BIR Ruling No. 144-12

February 27, 2012 BIR RULING NO. 144-12 Secs. 23, 31 and 32 of the NIRC of 1997, as amended; Sec. 2.78.1, RR 2-98, as amended; Section 7, R.A. 8439 Hon. Mario G. Montejo Secretary Department of Science and Technology Bicutan, Taguig, Metro Manila Dear Secretary Montejo : This refers to your letter dated March 10, 2011 reiterating the previous request of the Department of Science and Technology (DOST) to reconsider the legal opinion issued by the Bureau of Internal Revenue (BIR) dated July 20, 2007 to the Industrial Technology Development Institute (ITDI) denying exemption from income tax of the hazard pay given as incentive by the DOST under Republic Act (R.A.) No. 8439 or "AN ACT PROVIDING A MAGNA CARTA FOR SCIENTISTS, ENGINEERS, RESEARCHERS AND OTHER SCIENCE AND TECHNOLOGY PERSONNEL IN GOVERNMENT". Documents submitted disclosed that on March 6, 2007, the ITDI, an attached agency of the DOST, requested the tax exemption of the hazard allowance granted as incentive under R.A. 8439 to its employees; that on July 20, 2007 BIR issued a ruling (signed by then Deputy Commissioner Gregorio V. Cabantac) denying the request for lack of legal basis as there is no such specific provision in R.A. No. 8439 exempting the same from income tax; that on November 21, 2007, the DOST formally requested reconsideration of the said BIR ruling; that in its letter dated November 21, 2007, the DOST seeks reconsideration of the denial for the following reasons: 1. R.A. No. 8439 is a piece of social or general welfare legislation and is primarily designed to give relief to Science and Technology (S & T) Personnel and as such, it should be liberally construed in favor of said employees in order to attain the purpose for which it was enacted. 2. Hazard pay as embraced in R.A. No. 8439 is not synonymous to compensation under the National Internal Revenue Code (NIRC) as shown by the enumerations under Section 7 of said R.A. and thus, they are not remunerations in its strict sense as they do not depend upon the services rendered by such S & T Personnel. Moreover, it is your submission that upon the premises stated in BIR Ruling No. DA-031-02 dated March 7, 2002 and Revenue Memorandum Circular No. 15-87, hazard pay shall be tax exempt. 3. Nowhere in the law of taxation does it provide explicitly that hazard pay granted to civil service employees is subject to tax. The hornbook doctrine in the interpretation of tax laws declares that a statute will not be construed as imposing a tax unless it does so clearly, expressly and unambiguously. Thus, in case of doubt, the statute is to be construed most strongly against the government and in favor of the subjects or citizens. And 4. To allow the imposition of taxes to these privileges and benefits would be divergent to the legislative purpose and aforementioned declared policy. and that there was no response on their request for reconsideration, thus, this request. In reply please be informed that Section 7 of R.A. No. 8439 provides for "other benefits to be received by S & T personnel in the Government" defined and enumerated under Section 5 1 of the same law, to wit: "Section 7. Other benefits. Notwithstanding Section 12 of Republic Act No. 6758, science and technology personnel defined under Section 5 of this Act shall receive the following: (a) Honorarium. S & T personnel who rendered services beyond the established irregular workload of scientists, technologists, researchers and technicians whose broad and superior knowledge, expertise or professional standing in a specific field contributes to productivity and innovativeness shall be entitled to receive honorarium subject to rules to be set by the Department; (b) Share in royalties. S & T scientists, engineers, researchers and other S & T personnel shall be entitled to receive share in royalties subject to guidelines of the Department. The share in royalties shall be on a sixty percent-forty percent (60%-40%) basis in favor of the Government and the personnel involved in the technology/activity which has been produced or undertaken during the regular performance of their functions. For the purpose of this Act, share in royalties shall be defined as a share in the proceeds of royalty payments arising from patents, copyrights and other intellectual property rights; If the researcher works with a private company and the program of activities to be undertaken has been mutually agreed upon by the parties concerned, any royalty arising therefrom shall be divided according to the equity share in the research project; (c) Hazard allowance. S & T personnel involved in hazardous undertakings or assigned in hazardous workplaces, shall be paid hazard allowances ranging from ten (10%) to thirty (30%) percent of their monthly basic salary depending on the nature and extent of the hazard involved. The following shall be considered hazardous workplaces: (1) Radiation-exposed laboratories and service workshops; (2) Remote/depressed areas; (3) Areas declared under a state of calamity or emergency; (4) Strife-torn or embattled areas; (5) Laboratories and other disease-infested areas. (d) Subsistence allowance. S & T personnel shall be entitled to full subsistence allowance equivalent to three (3) meals a day, which may be computed and implemented in accordance with the criteria to be provided in the implementing rules and regulations. Those assigned out of their regular work stations shall be entitled to per diem in place of the allowance; (e) Laundry allowance. S & T personnel who are required to wear a prescribed uniform during office hours shall be entitled to a laundry allowance of not less than One hundred fifty pesos (P150.00) a month; (f) Housing and quarter allowance. S & T personnel who are on duty in laboratories, research and development centers and other government facilities shall be entitled to free living quarters within the government facility where they are stationed: Provided, That the personnel have their residence outside of the fifty (50)-kilometer radius from such government facility; (g) Longevity pay. A monthly longevity pay equivalent to five percent (5%) of the monthly basic salary shall be paid to S & T personnel for every five (5) years of continuous and meritorious service as determined by the Secretary of the Department; and (h) Medical examination. During the tenure of their employment, S & T personnel shall be given a compulsory free medical