KMBI

Partner for a progressive life

DATE : 23 February 2016
FOR

:
SUBJECT

MS. MAYLANIE D. APAWAN,

Department

Legal Manager, Legal

Legal Opinion: Exemption of Tax to Minimum Wage

Earners

The Legal Department renders an opinion on the main issue of: WHETHER
OR NOT KMBI SHOULD ADJUST THE TAX TREATMENT OF THEIR
NEWLY HIRED EMPLOYEES FOR THE TAXABLE YEAR 2015.
This issue sprouts from the conflicting claims of some employees of KMBI
and the Human Resource Department about the taxability of minimum
wage earners. The employees who were employed from March-July 2015
and then again from September 2015 with continues employment until
June 2016, complains that since they are receiving their salary as minimum
wage earners they should be exempted from the payment of the income
tax. The Human Resource Department, on the other hand, opposes this
view by asserting that the said employees are earning 1.14% more than the
prescribed daily minimum wage which effectively puts them out of the ambit
of tax exemption.
Analyzing these conflicting issues however, the Legal Department believes
that there is a misapplication of the appropriate laws on the taxability of
daily paid employees. Hence, it thinks that the organization should adjust
the income tax treatment of the subject employees for the taxable year
2015 until the end of their employment contract.
Nevertheless, for broader perspective, this opinion still hopes to aid the
organization in the future in its interpretation of pertinent tax and labor law
provisions on minimum wage earners.
Going back to the facts of this case, the following sub-issues should be
considered in the settlement of the parties conflicting positions:
1. Whether or not the subject employees are minimum wage
earners thus exempted from the payment of the income tax;
2. Whether or not the Human Resources Department applied the
applicable legal provisions correctly in assessing the taxability
of the subject employees;

3. Whether or not a change should be implemented in the

imposition or non-imposition of income tax to the subject
employees.
Looking above, it can be seen that answering these issues touches the
core of the respective positions of each of the parties involved. It can be
safe to assume therefore that the parameters of this opinion lies on these
basic issued to be resolved. Hence, a persuasive answer would bring the
matters at a hault.

I.
The first issue to be touched is whether or not the subject employees are
minimum wage earners thus exempted from the payment of the income
tax.
This argument is based mainly on the routinary treatment of the said
employees ever since from the beginning of their employment last March
2015. At the back of their minds they have been constantly told that they
are minimum wage earners. Who can actually blame them if even their
payslips as attached in this document would even show the basis of this
treatment.
The question now is, are they correct?
The Legal Department begs to disagree. They are not minimum wage
earners.
Minimum wage earners refer to a worker in the private sector who are
paid the statutory minimum wage or to an employee in the public sector
with compensation income of not more than the statutory minimum wage in
the non-agricultural sector where he/she is assigned." (Sec. 1, R.A. 9504).
Statutory Minimum Wage, on the other hand, refers to the rate fixed by
the Regional Tripartite Wage and Productivity Board (RTWPB), as defined
by the Bureau of Labor and Employment Statistics (BLES) of the
Department of Labor and Employment (DOLE). The RTWPB of each region
shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for
this purpose (Revenue Regulation 10-2008, Sec. 1 [B]).
These definitions provide parameters for the proper meaning of minimum
wage earner.application of tax laws to an employees income.
In the instant case, the

In addition Art. 99 of the Labor Code, which explicitely provides that:

The minimum wage rates for agricultural and nonagricultural employees and workers in each and every region of
the country shall be those prescribed by the Regional Tripartite
Wages and Productivity Boards.
The minimum wage and the statutory minimum wage is therefore founded
on an unambiguous, unfaltering, established legal basis. When the law is
clear urther
definCurrently, the statutory minimum wage rate for the
National
Capital
Region
is
Php.
481.00
per
day.
(http://www.nwpc.dole.gov.ph/pages/ncr/cmwr.html). It has a specific
computation as defined under Section 2. of Revenue Regulation 10-2008.
Now, it appears from the facts of the concerned employees that they are
receiving from the time they were hired until now, the salary of Php 10,
582.00 as computed by the Human Resource Department (HRD).
The HRD posits that the salary of the concerned employees should be
subjected to tax because they are earning above the monthly minimum
wage rate of Php 10, 461.75. This is on the basis of a Php 486.52 daily
wage rate compared to the Php 481.00 daily minimum wage rate computed
as follows:
MINIMUM WAGE RATE IMPOSED
BY LAW
Daily Minimum
Wage
Multiply No. of
paid days/year
Annual Earnings
Divided by 12
Months
Equivalent
Monthly Rate

