Imposition of Income Tax Deduction on the 'Additional Compensation Allowance' of Government Personnel up to Grade 25 Despite the Provision of Administrative Order No. 53, series of 1993

September 29, 1997 BIR RULING NO. 103-97 Bicol University Union of Federated Faculty Association Bicol University College of Education Daraga, Albay Attention: Mr . Rogerio A . Azul Associate Professor President Gentlemen : This refers to your letter addressed to the Hon. Executive Secretary Ruben Torres dated July 22, 1997 requesting for a clarificatory ruling regarding the opinion contained in the letter dated April 16, 1997 of Regional Director Alberto R. Paggabao, Jr. of our Revenue Region No. 10, Legaspi City, on the imposition of income tax deduction on the 'additional compensation allowance (ACA)' of Government personnel up to Grade 25 despite the provision of Administrative Order (AO) No. 53, series of 1993, inviting particular attention to paragraph 3 of page 2 of the said ruling, viz: cdtech "Furthermore, an Administrative Order such as AO 53 cannot amend the Tax Code, particularly the intendment of Sec. 21(a) thereof in relation to Sec. 27 of the same Code for reason that based on separation of powers, the amendatory functions belongs to the Legislative Branch of the government." In reply, please be informed that in several rulings issued by this Office on the same subject matter, the latest of which is BIR Ruling No. DA-254-97 dated July 29, 1997 addressed to the Sangguniang Bayan of Daraga, Albay, we have consistently ruled that the subject P500 additional compensation allowance is subject to income tax although it is not yet subject to the withholding tax prescribed under Sec. 72 of the Tax Code, as amended, as implemented by Revenue Regulations No. 6-82, as amended, and the only time that it will be subjected to the withholding tax deduction is upon integration to the basic pay of the said Government personnel as provided for under paragraph 1(1.2) of the said Administrative Order No. 53, reading: "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, HMDF fund, premiums and income tax deductions pending its format integration into the basic pay of the subject Government personnel with salary grade up to Grade 25 ." (Emphases supplied.) Consequently, the issue of whether or not Administrative Order No. 53 amends the Tax Code is of no moment because while it is true that only the Legislative Branch of the Government can amend a law, we believe that no amendment whatsoever, whether directly or indirectly, was brought about by the aforementioned AO 53 to the Tax Code, as amended. In fact, the term " additional compensation allowance ," as its name connotes, is indeed a "compensation" embraced within the term "taxable compensation income" which is defined as "all remuneration for services performed by an employee for his employer unless specifically excepted under Secs. 27, 28(b) and 71 of the Tax Code." The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, bonuses , allowances (such as transportation, representation, entertainment and the like), fringe benefits (monetary and non-monetary), fees, including director's fees, taxable pensions and retirement pay, and other income of a similar nature constitute taxable compensation income. Furthermore, the term " income tax deductions ," under the said AO, refers to "withholding tax deductions" and the phrase " not subject to income tax deductions " means that ACA is not yet subject to the withholding tax deductions pending its formal integration into the basic pay of the subject government personnel but it does not necessarily mean that it is not at all subject to income tax or that it is exempt from income tax . Necessarily, it simply means that ACA will only be subjected to the withholding tax deductions on compensation income under Sec. 72 of the Tax Code, as amended, upon its formal integration into the basic pay of the subject Government employee. In view thereof, we hereby confirm the ruling issued by Regional Director Alberto R. Paggabao, Jr. dated April 16, 1997 that ACA, although not yet subject to withholding tax pending its formal integration into the basic pay of government personnel, is nevertheless a taxable compensation income and hence, includible in W-2 Form as part of the gross compensation income subject to schedular rate of tax under Sec. 21(a) of the Tax Code, as amended. cdti We hope that we have sufficiently answered your question on the matter. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue