BIR Ruling [DA-026-05]

January 21, 2005 BIR RULING [DA-026-05] Sections 32 (B) (7) (e) (iv) & 33 (c); BIR Ruling No. 128-99 Lufthansa Technik Philippines, Inc . Macro Asia Special Economic Zone Villamor Air Base, Pasay City Attention: Mr . Nikolaj Shcmolcke VP-Finance/DCFO Gentlemen : This refers to your letter dated September 9, 2004 requesting for a confirmation of your opinion that the performance bonus (bonus) given by Lufthansa Technik Philippines, Inc. (LTP) to its employees, except those holding the position of Vice President, Senior Vice President and President, is not subject to tax. It is represented that LTP is a corporation duly registered under the laws of the Philippines and registered with the Philippine Economic Zone Authority under Certificate of Registration No. 00-070 dated August 31, 2000, to engage in the maintenance, repair and overhaul of aircraft, engine and components at the MacroAsia Economic Zone, Villamor Airbase, Pasay City; that the bonus is granted to all LTP employees to encourage them to achieve certain targets set by LTP, to avoid payment of penalties to customers; that under the service contract agreement between LTP and its customer, in case LTP incurs a delay in the delivery of its services due to its own fault, LTP shall pay the corresponding penalty that the bonus is given to LTP employees if the following conditions are met: 1) achievement of 98% maintenance original dispatch reliability; and 2) zero technical incidents per week; that dispatch reliability means the percentage flights, which depart without incurring a delay (technically originated) or cancellation (technically originated); that technical incidents shall mean the following: 1) any new maintenance overrun including AD/CN; 2) any damage to an aircraft, engine, components, or unsafe/non-airworthy condition thereof caused by faulty workmanship and/or non-compliance with standard practices/technical procedures and/or company procedures; 3) any finding of faulty workmanship and/or non-compliance with standard practices/procedures that, if undetected, could have resulted in damage of an aircraft, engine, components, or an unsafe/non-airworthy condition thereof; and 4) any case of incompletely and/or improperly accomplished release-to-service documentation; that the performance is measured on a weekly basis; and that once the two (2) conditions are met, LTP employees are entitled to the performance bonus based on their job grade classification: 1) job grades A to D P350.00/week; and 2) job grades E to E P700.00/week. 2005cdtai In reply, please be informed that under Section 32(b)(7)(e)(iv) of the Tax Code of 1997, "other benefits" include all benefits other than the 13th month pay, such as, the annual Christmas bonus given by private offices, 14th month pay, mid-year productivity incentives bonus, gifts in cash or in kind and other similar benefits and refer to those benefits received by an official or employee for one (1) calendar year, the total amount of which including the 13th month pay does not exceed P30,000.00. SEHaDI The performance bonus to be given by LTP to its employees can be equated to a productivity incentive bonus which may be considered as falling within the contemplation of "other benefits" provided for under Section 32(B)(7)(e)(iv) of the Tax Code of 1997, and therefore, need not form part of the employees' taxable compensation income subject to withholding tax on wages under Section 79 in relation to Section 24(A) both of the Tax Code of 1997, provided, however, that such "other benefits," inclusive of the above allowances/benefits, shall not, in the aggregate, exceed P30,000.00 when added to the 13th month pay. Moreover, Section 33(C) of the Tax Code of 1997 as implemented by Section 2.33(C) of Revenue Regulations (Rev. Regs.) No. 3-98, as amended by Rev. Regs. No. 8-2000 and 10-2000, provides, viz: "(C) Fringe Benefits Not Subject to Fringe Benefits Tax The following benefits are not taxable under this Section: (1) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not; (4) De Minimis benefits as defined in these Regulations; (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 the fringe benefit is for the convenience of the employer ." (Emphasis supplied.) Accordingly, the performance bonus is not subject to the fringe benefits tax also since it addresses the employer's concern in achieving certain targets and avoiding the payment of penalties arising from delays in the delivery of its services under the service contract agreement between LTP and its customer, which in effect redounds to the convenience of the employer. The amount of "de minimis" benefits conforming to the ceiling prescribed shall not be considered in determining the P30,000.00 ceiling of "other benefits" provided under Section 32(B)(7)(e) of the Code. However, if the employer pays more than the ceiling prescribed by the Regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30,000.00 ceiling. Provided, further, that any amount given by the employer as benefits to its employees, whether classified as "de minimis" benefits or fringe benefits, shall constitute as deductible expense upon such employer pursuant to Section 2.78.1(A)(3) of Rev. Regs. No. 8-2000, as amended. Section 2 of Rev. Regs. No. 8-2000, as amended, clarifies that "de minimis" benefits and "other benefits" are not the same. For purposes of determining the P30,000.00 ceiling in "other benefits," the two are treated differently in that "de minimis" benefits are not considered in computing P30,000.00 ceiling in "other benefits." The regulations did not provide for a ceiling in "de minimis" benefits. However, it provided for a limit in the amount of each "de minimis" benefit (e.g., rice subsidy should not exceed P1,000.00 per month). Both "other benefits" and "de minimis" benefits do not form part of the employees' taxable compensation income and are, therefore, not subject to withholding tax on wages under Section 79 in relation to Section 24(A) both of the Tax Code of 1997. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group