Fujitsu Philippines, Inc.

June 20, 2007 BIR RULING [DA-343-07] Section 32 (B) (7) (e) (iv) Fujitsu Philippines, Inc. 2nd Floor, United Life Bldg. 837 A. Arnaiz Ave. Legaspi Village, Makati City Attention: Mr. Joseph Bautista Vice President-Treasurer Gentlemen : This refers to your letter dated February 14, 2007 requesting on behalf of Fujitsu Philippines, Inc. Group of Companies ("FPIGC") for confirmation your opinion that the benefits being granted by FPIG to its employees qualify as de minimis benefits, which are neither subject to income tax nor to fringe benefits tax (FBT). As represented, Fujitsu Philippines, Inc. ("FPI") is a domestic corporation duly organized and existing under the laws of the Philippines, with principal office address at 2nd Floor, United Life Bldg., 837 A. Arnaiz Ave., Legaspi Village, Makati City. FPI has the following wholly-owned subsidiaries and the entire group is collectively called FPIGC: a) WeSolv Open Computing, Inc., a domestic corporation duly organized and existing under the laws of the Philippines, with principal office address at 5th Floor, United Life Building, 837 A. Arnaiz Ave., Legaspi Village, Makati City; b) WeServ Systems International, Inc., a domestic corporation duly organized and existing under the laws of the Philippines, with principal office address at 14th Floor, Net 2 Square Building, Crescent Park West, Bonifacio Global City, Taguig City; and c) WeCare Technology Services Corporation, a domestic corporation duly organized and existing under the laws of the Philippines, with principal office address at 3rd Floor, United Life Building, 837 A. Arnaiz Ave., Legaspi Village, Makati City. TCaAHI To promote the health, goodwill, contentment and efficiency of FPIGC employees, the following are the actual and proposed benefits to be given which are relatively of small value: 1. Medicines/Medical Benefits The employees (managerial and rank and file) are entitled to reimburse an annual medicine allowance of PhP2,000 to cover their medical needs. The employees are required to submit official receipts covering the purchase of prescribed medicines to support their claim for reimbursement. The employees are also entitled to free medical check-up and hospitalization benefits (i.e., X-ray, ECG, blood tests, etc.) which should not exceed PhP4,852 and PhP8,472 per year, for rank and file and managerial respectively, to aid in the promotion of their well being. 2. Quarterly Rice Subsidy Based on the Employee's Status: a) Single employees - PhP1,500 (or PhP500/month) b) Married without a child - PhP1,700 (or PhP566.67/month) c) Married with children - PhP2,500 (or PhP833.33/month) d) Single Parent - PhP1,700 (or PhP566.67/month) If both parents are employees of the company: e) Without child Male Employee - PhP1,700 (or PhP566.67/month) Female Employee - PhP1,500 (or PhP500/month) f) With child Male Employee - PhP2,500 (or PhP833.33/month) Female Employee - PhP1,500 (or PhP500/month) 3. Monetized Unused Vacation Leave Credits Unused vacations leave credits not exceeding ten (10) days per year is monetized to cash and given to the employees in the month following the end of the company's fiscal year. 4. Meal Allowance The company provides a meal allowance equivalent to PhP87.50 per day or equivalent to twenty five percent (25%) of the daily minimum wage. 5. Service Award A regular employee who has rendered 5, 10, 15, 20 and 25 years of continuous service with the company receives a plaque of recognition denoting the years of service, with a value of not exceeding PhP1,200. CDISAc 6. Perfect Attendance and Perfect Punctuality Incentive The company grants a perfect punctuality and perfect attendance incentive, each in the amount of PhP2,000 per year, to employees who have kept perfect attendance or perfect punctuality. The criteria for granting the incentive is the time record of the employee during the 12-month period from April 1 to March 31. 7. Social Interaction/Company Outing The company sponsors an annual social interaction activity/company outing to be attended by all employees to promote the recreational, athletic, and social upliftment of its employees aimed at developing mentally and physically healthy and productive employees in an atmosphere of unity based on goodwill, fellowship and camaraderie. The total amount spent on these activities varies annually. 8. 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. 9. Fujitsu Account Savings Plan To encourage thrift among employees, Fujitsu Account Savings Plan is a financial benefit to the employees whereby employees save by maintaining their own individual accounts with a designated bank and the Company complements the employees' savings by contributing a given percentage of the employees' deposit which should not exceed PhP200 per month. The Company intends to give the following benefits to enable its employees to observe proper business/office attire expected of them and consequently perform their office functions: 10. Clothing Allowance P3,000 per year 11. Laundry Allowance PhP300 per month 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: aSTAcH 1. Facilities or privileges that are categorized as 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 PhP30,000.00 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 PhP30,000.00 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 (RR) No. 3-98, as amended by RR No. 8-2000 and as further amended by RR 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 RR No. 8-2000 as amended by RR 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 PhP30,000.00 (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 RR Nos. 2-98 and 3-98, as amended by RR No. 8-2000 and as further amended by RR No. 