BDB Laws Tax Law for Business appears in the opinion section of Business Mirror every Thursday.

Tax on compensation

ONE consideration in accepting an employment contract is the compensation package that an

employee is entitled to. Though the gross compensation package being considered is important,
the net take-home pay is even more so. And when we talk of the net compensation package,
various deductions come into play.

As mandated by law, social-security contributions, such as those given to the Social Security
System, Government Service Insurance System (GSIS), Philippine Health Insurance Corp. and
Home Development Mutual Fund (Pag-IBIG), are deducted from the compensation income of
the employees. But a significant portion of the deducted amount is attributable to the income tax
due on the compensation income. The income tax is paid through the withholding-tax system,
such that the tax is deducted or withheld at the source.

For those in the private sector, the entire income that the employee is entitled to is subject to the
withholding tax on compensation, except those that are specifically excluded from the taxable
income or exempted from tax, such as the de minimis benefits, fringe benefits that are subject to
other type of tax, and 13th-month pay, among others. Other than those specifically exempted or
subject to other types of tax, all kinds of compensation income is ordinarily subject to the
withholding tax on compensation. The same principle applies to those working in the public
sector.

In fact, allowances, whether received regularly or occasionally, are covered by the withholding-
tax system. This was further clarified by the Bureau of Internal Revenue (BIR) when it issued on
June 20 Revenue Memorandum Order (RMO) 23-2014, which enumerates the allowances and
benefits usually received by those employed in the government sector that are subject to
withholding tax on compensation.
As laid down in RMO 23-2014, compensation, allowances, bonuses, honoraria and benefits
received by officials and employees working in the Judicial, Legislative and Executive branches
of the government, as well as those working in constitutional bodies, are subject to withholding
tax on compensation. Accordingly, only the following items are exempt from withholding tax on
compensation:

1. Thirteenth-month pay and other benefits not exceeding P30,000, paid or accrued during
the year.

2. De minimis benefits.

3. Fringe benefits, which are subject to the fringe-benefit tax.

4. Representation and transportation allowance.

5. Personnel and economic-relief allowance.

6. Monetized value of leave credits.

7. Mandatory/compulsory GSIS, Medicare and Pag-IBIG contributions.

8. Union dues of individual employees.

9. Compensation income of employees in the public sector, with compensation income of not
more than the statutory minimum wage.

10. Holiday pay, overtime pay, night-shift differential pay and hazard pay received by minimum-
wage earners

11. Benefits received from the GSIS Act of 1937.

12. All other benefits that are exempted by law, as confirmed by the BIR.

All allowances not included in these enumerated items are subject to withholding tax on
compensation. This means that the allowance is taxable. Consequently, in the event that the
taxable compensation, allowances, bonuses, honoraria and benefits are not subjected to
withholding taxes, corresponding penalties may be imposed on the government official
responsible for the nonwithholding of tax or nonremittance of taxes withheld.

Apparently, the withholding-tax obligation on the compensation income of government

employees is imposed on the chief executives of the local government units and their chief
accountants and treasurers. For government-owned and -controlled corporations and other
government offices, the obligation to deduct, withhold and remit taxes rests upon the chief
accountant and the head of the office or the official holding the highest position there. These are
the people who will bear the consequences resulting from failing to comply with the withholding-
tax requirement.

There are only a few employees who would dare check the correctness of the deductions
reflected on their payslips. Most employees, be it in the private or public sector, tend to simply
accept the taxes withheld on their compensation. Employees are entitled to the correct
computation of withholding taxes, and so they should not absolutely rely on the representations
of their employers. This is because there are consequences to the employees if the employer
fails to withhold the correct amount of tax. If the withholding tax made is excessive, the
employee is entitled to a refund of the excess from his or her employer. On the other hand, if the
withholding tax is deficient, the employee will not be entitled to the substituted filing for which he
or she will be required to personally prepare his or her income-tax return and pay the
corresponding taxes, notwithstanding that the employer will also be penalized for his or her
failure to comply with his or her withholding-tax obligations.

****

The author is a senior associate of Du-Baladad and Associates Law Offices, a member-firm of
the World Tax Services Alliance.

The article is for general information only, and is neither intended nor should be construed as a
substitute for tax, legal or financial advice on any specific matter. Applicability of this article to
any actual or particular tax or legal issue should, therefore, be supported by a professional
study or advice. For comments or questions, e-mail the author at
anthony.prestoza@bdblaw.com.ph or call 403-2001, local 370.