Tax implications of MWE's COLA and voluntary SSS, GSIS, PHIC and Pag-IBIG contributions

In general, all income earned by individuals are subject to income tax under Philippine laws. However, Republic Act (RA) No. 9504 exempted minimum wage earners (MWEs) from the payment of income tax on their compensation income, including holiday pay, overtime pay, night shift differential pay and hazard pay. A minimum wage earner refers to, among others, a worker in the private sector who is paid the statutory minimum wage. On July 2008, the BIR issued Revenue Regulations (RR) No. 10-2008 which reiterated that compensation income of MWEs are exempted from income tax and that the holiday pay, overtime pay, night shift differential pay and hazard pay earned by MWEs shall likewise be covered by the exemption. The Revenue Regulations clarified that an employee who receives additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000, taxable allowances and other taxable income other than the statutory minimum wage, holiday pay, overtime pay, hazard pay and night shift differential pay shall no longer enjoy the privilege of being a MWE. His/her entire earnings will not be exempt from income tax. The BIR regulations also clarified that MWEs who, in addition to compensation income, receive other income such as those from trade, business, professional practice, except income subject to final tax, are not exempted from income tax on their entire income for the taxable year.

On May 9, 2011, the Regional Tripartite Wage and Productivity Board-NCR issued Wage Order No. NCR-16 which grants to all private sector minimum wage workers and employees in the NCR a Cost of Living Allowance (COLA) in the amount of P22 per day. It covers all MWEs in the private sector in the NCR regardless of their position, designation or status of employment and irrespective of the method by which they are paid. In effect, starting May 26, 2011, the new wage rate in the NCR will be the following:

Non-Agriculture P426

Agriculture   (Plantation & Non plantation)        P389

Private hospitals with bed capacity of 100 or less      P389

Retail/service establishments employing 15 workers or less        P389

Manufacturing establishments regularly employing less than 10 workers         P389    

Last June 8, 2011, the BIR issued Revenue Memorandum Circular (RMC) No. 23-2011 and clarified that MWEs shall continue to enjoy income tax exemption based on the new wage rate, meaning, inclusive of COLA, as well as the holiday pay, overtime pay, night shift differential pay and hazard pay.

On another subject, the BIR issued RMC No. 27-2011 dated July 1, 2011 revoking four (4) BIR rulings which exempted from income tax voluntary contributions to GSIS, SSS, PHIC and Pag-IBIG. The BIR believes that the grant of income tax exemption to SSS, GSIS, PHIC and Pag-IBIG contributions were being abused. It was argued that by paying additional contributions, the employees are in effect making an investment which are not being subjected to tax. Bottom line, the exemption from withholding tax on compensation shall apply only to mandatory/compulsory GSIS, SSS, PHIC and Pag-IBIG contributions.