Taxwise Or Otherwise

In Manila, you can tell that the Christmas season has begun when street posts and trees are adorned with glittering lights; traffic gets heavier, shopping malls become busier; and Christmas songs start playing on the airwaves. For Filipinos, Christmas is the most awaited holiday of the year, anticipated as early as September. Such festivities, fortunately or otherwise, come with gift-giving traditions and family celebrations that often obligate people to dig deeper into their pockets.

According to reports, an average Filipino family’s earnings goes to food, clothing, utilities, transportation, and education. Managing the family budget becomes even more of a challenge in an inflationary Christmas season. More so if there is a new member of the family, whose inclusion requires an additional allocation from the household budget.

Thankfully, Republic Act (RA) No. 11210 or the Expanded Maternity Leave Law (EMLL) came into effect on March 11. For female workers, the maternity leave period was increased to 105 days with full pay, and an option to extend up to 30 days without pay. Solo mothers can also avail of an additional 15 days of leave.

Full pay consists of the maternity benefit under the Social Security System (SSS) based on the average salary credit plus salary differential, if any, to be paid by the employer. Thus, the expectant or postpartum mother, while away from work, is still compensated even in her absence.

The other good news is the position that the Bureau of Internal Revenue (BIR) has taken on the taxation of the salary differential under Revenue Memorandum Circular (RMC) No. 105-2019. In determining whether or not the salary differential is taxable, the BIR referred to Section 32 of the Tax Code as implemented by Section 2.78.1(B)(1)(e) of Revenue Regulations (RR) No. 2-98, as amended, which provides that “payments of benefits made under the Social Security System Act of 1954, as amended” are exempt from income/withholding tax.

Based on the cited provisions of the EMLL, its implementing rules (IRR), and the respective issuances of the SSS and the Department of Labor and Employment (DoLE), salary differential is considered a benefit. And since Section 2.78.1(B)(1)(e) of RR No. 2-98 does not provide any qualifications in granting tax exemptions for the benefits received under the SSS Law, the salary differential is exempt from income and withholding taxes.

This is truly an answered prayer for a female worker who availed of the EMLL and who, for example, receives an annual salary between P400,000 and P800,000. She will have a tax saving of P15,000 or 25%, assuming that the calculated salary differential is P60,000.

Now, one other question that a female worker who availed of the EMLL during the year may have is whether she will still receive her 13th month pay in an amount equivalent to a full month’s salary.

Based on the Labor Code of the Philippines, employees are entitled to a mandatory 13th month pay, which is paid out not later than Dec. 24 of every year to all rank and file employees, provided they worked for at least one month during the calendar year.

The 13th month pay is calculated as the total basic salary earned during the year divided over 12 months. The amount will be pro-rated if the employee has not been with his employer for the entire year. The “basic salary” of an employee for computing the 13th month pay includes all remunerations or earnings paid by his employer for services rendered, but does not include allowances and monetary benefits, which are not considered or integrated as part of the regular or basic salary, such as the cash equivalent of unused vacation and sick leave credits, overtime, premium, night differential and holiday pay, and cost-of-living allowances.

On this note, can the SSS maternity benefit and the salary differential be considered basic salary to calculate the 13th month pay? The answer is partly no and yes, respectively. On the one hand, the SSS maternity benefit is a benefit given by the SSS and not by the employer, and even before the effectivity of the EMLL, it was DoLE’s stand that this is not part of the 13th month pay computation. On the other hand, salary differential is mandated by law to be paid by the employers and it is further confirmed under Section IV of the DoLE Advisory No. 01-2019 (issued on July 9, 2019) that it shall be considered in the computation.

So, by following the statutory formula, only the salary differential shall be included in the computation of the 13th month pay, but not the maternity benefit received from the SSS. If the employee was on leave for 105 days, her 13th month pay needs to be prorated to exclude the 105 days of her absence. In sum, the concerned female worker would not receive a full 13th month pay, unless the employer generously gives the entire amount of the benefit above what is required by law.

Nonetheless, with the recent enhancements in the maternity benefit, our female workers have much to be grateful for. By expanding their maternity leave, the state acknowledges the vital contribution that mothers give to society. And while those who availed of their maternity leave cannot expect the full amount of their 13th month pay, the additional time off with their newborn, the salary differential, and the savings from the tax exemption of SSS benefits are enough reasons to rejoice this yuletide season.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


May Anne Tolentino is a manager at the Client Accounting Services group of Isla Lipana & Co., the Philippine member firm of the PwC network.

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