examination once a year and immunization as the case may warrant. The medical examination shall include: . . ." (Emphasis supplied) Briefly stated, Section 7 of R.A. 8439 provides that although Section 12 of R.A. No. 6758 directs the consolidation of Allowances and Compensation wherein all allowances, except for "representation and transportation allowances; clothing and laundry allowances; subsistence allowance of marine officers and crew on board government vessels and hospital personnel; hazard pay; allowances of foreign service personnel stationed abroad, and such other additional compensation not otherwise specified herein as may be determined by the DBM", shall be deemed included in the standardized salary rates prescribed therein, S & T personnel shall still receive other benefits enumerated above pursuant to R.A. 8439. While R.A. 8439 does not have a specific provision subjecting "hazard pay" to tax, it is a principle of taxation under Section 23 of the NIRC of 1997, as amended that "a citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines". In relation to the foregoing principle, Sections 24, 31 and 32 of the same Code subjects to income tax all taxable income of the individual citizen, provides: "SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein; xxx xxx xxx SEC. 31. Taxable Income Defined. The term taxable income means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. SEC. 32. Gross Income. (A) General Definition. Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar items; (2) . . ." (Underscoring supplied) Section 2.78.1 (A) of Revenue Regulations (RR) No. 2-98, as amended, defined "Compensation Income" as follows: (A) Compensation Income Defined. In general, the term "compensation" means all remunerations 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 (e.g. transportation, representation, entertainment and the like) , commissions; 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 Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income." (Underscoring supplied) Contrary to your submission that the foregoing benefits are not remuneration, it is evident these are incentives given to S & T personnel rendering services aligned with the Scientific and Technological Activities to the Government, who is the employer. It is by reason of such services rendered by S & T personnel that such incentives are granted them and hence, the hazard allowance shall form part of their compensation income that is subject to income tax imposed under Section 24 of the NIRC of 1997, as amended, as well as creditable withholding tax under Section 2.78.1 of Revenue Regulations No. 2-98, as amended. Cited as precedent to support your position that hazard pay shall be tax exempt is BIR Ruling No. DA-031-02 dated March 7, 2002. It should be clarified that BIR Ruling No. DA-031-02 was issued to rule on the tax exemption of the ex gratia of the taxpayer received from her employer over and above her retirement benefits. In this case, this Office was of the opinion that "Accordingly, all remuneration for services are generally included in the taxable compensation income of the employees such as but not limited to fringe benefits (monetary or non-monetary e.g., longevity pay, hazard pay and all kinds of allowances, except allowances for quarters, clothing and subsistence which are held to be exempt from income tax pursuant to Revenue Memorandum Circular No. 15-87). xxx xxx xxx Moreover, under the Flow of Wealth Theory in Taxation wealth that flows into the hands of a taxpayer is income subject to income tax. In view of the foregoing, this Office is of the opinion as it hereby holds that ex gratia is other income of a similar nature as longevity pay, allowances and commissions considered as compensation income, hence, subject to income tax under Section 24 (A) of the Tax Code of 1997, and consequently to withholding tax prescribed under Revenue Regulations No. 2-98." The above ruling fails to support or categorically state that hazard pay is included in the enumeration of those exempted from gross income. Furthermore, because taxes are the lifeblood of the nation, the court has always applied the doctrine of strict interpretation in construing tax exemptions. A claim for exemption from tax payments must be clearly shown and be based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. ( Paseo Realty & Development Corporation v. Court of Appeals, et al., G.R. No. 119286, October 13, 2004, as cited in Davao Oriental Electric Cooperative, Inc. vs. The Province of Davao Oriental, G.R. No. 170901, January 20, 2009) "He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that "exemptions are never presumed, the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt". In other words, since taxation is the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms." (Quezon City and The City Treasurer of Quezon City vs. ABS-CBN Broadcasting Corporation, G.R. No. 166408, October 6, 2008) In view of the foregoing and considering the imposition of income tax by the NIRC of 1997, as amended, on the receipt of hazard allowance/pay and the fact R.A. No. 8439 does not expressly provide for the exemption from income tax of the allowances and incentives granted therein, this Office finds no cogent reason to reconsider our opinion in the BIR ruling issued to the ITDI dated July 20, 2007. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue. Footnotes 1. Section 5. Classification of S & T Personnel. S & T personnel may be classified in the following categories: (a) S & T managers, supervisors, and planners. Those who are graduate degree holders or have at least ten (10) years of managerial experience or are performing executive, planning and policy-making functions to effectively carry out STA related activities as defined in Section 3 of this Act; (b) Members of the scientific career system; (c) Scientists, engineers and researchers. Those who are at least undergraduate degree holders in any of the natural science and engineering courses and are involved in research and development or other scientific and technological activities; and (d) DOST technicians and related S & T personnel. Those who obtained at least twelve (12) units in science, engineering and other related courses or any appropriate training as determined by the Secretary of the Department and are providing support services to S & T personnel enumerated in the three (3) preceding sub-sections.