BIR Ruling [DA-197-97]

May 2, 1997 BIR RULING [DA-197-97] Philippine Long Distance Telephone Company, Inc. P.O. Box No. 2148 Cable Address Fones Makati City Attention: Mr. Raul J. Palabrica Gentlemen : This refers to your letter dated March 26, 1997 stating that you intend to send employees (Seconded Employees) of the Philippine Long Distance Telephone Company, Inc. (PLDT) to Sri Lanka for the purpose of rendering technical and administrative services to GTE Telecoms (GTE), a Sri Lankan company, pursuant to a consulting services agreement (Agreement) between PLDT and GTE; that under the agreement, PLDT will provide technical and administrative personnel (i.e. the Seconded Employees) who will operate the telephone system of Sri Lanka and at the same time train the Sri Lankans who will eventually take over such operation; that PLDT's Seconded Employees are expected to stay in Sri Lanka for a period of up to five (5) years; that the Seconded Employees will receive the following employment benefits under the agreement: (1) the usual salary in Philippine pesos of the Seconded Employees and whatever salary adjustments that may be granted by PLDT to similarly-ranked employees in the Philippines; (2) a US$1,000 monthly per diem to be paid in Sri Lanka; (3) US$2000 to cover mobilization costs and US$2000 for demobilization; and (4) Free housing accommodations in Sri Lanka. In connection therewith, you are requesting confirmation of your opinion on the following: 1) That the usual salary in Philippine pesos of the Seconded Employees and whatever salary adjustments that may be granted by PLDT to similarly ranked employees in the Philippines shall be subject to income tax under Section 21 (a) of the Tax Code, as amended; 2) That the US$1,000 monthly per diem if paid in Sri Lanka by GTE shall be subject to income tax under Section 21 (b) of the Tax Code because the Seconded Employees which are expected to remain in Sri Lanka for five (5) years would qualify as "non-resident citizens"; however, if said per diems are to be paid by PLDT, the same shall be included in the taxable income of the seconded employees' subject to tax under Section 21 (a) of the Tax Code, as amended. 3) That the provisions of Revenue Audit Memorandum Order No. 1-87 shall apply to the US$2,000 to cover mobilization costs and US$2,000 for demobilization costs which would cover principally transportation and transit costs to and from Sri Lanka; 4) That on the assumption that the free housing accommodations in Sri Lanka are to be located within the business premises of the employer in Sri Lanka and that the Seconded Employee is required to accept such lodging as a condition of his employment, the value of the lodging so furnished to the Seconded Employee by or on behalf of the employer in Sri Lanka shall be excluded from the Seconded Employee's gross income; SIcEHC However, if the Seconded Employee is provided by the employer in Sri Lanka with company housing or living quarters outside the business premises or receives allowances, or reimbursements for housing and housing-related expenses, living quarters, outside the business premises, and such Seconded Employee, because of his position in the employer-company, also uses said house or living quarters for the benefit of the latter, like entertaining and putting up houseguests and guests of the employer-company, fifty percent (50%) of such allowance, rental value or depreciation if the living quarters are owned by the employer, shall be added to the compensation paid to such Seconded Employee. In reply thereto, please be informed that your opinions are hereby confirmed: 1) That the usual salary in Philippine pesos of the Seconded Employees and all salary adjustments which may be subsequently granted by PLDT to similarly-ranked employees in the Philippines shall be subject to tax under Section 21 (a) of the Tax Code, as amended; 2) Section 2 of the Revenue Regulations No. 12-86 amending Revenue Regulations No. 6-82 as amended, otherwise known as the Withholding Tax Regulations on Compensation implementing Section 72 of the Tax Code, as amended, for purposes of withholding tax the term "compensation" means all remuneration for services performed by an employee for his employer unless specifically excepted under Sections 29 (now Section 28) and 90 (now 80) of the National Internal Revenue Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, bonuses, allowances (such as transportation, representation, entertainment and the like), fringe benefits (monetary and non-monetary), fees, including director's fees, taxable pensions and retirement pay and other income of a similar nature constitute compensation income. Such being the case, the US$1,000 monthly per diem of the Seconded Employees if paid by PLDT constitutes part of the compensation of the Seconded Employees which shall be subject to tax under Section 21 (a) of the Tax Code, as amended; however, if the US$1,000 monthly per diem of the Seconded Employees is paid in Sri Lanka by GTE, said US$1,000 monthly per diem shall be subject to tax under Section 21 (b) of the Tax Code, as amended, because the Seconded Employees are considered as non-resident citizens falling under the category of contract workers as defined under Section 20 (e) (2) of the Tax Code, as amended; (BIR Ruling No. 182-82 dated May 24, 1982; BIR Ruling No. 043-89 dated March 22, 1989); 4) The cost of foreign travel away from the Philippines in pursuit of the trade or business of the employer shall not constitute taxable compensation to the employee to the extent that it does not exceed the cost of a business class plane ticket for such travel or its equivalent. The excess over the cost of a business plane ticket or its equivalent, whether paid directly by the employer to the airline company or reimbursed to the employee, shall not be deductible by the employer from its taxable income (Sec. 3 (3.3) (3.3.1) Revenue Audit Memorandum Order No. 1-87). DECSIT Moreover, allowances which are precomputed by the employer on a daily basis, or reimbursements for cost of meals and lodging enroute to one's foreign destination in pursuit of employer's trade or business and during the duration of the stay thereat to the extent that they do not exceed one hundred fifty United States dollars (US$150.00) per day for trips to the United States, Australia, Canada, Europe, Middle East and Japan, and one hundred United States dollars (US$100.00) for other places, shall not be considered taxable compensation to the employee. Any excess shall not be deductible to the employer even if substantiated (Sec. 2 (3.3) (3.3.2) Revenue Audit Memorandum Order No. 1-87). Furthermore, reimbursements for travel taxes, airport fees and other charges, if duly receipted or substantiated, shall not constitute taxable compensation and may be deductible by the employer as a business expense (Sec. 3 (3.3) (3.3.3) Revenue Audit Memorandum Order No. 1-87). Finally, the foregoing rules shall apply to similar expenses incurred within a one-day period before arrival at the foreign destination and after departure therefrom (Sec. 3 (3.3) (3.3.4) Revenue Audit Memorandum Order No. 1-87). The foregoing rules shall apply to the Seconded Employees with respect to the US$2,000 to cover mobilization costs and US$2,000 for demolization costs. 5) That on the assumption that the free housing accommodations in Sri Lanka are to be located within the business premises of the employer in Sri Lanka, and that the Seconded Employee is required to accept such lodging as a condition of his employment, the value of the lodging so furnished to the Seconded Employee by or on behalf of the employer in Sri Lanka shall be excluded from the Seconded Employee's gross income. (Sec. 2 (2.2) Revenue Audit Memorandum Order No. 1-87) 6) That if the Seconded Employee is provided by the employer in Sri Lanka with company housing or living quarters outside the business premises, or receives allowances or reimbursements for housing and housing-related expenses, living quarters outside the business premises and such Seconded Employee, because of his position in the employer-company, also uses said house or living quarters for the benefit of the latter, like entertaining and putting up houseguests and guests of the employer-company, fifty percent (50%) of such allowance, rental value, or depreciation if the living quarters are owned by the employer, shall be added to the compensation paid to such Seconded Employee. (Sec. 2 (2.5) (Revenue Audit Memorandum Order No. 1-87) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV OIC, Assistant Commissioner (Legal Service)