Punongbayan & Araullo

May 19, 2008 BIR RULING [DA-302-08] BIR Ruling No. 013-02, DA-081-03, DA-335-03, DA-146-04, DA-264-2004 & 001-2007 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated January 28, 2008 requesting on behalf of your client, Fujitsu Ten Corporation of the Philippines ("Fujitsu" for brevity) for confirmation of your opinion that the following benefits given by Fujitsu to its employees are considered as de minimis benefits exempt from withholding tax on compensation and fringe benefits tax: Type of Benefits Amount & Nature Coverage I. Part of Collective Bargaining Agreement 1. Transportation P650/month For all rank-and-file employees allowance 2. Meal allowance P1,250/month For all rank-and-file employees 3. Maternity assistance P2,000 normal For all rank-and-file employees delivery P4,000 caesarian For all rank-and-file employees delivery/miscarriage 4. Rice subsidy P1,000/month For all rank-and-file employees 5. Birthday cash gift P500/year For all rank-and-file employees 6. Funeral assistance P6,500 death of For all rank-and-file employees dependent II. Not Part of Collective Bargaining Agreement 1. Transportation and meal P4,500/month For all managerial employees allowance 2. Official business trip P50 for employees who For all employees meal allowance spend a minimum of 4 hours during official business trip 3. Incentives for P50 Level 1 For all employees production and quality employee P150 Level 2 employee given to employees for achieving target for production motivation schemes 4. Incentives (production P30 per employee For all employees activity) P3,000 per line (2 consecutive months without findings) 5. Perfect attendance P100 for 2 consecutive For all employees months of no absence, leave, lateness and undertime; P600 for 6 consecutive months of no absence, leave, lateness and undertime; P2,000 for 1 year of no absence, leave, lateness and undertime 6. Incentives for excellent P1,000 and plaque for 1 For all employees attendance year with no absence or leave and not more than 4 lateness or undertime 7. Incentives for good P500 for 1 year of not For all employees attendance more than 2 absences or leave, and not more than 8 lateness or undertime As represented, Fujitsu is a domestic corporation organized and existing in accordance with Philippine laws and registered with the Philippine Economic Zone Authority as an Ecozone Export Enterprise. Its principal place of business is located at 100 South Science Avenue, Laguna Technopark, Sta. Rosa, Laguna. The Company is mainly engaged in the manufacture and sale of car audio products, including deck mechanisms and components, softwares or microcodes for microprocessors of car audio-video electronics systems as well as electrical equipment and parts thereof. In the conduct of its business, Fujitsu granted certain benefits to its rank-and-file employees pursuant to a duly ratified Collective Bargaining Agreement (CBA). Among these benefits were the following: 1. Transportation allowance amounting to P650 a month; 2. Meal allowance of P1,250 a month; 3. Maternity assistance of either P2,000 or P4,000 depending on the delivery of birth; 4. Monthly rice subsidy of P1,000; 5. Annual birthday cash gift of P500; and 6. Funeral assistance of P6,000 in the event of a demise of an employee's dependent, while the death of the employee is covered by the Group Life Insurance. Fujitsu likewise extends the following benefits to certain employees though these were not mandated under the CBA: 1. Transportation and meal allowance provided to managers equal to P4,500 a month; 2. Official business trip meal allowance of P50 given to employees performing at least four (4) hours of official business trip; 3. Incentives for various production and quality related motivation schemes amounting to P50 for Level 1 employees, and P150 for Level 2 employees; 4. Incentives for achieving any production activity schemes, if there are no findings for two consecutive months, equal to P50 for every employee and P3,000 per line; 5. Incentives for perfect attendance: P100 for two (2) consecutive months of no absence, leave, lateness and undertime; P600 for six (6) consecutive months of no absence, leave, lateness and undertime; P2,000 for one (1) year of no absence, leave, lateness and undertime; 6. Incentives for excellent attendance: P1,000 and plaque for one (1) year with no absence or leave and not more than four (4) lateness and undertime; and 7. Incentives for good attendance: P500 for one (1) year of not more than two (2) absences or leave, and not more than eight (8) lateness and undertime. Based on the foregoing, you now request for confirmation of your opinion that the abovementioned benefits granted to the employees for the convenience of the employer are exempt from withholding tax on compensation income and/or fringe benefits tax. In reply, please be informed as follows: Transportation Allowance You represented that Fujitsu is located in Sta. Rosa, Laguna but many of its employees are based in Metro Manila. Many employees of Fujitsu commute to work and because of the distance of the office from Metro Manila, their usual mode of public transport is a bus or a taxi. Since Fujitsu cannot provide shuttle service to its employees, they