Pera, Rata, Allowances, Per Diems, Bonuses etc. - Tax Consequences

July 21, 1993 BIR RULING NO. 332-93 PERA, RATA, ALLOWANCES, PER DIEMS, BONUSES ETC. TAX CONSEQUENCES 21 (a) 29 51-92 32-93 Bukig National Agricultural and Technical School Department of Education, Culture and Sports Bukig, Aparri, Cagayan Attention: Mr . Victorino T . Laureta Vocational School Administrator I This refers to your letter dated September 28, 1992 requesting information as to whether the following are subject to income tax and consequently to withholding tax, to wit: cdtech 1. PERA 2. RATA 3. Clothing Allowance 4. Per Diems 5. Year-End Benefits/Bonus & cash gift 6. Longevity pay 7. Monetization of leave credits 8. Productivity Pay In reply thereto, I have the honor to inform you that pursuant to former President Corazon C. Aquino's Memorandum Circular No. 145, government offices, agencies and instrumentalities including government-owned and controlled corporations were instructed to stop deducting or withholding any income tax on PERA starting the year 1992. However, pending resolution of our request for reconsideration of the opinion of the Secretary of Justice stating that PERA, like RATA, should not be subject to the mandatory withholding tax, the concerned employees may file in writing with the BIR, Attn.: Appellate Division, their individual claims for refund of the withholding tax on PERA for 1991 or those already paid to them, within two (2) years, after the payment of the tax pursuant to Section 204 of the Tax Code, as amended. Appropriate action on the claim for refund will accordingly be taken as soon as a reply to said request for reconsideration is received from the Office of the President. It should be understood, however, that should our request for reconsideration be upheld, the deduction and remittance of the withholding tax on PERA beginning 1992 will be resumed. Corresponding deduction shall likewise be made from employees to cover PERA already paid to them which have not been subjected to withholding. Under BIR Ruling 62-91 dated April 15, 1991, as published and circularized in RMC 60-91 dated July 9, 1991, it was ruled that RATA is in fact a reimbursement for the expenses incurred in the performance of one's duties rather than as an additional compensation and therefore is not compensation subject to withholding tax pursuant to Section 2(2)(c) of Revenue Regulations No. 12-86. In other words, RATA is not taxable to the recipient thereof, provided that the substantiation requirements are fully complied with. However, although the amount of RATA is not subject to withholding tax, the excess of RATA, if not returned to, or accounted for by the employee to the employer, constitutes taxable income which should be declared in the recipient's income tax return for the year in which the RATA was received by him. Moreover, any amount of tax withheld on RATA received beginning January, 1991 by the concerned official/employee shall be credited against his income tax due for 1991, when the annualized withholding tax is determined in accordance with Section 22 (b) of Revenue Regulations No. 6-82, as amended by Revenue Regulations No. 12-86 (RMC 60-91). Clothing or uniform allowance given to personnel/employees as officially prescribed is not considered income subject to withholding tax ( BIR Ruling No. 55-89 ). However, per diems , like salaries and any other kind of remuneration which constitute compensation for services, are taxable income. The name by which the remuneration for services is designated and the basis upon which the remuneration is paid are immaterial in determining whether or not the remuneration for services rendered constitutes compensation income (BIR Ruling No. 244-89). Year-end benefits which include year-end bonus and cash gift granted to Government officials and employees are considered compensation subject to income tax under Section 21(a) of the Tax Code and consequently, to the withholding tax on wages prescribed by Section 72, Chapter X, Title II of the same Code, as amended, and implemented by Revenue Regulations No. 6-82, as amended ( BIR Ruling No. 251-92 ). Sec. 7(b), Rule X of the Omnibus Rules of the Civil Service provides that length of service incentive (longevity pay) shall be given to an employee who has rendered at least three (3) years of continuous satisfactory service in a particular position and shall consist of step increments in accordance with the provisions of the Joint CSC-DBM Circular No. 1, S. of 1990. Since from the context of the provision this incentive is granted to government employees in consideration of service rendered by them as such for their employer, the Philippine Government, the said longevity pay constitutes compensation income subject to withholding tax. The monetized unused vacation leave credits of employees not exceeding ten (10) days constitute facility or privilege as a means of promoting the health, goodwill, contentment of the employees as contemplated under Section 2 of Revenue Regulations No. 12-86, hence are likewise exempt from withholding tax ( BIR Ruling No . 29-92 ). Pursuant to Rule X, Section 7, paragraph (c) of Book V of Executive Order No. 292 and Omnibus Rules of the Civil Service, productivity incentives shall be given to an employee or group of employees who have exceeded their targets, or have incurred incremental improvement over existing targets. Accordingly, the productivity incentives pay shall form part of compensation subject to income tax, and consequently to the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by B.P. Blg. 135 and as implemented by Revenue Regulations No. 6-82, as amended. aisadc LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue