Isla Lipana & Co.

March 13, 2008 BIR RULING [DA-153-08] BIR Ruling No. DA-169-04; DA-266-04 & DA-252-06 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 November 8, 2006 requesting for confirmation of your opinion that the specific benefits included in Isla Lipana & Co.'s (the "Firm" for brevity) Rewards Management and Flexible Benefit Programs may be considered de minimis benefits not subject to fringe benefits tax for managerial and supervisory employees and to withholding tax for employees below the rank of managers. As represented, the Firm is a professional services firm providing industry-focused assurance, tax and advisory services to its clients. Being in the service industry, its main asset is its people. In order for the Firm to continuously foster improvement and enhance employee performance, productivity and efficiency, the Firm intends to provide its employees with additional benefits through performance-based and eligibility-based incentive programs. Rewards Management Program (RMP) The RMP is a performance-based incentive program that aims to provide motivation and basis for providing incentives to employees who meet performance targets on defined accomplishments. Some of the defined accomplishments under the RMP are the following: 1. Timely submission of appraisal reports; 2. Identification of potential engagements; ACTISE 3. Winning an engagement; 4. Perfect attendance; 5. Satisfaction of prescribed Key Performance Indicators; and 6. Active participation in professional organizations The employee performance on each defined accomplishment, i.e., how he/she is able to complete or meet the required task/s, will be rated by a committee. A corresponding number of points will be accorded to each level of accomplishment completed by the performer-employee. The number of points earned can be accumulated by the employee through performance and completion of other defined project/task. The accumulated points earned can then be redeemed from a selection of items with corresponding equivalent number of points. There shall be no conversion of the earned points into cash. In addition, the Firm recognizes that it would take several years for the employees to accumulate points which will enable them to redeem items worth 9,000 points and above. Accordingly, no expiry date has been imposed on the accumulated points, i.e., the points shall be allowed to accumulate during the employees' entire employment years with the company. The following are some items redeemable from the points earned by the employees (Note: 1 point is equivalent to PhP1.00 value): ITEMS POINTS REQUIRED 1. Starbucks gift certificate 150 2. Tower Records gift certificate 400 3. Power Books gift certificate 500 4. Rustan's gift certificate 500 5. National Bookstore gift certificate 500 6. Trip to Boracay 9,000 7. Trip to El Nido 10,000 8. Samsung 6-kg. fully automatic washing machine 10,300 9. Panasonic 21-inch flat TV 10,300 10. Samsung 7.7 cubic feet, no frost refrigerator 14,300 11. Sanyo 10 cubic feet 2-door refrigerator 15,600 12. TV 15,000 13. Ipod 19,000 14. Sony Home Theater (Model DAV-DZ120K) 21,100 15. Component 25,000 16. Digital camera 28,000 Flexible Benefit Program (FBP) This program is currently being implemented by the Firm to improve the benefit system and the benefits given to permanent employees. The FBP aims to give the employees the option to choose some benefits that best suit their needs. An employee will be entitled to a certain benefit allocation which he/she can use to "shop" for the benefits of his choice under the FBP, subject to submission of supporting official receipts. The annual benefit allocations (ABA) of employees are as follows: Managers up PhP6,000 Below the rank of managers 4,500 The existing choice of benefit items under the FBP are as follows: 1. Sodexho Meal Passes 2. Optical/Dental/Medicine Reimbursement To provide better flexibility to employees, the Firm wishes to include the following items under the FBP, without any change in the employees' annual benefit allocation: 1. Cellphone call cards 2. Parking subsidy 3. Massage/spa treatment vouchers 4. SM/Rustan's/Landmark gift certificates Every year, the employees shall be allowed to allocate their ABA and elect the benefits they want to avail of. The benefits so selected shall be provided to the employees strictly as such and not in cash. In reply, please be informed as follows: Benefits under the RMP. In respect to the benefits under the Firm's RMP, Section 32 (B) (7) (e) (iv) of the Tax Code of 1997 reads: "(B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: SEcADa xxx xxx xxx (e) 13th Month Pay and Other Benefits . Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: xxx xxx xxx (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. xxx xxx xxx" Thus, 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, productivity incentives and the annual Christmas bonus given by private offices, 14th month pay, mid-year productivity incentive bonus, gifts in cash or in kind and other similar benefits and refer to those * Thus, 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, productivity incentives and the annual Christmas bonus given by private offices, 14th month pay, mid-year productivity incentive 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. Further, Section 2.78.1 (B) (11) (b) of Revenue Regulations (Rev. Regs.) No. 2-98, as amended provides viz.: "(B) Exemptions from withholding tax on compensation . The following income payments are exempted from the requirement of withholding tax on compensation: xxx xxx xxx (11) Thirteenth (13th) month pay and other benefits. (a) Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the government (whether national or local), including government-owned or controlled corporations, and or private offices received after the twelfth (12th) month pay; and DaIAcC (b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. xxx xxx xxx" Applying the above law and regulations, it is the opinion of this Office that the specific benefits under the RMP given by the Firm to its employees can be equated to 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 as implemented by Section 2.78.1 (B) (11) (b) of Rev. Regs. No. 2-98, as amended, 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. Any amount in excess of the P30,000.00 ceiling shall be taxable to the employee receiving the benefits. 