BIR Ruling [DA-205-05]

April 21, 2005 BIR RULING [DA-205-05] Section 32 (B) (7) (e) & R.R. 2-98 BIR Ruling No. DA-198-02 & DA-238-2003 Capt. Orlando C. Alovera c/o Philippine Coast Guard Station, Subic Zambales S i r : This refers to your letter dated November 3, 2004 jointly signed with Mario M. Domingo, Hermoso Arevalo, Isidro Delicana, Benedicto Gallardo, Jr., Deovel Azcarraga, Rez Marquez, John Feliciano, Paulinio Gamlanga, Jr., Edgar Cortez, Michael Bemadas, and Jonathan Cuyos, requesting for a ruling on whether food allowance and economic cost of living allowance (ECOLA) are subject to withholding tax; and that your employer be investigated for deducting withholding tax on your allowances. It is represented that you are all employees of Italian-Thai MCRP Construction Corporation with office address at Coastal Road, Brgy. San Dionisio, Paraaque City; that you are construction seamen engage in various marine construction and committed to work 24 hours a day and 30 to 31 days a month; that you are being provided with food allowance in the amount of P100/day for officers and P70/day for the crew; and P50/day ECOLA for the crew only; and that your employer deduct withholding tax on your allowances. In reply, please be informed that the following rules shall generally apply in considering the tax consequences of certain benefits given by employers to their employees, whether rank-and-file, supervisory or managerial: 1. Facilities or privileges that are categorized as de minimis benefits under pertinent rules and regulations shall not be included as items of gross income for income tax purposes. They shall not also be included in the computation of the P30,000 threshold for a determination of the items of income that are to be excluded from income under Section 32(B)(7)(e) of the Tax Code of 1997. 2. Corollary to this, de minimis benefits are neither subject to income tax on compensation nor to the fringe benefits tax. Furthermore, no withholding tax thereon shall be imposed in view of their exclusion and exemption from tax. 3. The gross benefits granted to rank-and-file, supervisory or managerial employees of entities, to the extent of the threshold of P30,000 mandated by Section 32(B)(7)(e) of the Tax Code of 1997, shall not be included as items of gross income and shall, therefore, be exempt from income taxation. Accordingly, such benefits given in excess of the threshold amount shall be taxable to the recipient employee. 4. The "other benefits" referred to in Section 32(B)(7)(e)(iv) of the Tax Code of 1997 include all benefits, other than the 13th month pay, such as, the annual Christmas bonus given by private entities, 14th month pay and the like, gifts in cash or in kind and other similar benefits and refer to those benefits received by an employee in a calendar year. 5. Revenue Regulations No. 3-98, as amended by Revenue Regulations No. 8-2000 and 10-2000 are illustrative and non-exclusive in the enumeration of what constitutes de minimis fringe benefits. Accordingly, we have ruled that the meal and food benefits granted, although not intended to be used for overtime work, may still be added in the enumeration of de minimis fringe benefits. However, in terms of the de minimis threshold for regular meal and food benefit, the ceiling for benefits of similar nature under Revenue Regulations No. 8-2000 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 (BIR Ruling No. 23-2002 dated June 21, 2002). 6. In keeping with the spirit of the rules and regulations on de minimis benefits, we have ruled that there can be no aggregation of the values set for each item of benefit stated in Revenue Regulations Nos. 2-98 and 3-98, as amended by Revenue Regulations Nos. 8-2000 and 10-2000. The intent of the Regulations is to treat each item of de minimis benefit independently of each other, and we have to give life to that intent. Thus, the Regulations separately provide maximum values for rice allowance and for meal allowance. Accordingly, there can be no aggregation of de minimis values for rice and meal and food benefits (BIR Ruling No. 23-2002 dated June 21, 2002). In addition to the foregoing, it is the rule that the fringe benefits tax is a final tax on the employee, other than a rank-and-file employee, that shall be withheld and paid by the employer on a calendar quarterly basis as provided under Section 57(A) of the Tax Code of 1997. Being a final tax, however, the amount of fringe benefits given shall not be reported as income in the concerned employee's annual tax return consolidation. In view of the foregoing, the food allowance given to you and the employees of Italian-Thai MCRP Construction Corporation which is not intended to be used for overtime work may still be added in the enumeration of de minimis fringe benefits. The portion of the food allowance 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 as "other benefits" as contemplated under Sec. 32(B)(7)(e)(iv) of the Tax Code of 1997. The excess of the meal 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. (BIR Ruling No. DA-238-2003 dated July 23, 2003) In respect to economic cost of living allowance (ECOLA), this Office has consistently ruled that it is "compensation income" which is defined as all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for the services is designated is immaterial. Thus, salaries, wages, emoluments, and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like), fees including director's fees if the director is, at the same time, al,) employee of the employer/corporation, taxable bonuses and fringe benefits, except those which are subject to the fringe benefits tax under Section 33 of the Tax Code, taxable pensions and retirement pay, and other income of a similar nature constitute compensation income. Remuneration for services constitutes compensation even if the relationship of employer does not exist any longer at the time when the payment is made between the person in whose employ the services had been performed and the individual who performed them (Section 2.78.1(A), Revenue Regulations No. 2-98, as amended). The withholding tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals, whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent (Section 2.78, Ibid ). Accordingly, ECOLA shall form part of your compensation income subject to the withholding tax. Thus, it is the liability of the employer to withhold and remit the corresponding tax due on the said allowances to the BIR. It is to be emphasized, however, that every employer or other person who is required to deduct and withhold the tax on compensation shall furnish every employee from whose compensation taxes have been withheld the Certificate of Income Tax Withheld on Compensation (Form 2316, formerly Form No. W-2) on or before January 31 of the succeeding calendar year (Section 2.83.1, supra ). Taxes constitute the lifeblood of the nation and are greatly needed to support the government and its widely expanding services to the people. Thus, the collection and remittance of the withholding tax due on the ECOLA to be received by employees should instead arise at the time an income is paid or payable, whichever comes first (Section 2.57.4, Revenue Regulations No. 2-98, as amended). (BIR Ruling No. DA-198-2002 dated November 8, 2002) Finally, it is not within the jurisdiction of this Office to investigate cases involving violation of tax laws. You may file your complaint with the Special Investigation Division of the BIR-Revenue Region where your employer is registered. CAIaDT 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group