P82,000 tax free – guilt free?

The most anticipated news of the year was finally signed into law last Feb. 12, 2015.

Republic Act (RA)10653 increased the 13th month pay and other benefits ceiling excluded from the computation of gross income for purposes of income taxation from P30,000 to P82,000.

The good news does not stop there. The RA also provides that every three (3) years after the effectivity of the RA, the amount would be adjusted to its present value using the Consumer Price Index (CPI) published by the National Statistics Office (NSO). 

The RA would take effect 15 days after its publication in at least two (2) newspapers of general circulation. It was published on Feb. 14, 2015.

In celebration of the Chinese New Year last week, a non-working holiday was declared. Some companies may have provided New Year’s bonuses to its employees. This brought to mind some interesting questions:

1. If a company provided bonuses before the effectivity of the law, could they now apply the P82,000 ceiling to the bonuses received by the employees for purposes of reporting withholding tax for the month of February? If not:

2. Would the bonuses given before the effectivity of the law be allowed to be covered by the exclusion upon the computation of the year-end annualized withholding tax computation?

3. If an employee resigned even before the effectivity of the law, would that employee be entitled to a tax refund when the company recomputes his annualized withholding tax for inclusion in the alphalist at year-end?  Or would the annualized computation of his final pay upon his resignation be the final tax applicable?

To date, the implementing rules and regulations has not been published for the faithful and effective implementation of this law. Worth noting though is that the RA also provides that failure of the Secretary of Finance to promulgate the rules and regulations would not prevent the implementation of the RA upon its effectivity.

During the initial year of implementation of the law, the transitory provisions issued by the Bureau of Internal Revenue (BIR) usually provide clarity on how the law would be applied during the transition year. 

As a case in point, consider that  the last major change in the employees’ income taxation happened back in 2008 with the passage of RA 9504 fixing the basic personal exemption to P50,000 across all taxpayers whether single or married, and increasing the additional exemption to P25,000 per qualified dependent.

Upon issuance of Revenue Regulations 10-2008, the BIR came up with a Revised Transitional Withholding Tax Table as Annex D to be used to compute the withholding tax for income received from  July 6 to 31 Dec. 31,  2008.  Back then there was a pro-rated application of the old exemption and the new exemption. 

Coming to the present RA, without the issuance of the RR from the BIR, how are taxpayers supposed to treat the bonuses given in February? The taxes withheld on these bonuses are supposed to be remitted to the BIR on March 10, 2015 at the earliest.   

A further practical consideration is that most payroll softwares are programmed to exclude the first P30,000 of the bonuses provided from the beginning of the year.  The softwares are only adjusted upon the effectivity of a law.  Since the RA takes effect in March 2015, it is safe to assume that the income earned in February would still be subject to the P30,000 cap.  In effect, if an employee received a P50,000 bonus during the Chinese New Year, the software would compute tax on the amount in excess of P30,000.

During the annualized computation of withholding tax at year end, an employer normally lumps all the benefits like 13th month pay and other incentives provided to its employees during the year. If the RA would apply to all income earned during the year 2015, the first P82,000 would not be subject to tax and amount in excess of that ceiling is reported under the taxable portion of 13th month pay and other benefits in the alphalist.  However, would the same pro-ration be also implemented by the BIR with RA 10653? 

If this would be the approach of the BIR, would the 13th month pay which at the minimum accrues based on the amount earned by the employee per month be also subject to a prorated exclusion? 2/12 x 30,000 for the first two months before the effectivity and 10/12 x 82,000 for portion accrued after the effectivity. 

Given that the BIR has done it before to pro-rate the applicability of the personal exemptions, and that they claim a P25-to P30-billion loss as a result of this RA, it would not come as a surprise that the P82,000 exemption would be applied with some restraints.  The tax effect of the increase in the amount excluded could give an increased monetary benefit of up to, P16,640 per employee.  So just before we buy that new gadget, let us wait and see how this unfolds.        

Cecille A. Fernando is an assistant manager from the Tax Group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected]

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