Exemption of 25% of the Lump Sum Benefits from Both Income Tax and Value-Added Tax

December 7, 1990 BIR RULING NO. 231-90 72 000-00 231-90 Gentlemen : This refers to your letter dated August 13, 1990 stating that your Union, the Standard Chartered Bank Employees Union-National Union of Bank Employees (SCBEU-NUBE) have recently consummated/won a grant from its employer, the Standard Chartered Bank, a multi-national Bank operating in the country, a lump sum cash benefits amounting to about P12,000,000.00; that this amount will be given to the Union in exchange for a wage freeze for the year 1990-1991; that from this amount, 25% shall be retained by the Union as fees, while the rest (75%) shall be distributed to the qualified members on a proportionate basis based on their monthly salary. aisadc Based on the foregoing facts, you request a ruling on the following queries: "1. Is the 25% share of the Union exempt from taxation? "2. If on the other hand, the 75% is subject to tax, how should the said 75% be treated? Is it subject to withholding tax? "3. That this lump sum gain be treated as a special income, if ever, of our union members and whatever tax application be independent and distinct from the regular annual salary of our union members, the latter of which shall continuously be subjected to usual customary withholding tax and final tax declaration." In reply, please be informed that we are confirming your opinion that 25% of the lump sum benefits in the amount of P12,000,000.00 to be retained by the Union as fee for its effort in obtaining the said benefits shall be exempt from both income tax and value-added tax pursuant to Article 242 of Republic Act No. 6715, quoted as follows: "Art. 242. Rights of legitimate Labor Organizations . (f) . . . . Notwithstanding any provisions of a general or specific law to the contrary, the income and the properties of legitimate labor organizations, including grants, endowments, gifts, donations and contributions that they may receive from fraternal and similar organizations, local or foreign, which are actually, directly and exclusively used for their lawful purposes, shall be free from taxes , duties and other assessments. The exemptions provided herein may be withdrawn only by special law expressly repealing this provision." (Emphasis supplied) On the other hand, that portion corresponding to 75% of P12,000,000.00 which will be distributed to qualified members proportionately based on their monthly salary shall form part of their remunerations for 1990 and 1991 pursuant to Section 71 of the Tax Code because the same represents in fact additional remunerations to them during the period that the wage freeze is in effect. Such being the case, the same shall be subject to the withholding tax on wages pursuant to Section 72 of the Tax Code as implemented by Revenue Regulations No. 6-82 as amended by Revenue Regulations No. 12-86. However, for administrative convenience and in order not to disturb the company payroll showing the customary withholding tax, the withholding tax on the lump sum payment to the employees (union members) may be computed separately. This letter shall serve as authority for the Standard Chartered Bank (The employer) to compute separately the withholding tax due on the lump sum payment to the recipient employees. cdtech Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner