Obligation of De La Salle University to Withhold Income Tax

August 18, 1999 BIR RULING NO. 128-99 RR 2-98-128-99 De La Salle University 2401 Taft Avenue 1004 Manila Attention: Ms . Gloria S . de Leon Controller Gentlemen : This refers to your letter dated December 10, 1997 requesting for a ruling from this Office, on the following issues: CASE I : It is represented that the University has a research unit that engages specifically in research; that it is in keeping with the University's mission and vision of becoming a research university in the Asean Region; that the faculty members of De La Salle University who are research oriented submit research proposals and bid for funding from external agencies like the Ford Foundation, World Bank and other institutions; that in case the proposal is considered, the funding agency will award the money to these faculty members through De La Salle University for expediency of payments, as embodied in the Memorandum of Agreement; that when the University receives the grant, this is kept and maintained in a Research Fund held in trust for the funding agency and operated subject to the following conditions: 1. The University appoints the Research Director who will manage the research activity and such Director has authority over the disbursements of the fund; 2. All disbursements from the funds should be in accordance with the guidelines as stipulated in the Memorandum of Agreement; 3. The Research Director will in turn appoint all the personnel that is required to accomplish the research; LexLib 4. The Research Director will render a final or interim report to the funding agency whenever the project is already complete or when additional funding is required to be released; 5. The personnel working for the project are not employees of De La Salle University. Their tenure is co-terminus with the project; 6. Any unused funds from the project will be returned to the funding agency when the project is terminated. and that based on the foregoing you now posed the following questions: 1. Is the University required to withhold tax on the payments of honorarium to the project staff considering that the University does not own the money (funds held only in trust for the funding agency) and is not the employer of these personnel? 2. If no. 1 is yes, how do you classify income? Could it be classified as consultancy fee subject to withholding tax at 10% only? CASE NO . II : A. Is the incentive given to faculty members of De La Salle University who are doing research projects for the University, taxable or not, or can this be equated to a productivity incentive and therefore subject to the threshold of P12,000.00? B. Is the payment received by coaches who do not report every day, who are only paid allowances and who do not enjoy full benefits as a bona-fide employee compensation income or not? C. Is the allowance given to an ROTC Commandant who only reports during ROTC trainings and do not enjoy the benefits of a bona-fide employee subject to tax? If so, at what rate? CASE NO . III : It is represented that a University in Jakarta arranges with the University for a program to be undertaken in Jakarta; that the University will find qualified faculty members and send them to Jakarta to teach; that in turn, Jakarta will pay the travel expenses and honorarium of the faculty members sending the money to the University for expediency of payment; and that sometimes Jakarta pays the faculty members directly and therefore the University is not in any way involved. Based on the foregoing, you now request for a ruling on whether or not the University is under obligation to withhold income tax? CASE NO . IV : It is represented that some local companies contract with your faculty to do training programs which are mostly lecture type; that these companies sign the contract through your Research Centers (College of Business & Economics Research Department or CBERD) and then transfer the money to the Research Unit; that since the units of the Academic community like CBERD do not maintain a separate bank account, the check is made payable to the University; that the money will be kept in a depository account held in trust for CBERD; and that when CBERD disburses the funds to pay the faculty their honoraria, DLSU will issue its own checking account to cover the payment. prcd Based on the foregoing, you now request for a ruling on whether or not the University is under obligation to withhold any tax? CASE NO . V : It is likewise represented that graduating students in the graduate school level are required to defend their thesis; that during the defense, panelists are selected to evaluate the student; that the panelists are paid honoraria for their fee; and that the students pay the panelists through the University which in turn make the payment to the panelists. Is the University obliged to withhold any tax? In reply, please be informed of the following: CASE NO . I : Section 2.78.1 of Revenue Regulations No. 2-98 provides, viz: "SEC. 2.78.1. Withholding of Income Tax on Compensation Income. (A) Compensation Income Defined . In general, the term compensation 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 Sec. 33 of the Code, taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. On the other hand, Section 2.79 of Revenue Regulations No. 2-98 provides that every employer must withhold from compensation paid, an amount computed in accordance with these regulations. Provided, that no withholding of tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage of five thousand pesos (P5,000.00) monthly or sixty thousand pesos (P60,000.00) a year, whichever is higher. In relation to this, the term "employer" is also defined as any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation, who is not engaged in trade or business within the Philippines pursuant to Section 2.78.4(B) of the said Revenue Regulations. Based on the foregoing, it is the opinion of this Office that the income earned by the project staff are compensation income wherein the University has the responsibility of withholding the tax as an employer paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation, who is not engaged in trade or business within the Philippines. CASE NO . II : A. Section 33(C)(4) of the Tax Code of 1997 provides that: SEC. 33. Special Treatment of Fringe Benefit. "(C) Fringe Benefits Not Taxable under this Section . The following fringe benefits are not taxable under this Section: xxx xxx xxx "(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner." The incentive given to faculty members of De La Salle University who are doing research projects for the University can be equated to a productivity incentive and a productivity incentive is a fringe benefit. For supervisory and managerial employees, one of the fringe benefits that is not subject to the fringe benefits tax are "de minimis benefits." Section 2.79(D)(3)(d) of Revenue Regulations No. 2-98 provides that: "The term "de minimis benefits" which is exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges (such as entertainment, Christmas party and other cases similar thereto, medical and dental services; or the so-called courtesy discount on purchases), furnished or offered by an employer to his employees, provided such facilities or privileges are of relatively small value and are offered or furnished by the employer as a means or promoting the health, goodwill, contentment, or efficiency of his employees." The productivity incentive given is no longer subject to the P12,000.00 threshold but the same, plus the 13th month pay not exceeding P30,000.00 are excluded from gross income and therefore exempt from taxation pursuant to Section 32 (B)(7)(e) of the Tax Code of 1997. In excess thereof there shall be imposed a final tax of 34% beginning January 1, 1998, 33% beginning January 1, 1999 and 32% beginning January 1, 2000 and thereafter, on the grossed-up monetary value of fringe benefits pursuant to Section 33 of the Tax Code of 1997 and its implementing regulations. llcd B and C : In general, the relationship of the employer and employee exists when the person for whom services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which the result is accomplished. An employee is subject to the will and control of the employer not only as to what shall be done, but how it shall be done. In this connection, it is not necessary that the employer actually directs or controls the manner in which the services are performed. It is sufficient that he has the right to do so. The fact however that the Coaches and ROTC Commandant do not enjoy the benefits of a bona-fide employee of De La Salle University does not at all affect DLSU being the withholding agent of the Bureau of Internal Revenue because it is in fact the income payor of the said coaches and commandant and is fully responsible for the services performed by them on its behalf. Therefore, said allowances form part of their gross income and the tax shall be computed in accordance with and at the rates established in the following schedule: "Not over P10,000 5% "Over P10,000 but not over P30,000 P500 + 10% of the excess over P10,000 "Over P30,000 but not over P70,000 P2,500 + 15% of the excess over P30,000 '"Over P70,000 but not over P140,000 P8,500 + 20% of the excess over P70,000 "Over P140,000 but not over P250,000 P22,500 + 25% of the excess over P140,000 "Over P250,000 but not over P500,000 P50,000 + 30% of the excess over P250,000 "Over P500,000 P125,000 + 34% of the excess over P500,000 in 1998 Provided, That effective January 1, 1999, the top marginal rate shall be thirty three percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%). Section 23(C) of the Tax Code of 1997 provides, viz: "SEC. 23. General Principles of Income Taxation in the Philippines . Except when otherwise provided in this Code: xxx xxx xxx (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;" Therefore, if the qualified faculty member is an overseas contract worker which work contract passes thru the Philippine Overseas Employment Agency (POEA), the income that will be received by the said qualified faculty members are considered income not within the Philippines, not subject to tax, hence, the University is not under obligation to withhold income tax. On the other hand, if the qualified faculty member is considered as a non-resident citizen, then he is taxable only on income derived from sources within the Philippines. Thus, income earned by a non-resident citizen abroad is exempt from income tax. Moreover, Section 20(e) of the Tax Code of 1997 provides that the term "non-resident citizens" means: "(1) A citizen of the Philippines who establishes to the satisfaction of the commissioner the fact of his physical presence abroad with a definite intention to reside therein; "(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis; "(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year: (The phrase "most of the time" is interpreted to mean presence abroad or at least 183 days during the taxable year.) xxx xxx xxx" CASE NOS . IV AND V : An employer may be an individual, a corporation, a partnership, a trust, an estate, a joint-stock company, an association, or a syndicate, group, pool, joint venture, or other unincorporated organizations, group or entity. A trust or estate, rather than the fiduciary acting for or behalf of the trust or estate, is generally the employer. On the basis of your representations, it can be inferred that a trust had been created between the University and the local companies in Case No. IV, in favor of the faculty members, and between the University and the graduate school students in favor of the said faculty. Hence, it is the trust that is the employer and not the University which only acts as an agent or fiduciary. Nonetheless, being the agent, fiduciary or other person who has the control, receipt, custody or disposal of, or pays the compensation payable by another employer to such employee, the amount of tax required to be withheld on each compensation payment made through an agent, fiduciary, or person shall, whether the compensation is paid separately on behalf of all such employers, be determined based on the aggregate amount of such compensation payment or payments in the same manner as if such aggregate amount had been paid by one employer. It appearing that the University has the control, receipt, custody or disposal of or is the one who pays the compensation payable by another employer, the University is under obligation to withhold the corresponding income tax and remit the same to the Bureau of Internal Revenue on behalf of the said employers. We trust that the above information has provided you adequate responses to your clarificatory questions. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue