Differentials for the COLA Earned and Salary Differentials Due are Taxable in the Year When They Were Actually Received

February 13, 1992 BIR RULING NO. 047-92 38-00 000-00 047-92 The National Food Authority 101 E. Rodriguez Sr. Avenue Quezon City Attention: Mr . Pelayo J . Gabaldon Administrator Gentlemen : This refers to your letter dated September 11, 1990 requesting for a ruling on the taxable year within which to report differentials received in the year 1990 for cost of living allowance covering the period October, 1983 to December, 1988 and salary differentials due pursuant to the Salary Standardization Act covering the period July, 1989 to September, 1990. In reply, please be informed that under Section 38 of the Tax Code, as amended, pertinent portion of which reads: "Sec. 38. Period in which Items of Gross Income Included. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer , unless, under methods of accounting permitted under Section thirty-seven, any such amounts are to be properly accounted for as of a different period. . . . ." (Emphasis supplied) income is reportable in the year received unless, under methods of accounting allowed under the Tax Code (i.e. Section 37), any such amounts can be properly accounted for as of a different period. Therefore, it does not matter when the income was earned but when it was received by the taxpayer. Salaries, commissions, tips, director's fees, and other forms of compensation are income in the year received, and not in the year earned. [par. 717, p. 231, US Master Tax Guide (1969)] Thus, a taxpayer whose income is from salary or the like, as in this case, is required to file his income tax return on the cash basis . BIR Ruling 039/057-83/238-86 dated November 10, 1986 will not apply to the differentials received by your employees because said ruling involves a case of employee's illegal dismissal. In that case, the employee was accorded special treatment i.e., allowed to allocate or spread his back wages, allowances and benefits through the years 1983, 1984 and 1985, "having been denied payment of his wages when they were due because of circumstances not of his own making and, therefore beyond his control, the aforenamed employee comes within the scope of the inequity for which this ruling is precisely designed to remedy." In view thereof, this Office is of the opinion as it hereby holds that inasmuch as salaried employees-taxpayers are required to file their income tax returns on the cash basis, the differentials for the cost of living allowances earned by them for the period October 1983 to December 1988 and salary differentials due pursuant to the Salary Standardization Act covering the period July 1989 to September 1990, are taxable in the year when they were actually received. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue