BIR Ruling [DA-241-04]

May 7, 2004 BIR RULING [DA-241-04] Section 33 BIR Ruling No. 21-01 Sohbi Kohgei (Phils.), Inc. Special Economic Zone, LIMA Technology Center Lipa City, Batangas Attention: Ms. Merlita C. Navalta Accounting Manager Gentlemen : This refers to your letter dated December 4, 2000 and January 6, 2003 requesting for a ruling on the tax treatment of benefits extended to your expatriates. It is represented that you are a newly established corporation incorporated on July 7, 1999; that for the benefit of your Japanese expatriates, you are paying their hotel room rental at Lima City Hotel which is also located inside Lima Technology Center; and that you have chosen the said hotel because very often the company needs to call your expatriates especially during emergency cases. In reply, please be informed that the following rules shall generally apply in considering the tax consequences of housing benefits given by employers to their employees: 1. Pursuant to Section 2.33(B) of Revenue Regulations (Rev. Regs.) No. 3-98, the term 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) including housing. 2. Section 33 (a) of Republic Act No. 8424 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. Thus, where the house is required by the nature of, or necessary to the trade, business or profession of the employer, or is for the convenience or advantage of the employer, the benefit shall not be subject to the fringe benefit tax pursuant to Section 33 of the Tax Code of 1997. 3. The benefits given to the employees provided that the same fall under the definition of ordinary and necessary business expense as those enumerated under Section 34(A)(1)(a)(i) of the same Tax Code, are considered as valid deductible expenses of the Company. 4. If the employer leases a residential property for the use of his employee and the said property is the usual place of residence of the employee, the value of the benefit shall be the amount of rental paid thereon by the employer, as evidenced by the lease contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. 5. A housing unit which is situated inside or adjacent to the premises of a business or factory shall not be considered as a taxable fringe benefit. A housing unit is considered adjacent to the premises of the business if it is located within the maximum of 50 meters from the perimeter of the business premises. 6. Fringe benefits received by employees in special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are also subject to the normal rate of fringe benefit tax or the special rates of 25% or 15%, as the case may be in accordance with Section 25 of the Tax Code of 1997. 7. 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. On the other hand, Section 2.78.1 of Rev. Regs. No. 2-98 provides that the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. 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, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. On the basis of the foregoing and following the pertinent Revenue Regulations on the matter, we proceed to rule on the particular issue raised for our consideration: Rev. Regs. No. 3-98 did not distinguish between a lease contract entered under the name of the employers or under the name of the employee. As long as the grant of the housing allowance was given in addition to the basic salary of the employee, such benefit shall be considered as a fringe benefit subject to the fringe benefit tax. Such being the case, the housing allowance granted to your expatriates where the lease contract is between the expatriate and the lessor shall still constitute as a fringe benefit subject to the fringe benefit tax. However, where the amount of lease is less than the fixed allowance, only the actual amount of the lease shall be treated as fringe benefit subject to the fringe benefit tax and the difference shall be treated as part of compensation subject to income tax and consequently to the withholding tax prescribed under Section 79 of the Tax Code of 1997 ( BIR Ruling No. 025-2001 dated June 13, 2001 ). 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group