Backwages Considered as Compensation Income Subject to Income Tax

October 21, 1992 BIR RULING NO. 291-92 28 063-92 291-92 Mr. Rey G. Gotiangco Marikina Heights, Marikina Metro Manila S i r : This refers to your letter dated May 27, 1992 stating that you were an employee of Colgate Palmolive Philippines, Inc. (Colgate for brevity) and dismissed from employment on August 15, 1989; that as a result, you filed on an illegal dismissal case against Colgate and four (4) of its officers which was decided by Labor Arbiter Ceferina J. Diosina in your favor and therefore, respondents were ordered to reinstate you to your former position or any equivalent position with back wages and other benefits accruing from the date of dismissal, up to actual reinstatement plus attorney's fees of ten per cent (10%) of the actual amount awarded; that not being satisfied with the decision of the latter, the respondents appealed the case to the National Labor Relations Commission (NLRC for brevity) which rendered a decision on August 9, 1991 affirming that of the Labor Arbiter but modifying the order of reinstatement to the imposition of the alternative relief of separation pay (equivalent one month's pay for every year of service, a fraction of at least six months being considered as one whole year, complainant's dismissal being illegal), in addition to the award of full back wages, as mandated by the Labor Arbiter, for a period not to exceed three (3) years, since the relationship between you and respondents has become charged-up or strained to the point of rendering reinstatement impractical or disruptive of the working harmony in the company; and, not being satisfied with the decision of the NLRC, you subsequently filed before the Supreme Court a petition for certiorari with prayer for a temporary restraining order which the Court resolved to dismiss the petition, the question raised being factual and there being no grave abuse of discretion committed by the NLRC. llcd In connection therewith, you now request for a ruling on whether the lump sum amount of P1,760.000.00 which you agreed to receive from Colgate is exempt from income tax and consequently from withholding tax. In reply thereto, I have the honor to inform you that backwages are considered compensation for services rendered and as such, they form part of gross income pursuant to Section 28(a)(1) of the Tax Code, as amended. Therefore, the backwages for a period not to exceed three (3) years as mandated by the Labor Arbiter and affirmed by the NLRC and the Supreme Court, reckoned from the date of your dismissal which is August 15, 1989 are subject to income tax and consequently to the withholding tax. On the other hand, under Section 28(b)(7)(B) of the Tax Code, as amended, any amount received by an official or employee or by his heirs from his employer as a consequence of separation or such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of the said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. In other words, the separation must not be of his own making or choice. Since the separation in the instant case is beyond the control, any and all amounts to be received by you from your employer as a result thereof, i.e., the settlement amount are exempt from income tax and consequently from the withholding tax prescribed by Section 72, Chapter X, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended. cdtech Very truly yours, JOSE U. ONG Commissioner of Internal Revenue