WAGE COMPUTED BY THE HRD

481
261 days
125, 541.00
12
Php 10,461.75

Php 10,582.00
Multiply
12
months
Annual Earnings
Divided by No. of
paid days/year
Daily Rate

12 months
126, 984.00
261

Php
486.52
(Above minimum
rate 1.14%)
As explained by the HRD in an internal letter with to the Legal Department
for the clarification of this issue, they articulated that using the 261 days as
mentioned above, the resulting equivalent number of working days in a
month equals to 21.75 and that for practical reason, KMBI rounded it off to
22 days per month since 2008. They further said that in effect, KMBIs
salary entry rate (minimum/baseline) which is Php 10, 582.00 is technically
over and above the minimum daily wage by 1.14%. They also said that as
per appointment paper issued to our concerned employees, the monthly

salary reflected is Php 10, 582.00 and not the daily rate of Php 481.00.
Finally they concluded, that based on the above explanation, the
employees concerned are considered not a minimum earner primarily
because:
1) Their equivalent monthly rate of Php 10,582.00 is over and above the
equivalent monthly rate of daily wage earner which is Php 10, 461.75;
2) The treatment for the concerned employees are monthly earners not
daily wage earners.
The position of the HRD is based only on one argument: the employees
concerned are taxable because they are not minimum wage earners.
Unfortunately, the LD thinks that this position poses several conflicts in tax
regulations. Judging from the position of the HRD, the main sub-issue in
this case that should be addressed is whether the formula used by our
organization in computing the taxable wage for the concerned employees is
in accordance with the minimum wage law and regulations.
The Legal Department has a different view on the matter. It is in a position
that in the computation of the HRD it violates the provisions of Revenue
Regulation 10-2008, the primary tax regulation governing the exemption
from income tax of minimum wage earners.
Primarily under Section 2 of the said regulation where the provision for the
computation of wages is explained, it states there that in the determination
of the minimum wage on a monthly basis, the withholding agent shall be
guided by the prevailing minimum wage as reflected in the latest Matrix of
Wage Order and its own policy on whether employees are (a) not
considered paid on Saturdays and Sundays or rest days, (b) not
considered paid on Sundays or rest days, (c) considered paid on rest days,
special days and regular holidays, or (d) required to work everyday
including Sundays or rest days, special days and regular holidays. The
resulting number of days in the above enumerated categories are referred
to as the factor or number of working/paid days in a year.
Now, it appears that there is a contradiction
Whether or not the increase is significant
Whether or not the elimination of the salary difference and reverting it to the
minimum wage is against the Law
Art. 100. Prohibition Against Elimination or Diminution of Benefits- Nothing
in this Book shall be construed to eliminate or in any way diminish

supplements or other employee benefits being enjoyed at the time of

promulgation of this Code.
Commentary:
1. Separate Concurring Opinion of Justice Arturo D. Brion in the case of
Arco Metal Products, Inc. vs. Samahang ng mga Manggagawa sa
Arco Metal-NAFLU (SAMARM-NAFLU), G.R. 170734, May 14, 2008,
where he clarified that the basis for the prohibition against diminution
of established benefits is not really Article 100 of the Labor Code as
the respondents claimed and as the cases cited in the ponencia
mentioned. He emphasized therein that Article 100 refers solely to the
non-diminution of benefits enjoyed at the time of the promulgation of
the Labor Code. He thus posited that employer-employee relationship
is contractual in nature and is based on the express terms of the
employment contract as well as on its implied terms, among them,
those not expressly agreed upon but which the employer has freely
voluntarily and consistently extended to its employees. Under the
principle of mutuality of contracts embodied in Article 1308 of the Civil
Code, the terms of a contract-both express and implied-cannot be
withdrawn except by mutual consent or agreement of the contracting
parties.
2. So in other words, only by mutual consent can the salaries be
lowered to meet the minimum wage rate.
3. Tiangco vs. Leogardo, Jr. [G.R. L-57636, May 16, 1983], the principle
of non-diminution of benefits is founded on the Constitutional
mandate under Section 18 of Art. II thereof to protect the rights of
workers and promote their welfare, and Section 3 of Artcle XIII to
afford labor full protection. Said mandate in turn is the basis of Art.4
of the Labor Code which states that all doubts in the implementation
and interpretation of this Code, including its implementing rules and
regulations shall be rendered in favor of Labor.
Whether or not the elimination or diminution of benefits constitutes
demotion
The illegal and unjustified elimination or diminution of certain benefits may
result in illegal demotion. Under established jurisprudence, there is
demotion where the act of the employer results in the lowering in the
position or rank or reduction in salary of the employee. (Phil. Wireless, Inc.
vs. NLRC, G.R. No. 112963, July 20, 1999; Brillantes vs. Guevarra, G.R. L22586, February 27, 1969; Fernando vs. Sto. Tomas, G.R. No. 112309,
July 28, 1994)

