THE Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 39-2012 to require the withholding of taxes on back wages, allowances, and benefits received by virtue of a labor dispute award through garnishments of debts due to the employers and other credits to which the employer is entitled including bank deposits, financial interests, royalties, or commission.
It should be noted that back wages, allowances, and benefits awarded in a labor dispute constitute remunerations for services that would have been performed by the employee in the year when actually received, or during the period of his dismissal from the service which was subsequently ruled to be illegal.
The employee should report as income and pay the corresponding income taxes by allocating or spreading his back wages, allowances and benefits through the years from his separation up to the final decision of the court awarding the back wages. The back wages, allowances, and benefits are subject to withholding tax on wages.
However, when the judgment awarded in a labor dispute is enforced through garnishment of debts due to the employer or other credits to which the employer is entitled, the person owing such debts or having in possession or control of such credits would normally release and pay the entire garnished amount to the employee. As a result, employers who are mandated to withhold taxes on wages pursuant to Section 79 of the Tax Code of 1997, as amended, as implemented by Revenue Regulations NO. 2-98, as amended, cannot withhold the appropriate tax due thereon.
Based on Section 78(D)(1) of the Tax Code of 1997, as amended, and Section 2.78.4(A) of revenue Regulations NO. 2-98, as amended, however, persons having control of the payment of wages or salaries are authorized to deduct and withhold upon such wages or salaries the withholding tax due thereon.
In this case, the garnishees are the persons owning debts due to the employer or in the possession or control of credits to which the employer are entitled. Accordingly, they are in control of the payment of backwages, allowances and benefits and they are authorized to deduct and withhold the income tax due from the backwages, allowances and benefits to be paid to employees, and are respectively liable for such deductions.
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