ITAD Ruling No. 021-03

January 30, 2003 ITAD RULING NO. 021-03 Revenue Regulation No. 2-98 BIR Ruling No. 296-93 Department of Social Welfare and Development Batasan Pambansa Complex, Constitution Hills Quezon City Attention: Lualhati F. Pablo Undersecretary This refers to your letter dated September 24, 2002 requesting for an opinion on the treatment of income taxes on compensation/salaries paid to staff specifically hired for a project funded by the World Bank (WB). It is represented that the Children and Youth Foundation of the Philippines (CYFP) hired staff specifically for the Philippine Out-of-School Children and Youth Development (POSCYD) Project; that said project is funded by the WB; that CYFP pays in advance the salaries of the hired staff; that pursuant to Revenue Regulations No. 2-98 regarding withholding tax on compensation income, CYFP withholds taxes on the said salaries and remits the same taxes to the Bureau of Internal Revenue (BIR); that pursuant to the WB Disbursement Handbook, it is the policy of WB not to finance customs duties and other taxes charged or imposed by the borrowing member country; that the local mission of WB believes that the tax imposed on monthly compensation/salaries increases the cost of products or services; that, on the other hand, it is your opinion that taxes on compensation/salaries are imposed on the "seller of service," regardless of the person in whose employ the services had been performed, in which case, imposition of taxes does not affect the cost of services so tendered. In reply, please be informed that Section 2.78 of Revenue Regulations No. 2-98 (Implementing Rules relative to the Withholding on Income subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes) provides, viz : "Sec. 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. Sec. 2.78.1 Withholding of Income Tax on Compensation Income . (A) Compensation Income Defined In general, the term 'compensation' means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between in whose employ the services had been performed and the individual who performed them. xxx xxx xxx" Based on the above provisions, income tax on compensation is a tax imposed on the individual who derives income from compensation for services rendered in the Philippines, regardless of how it is earned, by whom it is paid, the label by which it is designated, the basis upon which it is determined, or the form in which it is received. ( BIR Ruling No . 296-93 dated July 8, 1993 ) In view of the above, this Office confirms your opinion that the tax imposed on the salaries of the hired staff is not a tax charged against the fund granted by WB to finance project POSCYD but against the income in the hands of the staff hired to work in said project. As such, it complies with WB Disbursement Handbook that no part of the grant shall be used to finance customs duties and other taxes charged or imposed by the borrowing member country. In the same manner, taxes imposed on subject salaries do not result in additional cost to the services procured. ECDaAc This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service