Whether or not the elimination or diminution of benefits constitutes

constructive dismissal.
Elimination or diminution of certain benefits may result in the constructive
dismissal of an employee. Constructive dismissal is an involuntary
resignation resorted to when continued employment is rendered
impossible, unreasonable or unlikely; when there is a demotion in rank
and/or a diminution in pay; or when a clear discrimination, insensibility or
disdain by an employer becomes unbearable to the employee that it could
foreclose any choice by him except to forego his continued employment.
(Unicorn Safety Glass, Inc. vs. Basarte, G.R. 154689, Nov. 25, 2004;
Uniwide Sales Warehouse Club. vs. NLRC, G.R. 154503, Feb. 29, 2008;
Chiang Kai
Whether or not the salary can no longer be reduced because of Company
practice
With regard to the length of time a certain act should have been done in
order for it to constitute voluntary employer practice which cannot be
unilaterally withdrawn by the employer, jurisprudence has not laid down any
exact or definitive rule requiring a specific minimum number of years. The
following criteria, however, have been used to ascertain the existence of a
binding and enforceable company practice.
1. The act of the employer has been done for a considerable period of
time.
2. The act should have been done consistently and intentionally.-the
intention to make a certain act a company practice may be logically
inferred from the peculiar circumstances obtaining in each case.
3. The act should not be a product of erroneous interpretation or
construction of doubtful or difficult question of law or provision in the
CBA

Whether or not there is wage distortion.

Whether or not the reversion to the minimum wage is a form of tax evasion
hits a brick wall
For your consideration,

Sincerely,
HENDRICK CARLO C. GARCIA

Legal Assistant
Noted by:

MAYLANIE D. APAWAN
Legal Services Office Manager
The 481 has a specific application in the law
It uses 261 days as a factor not 264
That is why 10461 is divided by 21.75 equals to 481
But if we are going to use 22 for 10461 which uses the 481 daily rate
The resulting number would be only 475.5
That is why we do not use 481
Why not 22 on a 481 because the law specifies that 481 has a specific
factor which is 21.75 which is equivalent to 261
The proper way of computing should be why not 481 on a 22 because it
has been specified that what should be used is 21.75 which is equivalent to
261
That is why10,461 uses 21.75 as a divisor which is equivalent to 481
If we use 22 as a divisor to 10461, it will result only to 475.5 which is below
the minimum wage rate.
So as a conclusion, the 481 has a specific factor which is 261 as provided
by revenue regulation 10-2008
So what should be done?
If we are going to use 22 as a factor the minimum duly wage for daily paid
workers should be above 481.
Let us say it is 482 for instance.
The computation would be as follows:
482 x 22 = 10,604
Now let us determine if this is above the minimum wage
10, 604 x 12= ? / 261= 487.54
What about the 10582 salary?

