Minimum wage earners and withholding tax
Minimum wage earners and withholding tax
by: FULVIO D. DAWILAN
Revenue Regulations (“RR”) No. 1-2006 introduced some amendments which call for the exemption from withholding tax of “compensation income of individuals that do not exceed the statutory minimum wage or Five thousand pesos (P5,000) per month (Sixty thousand pesos [P60,000] a year), whichever is higher.”
The exemption from withholding tax on compensation is not a rule of first impression. The original text of Section 2.79(A) of RR No. 2-98 provides that “no withholding of tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or five thousand pesos (P5,000) per month (sixty thousand pesos (P60,000.00) a year), whichever is higher.” The application of the rule, however, was discretionary on the part of the employee.
This mandatory exemption is long overdue considering that this rule is mandated under Section 79 of the 1997 Tax Code which provides that “no withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or Five thousand pesos (P5,000) per month, whichever is higher” without qualification. Thus, the newly introduced rule enforces the legislative intent of providing income relief from withholding tax for minimum wage earners. While to some extent, this maybe a welcome development, there are some concerns that both or either the employer and the employee may have to contend with. The amendment merely reiterates the law and the lack of details for the implementation would make it difficult to comply and may even result to its discretionary application.
Does this automatically exempt the compensation income of employees whom the employer contracts to pay minimum wage regardless of the amount actually paid? For example, if a minimum wage earner renders overtime work and necessarily earns income more than his minimum wage for that specific period, would the compensation still be entitled to the exemption? As so worded, the revenue regulations exempts the compensation income of individuals that do not exceed the statutory minimum wage. The subject of the exemption is the compensation income and not the minimum wage earner. Thus, it appears that the minimum wage earner is not automatically exempted from withholding tax. This would depend on how much the employer is actually required to pay for the services of the employee. Thus, if the employee renders overtime and earns compensation over and above the minimum wage, the income for that specific period would not be entitled to the withholding tax exemption.
The period for determining the entitlement to the exemption is another concern. The minimum wage could be easily determined on a daily basis considering that the minimum wages are normally fixed on a daily basis. Also, the periodic minimum wages for any period could be determined or determinable depending on the number of days the employees are required to work or have actually worked, in relation to the company policies, practices or agreements. What is not clearly defined is the reckoning of whether or not an employee has received or is receiving minimum wage. Should this be done for each payroll period or should it be reckoned on some other basis, such as daily, weekly, semi-monthly or annually?
On the part of the minimum wage earners, the exemption of their compensation from withholding tax at source does not mean exemption from income tax. While the income maybe exempt from withholding, it does not exempt the income from income tax. The individual employees have to pay their own income taxes. In fact, the new amendment specifically provides that the “individuals whose compensation income is not subject to withholding tax shall remain liable for income taxes and shall continue to file their annual income tax returns and pay the income taxes due thereon, if any, not later than April 15 of the yea r immediatel
y following the taxable year. This process is not really a relief from income taxation but a mere shifting of burden of remitting the tax from the employer to the employee.
Revenue rules and regulations are necessary for the effective enforcement of the provisions of the tax laws. While this should not expand the boundaries of the laws they seek to implement, it should by itself be complete to be able to carry into effect what is provided in the legislative enactment. Thus a revisit of the regulations or clarification is necessary. Or better still, policy considerations should consider not only the exemption from withholding tax but a complete exemption from income tax of minimum wage earners. (The author is a tax partner at Punongbayan & Araullo, member of Grant Thornton International. For comments and inquiries, please e-mail the author or call 886-5511.)