BIR Ruling

March 1, 1974 MEMORANDUM FOR: The Honorable The Secretary of Finance This refers to your Memorandum dated February 20, 1974 requesting the views of this Office on the tenability of the continued application of the provisions of Section 6 of Republic Act No. 708, as amended, otherwise known as the "Foreign Service Act," in view of the provisions of Section 6, Article XV of the New Constitution which states that "no salary or any from of emolument of any public officer or employee, including constitutional officers, shall be exempt from the payment of income tax." Section 6(a) of Republic Act No. 708 as amended by Republic Act No. 4112 approved on June 20, 1964 reads as follows: "SEC. 6. Exemption from taxation . (a) All allowances, per diems , benefits, and the like received by officers and employees of the service in consideration of their service, except their basic salaries, shall be exempt from the Philippine income tax." The Honorable, the Secretary of Justice has expressed his opinion on this matter in a letter dated February 5, 1974 to the Honorable, the Secretary of Foreign Affairs. This Office agrees with the following portion of said opinion as regards the meaning and scope of the word "emolument' as used in the above-quoted provision of the constitution. cdti "The word 'emolument' as used in the Constitution ought to be construed to refer to compensation or remuneration for service rendered, including those received by a public officer or employee in lieu of, or in addition to, the salary fixed for his position. It can have no reference to allowances for certain expenses which are incident to, or incurred, or expected to be incurred, in the discharge of official duties, as long as such allowances are not intended as increases of, or addition of salary but merely to relieve and an officer who receives a fixed salary or compensation from expending such salary for expenses incident to the performance of his duties." The secretary of Justice is of the opinion that living quarters allowances, post allowances, representation allowances, clothing allowances, "per diems" and travelling expenses, all of which are provided in Title VI, Part A, B & C of the Foreign Service Act are not considered emoluments within the purview of the above-quoted constitutional provision. It should be noted that living quarters allowances are exclusively intended to enable the foreign service officers to meet the rentals of suitable quarters, including utilities and maintenance thereof, and thus live in a manner befitting their representative capacities. The post allowances are given to any post to defray the unusual expenses incident to the operation and maintenance of an official residence suitable for the chief diplomatic or consular representative of the Philippines at that post. Post allowances are payable only when the officer is on duty status at his station. The representation allowances are given to principal officers of mission to enable said officers to uphold the prestige of the Republic of the Philippines to represent their country with dignity and distinction, and to carry out their functions more effectively. Said representation allowances are expended only for purposes which are of a public character, beneficial to the interest of the public service and connected with the exercise of the functions of the government in relation to the conduct of foreign affairs. The clothing allowances are fixed by law according to rank. It is enjoyed only by those assigned abroad, an indication that it is intended for expenses incident to the discharge of their official duties while assigned to a foreign post. The Secretary of Justice is, therefore, correct in stating that the clothing allowance contemplated in the Foreign Service Act is clearly an allowance to relieve him of an expense incident to or expected to be incurred in the discharge of official duty. The "per diems" are given to foreign service officers and employees on travel status or an assignment outside their regular post. When meals are included in the fare of any carrier, no "per diems" are allowed but service allowances equal to 50% of the "per diems" authorized shall be paid to the traveller. The travelling expenses are incurred when duly authorized by the Secretary of Foreign Affairs and consist of actual cost of transportation for the official or employee and his dependent. It is clear that the foregoing allowances, "per diems" and travelling expenses are incurred for the interest and benefit of the government and not for the personal benefit of the foreign service officer. In the case of living quarters allowances, the general rule is that they constitute income subject to tax. However, were the living quarters are furnished for the convenience of the employer, the ratable value of the same need not be added to the salary of cash compensation of the employee for income tax purposes. (Henderson vs. Collector, CTA Case No. 237, June 27, 1957). cd Pertinent portion of Section 2, Revenue Regulations No. V-8, or The Withholding Tax Regulations provides: "SEC. 2. Wages (a) In general . . . . xxx xxx xxx "If a person receives as remuneration for services rendered a salary and in addition thereto living quarters or meals, the value to such person of the quarters and means so furnished shall be added to the remuneration otherwise paid for the purpose of determining the amount of wages subject to withholding. If, however, living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as wages subject to withholding ." "(c) Travelling and other expenses . Amounts paid specifically either as advances or reimbursements for travelling or other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred in the business of the employer are not wages and are not subject to withholding . Travelling and other reimbursed expenses must be identified either by making a separate payment or by specifically indicating the separate amounts where both wages and expense allowances are combined in a single payment." xxx xxx xxx (Emphasis ours) It is, therefore, apparent that in the case of living quarters and travelling expenses, their exemption from income tax is based on the fact that they are incurred more for the interest and benefit of the employer and not for the personal benefit of the employee. It is believed that the same bases can be applied in the case of the other allowances and "per diems" mentioned above. In other words, since it cannot be denied that the living quarters allowances, post allowances, representation allowances, clothing allowances, "per diems" and travelling expenses given to foreign service officers and employees under the Foreign Service Act are for the interest and benefit of the Government, they should not be treated as compensation for income tax purposes. In this connection, as provided in Section 6, Part A, Title VI, of Republic Act No. 708, as amended, "all such allowances and allotments as are provided in this act shall be accounted for to the Secretary in such manner and under such rules and regulations as the President may prescribed." In other words, a foreign service officer must account for the expenses actually incurred by him and if the allowances, "per diems" and travelling expenses received exceed the expenses incurred, he is subject to income tax on the excess. " Adequate accounting eliminates reporting allowances and reimbursements . An employee who accounts to his employer for ordinary and necessary business expenses incurred solely for the employer's benefit is not required to include in his income tax return the amount he receives as an allowance or reimbursement. But the employee must state in his return that amounts received as reimbursement or other allowance did not exceed his ordinary and necessary business expenses. If the amounts received by the employee or paid on his behalf exceed his expenses, the employee must include the excess in income and state on his tax return that he has done so." (34, Am. Jur. 2d. 297) Such being the case, the following rule on travelling expenses as provided in Section 66 of Revenue Regulations No. 2, or the Income Tax Regulations may be applied: "SEC. 66. Traveling expenses . Traveling expenses as ordinarily understood, include transportation expenses and meals and lodging. If the trip is undertaken for other than business purposes, the transportation expenses are personal expenses, and the meals and lodging are living expenses, and therefore, not deductible. If the trip is solely on business, the reasonable and necessary traveling expenses, including transportation expenses, meals and lodging, become business instead of personal expenses . xxx xxx xxx "(b) If an individual receives a salary and is also repaid his actual traveling expenses, he shall include in gross income, the amount so repaid and may deduct such expenses ." "(c) If an individual receives a salary and also an allowance for meals and lodging, as for example, a per diem allowance in lieu of subsistence, the amount of the allowance should be included in gross income and the cost of such meals and lodging may be deducted therefrom ." (Emphasis ours) In other words, the allowance, "per diems" and travelling expenses should be included as part of the gross income and deduct therefrom the actual expenses incurred. It may be stated that the foregoing rules were applied by that Department in a letter dated March 15, 1968 to this Office in the case of Central Bank officials in the sense that their allowances for transportation and representation should be included as part of their gross income but their expenses may be claimed as deductions provided that they are substantiated. Cost of living allowance However, as regards the cost of living allowance, it appears that the same is granted to a foreign officer or employee while assigned abroad. As correctly stated by the Secretary of Justice gleaned from Section 2, Part A, Title VI of Republic Act No. 708, as amended, "This allowance is intended to augment the employees' salary to cushion the presumed increase in the cost of living abroad." It can be spent as the employee pleases, like his basic salary, Hence, the cost of living allowance should be treated as additional compensation and, therefore, subject to tax. Benefits In this connection, the above-quoted provision of Section 6 of Republic Act No. 708, as amended, also exempts certain benefits received by a foreign service officer from payment of income tax. Said benefits consists of loan of household equipment; medical service; cost of preparing and transporting remains of an officer or employee of the service and members of his family who die abroad; subsistence and living expenses of family of deceased officer or employee while abroad; leave of absence consisting of accumulated leave and home leave. It is believed that these benefits are more for the personal benefit of the foreign service officer. Hence, they should be treated as emolument as used in the constitutional provision which are not longer exempt from income tax. Recapitulation The living quarters allowances, post allowances, representation allowances, clothing allowances, "per diems" and travelling expenses, are exempt from income tax since they are not considered compensation for service rendered by the foreign service officer. However, the amounts actually received must be included as part of their gross income and deduct therefrom the expenses incurred duly substantiated. cdta The cost of living allowances as well as the benefits received be a foreign service officer are subject to income tax. Respectfully submitted: MISAEL P. VERA Commissioner of Internal Revenue