Interpretation of Sec. 29(j) of the Tax Code

November 23, 1988 BIR RULING NO. 555-88 39 000-00 555-88 Gentlemen : This refers to your letter dated November 15, 1988 requesting a ruling in behalf of your client, Mercury Group of Companies, Inc. and all its subsidiary companies as to the correct interpretation of Section 29(j) of the Tax Code, as amended relative to the bonuses to be given by your clients to their officers and/or employees under the following circumstances: cd "After the audit of each company is completed (on or before April 15 of the succeeding year) and the bonuses are finally determined, they are distributed to the officers and/or employees entitled thereto and the corresponding withholding taxes are deducted and remitted to the Bureau of Internal Revenue. The recipient officers and employees report said bonuses in the year the amounts are received by them. "Based on the foregoing facts, we would like to know if: (A) The Bonuses mentioned above are deductible in the same year they are accrued; (B) Deduction of withholding taxes should be made upon determination of the amount and distribution of the same to the officers and employees entitled thereto, and remittance to the Bureau of Internal Revenue of said withholding taxes be made on or before the 10th day of the following month; (C) The Bonuses distributed to the recipients should be reported in their respective income tax returns on the same year they received them." In reply thereto, I have the honor to inform you as follows: (1) Deductions shall be taken for the taxable year in which "paid or accrued" or "paid or incurred" dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. (Section 39, Tax Code, as amended) Accordingly, and since the method of accounting employed by your clients is the accrual method, the bonuses are deductible in the year they are accrued by your clients in their books as an expense. (2) The withholding tax on the bonuses should be deducted upon the distribution of the same to the officers and employees entitled thereto and remitted to the Bureau of Internal Revenue within ten (10) days after the end of each calendar month (Revenue Regulations No. 5-85); (3) Since individuals used the cash method of accounting, the bonuses received by the officers and employees of your clients should be reported in their income tax returns in the year the same is actually or constructively received by them. Income is constructively received when it is credited to the taxpayer's account and unconditionally set apart for him i.e. the income may be drawn by him at any time. The doctrine of constructive receipt is designed to prevent the exclusion from taxable income of items, the actual receipt of which would, at the option of a taxpayer's on the cash basis, be deferred or indefinitely postponed. (Montgomery's Taxes, Vol. 1, 1946-47, p. 1007) cdt Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner