BIR Ruling [DA-023-06]

January 27, 2006 BIR RULING [DA-023-06] DA 350-04 Isla Lipana & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Ms. Myrna M. Fernando Partner Gentlemen : This refers to your letter dated October 18, 2005 stating that your client, Sykes Asia, Inc. (Sykes) is one of the largest call centers in the Philippines whose clientele are mainly based outside of the Philippines; that in order for Sykes to deliver the desired services to customers located at different time zones, it conducts its business on a 24-hour basis; that to enable it to man this operation set-up, Customer Service Representatives (CSRs), whether probationary or regular, are made to work at designated hours, including night time; that in certain instances, employees may have to work overtime even after their shift ends; that Sykes, in recognition of the added risk that its CSRs take on having to commute to and from work during the graveyard/night shift, i.e., work shift starting or ending at anytime between 10:00 p.m. to 6:00 a.m., provides the CSRs with transportation subsidy, which, under the company's policy, is called "hazard pay"; that in the same light, Sykes provides a transportation allowance for any employee, which may include CSRs, who renders overtime work for at least four (4) hours per day; that due to the additional hours that these employees have to put up with to meet the demands of their work, your client believes that they would be too fatigued to take public transportation, thus, requiring the use of taxis; that the hazard pay and the overtime transportation allowance on regular days are equivalent to one-way transportation allowance corresponding to the prevailing rates of taxi fare; that the overtime transportation allowance on rest days and holidays, on the other hand, is equivalent to two-way transportation, also based on the prevailing taxi rates; that these benefits are automatically computed based on attendance and recorded shift code in the company's Human Resource Information System; that the amount of hazard pay or transportation allowance given to each CSR/employee ranges from P100 to P220 per day, depending on the location of the residence of the CSRs/employees, and which is credited to their account along with their semi-monthly payroll; that the CSRs who are assigned to daytime shift or employees who do not render overtime work do not receive any of these benefits; that the hazard pay and transportation allowance are intended to cover the additional transportation expenses of the employees working the night shift or rendering overtime who are forced to use taxis in coming to and going home from work for security and health reasons and due to unavailability of public transportation; that since call center support happens real-time, it is essential that CSRs report on time on their designated shift; that time then, is a critical factor in the success and profitability of Sykes' operations; that also, to ensure uninterrupted service to their customers, certain employees may be requested to work longer than their regular working hours at various instances; and that the provision of the hazard pay and transportation allowance by Sykes to their CSRs and employees become necessary to ensure that the CSRs come to work on time, to guarantee uninterrupted call center support to its customers around the globe and to promote the health, goodwill and efficiency of its CSRs/employees. Based on the foregoing representations, you now request confirmation of your opinion that the hazard pay and transportation allowance provided to its CSRs and employees who respectively work on night shift and render overtime work for at least four (4) hours are exempt from income tax and fringe benefits tax pursuant to Section 2.78.1(A)(3) of Revenue Regulations No. 2-98, as amended. In reply thereto, please be informed that Section 2.78.1(A)(3) of Revenue Regulations No. 2-98 provides "(3) Facilities and privileges of relatively small value. Ordinarily, facilities and privileges (such as entertainment, medical services, or so-called "courtesy discounts" on purchases), otherwise known as " de minimis benefit ," furnished or offered by an employer to his employees, are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities are offered or furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his employees." ECSHAD Corollarily, in Section 2.33(C) of Revenue Regulations No. 3-98 provides that "(C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits tax shall not be imposed on the following fringe benefits: xxx xxx xxx (5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or profession of the employer; or (6) If the grant of fringe benefits to the employee is for the convenience of the employer." Finally, in Section 2.78.1(A)(6)(b) of Revenue Regulations No. 8-2000 provides that "(6) Fixed or variable transportation, representation and other allowances. xxx xxx xxx (b) Any amount paid specifically, either as advances or reimbursements for traveling, representation and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied: CHATEa (i) It is for ordinary and necessary traveling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and (ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Section 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not required to the employer. Reasonable amounts of reimbursements/advances for traveling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of substantiation and to withholding." Thus, in BIR Ruling No. DA-350-04 dated June 25, 2004 , this Office ruled that "In view of the foregoing, this Office confirms your opinion that the transportation allowance being given by your subsidiaries, Parlance Systems, Inc. and Vocative Systems, Inc. to its customer service representatives are not compensation subject to income tax and consequently, to withholding tax on wages in accordance with Revenue Regulations No. 2-98, as amended. Moreover, since the transportation allowance is pre-computed on a daily basis and are paid to the employee while on an assignment or duty, the said transportation allowance is not subject to the requirements of substantiation and to withholding pursuant to Revenue Regulations No. 2-98, as amended." WHEREFORE, in view of the foregoing , this Office hereby confirms your opinion that the hazard pay and transportation allowance respectively given to CSRs working on night shift and rendering overtime work are exempt from income tax and consequently from withholding tax and from the fringe benefit tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service