BIR Ruling [DA-252-06]

April 12, 2006 BIR RULING [DA-252-06] Sections 32 & 33; RR 8-2000 & 10-2000 BIR Ruling No. DA-026-05 Lufthansa Technical Training Philippines, Inc . MacroAsia Special Economic Zone Villamor Air Base, Pasay City Attention: Mr . Michael Paarmann Gentlemen : This refers to your letter dated September 12, 2005 requesting for confirmation of your opinion that the performance bonus ("bonus") given by Lufthansa Technical Training Philippines, Inc. (LTTP) to its employees, except its General Manager, is not subject to tax (fringe benefit tax for those holding managerial position and compensation tax for those in the rank and file position), as this is granted by LTTP for its convenience and benefit. As represented, LTTP, a wholly owned branch office of Lufthansa Technical Training GmbH, with principal address at MacroAsia Special Economic Zone, Villamor Air Base, Pasay City is engaged in training and advanced training of Aeronautical Engineering staff and all activities connected therewith. The bonus is given to all employees, except LTTP's General Manager, to encourage them not to leave the company and achieve the annual company target, as approved by the Head Office. Developing an instructor who will qualify to teach any aviation course entails a lot of investment on the part of the company. DEICaA With the high demand of aviation personnel (aircraft mechanics and aircraft instructors) outside the Philippines, LTTP cannot compete if it will not more or less equate the offer given to its instructors outside the Philippines, in terms of benefits and salaries. LTTP's foreign competitor is offering higher salary, ranging from US$2,000 to US$5,000 per month, and attractive benefits to aviation instructors, depending on their qualification and experience. Instructor with an aircraft type rating commands a higher salary and good benefits outside the country. Before an instructor becomes a type rated instructor, he/she has to undergo a series of training usually conducted in foreign soil. Type training initial courses is usually conducted for more than 30 days and the tuition fee for this is in US dollars. An example is the A330/340 Airframe and Powerplant Ground Engineering Initial Course, which is conducted for approximately 45 days. Before an instructor can conduct the training for said course, he/she has to attend the course. Graduate of this course qualifies him/her to conduct a release-to-service for an aircraft, meaning that all the necessary procedure to ensure the airworthiness of the aircraft was conducted and that the aircraft can now proceed to its next destination. Just for this kind of training, the company needs at least US$13,000 per instructor. After two (2) years, the instructor needs to attend again the same course as a refresher, which is usually conducted for five (5) days, meaning another investment on the part of the company for the same kind of course. With the high cost of training given to every instructor to be qualified as an aviation instructor, allowing them to transfer to other company, after training them to be highly qualified instructor in terms of schooling and experience, means a big loss to the company. Giving them good compensation package will more or less give the company an edge over its foreign competitors. Retaining these instructors in this country means attracting foreign students to take their aviation courses in the Philippines, thus, providing the Philippine Government additional dollars, as the tuition fees of these trainees are paid for in dollars. In reply, please be informed that under Section 32(B)(7)(e)(iv) of the Tax Code of 1997, "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. The performance bonus to be given by LTTP to its employees can be equated to a productivity incentive bonus which may be considered as falling within the contemplation of "other benefits" provided for under Section 32(B)(7)(e)(iv) of the Tax Code of 1997, 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 Tax Code of 1997, provided, however, 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. TCaEAD Moreover, Section 33(C) of the Tax Code of 1997 as implemented by Section 2.33(C) of Revenue Regulations (Rev. Regs.) No. 3-98, as amended by Rev. Regs. No. 8-2000 and 10-2000, provides, viz: "(C) Fringe Benefits Not Subject to Fringe Benefits Tax The following benefits are not taxable under this Section: (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; (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 benefit is for the convenience of the employer ." (Emphasis ours.) Accordingly, the performance bonus is not subject to the fringe benefits tax also since it addresses LTTP's concern in encouraging its employees/instructors not to leave the company and achieve the annual company target, as approved by the Head Office, which in effect redounds to the convenience of the employer. The amount of "de minimis" benefits conforming to the ceiling 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., rice subsidy should not exceed P1,000.00 per month). Both "other benefits" and "de minimis" benefits do not form part of the employees' taxable compensation income and are, therefore, not subject to withholding tax on wages under Section 79 in relation to Section 24(A) both of the Tax Code of 1997. 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.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service