eTelecare Global Solutions, Inc.

April 17, 2007 BIR RULING [DA-233-07] BIR Ruling No. 55-99, 61-99, DA-13-02, DA-238-03, & DA-350-04 eTelecare Global Solutions, Inc. Citibank Square 20th Floor, Eastwood Cyberpark Bagumbayan, Quezon City Attention: Atty. Michael N. Montero Director for Tax & Corporate Affairs Gentlemen : This refers to your letters dated January 10, 2007 and February 26, 2007 requesting on behalf of eTelecare Global Solutions, Inc. ("EGSI") for confirmation of your opinion: 1) That the transportation, meal and mobile allowances being given across all EGSI staff/officer levels, are not subject to income tax either as compensation or fringe benefits; and 2) That there is no substantiation requirement for the said transportation and meal allowances. As represented, EGSI (formerly, "e-Telecare International, Inc.") is a Philippine domestic company registered under SEC Registration No. A200002674 issued on February 21, 2000. The primary purpose of EGSI is to develop and operate a call center business, which is defined as the provision of customer relationship management services (CRM) through various media including, but not limited to, telephone, facsimile, e-mail, web chat and Voice-Over Internet (VOIP), and any and all allied or related businesses. The specific attributes of EGSI's operations are as follows: 1. The CRM services provided by EGSI include inbound customer services, technical help desk and sales. 2. EGSI runs several programs for clients in a broad range of industries such as technology, financial services, travel, telecom and retail. Since commencing operations in 2000, the company has established six (6) different centers in the Philippines employing almost 5,000 Customer Service Agents. 3. The business is conducted on a 24-hour, 7-days-a-week basis with peak hours from 9:00 p.m. to 9:00 a.m. which coincide with the day hours across the time zones in the United States where all of EGSI's clients are located. 4. To enable it to efficiently run its operations and consequently meet and exceed clients' expectations, EGSI requires its employees to strictly adhere to their work schedules. Specifically, the employees are made to work at designated hours which are considered night shift (i.e., between 10:00 p.m. to 6:00 a.m.) and are also required to work overtime. The above work schedule is not only observed by operations personnel but even most personnel performing support functions such as human resources, recruiting, finance and IT. Even those who are primarily assigned day schedules intermittently report for night shift to meet the requirements of their positions. 5. To meet the requirements of their work and to likewise avoid the dangers of public transportation during the off-peak hours, the employees utilize taxi services going to and from work. This practice is not merely brought out of convenience but is in fact encouraged by EGSI management as conveyed in periodic staff meetings. 6. In consonance with the demands of the work, EGSI provides its employees in various positions and levels the following: - Maximum transportation allowance of P3,000 per month to rank and file and supervisory personnel in operations positions; - Maximum transportation allowance of P1,500 per month to rank and file and supervisory personnel in support positions; - Meal allowance of P100 per day to supervisory personnel in both operations and support positions; and - Mobile phone allowance of P1,200 per month to managers and directors in both operations and support positions. 7. EGSI grants a maximum transportation allowance in the amount of P3,000 or around P136 per day. The maximum allowance may be adjusted in case the current rate becomes insufficient to serve its purpose. The transportation allowance being given by EGSI to its rank and file and supervisory personnel performing operations and support functions is pre-computed on a daily basis and are paid to the employee while on an assignment or duty. It is being given to promote the efficiency and well being, as well as the safety of its employees and is also necessary to enable these employees to come to work on time without any untoward incident taking into account the prevailing security situation in the country. 8. The meal allowance to supervisory personnel in both operations and support positions are being granted for use by the said officers during the times that they are required to work overtime and would therefore incur meal expenses. 