COURAGE v. CIR

FACTS: CIR issued the assailed RMO No. 23-2014, in furtherance of RMC No. 23-2012 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," in order to clarify and consolidate the responsibilities of the public sector to withhold taxes on its transactions as a customer (on its purchases of goods and services) and as an employer (on compensation paid to its officials and employees) under the NIRC or Tax Code of 1997, as amended, and other special laws. 

Petitions:

G.R. No. 213446 - Confederation for Unity, Recognition and Advancement of Government Employees (COURAGE), et al., organizations/unions of government employees from the Sandiganbayan, Senate of the Philippines, Court of Appeals, Department of Agrarian Reform, Department of Social Welfare and Development, Department of Trade and Industry, Metro Manila Development Authority, National Housing Authority and local government of Quezon City, 

G.R. No. 213658 - 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 

Petitions-in-Intervention:

G.R. No. 213446 - National Federation of Employees Associations of the Department of Agriculture (NAFEDA) et al., duly registered union/association of employees of the Department of Agriculture, National Agricultural and Fisheries Council, Commission on Elections, Mines and Geosciences Bureau, and Philippine Fisheries Development Authority 

G.R. No. 213658 - Members of the Association of Regional Trial Court Judges in Iloilo City 

Summary of petitioners and intervenors’ arguments:

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.

Respondents:

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. 

ISSUES AND RULING:

Procedural

Non-exhaustion of administrative remedies. 

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

The CIR's exercise of its power to interpret tax laws comes in the form of revenue issuances, which include RMOs that provide "directives or instructions; prescribe guidelines; and outline processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, goals, objectives, plans and programs of the Bureau in all areas of operations, except auditing.” These revenue issuances are subject to the review of the Secretary of Finance. In relation thereto, Department of Finance Department Order No. 007-02 issued by the Secretary of Finance laid down the procedure and requirements for filing an appeal from the adverse ruling of the CIR to the said office. A taxpayer is granted a period of 30 days from receipt of the adverse ruling of the CIR to file with the Office of the Secretary of Finance a request for review in writing and under oath.

The doctrine of exhaustion of administrative remedies is not without practical and legal reasons. For one thing, availment of administrative remedy entails lesser expenses and provides for a speedier disposition of controversies. It is no less true to state that courts of justice for reasons of comity and convenience will shy away from a dispute until the system of administrative redress has been completed and complied with so as to give the administrative agency concerned every opportunity to correct its error and to dispose of the case. While there are recognized exceptions to this salutary rule, petitioners have failed to prove the presence of any of those in the instant case. 

Violation of the rule on hierarchy of courts. 

Petitioners violated the rule on hierarchy of courts as the petitions should have been initially filed with the CTA, having the exclusive appellate jurisdiction to determine the constitutionality or validity of revenue issuances. 

The CTA has exclusive jurisdiction to determine the constitutionality or validity of tax laws, rules and regulations, and other administrative issuances of the Commissioner of Internal Revenue. 

Substantive

In this case, the 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. 

Sections III and IV of RMO No. 23-2014 are valid. 

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. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.

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. 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 [Section 32(B)(6)(a) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(a) of RR No. 2-98];
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 [Section 32(B)(6)(b) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(b) of RR No. 2-98];
   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 [Section 32(B)(6)(c) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(c) of RR No. 2-98];
   
3. 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 [Section 32(B)(6)(d) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(d) of RR No. 2-98];
4. Payments of benefits made under the Social Security System Act of 1954 as amended [Section 32(B)(6)(e) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(e) of RR No. 2-98];
5. Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received by government officials and employees [Section 32(B)(6)(f) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(f) of RR No.2- 98];
6. Thirteenth (13th) month pay and other benefits received by officials and employees of public and private entities not exceeding P82,000.00 [Section 32(B)(7)(e) of the NIRC of 1997, as amended, and Section 2.78.1(8)(11) of RR No. 2-98, as amended by RR No. 03-15];
7. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual employees [Section 32(B)(7)(f) of the NIRC of 1997, as amended and Section 2.78.1(8)(12) of RR No. 2-98];
8. Remuneration paid for agricultural labor [Section 2.78.1 (B)(2) of RR No. 2-98];
9. Remuneration for domestic services [Section 28, RA No. 10361 and Section 2.78.1 (B)(3) of RR No. 2-98];
10. Remuneration for casual labor not in the course of an employer's trade or business [Section 2.78.1(8)(4) of RR No. 2-98];
11. 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 [Section 24(A)(2) of the NIRC of 1997, as amended];
12. Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization [Section 2.78.1(8)(5) of RR No. 2-98];
13. 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 [Section 32(B)(4) of the NIRC of 1997, as amended and Section 2.78.1 (B)(6) of RR No. 2-98];
14. 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 [Section 32(B)(1) of the NIRC of 1997, as amended and Section 2.78.1 (B)(7) of RR No. 2-98];
15. 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 [Section 32(8)(2) of the NIRC of 1997, as amended and Section 2.78.1(B)(8) of RR No. 2-98];
16. 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 [Section 32(8)(4) of the NIRC of 1997, as amended and Section 2.78.1(8)(9) of RR No. 2-98];
17. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines [Section 32(8)(5) of the NIRC of 1997, as amended and Section 2.78.1(B)(10) of RR No. 2-98];
18. Fringe and De minimis Benefits. [Section 33(C) of the NIRC of 1997, as amended); and
19. 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). 

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, unless specifically exempted or excluded by the Tax Code; and the duty of the Government, as an employer, to withhold and remit the correct amount of withholding taxes due thereon. 

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. As discussed, the 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. 

The fiscal autonomy enjoyed by the Judiciary, Ombudsman, and Constitutional Commissions, as envisioned in the Constitution, does not grant immunity or exemption from the common burden of paying taxes imposed by law. To borrow former Chief Justice Corona's words in his Separate Opinion in Francisco, Jr. v. House of Representatives, ”fiscal autonomy entails freedom from outside control and limitations, other than those provided by law. It is the freedom to allocate and utilize funds granted by law, in accordance with law and pursuant to the wisdom and dispatch its needs may require from time to time." 

Determination of existence of fringe benefits is a question of fact. 

Fringe benefits furnished or granted, in cash or in kind, by an employer to its managerial or supervisory employees, are not considered part of compensation income; thus, exempt from withholding tax on compensation. Instead, these fringe benefits are subject to a fringe benefit tax equivalent to 32% of the grossed-up monetary value of the benefit, which the employer is legally required to pay. On the other hand, fringe benefits given to rank and file employees, while exempt from fringe benefit tax, form part of compensation income taxable under the regular income tax rates provided in Section 24(A)(2) of the NIRC, of 1997, as amended; and consequently, subject to withholding tax on compensation. 

Furthermore, fringe benefits of relatively small value furnished by the employer to his employees (both managerial/supervisory and rank and file) as a means of promoting health, goodwill, contentment, or efficiency, otherwise known as de minimis benefits, that are exempt from both income tax on compensation and fringe benefit tax; hence, not subject to withholding tax, are limited and exclusive only to those enumerated under RR No. 3-98, as amended. All other benefits given by the employer which are not included in the said list, although of relatively small value, shall not be considered as de minimis benefits; hence, shall be subject to income tax as well as withholding tax on compensation income, for rank and file employees, or fringe benefits tax for managerial and supervisory employees, as the case may be.

Section VII of RMO No. 23-2014 is valid; Section VI contravenes, in part, the provisions of the NIRC of 1997, as amended, and its implementing rules. 

The Court finds that the CIR gravely abused its discretion in issuing Section VI of RMO No. 23-2014 insofar as it includes the Governor, City Mayor, Municipal Mayor, Barangay Captain, and Heads of Office in agencies, GOCCs, and other government offices, as persons required to withhold and remit withholding taxes, as they are not among those officials designated by the 1997 NIRC, as amended, and its implementing rules. 

Dispositive Portion:

WHEREFORE, premises considered, the Petitions and Petitions-in Interventions are PARTIALLY GRANTED. Section VI of Revenue Memorandum Order No. 23-2014 is DECLARED null and void insofar as it names the Governor, City Mayor, Municipal Mayor, Barangay Captain, and Heads of Office in government agencies, government- owned or -controlled corporations, and other government offices, as persons required to withhold and remit withholding taxes. 

Sections III, IV and VII of RMO No. 23-2014 are DECLARED valid inasmuch as they merely mirror the provisions of the National Internal Revenue Code of 1997, as amended. However, the Court cannot rule on petitioners' claims of exemption from withholding tax on compensation income because these involve issues that are essentially factual or evidentiary in nature, which must be raised in the appropriate administrative and/or judicial proceeding. 

The Court's Decision upholding the validity of Sections III and IV of the assailed RMO is to be applied only prospectively. 

Finally, the Petition for Mandamus in G.R. No. 213446 is hereby DENIED on the ground of mootness.