Court ruling needed: Are allowances tax-free?

A court ruling is needed to settle the question of whether prosecutors’ allowances from local government units (LGUs) should be   tax-free.

Regional State Prosecutor Fernando Gubalane, who insists the allowances are tax-free,  yesterday said he may  seek declaratory relief in court after the Commission on Audit (COA) suspended their allowances from  the Mandaue City government.

State auditors earlier told Mandaue Mayor Jonas Cortes that  no income tax was deducted from judges, prosecutors and court workers who received allowances  from 2009 to 2011 amounting to P6.46 million.

The mayor was ordered to  “correctly withhold taxes on compensation” or be held liable for violating audit rules.

Gubalane, who was among those affected, siad he would file a motion for reconsideration with the COA.

In a case for declaratory relief, the court will be asked to state what are the rights and obligations of parties  under the law or in a contract.

“We will exhaust all legal and administrative remedies,” Gubalane said.

He said  Republic Act 10071 or the National Prosecution Services Act  and the Local Government Code allows local governments to issue allowances to prosecutors, judges, teachers and other national government personnel if their finances allow it.

He said the controversy is  a “question of law” and centers on the interpretation of the Mandaue City auditor.

Gubalane said he will still consult  other prosecutors before taking action.

He said he respects Justice Secretary Leila de Lima’s view, when she said she wants to do away with the practice of  prosecutors receiving allowances from LGUs because it poses a potential “conflict of interest” in cases they handle.

Gubalane said they haven’t encountered any conflict-of-interest situation with the LGUs since most cases involving local officials were filed at the Ombudsman-Visayas.

Both Associate Justice Gabriel Ingles of the Court of Appeals-Cebu and Regional Trial Court Judge Meinrado Paredes said receiving allowances from LGUs may affect public perception on the independence of the judiciary and prosecutors.

“This is my personal view and I have always held this view: It is best for a judge not to receive any allowances from possible parties to a case that may be filed or pending before her or his sala. And LGUs can be parties to a case,” Ingles said.

Ingles refused to accept allowances from LGUs since he was a trial court judge until the present.

“It’s not only real impartiality and independence that is valued of judges but also the appearance of impartiality and independence,” he said.

Ingles said if COA classified the allowances as taxable income “then it should be taxed.”

“It’s just unfortunate, that’s all I can say,” he said.

Judge Paredes said receiving allowances from LGUs isn’t good to look at.

“Although the judge knows he or she is independent, people may doubt his or her partiality,” Paredes said.

While he declined his allowance from the Capitol, Paredes continues to receive a monthly allowance from Cebu City Hall.

But Paredes won’t be handling cases involving the city government because he is assigned to an illegal drugs court.

He said he respects the decision of other judges and prosecutors who continue to receive monthly stipend from LGUs.

Under the Local Government Code of 1991, local governments can “provide for additional allowances and other benefits to judges and prosecutors assigned in the city.”

“Not everything legal is moral. In the same manner, not everything moral is legal,” Paredes said.

Asst. City Prosecutor Mary Ann Castro said she is willing to comply with the COA memorandum.

“I have to help the government in defraying its expenses in my own little ways. It (taxes) is the lifeblood of the government,” Castro told Cebu Daily News.

Asst. City Prosecutor Aida Sanchez said the COA memorandum couldn’t supersede RA 10071.

“Whatever COA says is not controlling. If ever they will insist, they will get sued,” Sanchez said.

In its Feb. 24 memorandum, COA said the non-imposition of taxes on the honoraria or incentive pay deprived the government of funds that could be used for services and programs.

State auditors recommended the return of the income taxes not withheld on previous payments of allowances to 16 prosecutors, nine judges and 12 court personnel.

A provision of RA 10071 or the National Prosecution Services Act states that “the whole of the allowances or portion granted by the national or local government shall be exempt from the income tax.”

But COA said the Bureau of Internal Revenue (BIR) stated that “honoraria is compensation subject to withholding tax.”

Justice Secretary Leila de Lima discouraged prosecutors from receiving allowances from LGUs since it may lead to conflict-of-interest situations with them.