9. Finally, the mobile phone allowance are being granted to the managers and directors considering that the same is required by the nature of their high-level position since they are expected to be on call 24 hours a day. The same privilege will likewise be granted to supervisors whose job descriptions likewise require access anytime of the day. In reply, please be informed as follows: Transportation Allowance Cash allowances given to employees as incentives are generally considered compensation income subject to income tax and withholding tax pursuant to Section 2.78.1 of Revenue Regulations No. 2-98, as amended. However, this Office ruled in BIR Ruling No. DA-350-04 dated June 25, 2004 that ". . . if the transportation allowance . . . given to your customer service representatives and . . . to your coaches are provided for Parlance's and Vocative's convenience and benefit, the said transportation allowance is not subject to fringe benefits tax pursuant to Section 2.33(C) of Revenue Regulations no. 3-98, as amended. However, if the above-mentioned transportation and representation allowances are fixed in amounts and are regularly received by the employees as part of their monthly compensation income, the same shall not be treated as taxable fringe benefits but the same shall be treated as allowances which shall form part of their taxable compensation income subject to income tax and consequently to the withholding tax prescribed under Section 79 of the Tax Code of 1997. Moreover, any amount paid specifically, either as advances or reimbursements for traveling, representation and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied: (i) It is for ordinary and necessary traveling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and (ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Section 34 of the Code. The excess of advances made over actual expenses shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of substantiation and to withholding (Section 2.78.1(A)(6)(b) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 3-98, 8-2000 and 10-2000) In view of the foregoing, this Office confirms your opinion that the transportation allowance being given by your subsidiaries, Parlance Systems, Inc. and Vocative Systems, Inc. to its customer service representatives are not compensation subject to income tax and consequently, to withholding tax on wages in accordance with Revenue Regulations No. 2-98, as amended. Moreover, since the transportation allowance is pre-computed on a daily basis and are paid to the employee while on an assignment or duty, the said transportation allowance is not subject to the requirements of substantiation and to withholding pursuant to Revenue Regulations No. 2-98, as amended." Applying the above ruling, this Office confirms your opinion that since the transportation allowance being given to EGSI's employees is an ordinary and necessary expense paid or incurred by the employees in the pursuit of the business of the company, the said allowance is not considered compensation, hence, not subject to withholding tax. The said transportation allowance is not subject to the requirements of substantiation and to withholding since it is pre-computed on a daily basis and is paid to the employees while on an assignment or duty pursuant to Revenue Regulations No. 2-98, as amended. DCScaT Moreover, transportation allowance is not subject to the fringe benefits tax since it is required by the nature of the business of EGSI and under the convenience of employer rule pursuant to Section 33 (C) of the Tax Code of 1997 as implemented by RR No. 3-98, viz: "(C) Fringe Benefits Not Taxable under this Section . The following fringe benefits are not taxable under this Section: (1) . . . (2) . . . (3) . . . (4) . . . (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." Meal Allowance Section 2.78.1(a)(3) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 8-2000 and 10-2000 reads "The following shall be considered as ' de minimis ' benefits not subject to INCOME TAX AS WELL AS withholding tax on compensation income of both managerial and rank and file employees: xxx xxx xxx (j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage. xxx xxx xxx" This Office had occasion to rule in BIR Ruling No. 023-02 dated June 21, 2002 that the above regulations are illustrative and non-exclusive in the enumeration of what constitutes de minimis fringe benefits. The Commissioner held that although the meal and food benefits granted were not intended to be used for overtime work, they may still be added in the above enumeration. However, in terms of de minimis threshold for regular meal and food benefit, the ceiling for benefits of similar nature under RR 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. In one case, a call center providing technical support service with 24 hours operation daily planned to provide its graveyard shift employees PhP100.00 meal allowance for every night's work. This Office held "In view of the foregoing, the PhP100.00 meal allowance given to your graveyard shift employees 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 meal 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-238-03 dated July 23, 2003)." On the issue of whether the meal allowance is exempt from fringe benefits tax, Section 33 (C) of the Tax Code of 1997 provides viz: "(C) Fringe Benefits Not Taxable under this Section . The following fringe benefits are not taxable under this Section: (1) . . . (2) . . . (3) . . . (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." Accordingly, this Office holds that meal allowance being given across all EGSI staff/officer levels not exceeding 25% of their respective daily minimum wage may be considered de minimis meal benefit pursuant to RR No. 8-2000 and 10-2000 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 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 when added to the 13th month pay. 