BIR Ruling [DA-169-04]

April 6, 2004 BIR RULING [DA-169-04] 24 & 246 DA-11-97 & DA-353-2000 Mitsuwa Philippines, Inc. Lot 4, 6 & 8, Block 22, Phase IV Cavite Economic Zone Rosario, Cavite Attention: Ms. Josefina H. Maravillas Department Manager Accounting/Finance Gentlemen : This refers to your letter dated March 12, 2001 stating that your company is providing cash allowance to your employees as follows: (a) Monthly Performance Incentives given to rank and file employees P500 for engineers P350 for line leaders P200 for operators P400 for staff P250 for QC inspectors (b) Monthly Perfect Attendance incentives of P150 (c) Annual Perfect Attendance incentives P2,000 for one (1) year P6,000 for two (2) years P15,000 for three (3) years (d) Monthly meal and rice allowances P1,000 for supervisors P1,500 assistant managers P2,000 managers In reply, please be informed as follows: Question: "(1) Whether these cash allowances given to employees as incentives as in letters (a) to (c) are exempt from income tax on compensation and fringe benefit tax or are taxable as these were given and paid in cash? Question: "(2) If in case such allowances are taxable, and the employer agreed to pay for the corresponding taxes due to employees, is the amount paid by the employer on behalf of the employees taxable?" Answer to #1 and #2: 1.1. Income Tax on Compensation . 1.1.A. Rank and File, Supervisory and Managerial Employees . Under Section 32(B)(7)(e)(iv) of the 1997 Tax Code, "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 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. Such being the case, cash allowances given to your rank and file, supervisory and managerial employees may be considered as falling within the contemplation of "other benefits" provided for under Section 32(B)(7)(e)(iv) of the 1997 Tax Code, 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 1997 Tax Code, provided 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. ( BIR Ruling No. DA-11-97 dated August 29, 1997 ) 1.2. Fringe Benefits Tax. 1.2.A. Rank and File Employees . Section 2.33(C) of Revenue Regulations No. 3-98, as amended provides, viz : "(C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits tax shall not be imposed on the following 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; THSaEC (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 benefits is for the convenience of the employer." (Emphasis supplied.) Thus, the cash allowances given to your rank and file employees as incentives are not subject to the fringe benefits tax pursuant to Section 2.33(C)(3) of Rev. Reg. 3-98, as amended. 1.2.B. Supervisory and Managerial Employees . Section 2.33(C), Rev. Regs. 10-2000 amending Rev. Regs. No. 8-2000 and 3-98 provides, viz : "The term " de minimis " benefits which are exempt from the fringe benefits 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 . . . Section 2.33(C), Rev. Regs. 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 allowances that are subject of the present query. In view of the foregoing, cash allowances given to your supervisory and managerial employees may be considered de minimis benefit since 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. Consequently, they are exempt from the fringe benefits tax. Moreover, the amount of " de minimis " benefits conforming to the ceiling herein 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 the 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., laundry allowance should not exceed P300.00 per month; and uniform and clothing allowance should not exceed P3,000.00 per annum). " De Minimis " benefits are not considered as compensation income/wages and are, therefore, not subject to the withholding tax prescribed by Section 79 in relation to Section 24(A) both of the 1997 Tax Code. ( BIR Ruling No. DA-11-97 dated January 9, 1997 ) Question: "(3) Can a BIR Ruling that has been previously approved and issued to us as in BIR Ruling No. DA-122-96 re: incentives given to employees other than rank & file letter (d) be affected and replaced by recent rulings or by any future ruling on incentives?" Answer to #3 Under the law, the Commissioner has the power to revoke, modify and reverse rulings, opinions or circular issued by the Bureau of Internal Revenue. However, this is resorted to only as a result of a critical and deep analysis that the law and the facts warrant a revocatory action. In other words, the revocation is merely the exception to the norm that all issued rulings and opinions are, as much as practicable, let alone to stand or fall on their own merits. But this rule-making power should not be carried out with rigidity and inflexibility. In fact, in most cases, it is not the BIR but the taxpayers themselves who invoke the reversal of previous rulings on the basis of, for instance, new or contemporaneous laws supporting a contrary position, or upon showing that this office may have committed palpable error of judgment. And rightly so, for administrative rule-making power likewise demands that due process, justice and equity should not be ignored or disregarded just for the sake of maintaining a previous position on a given subject. Indeed, as there are doctrines, deeply rooted in the past, that have stood the test of time and circumstance, equally, there are also previous positions that must adapt to present circumstance, and so must be changed, in order to prevent injustice. In this regard, Section 246 of the Tax Code of 1997 provides the rule: "SEC. 246. Non-retroactivity of rulings . Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith." DAcSIC Accordingly, the revocation, reversal or modification of rulings cannot be made to apply retroactively to the prejudice of the taxpayer. Unless the taxpayer misstates or omits material facts in documents required by the Bureau of Internal Revenue, or misrepresents the facts upon which a ruling is based or acted in bad faith, he will not be made liable to tax as a result of such revocation or modification. Consequently, should a taxpayer rely on a ruling issued to him/it for purposes of entering into a transaction, contract or agreement, the tax consequences of a subsequent revocation or reversal of the ruling relied upon cannot be made to apply to the said transaction, contract or agreement if prejudicial to the affected taxpayer. 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group