BIR Ruling [DA-335-03]

October 7, 2003 BIR RULING [DA-335-03] Sections 32 & 33 BIR Rulings Nos. 23-02 & 25-01 Joaquin Cunanan & Co. 14/F, Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Atty. Alexander B. Cabrera Partner Gentlemen : This refers to your letter dated March 26, 1999 requesting on behalf of your client, International Flavors and Fragrances (Phils.), Inc. (IFF) for a confirmation of your opinion that the benefits being granted by IFF to its employees qualify as "De Minimis" benefits, which are neither subject to income tax nor to the fringe benefits tax. It is represented that your client is a corporation organized and existing under the laws of the Philippines; that it is primarily engaged in the manufacture, import, export, sale and distribution at wholesale, licensing to others produce or use, and generally deal in essential oils, natural and artificial flower oils, aromatic chemicals, fragrance, fruit and other plant extractives, perfumes and perfume materials, flavoring, odorizing, and deodorizing substances, pharmaceuticals, drugs, dye, stuffs, cosmetics, toiletries, and any and all other kinds of chemicals and chemical compounds and intermediates; that to promote the health, goodwill, contentment and efficiency of its employees, your client provides the following benefits, which are relatively of small value: ISEHTa 1. Medical Benefits a. The employees (supervisory and managerial, rank and file) are entitled to reimburse from IFF an annual medicine allowance of P1,500.00 to cover their medical and healthcare needs. The employees are required to submit official receipts evidencing the purchase of medicine support their claim for reimbursement. b. The employees are also entitled to free annual medical/executive check-up (i.e. X-ray, ECG, blood tests, etc.) which should not exceed: P500.00 (or P41.67/month) for rank and file employees, P6,000.00 (or P500.00/month) for supervisors and P8,000.00 (or P666.67/month) for junior and senior managers to aid in the promotion of their well being. c. IFF maintains a retainer arrangement with Polymedic Hospital equivalent to P25.00/regular employee for routine consultations. 2. Rice Allowance An annual sack of rice is given to all employees. IFF directly pays the supplier equivalent to P1,100.00 per employee or P92.00 per month. 3. Meal Allowance a. A meal allowance not to exceed P35.00 for rank and file employees and P70.00 for supervisors and junior managers is granted for every 2 hours of overtime work on weekdays and four (4) hours of overtime work on weekends. b. As IFF is located in an area where there are no immediate accessible food outlets, it subsidizes the cost of rice and soup sold in the office canteen. IFF spends an approximate amount of P36,000.00/month for the subsidy or P56.00/employee per working day. 4. Transportation Allowance A supervisory or managerial employee which renders overtime work for a minimum of two (2) hours on weekdays and four (4) hours on weekends are given transportation allowance not to exceed P70.00 on weekdays and P140.00 on weekends. 5. Birthday Gift IFF gives all employees a birthday gift usually in the form of a birthday cake, ice cream and/or noodles amounting to P450.00 per employee. 6. Company Outing To foster goodwill and camaraderie, IFF sponsors an annual company outing to be attended by all its employees. The total amount spent on the company outing varies annually. 7. Christmas Party To celebrate the Christmas season and to foster goodwill among all the employees, the company usually sponsors an annual Christmas party where the expense varies from year to year. 8. Christmas Gift Check IFF provides to its employees gift checks ranging from P800-P3,000.00/employee during Christmas which the employees can exchange for goods they would want to purchase instead of company give-away items. 9. Annual Credit Card Fee Nine (9) of IFF's managerial employees are entitled to reimburse the annual credit card fees. These employees use their credit cards for representation expenses incurred on behalf of the company. Thus, this expense is necessary to the business of IFF. 10. Protective Clothing IFF provides protective clothing allowance of P6,000.00 annually (or P500.00/month) for the purchase of safety shoes, jackets, and shirts to all its employees. The employees are required to submit official receipts as proof of purchase to be entitled to the protective clothing allowance. The provision of a clothing allowance would enable the employees to observe the proper business/office attire expected of them and consequently perform their office functions. Moreover, considering the nature of IFF's business, this allowance is given to its employees as a means to ensure their safety and protection from chemical substances (particularly those working in the factory). In reply, please be informed that the following rules shall generally apply in considering the tax consequences of certain benefits given by employers to their employees, whether rank-and-file, supervisory or managerial. 