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 FBT 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 RR No. 3-98, as amended by RR No. 8-2000, as further amended by RR No. 10-2000, recognize actual yearly medical benefits not exceeding PhP10,000.00 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 PhP10,000.00 per annum of medical benefits, taken together with all the other medical benefits provided to such employees is not subject to income and withholding tax. b. Rice Allowance The rice allowance benefit in the amount of PhP500, PhP566.67, and PhP833.33 per month (depending on the employee's status) is within the limitation set by RR No. 3-98, as amended by RR No. 8-2000 and as further amended by RR No. 10-2000. Accordingly, the rice allowance is not subject to income tax and withholding tax. c. Monetized Unused Vacation Leave Credits The monetized unused vacation leave credits given to the employees not exceeding ten (10) days during the year are not subject to income tax and withholding tax pursuant to Section 2.78.1 (A) (7) of RR No. 2-98, as amended by RR No. 3-98, as amended by RR No. 8-2000, as further amended by RR No. 10-2000 (BIR Ruling No. DA-329-00 dated August 28, 2000). Conversely, the cash equivalent of vacation leave exceeding ten (10) days is subject to tax (BIR Ruling No. DA-594-04 dated November 23, 2004). HAaECD d. 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 (RR No. 8-2000, as amended by RR 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). However, even if the meal allowance is not being given on the occasion of overtime work, it may still be considered de minimis meal allowance not subject to withholding tax on compensation. Section 2.33 (B) of RR No. 3-98, as amended by RR No. 8-2000 and as further amended by RR 10-2000 are illustrative and non-exclusive in the enumeration of what constitutes de minimis benefits (BIR Ruling No. 023-02 dated June 21, 2002). Accordingly, meal allowance although not given on the occasion of overtime work may still be added in the above enumeration. But in terms of de minimis threshold for meal allowance, the ceiling for benefits of similar nature under RR No. 8-2000 should be used as guidelines. Such being the case, meal allowance not given on the occasion of overtime work may be considered de minimis meal allowance being given on the occasion of overtime work 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. CcADHI e. Service Award Provided that the Service Award with a value not exceeding PhP1,200 is within the limitation set by RR No. 3-98, as amended by RR No. 8-2000, as amended (i.e., it must be in the form of a tangible personal property other than cash or gift certificate and received by the employee under an established written plan which does not discriminate in favor of highly paid employees), the service award is not subject to income tax and withholding tax. f. Perfect Attendance and Perfect Punctuality Incentive This Office ruled in BIR Ruling No. DA-159-05 dated April 14, 2005 as follows: "WHEREFORE, inasmuch as JAE Phil. provides the perfect attendance incentive for the purpose of promoting the contentment and efficiency of its employees by encouraging them to limit their absences through a reward system and the value thereof is relatively small, the aforesaid incentive (perfect attendance) to its supervisory employees is exempt from the fringe benefits tax. Moreover, since the perfect attendance incentive is considered as de minimis benefit, it is likewise not subject to income tax as well as to withholding tax on compensation income of both managerial and rank and file employees. . . ." Applying the foregoing, the Company's perfect attendance and perfect punctuality incentive, each in the amount of PhP2,000 per year, are not subject to withholding tax on compensation. g. Social Interaction/Company Outing Section 2.33 (C), RR No. 10-2000, amending RR No. 8-2000 and 3-98 enumerating de minimis benefits is not an exclusive enumeration by the use of the phrase "such as the following" (BIR Ruling No. 169-04 dated April 6, 2004). In BIR Ruling No. DA-335-03 dated October 7, 2003, this Office had occasion to rule, viz: " 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 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.' aCTADI 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)." Accordingly, the annual social interaction activity/company outing sponsored by the Company is not subject to withholding tax. h. Clothing Allowance Since the clothing allowance in the amount of PhP3,000 is within the limitation set by RR No. 8-2000, as amended, it is considered de minimis benefit not subject to income tax and withholding tax. i. Laundry Allowance The laundry allowance in the amount of PhP300 is within the limitation set by RR No. 3-98, as amended by RR No. 8-2000, as amended. Accordingly, it is not subject to income tax and withholding tax. Since the above benefits are being given to promote the health, goodwill, contentment and efficiency of FPPIGC employees and are relatively of small value, which redounds to the benefit of the Company, the said benefits are not subject to FBT pursuant to Section 33 (C) of the Tax Code of 1997 as implemented by Section 2.33 (C) of RR No. 3-98, as amended by RR No. 8-2000 and as further amended by RR No. 10-2000. As regards the issue on whether the Fujitsu Account Saving Plan benefit is exempt from withholding tax and FBT, please be informed that we decline to rule on the matter considering the factual nature of the issue raised. 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. IcHAaS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service