CONFEDERATION FOR UNITY, RECOGNITION AND ADVANCEMENT OF GOVERNMENT EMPLOYEES

(COURAGE), et. al., petitioners, vs CIR, et., al. respondents

G.R. No. 213446, July 03, 2018
Caguioa, J

FACTS:
On 2014, CIR issued RMO No. 23-2014, in furtherance on the "Reiteration of the Responsibilities of the
Officials and Employees of Government Offices for the Withholding of Applicable Taxes on Certain
Income Payments and the Imposition of Penalties for Non-Compliance Thereof," to clarify and
consolidate the responsibilities of the public sector to withhold taxes on its transactions as a customer
and as an employer under the NIRC. In sum, petitioners organizations/unions including COURAGE and
intervenors assailed and sought to nullify the order on the following grounds:

1. RMO No. 23-2014 is ultra vires insofar as: Sections III and IV of RMO No. 23-2014, for subjecting to
withholding taxes non-taxable allowances, bonuses and benefits received by government employees;
Sections VI and VII, for defining new offenses and prescribing penalties therefor, particularly upon
government officials;
2. RMO No. 23-2014 violates the equal protection clause as it discriminates against government
employees;
3. RMO No. 23-2014 violates fiscal autonomy enjoyed by government agencies;
4. The implementation of RMO No. 23-2014 results in diminution of benefits of government employees,
a violation of Article 100 of the Labor Code; and
5. Respondents may be compelled through a writ of mandamus to increase the tax-exempt ceiling for
13th month pay and other benefits.

On the other hand, respondents counter that:

1. The instant consolidated petitions are barred by the doctrine of hierarchy of courts;
2. The CIR did not abuse its discretion in the issuance of RMO No. 23-2014 because:
It was issued pursuant to the CIR's power to interpret the NIRC of 1997, as amended, and other tax laws,
under Section 4 of the NIRC of 1997, as amended;
RMO No. 23-2014 does not discriminate against government employees. It does not create a new
category of taxable income nor make taxable those which are exempt;
RMO No. 23-2014 does not result in diminution of benefits;

The allowances, bonuses or benefits listed under Section III of the assailed RMO are not fringe benefits;

The fiscal autonomy granted by the Constitution does not include tax exemption; and

3. Mandamus does not lie against respondents because the NIRC of 1997, as amended, does not impose
a mandatory duty upon them to increase the tax-exempt ceiling for 13th month pay and other benefits.
ISSUE:
Whether RMO No. 23-2014, particularly Sections III, IV, VI and VII thereof, is tainted with grave abuse of
discretion.

RULING:
Court finds the petitions partly meritorious only insofar as Section VI of the assailed RMO is concerned.
On the other hand, the Court upholds the validity of Sections III, IV and VII thereof as these are in fealty
to the provisions of the NIRC of 1997, as amended, and its implementing rules.

Section 4 of the NIRC of 1997, as amended, grants the CIR the power to issue rulings or opinions
interpreting the provisions of the NIRC or other tax laws. However, the CIR cannot, in the exercise of
such power, issue administrative rulings or circulars inconsistent with the law sought to be applied.
Indeed, administrative issuances must not override, supplant or modify the law, but must remain
consistent with the law they intend to carry out.

Compensation income is the income of the individual taxpayer arising from services rendered pursuant
to an employer-employee relationship. Under the NIRC of 1997, as amended, every form of
compensation for services, whether paid in cash or in kind, is generally subject to income tax and
consequently to withholding tax. The name designated to the compensation income received by an
employee is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions,
fees, (including director's fees, if the director is, at the same time, an employee of the
employer/corporation), bonuses, fringe benefits (except those subject to the fringe benefits tax under
Section 33 of the Tax Code), pensions, retirement pay, and other income of a similar nature, constitute
compensation income that are taxable and subject to withholding.

The law is therefore clear that withholding tax on compensation applies to the Government of the
Philippines, including its agencies, instrumentalities, and political subdivisions. The Government, as an
employer, is constituted as the withholding agent, mandated to deduct, withhold and remit the
corresponding tax on compensation income paid to all its employees. However, not all income payments
to employees are subject to withholding tax because NIRC of 1997 as amended expressly excluded
those.