1. Facilities or privileges that are categorized de minimis benefits under pertinent rules and regulations shall not be included as items of gross income for income tax purposes. They shall not also be included in the computation of the P30,000.00 threshold for a determination of the items of income that are to be excluded from income under Section 32(B)(7)(e) of the Tax Code of 1997. 2. Corollary to this, de minimis benefits are subject to neither income tax on compensation nor fringe benefits tax. Furthermore, no withholding tax thereon shall be imposed in view of their exclusion and exemption from tax. 3. The gross benefits granted to rank-and-file, supervisory or managerial employees of entities, to the extent of the threshold of P30,000.00 mandated by Section 32(B)(7)(e) of the Tax Code of 1997, shall not be included as items of gross income and shall, therefore, be exempt from income taxation. Accordingly, such benefits given in excess of the threshold amount shall be taxable to the recipient employee. 4. The "other benefits" referred to in Section 32(B)(7)(e)(iv) of the Tax Code of 1997 include all benefits, other than the 13th month pay, such as, the annual Christmas bonus given by private entities, 14th month pay and the like, gifts in cash or in kind and other similar benefits and refer to those benefits received by an employee in a calendar year. 5. Revenue Regulations No. 3-98, as amended by Revenue Regulations No. 8-2000 and Revenue Regulations No. 10-2000 are illustrative and non-exclusive in the enumeration of what constitutes de minimis fringe benefits. Accordingly, we rule that the meal and food benefits granted, although not intended to be used for overtime work, may still be added in the enumeration of de minimis fringe benefits. However, in terms of de minimis threshold for regular meal and food benefit, the ceiling for benefits of similar nature under Revenue Regulations No. 8-2000 and Revenue Regulations No. 10-2000 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 P30,000.00 (BIR Ruling No. 23-2002 dated June 21, 2002) . 6. In keeping with the spirit of the rules and regulations on de minimis benefits, we rule that there can be no aggregation of the values set for each item of benefit stated in Revenue Regulations Nos. 2-98 and 3-98, as amended by Revenue Regulations Nos. 8-2000 and 10-2000. The intent of the Regulations is to treat each item of de minimis benefit independently of each other, and we have to give life to that intent. Thus, the Regulations separately provide maximum values for rice allowance and for meal allowance. Accordingly, there can be no aggregation of de minimis values for rice and meal and food benefits (BIR Ruling No. 23-2002 dated June 21, 2002) . In addition to the foregoing, it is the rule that 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 for the concerned employee's annual tax return consolidation. On the basis of the foregoing and according to the pertinent Revenue Regulations on the matter, we proceed to rule on the particular issues raised for our consideration. 1. De Minimis Benefits. a. Medical Benefits De Minimis benefits are non-taxable fringe benefits. Accordingly, Section 2.79(D)(3)(d) of Revenue Regulations No. 2-98, as amended, provides that "[f]or purposes of determining whether the fringe benefit shall be considered payment of de minimis benefits, the employer shall submit a written representation to the Commissioner for the issuance of a ruling taking into account the peculiar nature and special need of the said employer's trade, business or profession." Revenue Regulations No. 8-2000, as amended by Revenue Regulations No. 10-2000, recognize actual yearly medical benefits not exceeding P10,000.00 per annum as de minimis. On this basis, the grant of medical benefits consisting of medicine allowance to cover medical and healthcare needs; annual medical/executive check-up; and routine consultations to your employees shall be considered de minimis to the extent of the maximum amount of P10,000.00 per annum of medical benefits, taken together with all the other medical benefits provided to such employees . b. Rice Allowance The rice allowance benefit in the amount of P92.00 per month is within the limitation set by Revenue Regulations No. 3-98, as amended by Revenue Regulations No. 8-2000 and 10-2000. Accordingly, the rice allowance in the amount of P92.00 per month is subject to neither income tax on compensation nor fringe benefits tax. c. Meal Allowance For a meal allowance to be considered de minimis, only such daily meal allowance for overtime work not exceeding 25% of the basic minimum wage, on a per region basis or in this case, the National Capital Region, shall be recognized and allowed (Revenue Regulations No. 8-2000, as amended by Revenue Regulations No. 10-2000). The elements of the benefit are as follows: i. The meal allowance is being given on the occasion of overtime work; ii. The amount must be computed on a daily basis; and iii. The amount must not exceed 25% of the minimum wage applicable in the area (BIR Ruling No. DA250-02 dated December 18, 2002). In respect to the P56.00 per working day meal allowance given to your employees which is not intended to be used for overtime work, the same 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 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 P30,000.00 (BIR Ruling No. 23-2002 dated June 21, 2002). d. Christmas Gift Check The Christmas gift checks ranging from P800.00P3,000.00/employee per annum are within the limitation set by Revenue Regulations No. 3-98, as amended by Revenue Regulations No. 8-2000 and Revenue Regulations No. 10-2000. Accordingly, the Christmas gift checks ranging from P800.00P3,000.00/employee per annum are not subject to income tax nor to the fringe benefits tax. e. Clothing Allowance To the extent of P3,000.00 per annum, any provision for uniform and clothing allowance shall be considered de minimis benefit. By implication the excess of P3,000.00 granted to all your employees as clothing allowance shall no longer be de minimis and therefore, shall accordingly be subject to the appropriate income tax, which shall be discussed hereafter (Revenue Regulations No. 8-2000, as amended by Revenue Regulations No. 10-2000). 2. Benefits Excluded from Income under Section 32(B)(7)(e) of the Tax Code of 1997. Gross benefits, not exceeding P30,000.00, that are received by officials and employees of public and private entities are not included in gross income for purposes of computing the recipient's applicable taxes under Title II (Income Tax) of the Tax Code of 1997. Among those enumerated are "other benefits such as productivity incentives and Christmas bonus." (emphasis supplied) In this regard, we find that the birthday gift usually in the form of birthday cake, ice cream and/or noodles is considered "other benefits." Accordingly, the amount of P450.00 birthday gift given to employees should be included in the consideration of the amount of gross benefits not to be reported as taxable income under the afore-stated Tax Code provision. 3. Fringe Benefits vis--vis Compensation Income. Section 2.33(C) of Revenue Regulations No. 3-98, as amended provides, viz. : "(C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits tax shall not be imposed on the following benefits: xxx xxx xxx (3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not; xxx xxx xxx (6) If the grant of the fringe benefits is for the convenience of the employer." Accordingly, if the transportation allowance in the amount not exceeding P70.00/P140.00 and the annual credit card fees for representation expenses given to your supervisory and managerial employees are provided for IFF's convenience and benefit, the said transportation and representation expenses are 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 (BIR Ruling No. 025-01 dated June 13, 2001). 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 travelling 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 Sec. 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 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). 4. Christmas Party and Company Outing DTEcSa In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits, except when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee. Moreover, Section 2.33(C)(4) and (6) of the Revenue Regulations No. 3-98, as amended, implementing Section 33 of the Tax Code of 1997 provides, viz.: "Sec. 33. Special Treatment of Fringe Benefit. xxx xxx xxx (C) Fringe Benefits Not Taxable under this Section. The following fringe benefits are not taxable under this Section: xxx xxx xxx (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. xxx xxx xxx (6) If the grant of the fringe benefit is for the convenience of the employer." "De minimis benefits" is defined under Section 2.79(D)(3)(d) of Revenue Regulations No. 2-98, as amended as follows: "The term 'de minimis benefits' which is exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges (such as entertainment, Christmas party and other cases similar thereto ; medical and dental services; or the so-called courtesy discount on purchases), furnished or offered by an employer to his employees, provided such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees." Since the annual Christmas party and company outing are sponsored by the company to foster goodwill and camaraderie among the employees, which redound to the convenience of the employer, the said Christmas party and company outing are exempt from the fringe benefit tax (BIR Ruling No. 061-99 dated May 5, 1999; BIR Ruling No. 128-99 dated August 18, 1999; and BIR Ruling No. DA-331-2000 dated August 28, 2000). 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group