Income Tax Imposed on the Cost of Living Allowance (COLA) Paid to Local Government Employee

December 15, 1989 BIR RULING NO. 263-89 21 (a) 000-82 263-89 Gentlemen : This refers to your Resolution No. 33, current series, requesting exemption from income tax of the cost of living allowance (COLA) paid to local government employee throughout the country. cdta In reply, please be informed that your request cannot be granted for lack of legal basis. It is a cardinal rule in taxation that exemptions from payment thereof are highly disfavored in law, and the party claiming exemption must justify his claim by a clear, positive, or express grant of such privilege by law. An exemption from the common burden cannot be permitted to exist upon vague implication. (Collector of Internal Revenue vs. Manila Jockey Club Inc., 98 Phil. 670; House vs. Posadas, 53 Phil. 338; Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466 cited in Phil. Bank of Communications vs. Commissioner of Internal Revenue, C.T.A. Case No. 2725, January 6, 1988) In other words, an exemption from the payment of taxes, like the income tax in the instant case, cannot be claimed unless it is expressly provided for/in by the law. The burden of proof is always upon him who claims a tax exemption in his favor to point out to some provisions of law granting the exemption and to bring himself within the terms of that exempting provision. In this case, however, you failed to point to any statutory provision explicitly granting such exemption . Taxable compensation, business and other income received during each taxable year from all sources by every individual, whether a citizen of the Philippines or alien residing in the Philippines shall be subject to income tax at the rates prescribed Under Section 21(a) in relation to Section 28 of the Tax Code, as amended. For purposes of withholding, the term compensation income means all remunerations for services performed by an employee for his employer unless specifically excepted under Sections 27, 28(b) and 71 of the Tax Code, as amended. Compensation income include all income payments received as a result of an employer-employee relationship, such as salaries, wages, honoraria, bonus, taxable pensions, allowances, fringe benefits, fees and other income of similar nature. (Rev. Regulations No. 6-82 as amended by Rev. Regulations No. 12-86) In view thereof, and being part of the remuneration or compensation paid to local government employees throughout the country for services rendered, the aforementioned cost of living allowance (COLA) is subject to income tax and consequently, to the withholding tax on wages prescribed by Section 72 in relation to Section 21(a), Chapter X, Title 11 of the Tax Code as amended, and implemented by Revenue Regulations No. 6-82 as amended. On the other hand, it appears that a special provision in the yearly appropriation of the Armed Forces of the Philippines (AFP) fixes and authorizes the payment of subsistence, clothing, quarters and other allowances to AFP personnel, i.e., enlisted men and officers, the value of which varies for each grade or rank; and that these allowances are intended to be given or furnished in kind for obvious reason, but in view of the lack of messing, quartering and other facilities obtaining throughout the headquarters, bases, camps or stations where military personnel are assigned, the money value of these allowances are given them in cash. If a person receives as remuneration for services rendered a salary and in addition thereto living quarters or meals, the value to such person of the quarters and meals so furnished shall be added to the remuneration otherwise paid for the purpose of determining the amount of compensation subject to withholding. If, however, living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as compensation subject to withholding . (Rev. Regs. No. 6-82 supra ). It is to be noted in this connection, that the said AFP personnel are expected to answer the call of duty at all times, and required to render service as may be necessary even during Saturdays, Sundays and holidays. Accordingly, since the said allowances for subsistence, clothing and quarters are being paid to enlisted men and officers of the AFP for the convenience of AFP, their employer, the same are not subject to income tax; hence, notwithstanding that the said allowances are paid in cash or commuted. (Rev. Memorandum Circular No. 15-87 dated April 1, 1987) Very truly yours, (SGD.) JOSE U. ONG Commissioner