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Supreme Court rules government allowances, benefits subject to tax

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TAXPAYERS filing their income return at the BIR office in Intramuros, Manila. — PHILIPSTAR/ EDD GUMBAN

THE Supreme Court, sitting en banc, has upheld a Bureau of Internal Revenue (BIR) memorandum which held that allowances, bonuses, and other benefits given to government employees are subject to tax.

The court had partially granted a 2014 petition which claimed these were nontaxable fringe and de minimis benefits.

According to a statement released by the SC’s Public Information Office on Wednesday, the petition challenged the Bureau of Internal Revenue’s (BIR) Revenue Memorandum Order (RMO) No. 23-2014 “which classified as taxable compensation income allowances, bonuses, compensation for services granted to government employees.”

The memorandum, which took effect on July 7, 2014, stated all fringe benefits received by government employees are subject to fringe benefits tax.

In a unanimous vote made on Tuesday, the high court “struck down Section VI of RMO 23-2014 but upheld the validity of Sections III, IV, and VII which subject the claimed non-taxable fringe and de minimis benefits to tax and requires the government, as employer, to withhold the amount corresponding to the tax,” the statement said.

“[A]ll income received by an employee from his/her employer is presumptively taxable and subject to withholding,” the court ruled.

The statement said, “[i]n upholding Sections III and IV, the Court ruled that no additional tax is imposed as the two sections merely mirror the relevant provisions of the National Internal Revenue Code (NIRC) of 1997 on withholding tax on compensation income.”

Section III of the RMO states that government offices, including government-owned or controlled corporations (GOCC) are constituted as withholding agents of the creditable tax required to be withheld from compensation paid to employees while Section IV listed benefits such as the 13th month pay are not subject to income tax and withholding tax. Section VII lists the penalties for not complying with the RMO.

The statement added: “The Court declared null and void Section IV of RMO 23-2014 only where it names the Governor, City Mayor, Municipal Mayor, Barangay Captain, and Heads of Office in government agencies, government-owned or controlled corporations, and other government offices, as persons required to withhold and remit withholding taxes.”

The high court found that the BIR “overstepped the boundaries of its authority to interpret existing provisions of the NIRC (National Internal Revenue Code) of 1997 in issuing Section VI as the NIRC of 1997 does not require any of these officers to deduct, withhold, and remit the correct amount of withholding taxes.”

According to the SC, the BIR “acted in grave abuse of discretion in issuing Section VI” of the memorandum as “imposing upon these officials an obligation not found in law or in Implementing Rules, the (BIR) did not merely issue an interpretative rule designed to provide guidelines for enforcement of the law but supplanted details — a power vested by law only on the Secretary of Finance.”

The SC statement noted the decision is to be applied prospectively. — Dane Angelo M. Enerio