Previous Interpretation of Section 32(B)(7)(f) of the NIRC of 1997
- Prior rulings interpreted the tax code provision as encompassing both mandatory and voluntary/contributory payments as exempt from income tax.
- Stated that law and regulations do not explicitly limit the exemption only to mandatory contributions.
Abuse of Income Tax Exemption for Voluntary Contributions
- It was observed that exemption on voluntary excess contributions is abused.
- Examples include additional voluntary monthly contributions to Pag-ibig 2 and PHIC apart from mandatory amounts.
- Voluntary contributions resemble investments but the income derived from them escape taxation.
- Employers find compliance with withholding tax difficult as voluntary contributions may not be processed through employer payroll.
Definition of "Contribution" under Various Statutes
- RA 8291 (GSIS Act): Contribution is the amount payable by member and employer as mandatory monthly contributions.
- RA 8282 (SSS Act): Contribution means amount paid by and for member per statutory schedule and compulsory deduction.
- RA 7875 (PhilHealth Act): Contribution is amount paid by or for member for coverage based on salary or other criteria.
- RA 9697 (HDMF-Pagibig Law): Contributions are amounts payable by members and employers mandatorily fixed by law with defined percentages and ceilings.
Clarification of Scope of "Contributions" under Tax Code
- Contributions in Section 32(B)(7)(f) refer solely to mandatory/compulsory payments prescribed by law.
- Voluntary contributions exceeding mandatory limits are not exempt from gross income or withholding tax.
Impact on Withholding Tax and Income Tax Treatment
- Section 278(1)(B)(12) of Revenue Regulations No. 2-98 applies tax exemption only to mandatory contributions to GSIS, SSS, PhilHealth, and Pag-ibig.
- Voluntary/additional contributions are taxable and subject to withholding tax.
Administrative and Enforcement Directives
- The revoked rulings are invalidated and all inconsistent revenue issuances repealed.
- Revenue officers must consider this Circular in audits and investigations.
- Exemption claims for voluntary contributions are disallowed and deficiency assessments may be issued.
Directive to Revenue Officials
- All revenue officials and employees are instructed to widely publicize the Circular.
- The ruling aims to ensure proper tax compliance and elimination of abuses related to voluntary contributions.
Adoption
- Circular took effect on 01 July 2011 upon issuance by Commissioner of Internal Revenue Kim S. Jacinto-Henares.