Withholding Tax on Wages Imposed on Back Salaries and/or Wages Covering the Year 1986

July 21, 1988 BIR RULING NO. 346-88 27-008 57-03 346-88 Gentlemen : This refers to your letter dated January 20, 1988 requesting that your Surigao Nickel Refining (SNR) employees be allowed to file an amended income tax return for the year 1986 so they could report their salaries, wages corresponding to said year which they received only in 1987. cdtech It is represented that you have been financially distressed since 1985 in view of the depressed nickel price in the world market; that a strike staged by your employees lead to the shutdown of your refinery in March 1986; that since the shutdown, you were unable to pay regularly the salaries of your employees who were retained as members of the skeleton crew to provide maintenance and security; that only partial payments or advance against their salaries were provided from whatever funds you could generate out of the sale of scraps and advances from the owner banks PNB and DBP; that a major portion of the 1986 salaries of your SNR employees was paid during the calendar year 1987; that the compensation income of your said employees for 1987 would consist of 1986 back wages plus salaries/wages earned and received in 1987; that the withholding taxes corresponding to the unpaid salaries were remitted only in 1987; and that the late remittance was allowed without penalty per this Office letter dated July 23, 1987. In reply, I have the honor to inform you that back salaries and/or wages covering the year 1986 paid by you to your SNR employees during the calendar year 1987 are subject to the withholding tax on wages pursuant to Section 72, Chapter XI, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82. Under Section 37 of the Tax Code, if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year. All items of income shall be included in gross income for the taxable year in which received by the taxpayer except those expressly excluded and already subjected to the final income tax, and exemptions as well as deductions taken accordingly pursuant to Section 21 and 27 in relation to Section 38 all of the Tax Code, as amended. Salaries, commissions, tips, director's fee and other forms of compensation are income in the year received, and not in the year earned. (par. 717. 231, US Master Tax Guide (1969). Thus, a taxpayer whose income is from salary or the like is required to file his income tax return on the cash basis. However, considering that such back salaries and/or wages constitute remunerations prior to the year 1987 when actually received by the employee, it is felt that the liberal construction of the statute is called for in this particular case if only to protect employees who, in fact had been deprived of the payment of their wages from the payment of a tax heavier than what should have been imposed if the employer had promptly met its obligation. In the case of "Commissioner of Internal Revenue vs. Joseph G.R. Robillard & Margaret H. Robillard" (C.A. 308 F. 2d 518, 519) it was held that income received by a taxpayer in 1957 as "back pay" or additional pay for services rendered to his employer for the period from July 1, 1955 through December 1, 1956, which indubitably, would have been paid prior to 1957, except for the intervention of an event similar in nature to a dispute as to the liability of the employer to pay the remuneration in question, is entitled to a special treatment and was properly allocable to taxable years 1955 and 1956. Accordingly, having been denied payment of their wages when they were due because of circumstances not of their own making and, therefore, beyond their control, the employees come within the scope of the inequity for which this ruling is precisely designed to remedy. Such being the case, your SNR employees should report as income and pay their respective income taxes thereon by allocating or spreading their back wages through the years 1986 and 1987. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner