BIR Ruling No. 291-11

August 12, 2011 BIR RULING NO. 291-11 Sections 23, 24, 79 of the Tax Code of 1997; RR 2-98; RR 7-10; BIR Ruling No. DA-385-00 Marymount Child Development Center, Inc. No. 9 Gen. Hizon cor. Gen. Torres Sts., Galler Heights Subdivision, Banlat, Tandang Sora, Quezon City Attention: Editha Maniago Administrator Gentlemen : This refers to your letter dated September 17, 2010 requesting legal opinion on whether or not a retired personnel who was re-hired is exempt from payment of income taxes on the compensation such personnel will receive from MARYMOUNT CHILD DEVELOPMENT CENTER, INC. It is represented that MARYMOUNT CHILD DEVELOPMENT CENTER, INC. (TIN 004-559-631) has re-hired a retired personnel in the name of LUCIA B. MANDANI (TIN 106-353-562); that LUCIA B. MANDANI retired on 30 June 2001; that she was subsequently re-hired by the corporation on 15 July 2001 and resigned on June 30, 2010 or after nine (9) years; that for the period of employment after being re-hired, LUCIA B. MANDANI's compensation was subjected to withholding tax which the corporation collects and remits; that LUCIA B. MANDANI is claiming refund of the taxes that was withheld from her compensation on the basis that she was already a retiree; and that you are seeking opinion on whether or not she had basis to claim refund of the income taxes withheld from her. In reply, please be informed that Section 23 of the Tax Code of 1997, as amended provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;" In relation to this is Section 24 of the same Code, which states "SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31 1 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein;" aTADcH Compensation includes all remuneration for services performed by an employee for his employer under an employer-employee relationship. All compensation paid to the employee is subject to withholding tax under Section 2.78 of Revenue Regulations (RR) 2-98, as amended: "SECTION 2.78. Withholding Tax on Compensation. The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent." In this regard, employers are treated as withholding tax agents for the government pursuant to Section 79 of the Tax Code, as amended by R.A. 9504, to wit: "SEC. 79. Income Tax Collected at Source. (A) Requirement of Withholding. Except in the case of a minimum wage earner as defined in Section 22 (HH) of this Code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner." Unless the income of the employee is found to be included among the enumerations under Section 32 (B) (Exclusions from Gross Income) of the Tax Code of 1997, as amended, and/or falls under Section 2.78.1 (B) (Exemptions from withholding tax on compensation) RR 2-98, as amended, the compensation received by LUCIA B. MANDANI from MARYMOUNT CHILD DEVELOPMENT CENTER, INC. after being re-hired shall be treated as taxable income subject to withholding tax in accordance with the aforementioned provisions of law. There is no legal basis for LUCIA B. MANDANI's claim of being exempt from income tax and withholding tax on the ground that she is a retiree since the salaries she received were not retirement benefits but compensation as an employee of the company. Neither can LUCIA B. MANDANI claim the privilege of tax exemption as a senior citizen, being 75 years old at the time of resignation because in order to qualify under R.A. 9994 or the "Expanded Senior Citizens Act of 2010" as implemented by RR 7-10, 2 her annual taxable income for the previous year should not exceed the poverty level as determined by the National Economic and Development Authority (NEDA) through the National Statistics Coordination Board (NSCB) (BIR Ruling No. DA-385-00 dated November 07, 2000) , as follows: Annual Per Capita Poverty Threshold Region/Province (in Pesos) d/ 1991 a/ 2003 2006 2009 PHILIPPINES 5,776 10,976 13,348 16,841 NCR 7,508 13,997 16,487 19,802 1st District b/ 13,997 16,487 19,802 2nd District 13,997 16,487 19,802 3rd District b/ 13,997 16,487 19,802 4th District b/ 13,997 16,487 19,802 Since her annual taxable income for the years 2002 to 2009 far exceeds poverty levels or the amount determined by NEDA through the NSCB for National Capital Region for the years 1991, 2003, 2006 and 2009, 3 it would appear that she is not qualified under the Section 8 or RR 7-10. It is well to note that 'a tax exemption represents a loss of revenue to the State and must therefore not be lightly granted or inferred. When claimed, it must be strictly construed against the taxpayer, who must prove that he comes under the exemption rather than the rule that every one must contribute his just share in the maintenance of the government'. 4 WHEREFORE, this Office is the opinion that the compensation received by LUCIA B. MANDANI for the period of her employment from 15 July 2001 to 30 June 2010 is subject to income tax and consequently, to creditable withholding tax. SCIAaT 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 as represented 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. SEC. 31. Taxable Income Defined. The term taxable income means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. 2. Implementing the Tax Privileges Provisions of Republic Act No. 9994, Otherwise Known as the "Expanded Senior Citizens Act of 2010", and Prescribing the Guidelines for the Availment Thereof. 3. http://www.nscb.gov.ph/poverty/2009/table_1.asp. 4. Ernesto M. Maceda vs. Hon. Catalino Macaraig, Jr., et al. , G.R. No. 88291 May 31, 1991.