deem it necessary to grant a fixed precomputed transportation allowances to all employees on duty which is credited to the employees account. Transportation allowance will ensure that Fujitsu's employees will arrive on-time to deal with and give fast and efficient service to Fujitsu's customers and clients, a trademark for which Fujitsu is well known for. Transportation allowance may or may not be subject to withholding tax on compensation. If the transportation allowances are fixed in amount and regularly received as part of the employees' monthly compensation income, the allowances shall be considered as taxable compensation income subject to tax imposed under Section 24 of the Tax Code of 1997, as amended. Corollary thereto, if the transportation allowances are not fixed in amount or regularly received as part of the employees' monthly compensation income, the allowances shall not be considered as taxable compensation income subject to tax. However, such expenses shall have to be substantiated as prescribed under Section 34 of the same Tax Code. Since the transportation allowance amounting to P650/month for all rank-and-file employees, P4,500/month are fixed in amount and regularly received as part of the employees' monthly compensation income, the allowances shall be considered as taxable compensation income subject to tax imposed under Section 24 of the Tax Code of 1997, as amended. Meal Allowance You represent that since Fujitsu is located inside the economic zone, its employees have limited food choices. There are no stores, canteens or malls nearby. Thus, in order to promote the health and efficiency of its employees and for its own benefit as well, Fujitsu finds it proper to grant meal allowance to its employees. In this manner, the employees are encouraged to prepare packed food or buy food before then enter the economic zone, instead of leaving the office for the sole purpose of buying food. Pursuant to Revenue Regulations (RR) No. 2-98, as amended by RR 3-98, RR 8-2000 and RR 10-2000, 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 "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. It is represented that the daily minimum wage in Laguna is P300. Accordingly, the P1,250/month or P48/day meal allowance for rank-and-file employees and the P1,950 a month or P75/day meal allowance for managerial employees is exempt from tax. Official Business Trip Meal Allowance In BIR Ruling No. 013-02 dated April 5, 2002, 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. This Office ruled in the said case as follows: ". . . 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. xxx xxx xxx" Applying the foregoing, and since you represented that the official business trip meal allowance in the amount of P50 for each employee is given only to employees who have spent at least four (4) hours doing official business trip, the 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. Maternity Assistance Pursuant to the above regulations, if the medical benefits granted to the employees do not exceed P10,000 per annum, the same shall be considered de minimis benefits not subject to income tax as well as to withholding tax on compensation income of both managerial and rank and file employees. However, if the employer pays more than the P10,000 de minimis ceiling, the excess of the benefit 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. If the excess of the benefit given over the de minimis ceiling, when added to the total amount of "other benefits" provided in Section 32 (B) (7) (e) of the Tax Code, as amended, goes beyond the P30,000 ceiling, the same shall be taxable to the employee receiving the benefits i.e. , if pertaining to supervisory employees, the excess shall be subject to fringe benefits tax while those pertaining to rank and file employees, the excess shall be subject to withholding tax on compensation. Considering that the P2,000 or P4,000 maternity benefits given to Fujitsu's employees is within the P10,000 ceiling provided under the regulations, the said benefits may be considered de minimis benefits exempt from tax. However, the employee must fully substantiate with official receipts in his name or adequate records the medical benefits so granted on or before the annualization of withholding taxes in any given calendar year in order to be considered as de minimis and a valid deductible expense on the part of Fujitsu. Monthly Rice Subsidy The rice allowance benefit in the amount of PhP1,000 per month is within the limitation set by the regulations. Accordingly, the rice allowance in the amount of P1,000 per month is subject to neither income tax on compensation nor fringe benefits tax. Annual Birthday Cash Gift In BIR Ruling No. DA-335-03 dated October 7, 2003, this Office had occasion to rule that birthday gift usually in the form of birthday cake, ice cream and/or noodles is considered "other benefits" under Section 32 (B) (7) (e) of the Tax Code, as amended that should be included in the consideration of the amount of gross benefits not to be reported as taxable income under Title II (Income Tax) of the Tax Code, as amended. Thus, birthday gift in the amount of P500 given to the employees of Fujitsu is considered as "other benefits" exempt from tax. Funeral Assistance Funeral Assistance may be considered de minimis benefits exempt from the fringe benefits tax if they are of relatively small value and offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. However, in the absence of any threshold for the abovementioned benefit, the same is considered as "other benefits" following the principle of strictissimi juris in the grant of tax exemption considering that what may be of relatively small value for one may not be so for another in the absence of a ceiling. Productivity and Perfect Attendance Incentives In BIR Ruling No. 001-2007 dated January 10, 2007, this Office ruled as follows: ". . . it is basic in statutory construction that where the law is clear and unambiguous, there is no room for interpretation. Hence, the duty of this Office is merely to apply the law. 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, productivity incentives and 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. Section 32(B)(7)(e)(iv) of the Tax Code of 1997 reads: '(B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (7) Miscellaneous Items. xxx xxx xxx (e) 13th Month Pay and Other Benefits. Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: xxx xxx xxx (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. xxx xxx xxx' Section 2 of Rev. Regs. No. 8-2 00 0, as amended, clarifies that 'other benefits' and 'de minimis' benefits are not the same. For purposes of determining the P30,000.00 ceiling in 'other benefits,' the two are treated differently in that the amount of 'de minimis' benefits conforming to the limits prescribed under Revenue Regulations (Rev. Regs.) No. 8-2000 shall not be considered in determining the P30,000.00 ceiling of 'other benefits' provided under Section 32(B)(7)(e) of the Code. The regulations does not provide for ceiling with regard to 'de minimis' benefits. However, it provides for a limit in the amount of each 'de minimis' benefit such that if the employer gives more than the limit prescribed, the excess of the PhP30,000 ceiling/limit shall be taxable to the employee receiving the benefits. 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. Moreover, Section 2.78.1(B)(11) of Rev. Regs. No. 2-98, as amended provides viz. : EHTADa '(B) Exemptions from withholding tax on compensation. The following income payments are exempted from the requirement of withholding tax on compensation: xxx xxx xxx (11) Thirteenth (13th) month pay and other benefits. (a) Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the government (whether national or local), including government-owned or controlled corporations, and or private offices received after the twelfth (12th) month pay; and (b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. ATCaDE xxx xxx xxx' In view of the foregoing, the performance bonus given by PLDT to its rank and file employees as well as to supervisory 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. Any amount in excess of the P30,000.00 ceiling shall be taxable to the employee receiving the benefits. 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. R eg s. No. 8-2000, as amended. Further, Section 33(C) of the Tax Code of 1997 as implemented by Section 2.33(C) of Rev. R eg s. No. 3-98, as amended by Rev. R eg s. No. 8-2000 and 10-2 00 0, provides, to wit: cEASTa '(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 PLDT's concern in encouraging good performance as well as promoting contentment and efficiency among its employees, which in effect redounds to the convenience of the employer. xxx xxx xxx" In view of the foregoing, it is the opinion of this Office that the incentives for (1) various production and quality related motivation schemes in the amount P50 and P150 given to Level 1 and Level 2 employees, respectively, (2) achieving any production activity schemes in the amount of P30 for every employee and P3,000 per line and (3) perfect/excellent/good attendance 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 as implemented by Section 2.78.1 (B) (11) (b) of RR No. 2-98, as amended, 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. TCASIH Any amount in excess of the P30,000.00 ceiling shall be taxable to the employee receiving the benefits. 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 by Rev. Regs. No. 10-2000. Further, Section 33 (C) of the Tax Code of 1997 as implemented by Section 2.33 (C) of Rev. Regs. No. 3-98, as amended by Rev. Regs. No. 8-2000 and 10-2000, provides, to wit: "(C) Fringe Benefits Not Subject to Fringe Benefits Tax The following benefits are not taxable under this Section: (3) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law; (4) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (7) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not; (8) De Minimis benefits as defined in these Regulations; (9) 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 (10) If the grant of the fringe benefit is for the convenience of the employer ". (Emphasis ours) Accordingly, the above incentives are not subject to the fringe benefits tax also since they aim to provide motivation, among others to meet performance targets which in effect redound to the convenience of the employer. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service