers to your letter dated April 16, 2001 requesting for a ruling on the tax consequences relative to the back benefits to be received by the Philippine Ports Authority (PPA) employees covering Cost of Living Allowance (COLA) and Amelioration Allowance for the periods July 1, 1989 to March 16, 1999; and that you also presented the following issues for our determination: "1. Application of the yearly tax rates only on the COLA and Amelioration Allowance to be received using the computation format shown in Annex "A"; "2. Centralized withholding tax collection and remittance of taxes due; "3. Waiver of the filing of the individual amended ITRs on taxes due for the prior years by the employees; "4. Remittance of the total withholding tax 30 days after receipt of the BIR resolution." In reply thereto, please be informed that the term "Compensation Income" 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 Tax Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. 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. ( Sec 2. 78.1(A). revenue regulations No. 2-98) Please note that the withholding 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. (Sec. 2.78, Ibid) In applying the above-cited regulations to the case at bar, the COLA and Amelioration Allowances to be received by the PPA employees form part of their compensation income subject to withholding tax. Thus, it is the liability of the employer, PPA, to withhold and remit the corresponding tax due on the said allowances to the BIR. Considering that such back benefits, i.e. , COLA and Amelioration Allowances, constitute remunerations prior to the year 1989 when actually received by such employees, a liberal construction of the statute is called for in this particular case if only to protect employees from the payment of a tax heavier than what should have been imposed if the employer had promptly met its obligation. (BIR Ruling No. 346-88 dated July 21, 1988). Accordingly, in filing their annual income tax returns, they should report as income and pay their respective income taxes by allocating or spreading their back benefits for the years 1989 to 1999 or equivalent to a period of ten (10) years. With regard to the application of the yearly tax rates on COLA and Amelioration allowances, this Office interposes no objection to the manner by which PPA will compute the benefits to be received by the employees which clearly shows the tax withheld from them during the years in question, as shown in Annex "A" attached herewith. ( BIR Ruling No. 014-200 dated January 7, 2000 ) On the issue of centralizing the withholding tax collection and remittance of taxes due, Section 81 of the Tax Code of 1997 provides that except as the Commissioner otherwise permits, taxes deducted and withheld by the employer on wages of employees 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. (Sec. 2.81, Revenue Regulations No. 2-98) It is to be emphasized, however, that every employer or other person who is required to deduct and withhold the tax on compensation . . . shall furnish every employee from whose compensation taxes have been withheld the Certificate of Income Tax Withheld on Compensation (Form No. 2316, formerly Form No. W-2) on or before January 31 of the succeeding calendar year. (Sec. 2.83.1, supra) Considering that the processing and payment of the back benefits of the employees will be done at the PPA Central Office, your request to centralize the collection and remittance of the withholding tax is hereby granted. Thus, you are hereby authorized to remit to Revenue District Office No. 33 Ermita-Intramuros-Malate, the withholding tax due from the employees entitled to the back benefits corresponding to the years 1989 to 1999. Your request for the waiver of the filing of amended returns on taxes due for prior years covering the COLA and Amelioration Allowances is hereby granted. This Office has already occasioned to rule that, in lieu of said amended returns, PPA should instead file with the concerned Revenue District Office an Alphabetical List of Employees who were given back benefits for 1989 to 1999 on a per year basis. This is for monitoring purposes to enable this Office to check if the income tax due from each employee tallies with what was actually remitted by them. Finally, taxes constitute the lifeblood of the nation and are greatly needed to support the government and its widely expanding services to the people. Thus, the collection and remittance of the withholding tax due on the back benefits to be received by the employees of PPA should never depend on the resolution of this Office but should instead arise at the time an income is paid or payable, whichever comes first. (Sec. 2.57.4 Revenue Regulations No. 2-98) 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.) RENE G. BAEZ Commissioner of Internal Revenue