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 PhP30,000 ceiling (cited in BIR Ruling No. 001-2007 dated January 20, 2007). The said meal allowance is not subject to fringe benefits tax since it is specifically exempted from the application thereof pursuant to Section 33(C)(4), (5) and (6) of RR 3-98 implementing Section 33(C) of the Tax Code. (BIR Ruling No. 61-99 dated May 5, 1999). Neither is it subject to substantiation requirement. DISaEA Mobile Allowance As stated earlier, cash allowances given to employees as incentives are generally considered compensation income subject to income tax and withholding tax pursuant to Section 2.78.1 of RR No. 2-98, as amended. However, in one case, a company operating a power plant was compelled to provide housing facility to ensure 24-hour access to skilled workers as power failure and trouble shooting may be required at any time of the day. This Office has ruled in the said case that ". . . fringe benefits means any goods, service or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an employee (except rank and file employee) such as housing. Section 33(a) of the Tax Code of 1997 stipulates that fringe benefits which are 'required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer' are not subject to the fringe benefit tax. If the living quarters are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of compensation income subject to withholding. . . . xxx xxx xxx . . . considering that it is a fringe benefit for the convenience and advantage of the employer, it shall not be included as part of compensation income of the employee subject to withholding neither will it be subject to the fringe benefits tax under Sec. 33 of the Tax Code of 1997 as implemented by Revenue Regulations No. 3-98." (BIR Ruling No. 055-99 dated April 23, 1999) In another case, a company gives a fixed amount of outstation allowance for meals, baggage services, laundry expenses, parking fees, toll fees, telephone fees and other incidental expenses to employees who are sent to locations beyond Metro Manila. The Commissioner held that ". . . as a general rule, Section 33(A) of the Tax Code of 1997 imposes a final withholding tax of 32% on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees) by the employer, whether an individual or corporation. This general rule is not, however, without exception. The aforequoted section sets forth two scenarios wherein no fringe benefits tax will be imposed, i.e., (1) when the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. xxx xxx xxx The Outstation Allowance, therefore, is clearly required by the nature of or necessary to the trade or business of PGMC. Accordingly, this Office opines and so holds that the grant of the Outstation Allowance by PGMC to its managerial and supervisory employees are not subject to the fringe benefits tax prescribed in Section 33(A) of the said Code. Consequently, the Outstation Allowance, not being part of the compensation income of the employee, is not subject to income tax and consequently to withholding tax. By the same token, the Outstation Allowance which may be incurred or expected to be incurred by the aforesaid employee in the performance of his duties cannot be considered as part of compensation subject to withholding tax even if the employee fails to account/liquidate the same considering that said expense is pre-computed on a daily basis and is paid to an employee while he is on an assignment or duty. Section 2(6)(b)(ii) of Revenue Regulations No. 8-2000 specifically states that: '(ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/advances for traveling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of substantiation and to withholding.' "(BIR Ruling No. 013-02 dated April 5, 2002) In view of the foregoing and since you represented that the mobile phone allowance is being granted to directors, managers and supervisors because the nature of their jobs requires them to be on call 24 hours a day which is necessary to the business of EGSI and redounds to the convenience and benefit of the company, said fringe benefit shall not be included as part of compensation income of the concerned employees subject to withholding tax prescribed under Section 79 of the Tax Code of 1997 neither will it be subject to the fringe benefits tax under Section 33 of the Tax Code of 1997, as implemented by RR No. 3-98, as amended. Further, the mobile allowance is not subject to the requirement of substantiation. 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. ECAaTS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service