BIR Ruling No. 411-2022

REPUBLIC OF THE PHILIPPINES

BUREAU OF INTERNAL REVENUE DEPARTMENT OF FINANCE

Section 32 (B)(6) of the Tax Code BIR Ruling No. OT-005-21 of 1997, as amended; RMC No. 39-2012; RR No. 2-98, as amended Ore OCT O 7 2022 1- 2022

PONCIANO R. AGUIRRE

Sir:

were granted by the Supreme Court to you in the case entitled "NPC Drivers and Mechanics Association (NPC DAMA) vs. National Power Corporation (NPC)1. the amount representing unpaid salaries, and interest income accumulated in relation thereto which This refers to your request for clarification on the tax rate applicable to the backwages and

Law?. However, the Supreme Court in the above-mentioned case, ordered that the terminated receive salary differentials plus interests for the period covered from 2003 to 2007. Hence, this employees be reinstated from work commencing March 1, 2003 to February 2007. Consequently, your length of service was extended by about fifty-four (54) months which have entitled you to request. along with some two thousand (2,000) co-employees in 2003 due to the enactment of the EPIRA It is represented that you are a retired employee of the NPC and was illegally terminated

dated November 21, 2017 relative to the above-cited case for consistency of the terms, viz: On the outset, the Bureau reckons this opinion on the Resolution of the Supreme Court

"Clarifiying the Main Decision

Subsequently, We clarified the effect of Our Decision in our Resolution dated September 17, 2008 to wit:

resolution, in accord with law and jurisprudence, approving a new separation program from its employees. 1. The Court 's Decision does not preclude the NPB from passing another

2. The termination of the petitioners' employment on January 31, 2003 was illegal.

because NPC was still able to proceed with its reorganization prior to the promulgation of the Decision dated September 26, 2006. 3. Due to the illegal dismissal, as a general rule, the petitioners are entitled to reinstatement. However, reinstatement has become impossible

2 Republic Act (RA) No. 9136 otherwise known as the "Electric Power Industry Reform Act of 2001 1 G.R. No. 156208 dated September 26, 2006

OT 411-Z022 OCT 0 7 2022 4. Thus, the petitioners are entitled to the following:

separation program of the NPC; and a. Separation pay in lieu of reinstatement, based on a validly approved

b. Back wages together with wage adjustments and all other benefits which they would have received had it not been for the illegal dismissal. computed from January 31, 2003 until actual reinstatement or payment of separation pay.

5. However, any amount of separation benefits already received by the deducted from their total entitlement. petitioners under NPB Resolution Nos. 2002-124 and 2002-125 shall be

X (Emphasis supplied)

Award of Backwages and Unpaid Salaries

is required to withhold the income tax corresponding to the income to be received as backwages by an employee found to be illegally dismissed. However, the illegally dismissed employee is accorded special treatment i.e., he is allowed to allocate or spread his backwages, allowances and benefits through the years he was dismissed from service, having been denied payment of his wages when they were due because of circumstances not of his own making and, therefore, beyond his control. which are subject to income tax, and, consequently, to the withholding tax on wages. The employer Backwages and the amount representing unpaid salaries are remuneration for services

Section 2.57 (B) of Revenue Regulations (RR) No. 2-98, as amended, provides:

"Section 2.57. Withholding of Tax at Source. -

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are creditable in nature. " (Emphasis supplied) withholding tax (referred to in Sec. 2.57.2 of these regulations) and system, taxes withheld on certain income payments are intended to egual income recipient is still required to file an income tax return, as prescribed in Sections 51 and 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded (B) Creditable Withholding Tax. - Under the creditable withholding tax or at least approximate the tax due of the payee on said income. The compensation income (referred to in Sec. 2. 78 also of these regulations)

he is required to report such income (backwages) for the years he was dismissed from service, as in the process the corresponding income tax withheld from said wage payments. he files and pays his corresponding income tax thereon by allocating or spreading his backwages, allowances and benefits through the years from the time of his dismissal to actual reinstatement or actual separation (if he opts for separation instead of reinstatement), as the case may be, crediting Whether an employee found to be illegally dismissed is reinstated or opts for separation,

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Thus, in computing your net income tax, the amount deducted and withheld for the taxable years you were illegally dismissed from service by NPC shall be allowed as a credit against the tax imposed under Section 24 (A) of the National Internai Revenue Code (Tax Code) of 1997, as amended, in relation to Section 79 (C) (2) of the same Code. Moreover, you are likewise allowed to deduct personal and additional exemptions during the years you were illegally dismissed in accordance with Section 35 (A) and (B) also of the aforesaid Code.

subject to income tax and consequently, to withholding tax on wages pursuant to Section 79, Such being the case, said backwages and amount representing your unpaid salaries are

Chapter XIII, Title II of the Tax Code of 1997, as amended, as implemented by RR No. 2-98, as amended. NPC shall apply the withholding tax rate as provided thereunder for the years 2003-2007.

On the other hand, the amount representing the 13th month pay of the employees received from the years 2003-2007 is exempt from income tax, the same being treated as an exclusion from the gross income under Section 32 (B) (7) (e) of the Tax Code of 1997, as amended.

Judgment Award Interest accumulated in relation to the

considered as compensation because the remuneration is not for services rendered. The imposition Interest income, while accumulated in relation to the award of backwages, cannot be

payment has been sufficiently established. The Civil Code provisions governing these concepts thereof is to ensure prompt payment by the judgment debtor and is justified only when the delay in

read as follows:

the debtor incurs in delay, the indemnity for damages, there being no and in the absence of stipulation, the legal interest, which is [6%] per stipulation to the contrary, shall be the payment of the interest agreed upon, 'ART. 2209. If the obligation consists in the payment of a sum of money, and

annum.

damages awarded for breach of contract. ART. 2210. Interest may, in the discretion of the court, be allowed upon

may, in a proper case, be adjudicated in the discretion of the court. ART. 2211. In crimes and quasi-delicts, interest as a part of the damages

ART. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.

damages, except when the demand can be established with reasonable ART. 2213. Interest cannot be recovered upon unliguidated claims o

certainty.

the Civil Code) is that which is allowed in actions for breach of contract or tort for the unlawful Compensatory interest (i.e., interest awarded as damages under Articles 2209 to 2213 of

be imposed by law or by the courts as penalty or indemnity for damages.3 detention of money already due. As the governing provisions indicate, compensatory interest may

3 Philippine Commercial and International Bank vs. William Golangco Construction Corporation, G.R. No. 195372 dated April 10, 2019 Page 3 of 4

OE: 411 : 202.2 OCT 0 7 2022

shall not be subject to withholding tax pursuant to Section 2.78.1 (B) (6) of RR No. 02-98, as amended, which provides: Since the nature of the interest in question is in the nature of damages, the same, therefore

"SEC. 2.78 WITHHOLDING TAX ON COMPENSATION INCOME.

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(B) Exemptions from withholding tax on compensation. income payments are exempted from the requirement of withholding tax on compensation: The following

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an employee or his heirs pursuant to a final judgment or compromise (6) Damages. -- Actual, moral exemplary and nominal damages received by agreement arising out of or related to an employer-employee relationship.

legislative policy to include all income not expressly exempted as within the class of taxable income interest stemmed from the awarded backwages on the broad definition and scope of compensation income. under our laws.4 The peculiarity surrounding the circumstances is not enough to extricate the definition of Gross Income under Section 32 of the Tax Code of 1997, as amended, discloses a Nevertheless, the interest income in question shall still be subject to income tax. The

corresponding income tax thereon subject to the graduated rates under the Tax Code of 1997, as amended. Accordingly, you are required to report the interest income as you file and pay your

Please be guided accordingly

Very truly yours.

hl eG

Commissioner of Internal Revenue LILIA CATRIS GUILLERMO

K-1 001878

4 Banco de Oro vs. The Republic of the Philippines, G.R. No. 198756 dated January 13, 2015 Page 4 of 4