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 by Rev. Regs. No. 10-2000. Further, Section 33 (C) of the Tax Code of 1997 as implemented by Section 2.33 (C) of Rev. Regs. No. 3-98, as amended by Rev. Regs. No. 8-2000 and 10-2000, provides, to wit: "(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; CSIDTc (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 ours.) Accordingly, the RMP is not subject to the fringe benefits tax also since it aims to provide motivation and basis for providing incentives to employees to meet performance targets on defined accomplishments as well as promoting contentment and efficiency among its employees, which in effect redounds to the convenience of the employer. Benefits under the FBP. On the issue of whether the specific benefits included in your Firm's Flexible Benefit Programs may be considered de minimis benefits, Section 2.78.1 (A) (3) of Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 8-2000, as further amended by Rev. Regs. No. 10-2000 and Section 2.33 (C) of Rev. Regs. No. 3-98 as amended by Rev. Regs. No. 10-2000, implementing Section 33 (C) (4) of the Tax Code of 1997 provides that de minimis benefits are facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees, and as such, they are neither compensation income tax nor fringe benefits tax. They are, therefore, not subject to withholding tax as well. Please note that Section 2 of Rev. Regs. No. 8-2000, as amended by Rev. Regs. No. 10-2000, clarifies that "other benefits" and de minimis benefits are not the same. For purposes of determining the P30,000 ceiling in "other benefits," the two are treated differently in that the amount of de minimis benefits conforming to the limits prescribed under Rev. Regs. No. 8-2000 as amended by Rev. Regs. No. 10-2000 shall not be considered in determining the P30,000 ceiling of "other benefits" provided under Section 32 (B) (7) (e) of the Code. 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. Both "other benefits" and de minimis benefits which do not exceed the prescribed thresholds 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. AaCTID Hence, the amount of de minimis benefits conforming to the maximum values prescribed for each of the benefits enumerated in Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 8-2000, as amended by Rev. Regs. No. 10-2000 shall not be considered in determining the PhP30,000 threshold of "other benefits" provided in Section 32 (B) (7) (e) of the Tax Code of 1997. However, any amount of fringe benefits paid by the employer in excess of the maximum values set in the stated Regulations shall be considered, along with the "other benefits," in determining the PhP30,000 threshold which amount shall be taxable to the employee receiving the benefits (Sec. 2.78.1 (A) (3), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 8-2000 as amended by Rev. Regs. No. 10-2000). On the basis of the foregoing and following the pertinent Regulations on the matter, we proceed to rule on the particular issue raised for our consideration. 1. In terms of de minimis threshold for Sodexho Meal Passes, the ceiling for benefits of similar nature under Rev. Regs. No. 8-2000 as amended by 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. 2. The Optical/Dental/Medicine Reimbursement not exceeding PhP10,000 per annum may be considered tax-exempt benefits. Any excess over the PhP10,000 limits prescribed under the Regulations shall, be considered, along with the "other benefits" under Section 32 (B) (7) (e) (iv) of the Tax Code of 1997, in determining whether or not the PhP30,000 threshold has been exceeded. The excess thereof shall become taxable to the employee receiving the benefits. acEHCD 3. In BIR Ruling No. 169-2004 dated May 17, 2004, this Office had occasion to rule that Section 2.33 (C) of Rev. Regs. No. 10-2000, amending Rev. Regs. No. 8-2000 and 3-98, enumerating fringe benefits not subject to fringe benefits tax is not an exclusive enumeration by the use of the phrase "such as the following." This being so, the term can include in its scope the following: a. Cellphone call cards; b. Parking subsidy; c. Massage/spa treatment vouchers; and d. SM/Rustan's/Landmark gift certificates. The above benefits may be considered de minimis benefits exempt from the fringe benefits tax if they are of relatively small value and offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. However, in the absence of any threshold for the abovementioned benefits in kind, the same are considered as "other benefits" following the principle of strictissimi juris in the grant of tax exemption considering that what may be of relatively small value for one may not be so for another in the absence of a ceiling. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service