Sections III and IV of the assailed RMO do not charge any new or additional tax. On the contrary, they
merely mirror the relevant provisions of the NIRC of 1997, as amended, and its implementing rules on
the withholding tax on compensation income. The assailed Sections simply reinforce the rule that every
form of compensation for personal services received by all employees arising from employer-employee
relationship is deemed subject to income tax and, consequently, to withholding tax,bunless specifically
exempted or excluded by the Tax Code.

While Section III enumerates certain allowances which may be subject to withholding tax, it does not
exclude the possibility that these allowances may fall under the exemptions identified under Section IV.
In other words, Sections III and IV articulate in a general and broad language the provisions of the NIRC
of 1997, as amended, on the forms of compensation income deemed subject to withholding tax and the
allowances, bonuses and benefits exempted therefrom.

Furthermore, the Court finds untenable petitioners' contention that the assailed provisions of RMO No.
23-2014 contravene the equal protection clause, fiscal autonomy, and the rule on non-diminution of
benefits. The constitutional guarantee of equal protection is not violated by an executive issuance which
was issued to simply reinforce existing taxes applicable to both the private and public sector.
Withholding tax system embraces not only private individuals, organizations and corporations, but also
covers organizations exempt from income tax, including the Government of the Philippines, its agencies,
instrumentalities, and political subdivisions. While the assailed RMO is a directive to the Government, as
a reminder of its obligation as a withholding agent, it did not, in any manner or form, alter or amend the
provisions of the Tax Code, for or against the Government or its employees.
Development Bank of the Philippines (DBP) Board of Governors adopted Resolution No. 794 creating the
a Gratuity Plan and authorizing the setting up of a retirement fund to cover the benefits due to DBP
retiring officials a which covers all employees of the baknk. In 1983, DBP established a Special Loan
Program wherein under this, a prospective retiree is allowed the option to utilize in the form of a loan a
portion of his outstanding equity in the gratuity fund and to invest it in a profitable investment or
undertaking. The earnings of the investment shall then be applied to pay for the interest due on the
gratuity loan which was initially set at 9% per annum subject to the minimum investment rate resulting
from the updated actuarial study.The excess or balance of the interest earnings shall then be distributed
to the investor-members. Meanwhile, COA in its Audit Observation Memorandum No. 93-2 disallowed
payments, on the ground that the distribution of income of (GPF) to future retirees of DBP is irregular
and constituted the use of public funds for private purposes which is specifically proscribed under
Section 4 of P.D. 1445.

ISSUE:
whether the income of the Gratuity Plan Fund is income of DBP

RULING:
No. In a trust, one person has an equitable ownership in the property while another person owns the
legal title to such property, the equitable ownership of the former entitling him to the performance of
certain duties and the exercise of certain powers by the latter. In the present case, DBP, as the trustor,
vested in the trustees of the Fund legal title over the Fund as well as control over the investment of the
money and assets of the Fund. The Agreement indisputably transferred legal title over the income and
properties of the Fund to the Funds trustees. Thus, COAs directive to record the income of the Fund in
DBPs books of account as the miscellaneous income of DBP constitutes grave abuse of discretion. The
income of the Fund does not form part of the revenues or profits of DBP, and DBP may not use such
income for its own benefit. The principal and income of the Fund together constitute the res or subject
matter of the trust.
G.R. No. 96016 October 17, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS and EFREN P. CASTANEDA, respondents.

PADILLA, J.:

FACTS:
Efren P. Castaneda retired from the government service as Revenue Attache in the Philippine Embassy in
London, England. Upon retirement, he received, among other benefits, terminal leave pay from which
petitioner Commissioner of Internal Revenue withheld P12,557.13 allegedly representing income tax
thereon. Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13,
contending that the cash equivalent of his terminal leave is exempt from income tax. CTA ordered CIR to
refund Castaneda the sum of P12,557.13 withheld as income tax which was affirmed by CA.

ISSUE:
whether or not terminal leave pay received by a government official or employee on the occasion of his
compulsory retirement from the government service is subject to withholding (income) tax.

RULING:
In the case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al., the Court explained the
rationale behind the employee's entitlement to an exemption from withholding (income) tax on his
terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer
or employee who retires, resigns or is separated from the service through no fault of his own. In the
exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The
Government recognizes that for most public servants, retirement pay is always less than generous if not
meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided.
Terminal leave payments are given not only at the same time but also for the same policy considerations
governing retirement benefits. In fine, not being part of the gross salary or income of a government
official or employee but a retirement benefit, terminal leave pay is not subject to income tax.
G.R. No. L-18840 May 29, 1969

KUENZLE & STREIFF, INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
DIZON, J.:

FACTS:
Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return, declaring losses
2. CIR filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said years in the amounts
of P40,455.00, P11,248.00 and P16,228.00, respectively, arising from the disallowance, as deductible
expenses, of the bonuses paid by the corporation to its officers, upon the ground that they were not
ordinary, nor necessary, nor reasonable expenses within the purview of Section 30(a) (1) of the National
Internal Revenue Code.
3. The corporation filed with the Court of Tax Appeals a petition for review contesting the assessments.
CTA favored the CIR, however lowered the tax due on 1954. The corporation moved for reconsideration,
but still lost
4. The Corporation contends that the tax court, in arriving at its conclusion, acted "in a purely arbitrary
manner", and erred in not considering individually the total compensation paid to each of petitioner's
officers and staff members in determining the reasonableness of the bonuses in question, and that it
erred likewise in holding that there was nothing in the record indicating that the actuation of the
respondent was unreasonable or unjust.

ISSUE: Whether or not the bonuses in question was reasonable and just to be allowed as a deduction?

HELD: No. It is a general rule that `Bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees are deductible, provided such
payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the
services rendered. There is no fixed test for determining the reasonableness of a given bonus as
compensation. This depends upon many factors, one of them being the amount and quality of the
services performed with relation to the business. Other tests suggested are: payment must be 'made in
good faith'; the character of the taxpayer's business, the volume and amount of its net earnings, its
locality, the type and extent of the services rendered, the salary policy of the corporation'; 'the size of
the particular business'; 'the employees' qualifications and contributions to the business venture'; and
'general economic conditions. However, 'in determining whether the particular salary or compensation
payment is reasonable, the situation must be considered as a whole.
G.R. No. L-12954 February 28, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ARTHUR HENDERSON, respondent.

PADILLA, J.

FACTS:
Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the BIR. Arthur is
president of American International Underwriters for the Philippines, Inc., which is a domestic
corporation engaged in the business of general non-life insurance, and represents a group of American
insurance companies engaged in the business of general non-life insurance.

• The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR included as part
of taxable income: 1) Arthur’s allowances for rental, residential expenses, subsistence, water, electricity
and telephone expenses 2) entrance fee to the Marikina Gun and Country Club which was paid by his
employer for his account and 3) travelling allowance of his wife

• The taxpayers justifications are as follows:

1) as to allowances for rental and utilities, Arthur did not receive money for the allowances. Instead, the
apartment is furnished and paid for by his employer-corporation (the mother company of American
International), for the employer corporation’s purposes. The spouses had no choice but to live in the
expensive apartment, since the company used it to entertain guests, to accommodate officials, and to
entertain customers. According to taxpayers, only P 4,800 per year is the reasonable amount that the
spouses would be spending on rental if they were not required to live in those apartments. Thus, it is the
amount they deem is subject to tax. The excess is to be treated as expense of the company.

2) The entrance fee should not be considered income since it is an expense of his employer, and
membership therein is merely incidental to his duties of increasing and sustaining the business of his
employer.

3) His wife merely accompanied him to New York on a business trip as his secretary, and at the
employer-corporation’s request, for the wife to look at details of the plans of a building that his
employer intended to construct. Such must not be considered taxable income.
• The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent expense
and travel expenses were still held to be taxable. The Court of Tax Appeals ruled in favor of the
taxpayers, that such expenses must not be considered part of taxable income. Letters of the wife while
in New York concerning the proposed building were presented as evidence.

ISSUE: Whether or not the rental allowances and travel allowances furnished and given by the
employer-corporation are part of taxable income?

HELD: NO. Such claims are substantially supported by evidence.

These claims are therefore NOT part of taxable income. No part of the allowances in question
redounded to their personal benefit, nor were such amounts retained by them. These bills were paid
directly by the employer-corporation to the creditors. The rental expenses and subsistence allowances
are to be considered not subject to income tax. Arthur’s high executive position and social standing,
demanded and compelled the couple to live in a more spacious and expensive quarters. Such
‘subsistence allowance’ was a SEPARATE account from the account for salaries and wages of employees.
The company did not charge rentals as deductible from the salaries of the employees. These expenses
are COMPANY EXPENSES, not income by employees which are subject to tax.