BIR Ruling No. 267-13

July 15, 2013 BIR RULING NO. 267-13 Rev. Reg. 2-98; RMC No. 39-12 Capuyan and Quimpo Law Offices 3rd Floor, Doa Guadalupe Building 7462 Bagtikan Street, San Antonio Village Makati City Attention: Reynaldo M. Quimpo Legal Counsel Gentlemen : This refers to your letter dated 22 March 2013 requesting on behalf of your client, VEOLIA WATER SYSTEMS (PHILS.), INC., for a legal opinion on the application of Revenue Memorandum Circular No. 39-2012 in relation to Section 79 of the Tax Code of 1997, as amended. It is represented that VEOLIA WATER SYSTEMS (PHILS.), INC. was declared liable for illegal dismissal by the National Labor Relations Commission and was ordered to reinstate and to pay backwages, allowances and benefits to one Merlinda G. Victoriano in the sum of One Million One Hundred Fifteen Thousand Seven Hundred Twenty Two Pesos and Thirty Six Centavos (Php1,115,722.36). To enforce the monetary award, a Notice of Garnishment dated 19 February 2013 was served upon Standard Chartered Bank, VEOLIA WATER SYSTEMS (PHILS.), INC.'s depositary bank. To satisfy the monetary award, VEOLIA WATER SYSTEMS (PHILS.), INC. tendered payment to Melinda G. Victoriano a sum equivalent to the monetary award less applicable rate of withholding tax as compensation. However, Melinda Victoriano rejected the tender of payment on the ground that the withholding tax should only be five percent (5%) under Revenue Memorandum Circular No. 39-2012. You are now requesting for legal opinion on whether or not VEOLIA WATER SYSTEMS (PHILS.), INC., as direct employer and withholding agent, pending release by the garnishee bank of the amount to satisfy the judgment, may directly pay and satisfy the monetary award and deduct the appropriate rate of withholding tax due thereon under Section 79 of the Tax Code, as amended, and not just the five percent (5%) withholding tax pursuant to Revenue Memorandum Circular No. 39-2012. DHTCaI In reply, please be informed that backwages are considered compensation income and are subject to income tax and consequently, to the withholding tax on wages pursuant to Section 79, Chapter XIII, Title II of the Tax Code as implemented by Revenue Regulations No. 2-98, as amended. However, when backwages are awarded in a labor dispute and is enforced through garnishment of debts due to the employer or other credits to which the employer is entitled, the person owing such debts or having in possession or control of such credits ( e.g. , banks or other financial institutions) would normally release and pay the entire garnished amount to the employee. As a result, employers who are mandated to withhold taxes on wages pursuant to Section 79 of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 2-98, as amended, cannot withhold the appropriate tax due thereon. It is for this reason that RMC 39-12 was issued. Thus, in order to ensure the collection of the appropriate withholding taxes on wages, garnishees of a judgment award in a labor dispute are constituted as withholding agents with the duty of deducting the corresponding withholding tax on wages due thereon in an amount equivalent to five percent (5%) of the portion of the judgment award representing the taxable backwages, allowances and benefits. From the foregoing, it is clear that backwages are subject to withholding tax on compensation which the employer is obliged to deduct as withholding agent pursuant to Section 79 of the Tax Code of 1997, however, if the taxable backwages, allowances and benefits is released and paid by the garnishee bank to the employee, it is subject to the 5% withholding tax which the garnishee bank, as duly constituted withholding agent, has the duty to deduct. It is should be understood that the 5% withholding tax is creditable in nature since this is imposed on backwages that is considered as compensation income. Thus, the income recipient is still required to file an income tax return, report the income and/or pay the difference between the tax withheld and the tax due on the income (Sec. 2.57 (B) of Revenue Regulations No. 2-98) Considering that VEOLIA WATER SYSTEMS (PHILS.), INC. is capable of paying the judgment award in favour of Melinda G. Victoriano, this Office holds that VEOLIA WATER SYSTEMS (PHILS.), INC. may directly pay the said award representing backwages, allowances and benefits to Merlinda G. Victoriano in the sum of One Million One Hundred Fifteen Thousand Seven Hundred Twenty Two and Thirty Six Centavos (Php1,115,722.36) subject to the applicable rate of withholding tax on compensation pursuant to Section 79 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will 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