Taxability of Additional Compensation Allowance of Government Personnel

November 22, 1999 BIR RULING NO. 179-99 Sec. 24 (A) A.O. No. 53-144-99-179-99 Mr . Danilo C. Furia Assistant City Budget Officer Butuan City S i r : This has reference to BIR Ruling No. 14s99 dated September 14, 1999, issued in your favor relative to your request for a legal opinion on the taxability of the additional compensation allowance (ACA) earned in 1998 pending its formal integration into the basic pay of the government personnel, pertinent portion of which provides that "Effective January 1, 1998, however, excluded from taxable gross income under Sec. 32 of Republic Act No. 8424, are the 13th month pay and other benefits received as a consequence of employer-employee relationship. Thus, (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: "xxx xxx xxx (7) Miscellaneous Items. (e) Gross benefits received by officials and employees of public and private entities: Provided, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to R.A. 6686; (ii) Benefits received by employees pursuant to P.D. 851, as amended by Memorandum Order No. 28 dated August 13, 1986; (iii) Benefits received by officials and employees not covered by P.D. 851, as amended by Memorandum Order No. 28 dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. "The additional compensation income per month granted under A.O. No. 53 falls within the meaning of " other benefits " as defined in Sec. 32(B) above cited. Accordingly, the additional compensation income granted under A.O. 53 dated May 17, 1993 or such amount thereof that, when in conjunction with " the other benefits " do not exceed the limitation of P30,000 prescribed under Sec. 32(B) of RA. 8424, shall be treated as an exclusion from taxable gross income, and such, is exempt from income tax." After a thorough study of said BIR ruling, this Office is of the opinion as it hereby holds that the " other benefits " contemplated under Section 32(B)(7) of the 1997 Tax Code, which are excluded from gross compensation provided the total amount does not exceed P30,000, shall include, but not limited to, the 13th month pay, productivity incentive bonus, Christmas bonus, loyalty awards, gifts in cash or in kind and other benefits of similar nature paid to an employee. Apparently, ACA is not of similar nature with the above-enumerated benefits paid to an employee. The term "additional compensation allowance" as its name connotes, is indeed "compensation" embraced within the term "taxable compensation income" which is being defined as "all remuneration for services performed by an employee for his employer" under Sections 31 and 78 in relation to Section 32, both of the Tax Code, unless specifically excepted under Section 32(B) of the same Tax Code (then Sections 27, 71 and 27(b) of the Tax Code, as amended). Thus, the 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. This principle has been consistently applied in previous BIR rulings issued on the matter, viz.: 1. BIR Ruling No. 006-95 dated January 16, 1995; 2. BIR Ruling No. DA-254-97 dated July 29, 1997; 3. BIR Ruling No. 103-97 dated September 29, 1997; 4. BIR Ruling No. DA-429-97 dated December 11, 1997; 5. BIR Ruling No. DA-184-98 dated May 8, 1998; and 6. BIR Ruling No. DA-254-97 dated July 29, 1997 which categorically state that the P500 additional compensation allowance is subject to the income tax although it is not yet subject to the withholding tax prescribed under Sec. 78 of the 1997 Tax Code, as implemented by Revenue Regulations No. 2-98 (then Sec. 72 of the Tax Code, as amended, and as implemented by Revenue Regulations No. 6-85, as amended). It was also ruled that the only time that it will be subject to the withholding tax deduction is upon its formal integration to the basic pay of the said government personnel as provided for under paragraph 1(1.2) of Administrative Order No. 53. The reason therefore, for the non-withholding of the said P500 additional compensation allowance was clearly provided for under said Administrative Order No. 53, i.e., it is not yet subject to withholding tax pending its formal integration into the basic pay of government personnel. Thus, it does not necessarily mean that the additional compensation allowance is not at all subject to income tax or that it is exempt from income tax . Considering therefore, that it is a taxable compensation, the same should be included in W-2 Form as part of the gross compensation income subject to schedular rate of tax under Section 24(A) of the 1997 Tax Code [then Sec. 21 (a) of the Tax Code, as amended.]. cdlex This ruling is being issued in lieu of BIR Ruling No. 144-99 dated September 14, 1999, which is hereinafter considered revoked. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue