Is BIR killing the spirit of RA 9504? (Part II)

Is BIR killing the spirit of RA 9504? (Part II)

by Dick Du-Baladad

Part I of this article which came out in this column last week discussed the increases in personal exemptions. Part II will focus on the minimum wage earners’ (MWE) exemption from income tax.

RA 9504 exempts minimum wage earners from income tax and, consequently, from withholding tax on compensation.

A "MWE" refers to a worker receiving the statutory minimum wage rate fixed by the Regional Tripartite Wage and Productivity Board, in the place where the worker is assigned.

A worker in Metro Manila receiving P382 per day or P9,932 per month, or a worker in Cavite or Laguna receiving P320 per day or P8,320 per month, is exempted from income tax and his compensation will no longer be subject to withholding tax. Thus, he brings home the full amount of his earnings without the usual deduction for taxes.

What a noble act of kindness from the government! There will be a reduction of revenue to the national coffers, but the government willingly accepts it.

Of course, as expected, the BIR has not taken this lightly. On the principle that tax exemptions are to be strictly construed against taxpayers, the draft revenue regulations released by the BIR last Aug. 5, 2008 has put tight constraints to claims for exemptions by MWEs.

The regulations clearly state that the exemption applies only to a worker receiving the statutory minimum wage and nobody else.  Thus, a worker who receives one peso higher than the statutory minimum wage rate will lose his exemption as a MWE. All his pay will be subjected to withholding tax on compensation, resulting in an even lower take home pay than that of MWE.

Naturally, this situation forces a worker to forego receiving any amount over and above the minimum wage, if such amount will reduce his take home pay lower than that if he were a MWE.

But the BIR said you cannot do that. Any agreement to reduce the pay of a worker is unlawful which could subject the employer and the employee to criminal prosecution. Likewise, the compensation of the employee cannot be claimed by the employer as a deductible expense.

Is this really what RA 9504 intended — to create and encourage absurd situations? Can’t the BIR, at least, read the real intent of RA 9504 and help promote social justice by saying that any income received by a worker over and above the minimum wage, to the extent that the tax distortion is eliminated and the take home pay is equalized, be still exempt from taxes as a MWE?

It may be difficult to justify such move, considering that the flaw is in the law itself. But the BIR was able to do it in certain instances in the past.
For example, when the Expanded VAT law was first introduced, the BIR realized the administrative difficulty it imposed on very small businesses. Thus, it coined the word "marginal income earners" and defined it to be those earning not more than P100,000 a year. The marginal income earners were given exemption from certain taxes (VAT, percentage tax) and even from keeping books of accounts.

The BIR justified this move by saying that this group of taxpayers is not engaged in business but is only earning its livelihood. Isn’t this the same concept for the exemption of MWEs? They earn in order to live and not to enrich themselves.

Again, talking about strict interpretation of the MWE exemption, the draft regulations also state that a MWE receiving other taxable income, say from sale of vegetables produced from his backyard, or from junk materials, or from other employee benefits over the exemption threshold allowed by regulations, will lose his exemption as MWE and his entire income will be subject to income tax.

Below, I present sample situations:

Situations	Tax Treatment
Statutory wage (includes holiday, overtime, hazard pay, night shift differential)	Exempt
Statutory wage + de minimis benefits within ceilings and/or other benefits not exceeding the P30,000 exemption	Exempt
Statutory wage + any de minimis benefits beyond ceilings and/or other benefits exceeding the P30,000 exemption	Taxable (entire income)
Statutory wage + commissions or allowances	Taxable (entire income)
Statutory wage + business commissions (other than those subject to final taxes such as interest income)	Taxable (entire income)

As clearly seen from the above table, the moment a MWE receives other taxable income, no matter how small, he immediately loses his tax exemption and his entire income is then subject to the regular taxes.

To my mind, the more appropriate interpretation, following the spirit of RA 9504, will be to impose taxes only on the taxable income received in excess of the minimum wage, but not to lose his exemption as a MWE altogether. A worker who receives the statutory minimum wage as his basic pay remains an MWE. The receipt of any incidental income during the year, intended or unintended, such as when he receives a loyalty bonus, or that he sold his bike, should not disqualify him as a MWE. He should remain an MWE, entitled to exemption as such, but the taxable income received other than as MWE may be subjected to appropriate taxes.

The BIR did not issue the final regulations last week. Let’s remain vigilant.

(The author is head of the Tax Advisory and Compliance Division of Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please e-mail Benedicta.Du-Baladad@pna.ph or call 886-5511.)