Back wages, allowances, benefits subject to tax

MANILA, Philippines - The Bureau of Internal Revenue (BIR) said back wages, allowances and benefits received by an employee from a labor dispute are subject to tax.

In cases when the labor dispute judgment is rendered through garnishment of debts due to the employer, the BIR said banks or financial institutions or other concerned entities in control of such debts owed to the employer are the ones responsible for withholding the tax.

In Revenue Memorandum Circular 39-2012 dated Aug. 3 but published Friday, the BIR said these back wages and other benefits are subject to tax because they constitute income earned by the employee during the period of his dismissal from service which was subsequently ruled to be illegal.

“The employee should report as income and pay the corresponding income taxes by allocating or spreading his back wages, allowances and benefits through the years from his separation up to the final decision of the court awarding the back wages. The said back wages, allowances and benefits are subject to withholding tax on wages,” BIR Commissioner Kim Henares said in the circular.

However, Henares clarified that if judgment is enforced through garnishment of debts owed to the employer, the person or entities that owe such debts are the ones responsible for paying the withholding tax.

These may be individuals that do business with the employers such as buyers or the banks and financial institutions that have control of their bank accounts.

“Persons having control of the payment of wages or salaries are authorized to deduct and withhold upon such wages or salaries the withholding tax due thereon. In this case, the garnishees are the persons owning debts due to the employer or in possession or control of credits to which the employer is entitled. Accordingly, they are in control of the payment of back wages, allowances and benefits and they are authorized to deduct and withhold the income tax due from the back wages, allowances and benefits to be paid to employees and are respectively liable for such deductions,” Henares said in the circular.

The withholding tax on the back wages is equivalent to five percent of the judgment award, Henares also said.

The issuance of the circular is part of the BIR’s efforts to raise more revenues.

The government’s main revenue agency is tasked to collect P1.06 trillion this year from a target of P940 billion in 2011.