Let’s Talk Tax
By Junaleen M. Magno
In February, President Rodrigo R. Duterte signed Republic Act No. 11210 or the 105-Day Expanded Maternity Leave Law (EMLL). The expanded maternity leave benefits under the EMLL are fully tax-exempt. This is the interpretation issued by the BIR in RMC 105-2019. Indeed, this is a deserved tax break for working mothers.
Under the law, all covered female workers in the private and public sector, including those in the informal economy, regardless of civil status or the legitimacy of the child, is entitled to 105 days of maternity leave, a considerable increase from the initial 60 days, or 78 days in case of caesarian section, with an option to extend for an additional 30 days without pay.
In addition, the law also mandates full pay. Under the old law, the maternity benefit does not add up to 100% of the employee’s compensation. It is computed only based on the average daily salary which is obtained by dividing the sum of the female member’s six highest monthly salary credits in the twelve-month period preceding the semester of contingency by 180 days:
Average daily salary = [(monthly salary credit x 6)/180]
The monthly salary credit, on the other hand, is based on the Schedule of Contribution of the SSS, wherein the maximum monthly salary credit for the year is only P20,000. The average daily credit multiplied by 60 days, which is the previous number of maternity leave credits, will be the total benefit due. Hence, this cannot reach the full pay.
Under Section I.j. of Rule II of the Implementing Rules and Regulations (IRR) of the Act jointly issued by the Civil Service Commission (CSC), Department of Labor and Employment (DoLE) and Social Security System (SSS), the term “full pay” is defined as:
“…actual remuneration or earnings paid by an employer to a worker for services rendered on normal working days and hour not lower than the wage rate fixed by the Regional Tripartite Wages and Productivity Board (RTWPB) including allowances provided for under existing company policy or collective bargaining agreement, if any. Full pay in the public, on the other hand, includes the basic salary and allowances as may be provided under existing guidelines”
Although the law mandates full pay, this will still be partly shared by the SSS and the employer. The SSS will contribute based on the old formula on average daily salary. The payment of the salary differential representing the difference between the SSS-paid benefit and the employee’s basic pay, will be mandatorily shouldered by the employer.
Previously, payment of the salary differential was not mandatory and only upon discretion of the employer.
With the new law, female workers availing of maternity benefit will now receive full pay which consists of the SSS maternity benefit based on their average daily salary credit and the salary differential, if any. This ensures that the employee will still receive the equivalent of full pay while on maternity leave.
While employers are now required to pay the salary differential, the new law also listed certain establishments that may be exempted from paying the salary differential subject to compliance with certain requirements.
(1) Those operating distressed establishments;
(2) Those retail/service establishments and other enterprises employing not more than 10 workers;
(3) Those considered micro enterprises and engaged in the production, processing, or manufacturing of products or commodities including agro-processing, trading, and services, whose total assets are not more than P3 million; and
(4) Those who are already providing similar or more than the benefits herein provided.
Here lies the question: Will the salary differential continue to be a taxable benefit? Before the enactment of RA 110210, any salary differential given by employers is treated as a taxable benefit since the income tax exemption under the Tax Code only covers the SSS maternity benefits, i.e., the amount reimbursed by SSS to the employer. Unfortunately, there is nothing in the Expanded Maternity Leave Law that provides for the tax exemption of the salary differential.
In July, DoLE issued Department Advisory (Series of 2019) which provides the guidelines on the computation of salary differential of female workers during maternity leave and the criteria for exemption.
Under Item II. Computation of Salary Differential, the guidelines provide that the amount of salary differential are to be treated as taxable income of the female worker subject to the rules and regulations of the Bureau of Internal Revenue.
But lo and behold, with less than a hundred days before Christmas, the Bureau issued a memorandum circular to clarify the proper tax treatment of the salary differential to be paid by the employer under the 105-Day Expanded Maternity Leave Law. With the issuance of Revenue Memorandum Circular (RMC) No. 105-2019, the Bureau clarified that salary differential paid by the employer should be treated as tax-exempt benefits.
Based on the cited provisions of the new law, wherein the maternity benefit has been expanded from the previous 100% of the average daily credit to full pay or salary including the salary differential as its component, the BIR now interpreted that indeed the salary differential is considered a benefit. Under Section 2.78.1(B)(1)(e) of Revenue Regulations (RR) No. 2-98, as amended, the payments of benefits made under the Social Security Act of 1954, as amended, are exempt from withholding tax.
It is the Bureau’s interpretation that the salary differential is considered a benefit under the Social Security Law. Therefore, the Bureau concludes that the salary differential, in addition to the SSS maternity benefit, is to be exempt from withholding tax on compensation.
Another question being raised is the effectivity of the RMC. Will the adjustments be prospective or retrospective? Will it have the same effectivity as the RA 1011210 or the 105-Day Expanded Maternity Leave Law? The effectivity of the memorandum circular must be clearly stated for everyone’s guidance.
The simplest answer is this should apply prospectively to all female employees who availed of maternity leave credits on or before March 11, 2019, which is the effectivity of the Expanded Maternity Leave Law.
While childbirth is indeed a gift and a blessing to the family; it brings not only joy, but also entails some additional expenses. Having a newborn child would also mean additional expenses for their necessities — clothing, diapers, feeding bottles, vitamins, infant formula, and the like, not mentioning the cost of hospitalization. These additional expenses are just a few of the challenges new mothers and soon-to-be mothers are and will be facing.
With this recent issuance, somehow the weight of the additional expenses to be incurred by new mothers and soon-to-be mothers will be reduced, knowing that they can now receive their full salary, while they are on maternity leave, tax-free.
Christmas came early for those female employees who availed of maternity leave following the enactment of RA 101120 on March 11. Truly, it is a well-deserved tax break for working mothers.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Junaleen Magno is a senior of Tax Advisory & Compliance
division of P&A Grant Thornton