Re: Applicability of Section 43 of the Corporation Code to Joint Venture Partnership

February 19, 2008 BIR RULING [DA-098-08] Rev. Regs. No. 2-98; BIR Ruling No. 43-2001 Mr. Flaviano Y. Madrid BIR-Revenue Region #3 Tuguegarao, Cagayan S i r : This refers to your letter dated June 13, 2007, requesting legal opinion on the tax implication of your forthcoming receipt of your backwages for the period covering March 8, 1997 to December 6, 1998 pursuant to the decision of the Civil Service Commission (CSC) on January 29, 2007. It is represented that your backwages arose from your exoneration of an administrative charge filed against you as decided by the Civil Service Commission on January 29, 2007; that you and your family had suffered tremendously during that period due to financial difficulties; that however, you had filed your income tax returns for 1997 and 1998 only for the income you actually earned during those years; that anticipating for a protection from the payment of heavier tax on your forthcoming backwages, you are now invoking BIR Ruling Nos. 346-88 dated July 21, 1988 and 14-2000 dated January 7, 2000, reiterated by BIR Ruling No. 043-2001, whereby the employer is authorized to spread and allocate backwages over the period it was earned for purposes of the withholding of taxes. In reply, please be informed that the term "Compensation Income" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. ETISAc 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 fee, 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 Section 33 of the Tax Code; taxable provisions and retirement pay; and other income of a similar nature constitute compensation income. cEaTHD 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 the person in whose employ the services had been performed and the individual who performed them. [Sec. 2.78.1 (A), Revenue Regulations No. 2-98] Withholding tax on compensation income is a method of collecting 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. Ibid.) In applying the above-cited regulations, the backwages you will be receiving form part of your income subject to withholding tax. Thus, it is the liability of your employer to withhold and remit the corresponding tax due on the said backwages to this Bureau. Considering that such backwages constitute remuneration for March 8, 1997 to December 6, 1998, a liberal construction of the statute is called for in this particular case if only to protect employees from the payment of a tax heavier than what should have been imposed if the employer had promptly met its obligation. (BIR Ruling No. 346-88 dated July 21, 1998). Accordingly, in filing your annual income tax returns, you should report as income and pay your respective income taxes by allocating or spreading your back benefits for the years 1997 and 1998 for a period of two (2) years. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner