COURAGE v.

BIR,
G.R. No. 213446, July 3, 2018
CAGUIOA, J:
DOCTRINE:
POWER OF CIR TO INTERPRET PROVISIONS OF NIRC and OTHER TAX LAWS:
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. In Philippine Bank of Communications v.
Commissioner of Internal Revenue, the Court upheld the nullification of RMC No. 7-85 issued by
the Acting Commissioner of Internal Revenue because it was contrary to the express provision
of Section 230 of the NIRC of 1977. Conversely, if the assailed administrative rule conforms with
the law sought to be implemented, the validity of said issuance must be upheld. Thus, in The
Philippine American Life and General Insurance Co. v. Secretary of Finance, the Court
declared valid Section 7 (c.2.2) of RR No. 06-08 and RMC No. 25-11, because they merely
echoed Section 100 of the NIRC that the amount by which the fair market value of the
property exceeded the value of the consideration shall be deemed a gift; thus, subject to donor's
tax.
COMPENSATION INCOME: 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 withholding tax system was devised for three primary reasons, namely: (1) to provide the
taxpayer a convenient manner to meet his probable income tax liability; (2) to ensure the
collection of income tax which can otherwise be lost or substantially reduced through failure
to file the corresponding returns; and (3) to improve the government's cash flow.
Section 79(A) of the NIRC of 1997: SEC. 79. Income Tax Collected at Source. (A) Requirement
of Withholding - Except in the case of a minimum wage earner as defined in Section 22(HH) of
this Code, every employer making payment of wages shall deduct and withhold upon such wages
a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
Section 2.78 of RR No. 2-98, issued by the Secretary of Finance to implement the withholding
tax system under the NIRC of 1997:
SECTION 2.78. Withholding Tax on Compensation. — The withholding of tax on
compensation income is a method of collecting the income tax at source upon receipt of the
income. It applies to all employed individuals whether citizens or aliens, deriving income
from compensation for services rendered in the Philippines. The employer is constituted as
the withholding agent.
The following allowances, bonuses or benefits, excluded by the NIRC of 1997, as amended, from
the employee's compensation income, are exempt from withholding tax on compensation.
1. Retirement benefits received under RA No. 7641 and those received by officials and employees
of private firms, whether individual or corporate, under a reasonable private benefit plan
maintained by the employer subject to the requirements provided by the Code.
2. Any amount received by an official or employee or by his heirs from the employer due to
death, sickness or other physical disability or for any cause beyond the control of the said
official or employee, such as retrenchment, redundancy, or cessation of business
3. Social security benefits, retirement gratuities, pensions and other similar benefits received by
residents or non-resident citizens of the Philippines or aliens who come to reside permanently
in the Philippines from foreign government agencies and other institutions private or public
4. Payments of benefits due or to become due to any person residing in the Philippines under the
law of the United States administered by the United States Veterans Administration
5. Payments of benefits made under the Social Security System Act of 1954 as amended.
6. Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received
by government officials and employees
7. Thirteenth (13th) month pay and other benefits received by officials and employees of public
and private entities not exceeding P82,000.00
8. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual employees
9. Remuneration paid for agricultural labor
10. Remuneration for domestic services
11. Remuneration for casual labor not in the course of an employer's trade or business
12. Remuneration not more than the statutory minimum wage and the holiday pay, overtime pay,
night shift differential pay and hazard pay received by Minimum Wage Earners
13. Compensation for services by a citizen or resident of the Philippines for a foreign government
or an international organization
14. Actual, moral, exemplary and nominal damages received by an employee or his heirs pursuant
to a final judgment or compromise agreement arising out of or related to an employer-employee
relationship
15. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured, whether in a single sum or otherwise, provided however, that interest payments agreed
under the policy for the amounts which are held by the insured under such an agreement shall
be included in the gross income
16. The amount received by the insured, as a return of premium or premiums paid by him under
life insurance, endowment, or annuity contracts either during the term or at the maturity of the
term mentioned in the contract or upon surrender of the contract
17. Amounts received through Accident or Health Insurance or under Workmen's Compensation
Acts, as compensation for personal injuries or sickness, plus the amount of any damages
received whether by suit or agreement on account of such injuries or sickness
18. Income of any kind to the extent required by any treaty obligation binding upon the
Government of the Philippines
19. Fringe and De minimis Benefits.
20. Other income received by employees which are exempt under special laws (RATA granted to
public officers and employees under the General Appropriations Act and Personnel Economic
Relief Allowance granted to government personnel).

FACTS:
The petitioners are all groups of Government workers who were affected by CIR in issuing RMO
No. 23-2014. According to petitioners, RMO No. 23-2014 classified as taxable compensation, the
following allowances, bonuses, compensation for services granted to government employees,
which they alleged to be considered by law as non-taxable fringe and de minimis benefits. assert
that the imposition of withholding tax on these allowances, bonuses and benefits, which have been
allotted by the Government to its employees free of tax for a long time, violates the prohibition on
non-diminution of benefits under Article 100 of the Labor Code;[3] and infringes upon the fiscal
autonomy of the Legislature, Judiciary, Constitutional Commissions and Office of the Ombudsman
granted by the Constitution. Other petitioners Armando A. Yanga, President of the Regional Trial
Court (RTC) Judges Association of Manila, and Ma. Cristina Carmela I. Japzon, President of the
Philippine Association of Court Employees – Manila Chapter, filed a Petition for Certiorari and
Prohibition. National Federation of Employees Associations of the Department of Agriculture
(NAFEDA) claiming similar interests filed a Petition-in-Intervention. The petitioners generally
complain that 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. Hence, the case at bar.
ISSUE:
Whether sections III and IV of RMO No. 23-2014 should be declared valid.
RULING:
YES, RMO no. 23-2014 is valid as it merely mirror the relevant provisions of the NIRC of
1997, as amended, and its implementing rules on the withholding tax on compensation income.
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
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.
In the instant case, it is clear that the provisions in Sections III and IV and VII of RMO no.
23-2014 mirrors the provisions in the NIRC. The law enumerates taxable compensation incomes
and those that are exempt from such taxation. Basically, RMO no. 23-2014 merely provides a
means to implement the rules on withholding tax on compensation income.