BIR Ruling No. 076-10

September 23, 2010 BIR RULING NO. 076-10 BIR Ruling No. DA-136-2003 Philippine Tourism Authority Room 621 DOT Bldg., 6th Floor T.M. Kalaw St. Ermita, Manila Attention: Atty. Teodoro M. Hernandez Corporate Legal Counsel Gentlemen : This refers to your letter dated June 25, 2007 requesting for a ruling on whether or not the back pay representing Cost of Living Allowance (COLA) and Amelioration Allowance of Philippine Tourism Authority (PTA) employees is subject to tax. As represented, the employees of the PTA, a government-owned and controlled corporation, are receiving COLA and Amelioration Allowance. However, it was discontinued in 1989 by virtue of DBM Corporate Compensation Circular No. 10-99, prescribing the Implementing Rules and Regulations of Republic Act (R.A.) No. 6758, otherwise known as the Salary Standardization Law, which integrated said allowances into the basic salary effective July 1, 1989. The said Circular was declared ineffective on August 12, 1998 for lack of publication either in the Official Gazette or in newspaper of general circulation. PTA employees, for having been deprived of their COLA and Amelioration Allowance from July 1, 1989 to March 16, 1999 were then given back pay representing the said allowances, on a staggered basis depending on whether or not PTA has savings. TAIaHE In reply, please be informed that the issue on whether COLA and amelioration allowance are subject to income tax has been settled by this Office in BIR Ruling No. 043-2001 dated September 20, 2001, DA-136-2003 dated April 29, 2003 and DA-009-2004 dated January 7, 2004. In BIR Ruling No. DA-136-2003 dated April 29, 2003, this Office denied the request for tax exemption of the National Development Company on the COLA it was imperative to pay, in view of the ruling of the Supreme Court in Rodolfo S. de Jesus, et al. vs. Commission on Audit, et al. promulgated on August 12, 1998, to its employees for the period 1989 to 1999. The BIR held 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) DCTHaS xxx xxx xxx' 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 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 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. xxx xxx xxx" In view of the foregoing, the back pay representing COLA and Amelioration Allowance of PTA employees is subject to tax. 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 as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue