Applicable Tax Rate and Tax Regulation Withheld on Income Tax from the Profit/Production Shares of the Beneficiaries

April 5, 1989 BIR RULING NO. 057-89 71 000-00 057-89 Gentlemen : This refers to your letter dated March 7, 1989 stating that the Comprehensive Agrarian Reform Law, R.A. No. 6657 and E.O. No. 229 requires you to implement production and profit sharing plans with qualified farm members as beneficiaries; that production sharing is calculated at 2.5% of gross sales under Executive Order No. 229 and later increased to 3.0% under R.A. No. 6657; that profit sharing is 10% of net profit after tax under R.A. No. 6657; that the beneficiaries are employees and contractual laborers who render service regardless of duration, within the period covered by R.A. No. 6657 and E.O. No. 229; that employees of labor contractors engaged by you are also eligible; and that upon the transfer of ownership of the land to the beneficiaries, the profit and production share cease to be paid. cdtech Based on the foregoing representation, you now request in effect a ruling on the applicable tax rate and tax regulation upon which you shall withhold income tax from the profit/production shares of the beneficiaries. In reply, please be informed that Section 16 of E.O. #229 and Section 32 of R.A. No. 6657 respectively provides, viz: "SEC. 16. Production Sharing Individuals or entities owning and/or operating under lease agricultural lands with gross sales in excess of Five Million Pesos (P5 million) per annum are hereby mandated to execute a production sharing plan whereby at least two and one-half (2.5%) percent of the gross sales from the production/cultivation of such lands are distributed as compensation to the farmworkers over and above the compensation they currently receive, provided that such individuals or entities are not obligated to pay more than 100 percent of the regular annual compensation of the farmworkers." "SEC. 32. Production Sharing . Pending final land transfer, individuals or entities owning, or operating under lease or management contract, agricultural lands are hereby mandated to execute a production-sharing plan with their farmworkers or farmworker's organization, if any, whereby three percent (3%) of the gross sales from the production of such lands are distributed within sixty (60) days of the end of the fiscal years as compensation to regular and other farmworkers in such lands over and above the compensation they currently receive: Provided, that these individuals or entities realize gross sales in excess of five million pesos per annum unless the DAR, upon proper application, determines a lower ceiling. "In the event that the individual or entity realizes a profit, an additional ten percent (10%) of the net profit after tax shall be distributed to said regular and other farmworkers within ninety (90) days of the end of the fiscal year." "To forestall any disruption in the normal operation of lands to be turned over to the farmworker-beneficiaries mentioned above, a transitory period, the length of which shall be determined by the DAR, shall be established." "During this transitory-period, at least one percent (1%) of the gross sales of the entity shall be distributed to the managerial, supervisory and technical group in place at the time of the effectivity of this Act, as compensation for such transitory managerial and technical functions as it will perform, pursuant to an agreement that the farmworker-beneficiaries and the managerial, supervisory and technical group may conclude, subject to the approval of the DAR." Under the above-quoted provisions, the percentage of gross sales from the production of such lands to be distributed to the farmworker-beneficiaries and the transitory managerial, supervisory and technical group shall be classified as compensation. For purposes of withholding tax, the term "compensation" means all remuneration for services performed by an employee for his employer unless specifically excepted under Sections 28 and 71 of the Tax Code. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece work, or a percentage of profits as in this case, or may be paid hourly, daily, weekly, or annually. (Sec. 2, Revenue Regulations No. 6-82) The term "compensation" (wages) does not include remuneration paid for agricultural labor paid entirely in products of the farm where the labor is performed. (Sec. 71(1), Tax Code) All payments made in cash or other forms other than products of the farm where labor is performed for services constituting agricultural labor do not fall within the exceptions from withholding (Sec. 3, Revenue Regulations No. 6-82) Accordingly, and since it does not appear that the shares were paid entirely in products of the farm where labor is performed, this Office is of the opinion as it hereby holds that the said profit/production share of your farmworker-beneficiaries as well as your transitory managerial, supervisory, technical group, if any, that you will pay pursuant to Executive Order No. 229 and R.A No. 6657 shall be subject to the withholding tax on wages at the rates prescribed by Section 21(a) in relation to Section 71, Chapter 10, Title II of the Tax Code as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended. cd Very truly yours, (SGD.) JOSE U. ONG Commissioner