BIR Ruling [DA-159-05]

April 14, 2005 BIR RULING [DA-159-05] Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated January 26, 2005 stating that your client, JAE Philippines, Inc. (JAE Phil.) [formerly Japan Aviation Electronics Philippines, Inc.] is incorporated in the Philippines and is wholly owned subsidiary of Japan Aviation Electronics Industry, Ltd. of Japan; that JAE Phil. is registered with Philippine Economic Zone Authority (PEZA) and is engaged in the production and exportation of connectors and switches, system equipment and operational panel units, optoelectronic products, and electronic equipment for aerospace and related application; that its principal place of business is located at PEZA Zone, Gateway Business Park, Javalera Gen. Trias, Cavite, Philippines; that to encourage the attendance of its employees, JAE Phil. provides the following cash allowances (Perfect Attendance Incentive) to its rank-and-file, as well as its supervisory employees: (a) Monthly Perfect Attendance Incentive of P200.00 per month from the month of December of the previous year to November of the current year is awarded to qualified employees every December of the current year; (b) Quarterly Perfect Attendance Incentive of P600.00 per quarter is awarded to qualified employees at the end of every quarter; and (c) Annual Perfect Attendance Incentive of P1,000.00 is awarded to employees with perfect attendance for one (1) year (from December of the previous year up to November of the current year) in addition to a gift in kind. and that the benefits are given to promote good will, contentment and efficiency of its employees by encouraging them to limit their absences through a reward system. Based on the foregoing representations, you now request confirmation of your opinion that the cash allowances given by JAE Phil. to its employees as incentives for perfect attendance are exempt from the fringe benefit tax under Revenue Regulations No. 3-98, as amended; and income tax on compensation as de minimis benefits under Revenue Regulations No. 2-98, as amended. In reply thereto, please be informed that Section 33(B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 3-98, as amended provides that the term fringe benefit means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations). Likewise, Section 33(C), supra , as implemented by Revenue Regulations No. 3-98, as amended, provides that (C) Fringe Benefits Not Subject to Fringe Benefit Tax In general, the fringe benefits tax shall not be imposed on the following fringe benefits: (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. The exemption of any fringe benefit from the fringe benefit tax imposed under this Section shall not be interpreted to mean exemption from any other income tax imposed under the Code except if the same is likewise expressly exempt from any other income tax imposed under the Code or under any other existing law. Thus, if the fringe benefit is exempted from the fringe benefits tax, the same may, however, still form part of the employee's gross compensation income which is subject to income tax, hence, likewise subject to a withholding tax on compensation income payment. The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. Generally, fringe benefits granted or paid by the employer to the employee (except rank and file employees) is subject to a final withholding tax imposed under Section 33(A) of the Tax Code of 1997. However, said rule is not without exemptions, among them, is de minimis benefits as defined above. Accordingly, any benefit furnished by an employer is considered de minimis if it is among those benefits included in Revenue Regulations No. 3-98, as amended or it complies with the following conditions, to wit: (1) it is relatively of small value; and (2) it is provided by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employees. WHEREFORE, inasmuch as JAE Phil. provides the perfect attendance incentive for the purpose of promoting the contentment and efficiency of its employees by encouraging them to limit their absences through a reward system and the value thereof is relatively small, the aforesaid incentive (perfect attendance) to its supervisory employees is exempt from the fringe benefits tax. Moreover, since the perfect attendance incentive is considered as de minimis benefit, it is likewise not subject to income tax as well as to withholding tax on compensation income of both managerial and rank and file employees. Finally, the said incentive should not be considered in computing the P30,000.00 ceiling of "other benefits" provided under Section 32(B)(7)(e) of the Tax Code of 1997, considering that it is exempt from withholding tax on compensation. EHSADc 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group