BIR Ruling [DA-037-05]

January 28, 2005 BIR RULING [DA-037-05] RR 2-98 BIR Ruling No. DA-250-02; 23-02 & 29-02 Mr. Adelfo B. Castro Office of the Auditor, Commission on Audit Light Rail Transit Authority Administration Bldg., LRTA Compound Aurora Blvd., Pasay City S i r : This refers to your letter dated July 29, 2003 requesting for a ruling on the following: 1) whether or not the salaries, allowances and other benefits paid by the Light Rail Transit Authority (LRTA), a government-owned and -controlled corporation, to expatriates contracted as consultants for services rendered, are taxable; and 2) whether you can require the Authority to remit to the BIR the taxes corresponding to the income of these consultants or compel the officials of the LRTA to withhold taxes. It is represented that these emoluments were coursed through progress billings and charged against the agency's foreign loans, the Japan Bank for International Cooperation (JBIC); and that one of the provisions in the contract for consultancy services states that "all taxes, duties, fees, levies and other impositions (including VAT), under the laws and regulations of the Philippines or political subdivisions or agency thereof (other than personnel who are citizens or permanent residents of the Philippines) shall be for the client's account." In reply, please be informed that the following rules shall generally apply in considering the tax consequences of certain benefits given by employers to their employees, whether rank-and-file, supervisory or managerial: a) In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Tax Code of 1997. Salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Section 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. cCHITA The name and basis by which the remuneration for services is designated is immaterial in determining whether the remuneration constitutes compensation. Thus, fringe benefits, unless specifically excluded from gross income and unless subject to the fringe benefits tax under Section 33 of the Tax Code of 1997, would generally, constitute compensation to the recipient (Section 2.78.1(A), Rev. Regs. No. 2-98, as amended). Furthermore, any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee, except rank-and-file employees as defined, shall generally be understood as fringe benefits, and as such, shall be subject to the fringe benefits tax, unless specifically excluded under the same Code, as implemented according to rules and regulations as are necessary to carry out efficiently and fairly the provisions of the Code (Section 33, Tax Code of 1997, as implemented by Rev. Regs. No. 3-98, as amended). b) Facilities or privileges that are categorized as de minimis benefits under pertinent rules and regulations shall not be included as items of gross income for income tax purposes. They shall not also be included in the computation of the P30,000 threshold for a determination of the items of income that are to be excluded from income under Section 32(B)(7)(e) of the Tax Code of 1997. c) Corollary to this, de minimis benefits are neither subject to income tax on compensation nor to the fringe benefits tax. Furthermore, no withholding tax thereon shall be imposed in view of their exclusion and exemption from tax. d) The following shall be considered as "de minimis" benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank-and-file employees: 1. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees; 2. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month; 3. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00; 4. Uniform and clothing allowance not exceeding P3,000.00 per annum; 5. Actual yearly medical benefits not exceeding P10,000.00 per annum; 6. Laundry allowance not exceeding P300.00 per month; 7. Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; 8. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum; 9. Flowers, fruits, books or similar items given to employees under special circumstances e.g. on account of illness, marriage, birth of a baby, etc., and 10. Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage. AcHEaS e) The gross benefits granted to rank-and-file, supervisory or managerial employees of entities, to the extent of the threshold of P30,000 mandated by Section 32(B)(7)(e) of the Tax Code of 1997, shall not be included as items of gross income and shall, therefore, be exempt from income taxation. Accordingly, such benefits given in excess of the threshold amount shall be taxable to the recipient employee. f) The "other benefits" referred to in Section 32(B)(7)(e)(iv) of the Tax Code of 1997 include all benefits, other than the 13th month pay, such as, the annual Christmas bonus given by private entities, 14th month pay and the like, gifts in cash or in kind and other similar benefits and refer to those benefits received by an employee in a calendar year. g) Revenue Regulations No. 3-98, as amended by Rev. Regs. No. 8-2000 and 10-2000 are illustrative and non-exclusive in the enumeration of what constitutes de minimis fringe benefits. Accordingly, we have ruled that the meal and food benefits granted, although not intended to be used for overtime work, may still be added in the enumeration of de minimis fringe benefits. However, in terms of the de minimis threshold for regular meal and food benefit, the ceiling for benefits of similar nature under Rev. Regs. No. 8-2000 and Rev. Regs. No. 10-2000 should be used as guidelines. Such being the case, meal and food benefits not exceeding 25% of the daily minimum wage may be considered de minimis meal benefit, and therefore, tax exempt. The excess over this amount shall be considered "other benefits" as contemplated under Section 32(B)(7)(e)(iv) of the Tax Code of 1997. The excess of the meal and food allowance given over the de minimis ceiling shall still be exempt provided that it, together with the total amount of "other benefits," shall not exceed Php30,000. h) In keeping with the spirit of the rules and regulations on de minimis benefits, we have ruled that there can be no aggregation of the values set for each item of benefit stated in Rev. Regs. Nos. 2-98 and 3-98, as amended by Rev. Regs. Nos. 8-2000 and 10-2000. The intent of the Regulations is to treat each item of de minimis benefit independently of each other, and we have to give life to that intent. Thus, the Regulations separately provide maximum values for rice allowance and for meal allowance. Accordingly, there can be no aggregation of de minimis values for rice and meal and food benefits. i) The fringe benefits tax is a final tax on the employee, other than a rank-and-file employee, that shall be withheld and paid by the employer on a calendar quarterly basis as provided under Section 57(A) of the Tax Code of 1997. Being a final tax, however, the amount of fringe benefits given shall not be reported as income in the concerned employee's annual tax return consolidation. j) Pursuant to Section 2.33(B) of Revenue Regulations (Rev. Regs.) No. 3-98, the term fringe benefits means any goods, service or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an employee (except rank-and-file employee). k) Section 33 (a) of Republic Act No. 8424 stipulates that fringe benefits which are "required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer" are not subject to the fringe benefit tax. AHDacC l) The benefits given to the employees provided that the same fall under the definition of ordinary and necessary business expense as those enumerated under Section 34(A)(1)(a)(i) of the same Tax Code, are considered as valid deductible expenses of the Company. On the basis of the foregoing and following the pertinent Revenue Regulations on the matter, we proceed to rule on the particular issues raised for our consideration. 1) Section 2.79(B) of Revenue Regulations No. 2-98, as amended categorizes taxable compensation income into regular taxable compensation income and supplementary compensation income. Under the said regulations, regular taxable compensation income includes basic salary, fixed allowances for representation, transportation and other allowances paid to an employee per payroll period. Supplementary compensation is defined by the same regulations as payments made to an employee in addition to the regular compensation such as commission, overtime pay, taxable retirement pay, taxable bonus and other taxable benefits, with or without regard to a payroll period. Accordingly, salaries, allowances and other benefits are subject to income tax as compensation income under Sections 24(A) and 25(B) of the Tax Code of 1997, as the case may be, and consequently, to withholding tax which shall be creditable against the total income tax due of the employee. In view of the foregoing, the income payments to your expatriates is subject to the following rates imposed under the Tax Code of 1997, to wit: a. If a Filipino citizen, whether resident or non-resident, or a resident alien, graduated tax rates of 5%-32%; b. If a non-resident alien engaged in trade or business in the Philippines graduated tax rates of 5%-32%; c. If a non-resident alien not engaged in trade or business in the Philippines 25%. 2) Section 2.57.(B) of Revenue Regulations No. 2-98, as amended, implementing Republic Act No. 8424, "An Act Amending The National Internal Revenue Code, As Amended" relative to the Withholding on Compensation, provides, viz : "Sec. 2.57. Withholding of Tax at Source. (A) . . . (B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in nature." Thus, the withholding tax on compensation income of government employees is creditable in nature. Therefore, pursuant to Section 79(C)(2) of the Tax Code of 1997, the amount deducted and withheld during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24(A) and 25(B) of the same Code. As regards any deficiency or excess in the monthly withholding, Step 6 of Section 2.79(B)(5)(b) of Revenue Regulations No. 2-98, as amended provides that the deficiency tax (when the amount of tax computed in Step 5 is greater than the amount of cumulative tax already deducted and withheld or when no tax has been withheld from the beginning of the calendar year) shall be deducted from the last payment of compensation for the calendar year. If the deficiency tax is more than the amount of last compensation to be paid to an employee, the employer shall be liable to pay the amount of tax which cannot be collected from the employee. The obligation of the employee to the employer arising from the payment by the latter of the amount of tax which cannot be collected from the compensation of the employee must be settled between the employee and employer. The excess tax (when the amount of cumulative tax already deducted and withheld is greater than the tax computed in Step 5) shall be credited or refunded to the employee not later than January 25 of the following year. However, in case of termination of employment before December, the refund shall be given to the employee at the payment of the last compensation during the year. In return, the employer is entitled to deduct the amount refunded from the remittable amount of taxes withheld from compensation income in the current month in which the refund was made, and in the succeeding months thereafter until the amount refunded by the employer is fully repaid. On the basis of the foregoing, the deficiency or excess in the withholding tax on compensation income of government employees, which is creditable in nature, may be reconciled or adjusted at year-end, more particularly during the last payroll period of the employee pursuant to Section 79(C)(2) of the Tax Code of 1997 as implemented by Revenue Regulations No. 2-98, as amended. Moreover, Revenue Regulations No. 3-2002 dated March 22, 2002 provides that employees receiving compensation income from only one employer for one taxable year whose tax due is equal to tax withheld qualify for substituted filing of Income Tax Return (ITR). In substituted filing of ITR, the employer's annual information return (BIR Form No. 1604-CF) may be considered the "substituted" ITR of the employee inasmuch as the information he would have provided the BIR in his own ITR (BIR Form No. 1700) would have been exactly the same information contained in the employer's annual information return. This being the case, the taxpayer has the option to file his ITR for the taxable year involved. Substituted filing applies only if all the following circumstances are present: 1. The employee receives purely compensation income (regardless of amount) during the taxable year; 2. The employee receives the income only from one employer during the taxable year; 3. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; and 4. The employee's spouse also complies with all the three (3) conditions stated above. However, pursuant to Revenue Regulations No. 3-2002 the following individuals are not qualified for substituted filing and therefore, still required to file BIR Form No. 1700 in accordance with existing regulations: "(A) Individuals deriving compensation from two or more employers concurrently or successively at anytime during taxable year. (B) Employees deriving compensation income, regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or refundable return. (C) Employees whose monthly gross compensation income does not exceed Five Thousand Pesos (P5,000.00) or the statutory minimum wage, whichever is higher, and opted for non-withholding of tax on said income. (D) Individuals deriving other non-business, non-profession-related income in addition to compensation income not otherwise subject to a final tax. (E) Individuals receiving purely compensation income from a single employer, although the income tax of which has been correctly withheld, but whose spouse falls under Section 2.83.4(A), (B), (C) and (D) of these Regulations. IaEHSD (F) Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income, or compensation income and other non-business, non-profession-related income ." Finally, Revenue Regulations No. 3-2002 shall cover taxable year 2002 and succeeding years although substituted filing is optional on the part of the employee for income earned for taxable year 2001. 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group