Infosys-BPO Ltd. — Philippine Branch

May 2, 2008 BIR RULING [DA-275-08] 33; RR 2-98; RR 3-98; RR 8-2000; 10-2000; # 55-99; # 61-99; DA-13-2002; DA-238-2003; DA-350-2004; DA-233-2007 Infosys-BPO Ltd. Philippine Branch 3rd Floor, Trade Hall, Market Market Fort Bonifacio, Taguig City Attention: Mr. Madhusudan Menon Center Manager & Delivery Head Gentlemen : This refers to your letter dated April 25, 2008 requesting for confirmation of your opinion that: 1) The transportation, meal and mobile allowances being given by your company, Infosys-BPO Limited-Philippine Branch, to all its staff/officer levels are not subject to income tax either as compensation or fringe benefits; and 2) There is no substantiation requirement for the said transportation, meal and mobile allowances. As represented, Infosys-BPO Limited-Philippine Branch ("Infosys-BPO" for brevity) is a domestic corporation registered with the Securities and Exchange Commission under SEC Registration No. FS200707700 issued on May 23, 2007. The primary purpose of Infosys-BPO is to develop and operate a business process outsourcing and contact 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. DcCITS The specific attributes of Infosys-BPO's operations pertinent to the instant request are as follows: 1. The CRM services provided by Infosys-BPO include inbound customer services, technical help desk, finance and accounting, procurement service, order management and sales. 2. Infosys-BPO runs several programs for clients in a broad range of industries such as banking and capital market, telecom, hi-tech and discrete manufacturing, automobiles, insurance, life science and healthcare and retail. Since commencing operations in July 2007, the company has established a center in the Philippines employing almost 155 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 most of Infosys-BPO's clients are located. 4. To enable it to efficiently run its operations and consequently meet and exceed clients' expectations, Infosys-BPO 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 may also be 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 Infosys-BPO management as conveyed in periodic staff meetings. AEIcSa 6. In consonance with the demands of the work, Infosys-BPO provides its employees in various positions and levels the following: Maximum transportation allowance of P3,000.00 per month to rank and file and supervisory personnel in operations and support positions; Representation allowance of P10,000.00 to Center Manager and P5,000.00 to department heads in both operations and support position; Meal allowance of P100.00 per day to supervisory personnel in both operations and support positions; and Mobile phone allowance of P1,200.00 per month to managers and supervisors in both operations and support positions. DTISaH 7. In addition to ensuring the safety of the personnel, the above transportation allowances are all being granted to Infosys-BPO's personnel in view of the fact that one of the company's main mission is to create superior value for its employees and to ensure the promotion of the health, contentment and efficiency of all Infosys-BPO's employees. The said transportation allowance is pre-computed on a daily basis and is paid to the employee while on an assignment or duty. 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 during the night, weekends and overtime and would therefore incur meal expenses. 9. The representation allowance is being granted to the center head and some department heads for use during the times that they are required to entertain clients and guests. Being in the high level position, it entails responsibility for establishing and maintaining valuable relationship with clients. ETHCDS 10. Finally, the mobile phone allowances are being granted to the managers and department heads 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. We reply, as follows: Transportation & Representation 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 (RR) No. 2-98, as amended. However, transportation and representation allowances are not subject to the fringe benefits tax since it is required by the nature of the business of Infosys-BPO and under the convenience of the 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." SHADEC As stated above and pursuant to Section 33 (C) of the Tax Code of 1997, as amended, and being implemented by RR No. 3-98, any amount paid specifically, either as advances or reimbursements for transportation and 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, provided that the transportation and representation allowances or entertainment expenses are paid or incurred by the employee in the pursuit of the trade, business or profession of the employer and that 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 Tax Code of 1997, as amended. 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). Accordingly, since the transportation allowances given by Infosys BPO to its personnel is used to ensure the safety of the personnel when they 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 may also be required to work overtime, and to meet the requirements of their work, said transportation allowance clearly redounds to the benefit and convenience of Infosys BPO as the employer. As such, said transportation allowance is not compensation subject to withholding tax because the same is paid or incurred by the employee in the pursuit of the trade, business or profession of the employer and that the employee is required to account/liquidate said transportation expense in accordance with the specific requirements of substantiation for each category of expenses pursuant to Section 34 of the Tax Code of 1997, as amended. Due to the fact that taxi operators/services are not issuing Official Receipts/Invoices, a Memorandum to the effect that transportation allowance is given and duly received by the personnel while on an assignment or duty shall be issued by Infosys BPO. The Memorandum shall require its personnel to report and perform their assigned task on a given date and time and shall contain the names of the personnel, the date of assignment or duty and amount of allowance, among others. Said Memorandum issued by Infosys BPO is sufficient in complying with the substantiation requirements for purposes of claiming deductions as business expense, pursuant to Section 34 of the Tax Code of 1997, as amended. Likewise, since the representation allowance given by Infosys BPO to its Center Managers and Department Heads is used to entertain company's clients and guests for the purpose of establishing and maintaining valuable relationship with its clients, said representation allowance clearly redounds to the benefit and convenience of Infosys BPO as the employer. As such, said representation allowance is not compensation subject to withholding tax because the same is paid or incurred by the employee in the pursuit of the trade, business or profession of the employer and that the employee is required to account/liquidate said representation expense in accordance with the specific requirements of substantiation for each category of expenses pursuant to Section 34 of the Tax Code of 1997, as amended. ITDHcA 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 the occasion to rule in BIR Ruling No. 023-2002 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-238-2003 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, as amended, provides viz. : CcAHEI "(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." HSaIDc Accordingly, this Office holds that meal allowance being given across all Infosys-BPO staff/officer levels not exceeding 25% of their respective daily minimum wage may be considered de minimis meal benefit pursuant to RR Nos. 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, as amended. 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 PhP30,000.00 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 PhP30,000.00 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 No. 3-98 implementing Section 33 (C) of the Tax Code, as amended. (BIR Ruling No. 61-1999 dated May 5, 1999) . Neither is it subject to substantiation requirement. 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 Regulati ons N o. 3-98." (BIR Ruling No. 055-99 dated April 23, 1999) cSATEH 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) SCEHaD 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 Infosys-BPO 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service