BIR Ruling [DA-041-05]

January 28, 2005 BIR RULING [DA-041-05] San Jose Kitchen Cabinet System People's Technology Complex Carmona, Cavite Attention: Mr. Oscar P. Chan General Manager Gentlemen : This refers to your letter dated February 24, 2004 requesting for clarification as to whether or not your company is entitled to claim special deduction from gross income equivalent to fifty percent (50%) of the total productivity bonuses given to its employees under Section 7 of Republic Act (R.A.) No. 6971, otherwise known as the Productivity Incentives Act of 1990. In reply thereto, please be informed that Section 7 of R.A. No. 6971, as amplified in Revenue Memorandum Circular (RMC) No. 102-90 provides that "Section 7. Benefits and Tax Incentives . (a) Subject to the provisions of Section 6 hereof, a business enterprise which adopts a productivity incentives program, duly and mutually agreed upon by parties to the labor-management committee, shall be granted a special deduction from gross income equivalent to fifty percent (50%) of the total productivity bonuses given to employees under the program over and above the total allowable ordinary and necessary business deductions for said bonuses under the National Internal Revenue Code, as amended. "xxx xxx xxx" Corollarily, Section 8 of the said Act provides that "Section 8. Notification . A business enterprise which adopts a productivity incentives program shall submit copies of the same to the National Wages and Productivity Commission and to the Bureau of Internal Revenue for their information and record. Generally, ordinary and necessary expenses (salaries, wages and other forms of compensation for personal services actually rendered) paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession are deductible from gross income pursuant to Section 34(A)(1) of the Tax Code of 1997. However, R.A. No. 6971 provides for a wider incentives for business enterprise availing of the productivity incentives program by granting them a special deduction from their gross income equivalent to 50% of the total productivity bonuses given to employees over and above the ordinary and necessary expenses prescribed in Section 34 of the Tax Code. DSHTaC It is to be emphasized, however, that in order for the said bonuses to be deductible from gross income, the following requirements must be met: 1) the payment of bonuses is in fact compensation: 2) it must be for personal services actually rendered; and 3) the bonuses when added to salaries are reasonable when measured by the amount and quality of the services performed with relation to the business of the particular employee. (see Kuenzle & Streiff, Inc. vs. Collector, 106 Phil. 355 ) WHEREFORE, in view of the foregoing , this Office holds that since your company is availing of the productivity incentives program under R.A. No. 6971, you are entitled to claim 50% special deduction from your gross income of the total productivity bonuses given to your employees. Please be guided accordingly. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group