BIR Ruling No. 195-12

March 21, 2012 BIR RULING NO. 195-12 R.A. 9504; 000-00 Jommel F. Hernandez B1 L11 Sitio Sampalocan St. Martin de Porres, Paraaque City Sir : This refers to your letter dated July 12, 2011, requesting for an opinion on the taxability of minimum wage earners. You represented that you are one of more than one hundred employees of Developed Logical Techniques for Airconditioning Technologies Corporation (DELTA-T) receiving Php404.00 per day as basic compensation income. You also inquired as to whether or not the improperly withheld or excess withholding tax deducted from your wages may be refunded to you. In reply, please be informed that Republic Act No. 9504 1 (RA 9504) provides that minimum wage earners, as defined therein, 2 are exempt from the payment of income tax on their taxable income and that the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. 3 Moreover, Revenue Regulations No. 10-08 4 (RR 10-08) implements the above statutory provisions by amending pertinent provisions of Revenue Regulations No. 2-98 (RR 2-98), as amended, with respect to the withholding tax on compensation income of minimum wage earners, among others, as follows: "Section 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as follows: 'Sec. 2.78.1. Withholding of Income Tax on Compensation Income . ... (B) Exemptions from Withholding Tax on Compensation. The following income payments are exempted from the requirements of withholding tax on compensation : IAETDc xxx xxx xxx (13) Compensation income of MWEs who work in the private sector and being paid the Statutory Minimum Wage (SMW),as fixed by Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity Commission (NWPC),applicable to the place where he/she is assigned. The aforesaid income shall likewise be exempted from income tax. 'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB),as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).The RTWPB of each region shall determine the wage rates in the different regions based on established criteria and shall be the basis of exemption from income tax for this purpose. Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall likewise be covered by the above exemption .Provided, however, that an employee who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax, and consequently, from withholding tax. MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their entire income earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax. For purposes of these regulations, hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, disease-infested places, or in distressed or isolated stations and camps, which expose them to great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed subject to income tax and consequently, to withholding tax. In case of hazardous employment, the employer shall attach to the monthly Remittance Return of Withholding Tax on Compensation (BIR Form No. 1601C) for return periods March, June, September and December a copy of the list submitted to the nearest DOLE Regional/Provincial Offices Operations Division/Unit showing the names of MWEs who received the hazard pay, period of employment, amount of hazard pay per month; and justification for payment of hazard pay as certified by said DOLE/allied agency that the hazard pay is justifiable. The NWPC shall officially submit a Matrix of Wage Order by region (Annex "A"),and any changes thereto, within ten (10) days after its effectivity to the Assistant Commissioner, Collection Service, for circularization in the BIR. Any reduction or diminution of wages for purposes of exemption from income tax shall constitute misrepresentation and therefore, shall result to the automatic disallowance of expense, i.e. ,compensation and benefits account, on the part of the employer. The offenders may be criminally prosecuted under existing laws. ...'" [emphasis supplied] ETCcSa Section 252 of the Tax Code, as amended, imposes penalties on employers/withholding agents who fail to refund to employees excess withholding tax: "Section 252. Failure of a Withholding Agent to Refund Excess Withholding Tax. Any employer/withholding agent who fails or refuses to refund excess withholding tax shall, in addition to the penalties provided in this Title, be liable to a penalty equal to the total amount of refunds which was not refunded to the employee resulting from any excess of the amount withheld over the tax actually due on their return." RR 2-98, as amended by RR 10-08, reiterates the above Tax Code provision, as follows: "Section 2.80. Liability for Tax. (A) Employer. ... (3) Any employer/withholding agent who fails, or refuses to refund excess withholding tax not later than January 25 of the succeeding year shall, in addition to any penalties provided in Title X of the Code, as amended, be liable to a penalty equal to the total amount of refund which was not refunded to the employee resulting from any excess of the amount withheld over the tax actually due on their return. ..." [emphasis supplied] Therefore, provided that you are indeed a minimum wage earner as defined by RA 9504 and RR 10-08, then you are exempt from the payment of income tax on your taxable income, and that the holiday pay, overtime pay, night shift differential pay and hazard pay you receive shall likewise be exempt from income tax. As an employee, you are likewise entitled to the refund of excess withholding tax from the employer, if any, as computed under RR 2-98, as amended, from the effectivity of RA 9504. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. AN ACT AMENDING SECTIONS 22, 24, 34, 35, 51, AND 79 OF REPUBLIC ACT NO. 8424, AS AMENDED, OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE CODE OF 1997; approved on June 17, 2008. 2. SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended by adding the following definitions after Subsection (FF) to read as follows: "SEC. 22. Definitions. When used in this Title: "(A) .... "xxx xxx xxx. "(FF) .... "(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). "(HH) The term 'minimum wage earner' shall refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned." 3. SECTION 2. Section 24 (A) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended to read as follows: "SEC. 24. Income Tax Rates . xxx xxx xxx "Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax . "xxx xxx xxx." [emphasis supplied] 4. Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as The National Internal Revenue Code" Relative to the Withholding of Income Tax on Compensation and Other Concerns; dated July 8, 2008.