LEGAL OPINION ON MINIMUM WAGE EARNERS IMPOSITION OF TAX

FACTS: 1. EMPLOYEES ARE EARNING 10, 582.00
The computation is based on the formula 481 x 264 = 10,
582.00/yr (12 months)
481 is the current minimum wage in NCR
Under RR 10-2008, a regulation for minimum wage earners,
applies 261 as a divisor
481 x 261 = 10, 461.75/yr (12 months) is supposed to be paid per
month to a minimum wage earner
261 is fixed by law
If the
Concept
The principle of non-diminution of benefits states that: any
benefit and supplement being enjoyed by employees cannot be
reduced, diminished, discontinued or eliminated by the
employer.[1]
This principle is founded on the Constitutional mandate to
protect the rights of workers and promote their welfare, and to
afford labor full protection. Said mandate in turn is the basis of
Article 4 of the Labor Code which states that all doubts in the
implementation and interpretation of this Code, including its
implementing rules and regulations shall be rendered in favor of
labor.[2]
Benefit and supplement definition
Employee benefits are compensations given to employees in
addition to regular salaries or wages. [3] Some benefits are legally
required, e.g., social security benefits, medicare, retirement
benefits, maternity benefits,service incentive leave, etc. Other
benefits are offered by the employer as an incentive to attract
and retain employees as well as increase employee morale and
improve job performance.[4]

Supplements include those benefits or privileges granted to an

employee for the convenience of the employer, e.g., board and
lodging within the company premises.
Common application
In employment setting, the principle of non-diminution of benefits
finds application when a change initiated by the employer to
existing company policies, specially matters concerning employee
benefits, results in reduction, diminution or withdrawal of some or
all of the the benefits already enjoyed by the employees. For
example, if the employees of a certain company is traditionally
granted 14th month pay, and the employer subsequently
withdrew such benefit, or reduced its amount, the reduction or
withdrawal is objectionable on the ground that it would result to
diminution of benefits.
Requirements
The application of the principle presupposes that a company
practice, policy and tradition favorable to the employees has been
clearly established; and that the payments made by the company
pursuant to it have ripened into benefits enjoyed by them. [5]
To ripen into benefits, the following requisites must concur:
1.
2.

1.

2.

3.

4.

It should have been practiced over a long period of time; and

It must be shown to have been consistent and deliberate. [6]
With regard to the length of time the company practice should
have been exercised to constitute voluntary employer practice
which cannot be unilaterally withdrawn by the employer, the
Court has not laid down any rule requiring a specific minimum
number of years.[7]
In the case of Davao Fruits Corporation vs Associated Labor
Unions (G.R. No. 85073, August 24, 1993), the company practice
lasted for six years.
In Davao Integrated Port Stevedoring Services vs.
Abarquez (G.R. No. 102132, March 19, 1993), the employer, for
three years and nine months, approved the commutation to cash
of the unenjoyed portion of the sick leave with pay benefits of its
Intermittent workers.
In Tiangco vs Leogardo, Jr. (G.R. No. L-57636, May 16, 1983),
the employer carried on the practice of giving a fixed monthly
emergency allowance from November 1976 to February 1980, or
three years and four months.
In the case of Sevilla Trading Company vs Semana, ibid., the
employer kept the practice of including non-basic benefits such as
paid leaves for unused sick leave and vacation in the computation
of their 13th-month pay for at least two (2) years.

In all these cases, the grant of benefits has been held to have
ripened into company practice or policy which cannot be
peremptorily withdrawn.
1.

See MERALCO vs Quisumbing, G.R. No. 127598, January 27,

1999,http://sc.judiciary.gov.ph/jurisprudence/1999/jan99/127598.
htm.
2.
See Sevilla Trading Co vs Semana, G.R. No. 152456, April
28,
2004,http://sc.judiciary.gov.ph/jurisprudence/2004/apr2004/1524
56.htm.

http://www.bir.gov.ph/index.php/registrationrequirements/primary-registration/application-for-tin.html#one
https://www.scribd.com/doc/81916268/New-Income-Tax-ReturnBIR-Form-1701-November-2011-revised
http://businesstips.ph/new-revised-income-tax-return-bir-forms/
http://www.philippinecpa.com/2011/06/withholding-tax-rr-298.html
https://www.google.com.ph/?
gfe_rd=cr&ei=dI_BVoelDYjF0ATFw72IDw#q=rr+102008+text+file
ftp://ftp.bir.gov.ph/webadmin1/pdf/42126rr%20no.%20102008.pdf
http://www.dole.gov.ph/news/view/2756
ftp://ftp.bir.gov.ph/webadmin1/pdf/42126rr%20no.%20102008.pdf