BIR Ruling [DA-364-03]

October 13, 2003 BIR RULING [DA-364-03] Sections 32 & 33 85-91; 2-99; 27-01 & DA-81-03 China Banking Corporation Paseo de Roxas corner Villar Street Makati City Attention: Mr. Reynaldo P. Del Rosario, Jr. Deputy Senior Manager Gentlemen : This refers to your letter dated July 29, 2002 requesting clarification on the following 1.a. What documents are needed to claim the amount of P2,400.00 premium payment on health/hospitalization insurance as deduction from the gross taxable income of a taxpayer? A: Premium payments on health and/or hospitalization insurance shall be allowed as deduction from gross income provided the taxpayer attaches evidence of premium payments (the deductible amount shall not exceed P2,400 or P200 per month whichever is lower) and that their family's total gross income does not exceed P250,000 for the calendar year (BIR Ruling No. 002-99 dated January 12, 1999). For purposes of substantiating the claim of insurance expense, the policy contract shall be presented to the employer together with the original official receipt of the premium payment (Section 2.79.(B)(5)(b) of Revenue Regulations No. 2-98, as amended). The spouse claiming the additional exemptions for the qualified dependent children shall be the same spouse to claim the deductions for premium payments (Section 2.79.(B)(5)(b) of Revenue Regulations No. 2-98, as amended). 1.b. What is your definition of family income as used in Section 34(M) of the Tax Code of 1997? HEcSDa A: Under Section 2.79.(B)(5)(b) of Revenue Regulations No. 2-98, as amended, "total family income" includes primary income and other income from sources received by all members of the nuclear family, i.e. , father, mother, unmarried children living together as one household, or a single parent with children. A single person living alone is considered as a nuclear family. 2. If an employee reaches the age of 50 with 10 years or more of service with the company is he entitled to tax-free separation benefits if he resigns from the company? A: The requirement that the employee is not less than fifty (50) years of age and has rendered at least ten (10) years of service in the company refers to employees retiring pursuant to a reasonable private benefit plan maintained by the employer under Section 32(B)(6)(a) of the Tax Code of 1997 and not to employees who are resigning from the service of the company. In the case of resignation from the service of the company, any and all amounts to be received by the employees shall be subject to income tax (BIR Ruling No. 085-91 dated May 15, 1991). Moreover, if the plan is contributory, any and all amounts to be received by the employees over and above his/her personal contribution to the plan shall be subject to income tax. 3.a. How much of the employees' Medicine Allowance is tax exempt? A: The term de minimis benefits which are exempt from the fringe benefits tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that 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. 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: 1. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees; 2. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month; 3. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00; 4. Uniform and clothing allowance not exceeding P3,000.00 per annum; 5. Actual yearly medical benefits not exceeding P 10,000.00 per annum; 6. Laundry allowance not exceeding P300.00 per month; 7. Employees achievement awards, e.g. , for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; 8. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum; 9. Flowers, fruits, books or similar items given to employees under special circumstances e.g. on account of illness, marriage, birth of a baby, etc., and 10. Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage. In view of the foregoing, the medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125.00 per month and actual yearly medical benefits not exceeding P10,000.00 per annum if given to the rank and file and managerial employees are considered de minimis benefits and therefore not considered as compensation income/wages and which are not subject to either fringe benefits tax, income tax or withholding tax on compensation (Revenue Regulations No. 2-98, as amended). The amount of de minimis benefits conforming to the ceiling herein 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 (BIR Ruling No. DA-081-03 dated March 17, 2003). 3.b. Are the employees required to submit official receipts? A: Yes. Section 34(A)(1)(a)(i) of the Tax Code of 1997 provides, viz. : "Sec. 34. Deductions from Gross Income . . . . (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses. (a) In General. There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession . . ." For income tax purposes, medicine allowance is a proper deduction from gross income, provided that such benefits, to the extent that the amount thereof exceeds the amount of de minimis benefits provided under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 10-2000, have been subjected to the appropriate withholding tax, in accordance with Revenue Regulations No. 2-98, as amended. However, for an expense to be deductible, it must be substantiated by official receipts or adequate records. Generally, this Office only accepts the original copy of the receipts, which a taxpayer presents to substantiate deductible expense. Nevertheless, the absence of original receipts or records does not prevent a taxpayer from proving by other evidence that the claimed deduction was really paid or incurred ( Zamora vs. Collector, L-15290, May 13, 1963; Visayan Cebu Terminal Co., Inc. vs. Collector, L-12798, May 30, 1960 ). Accordingly, this Office will accept certified true copies of the official receipts, certified by the duly authorized officer of the hospital concerned or by the person who issued the lost original receipt, presented by the employee claiming reimbursement for his hospitalization only upon proof that the original of said receipts were actually lost or destroyed. For this purpose, the employee concerned should be required to execute an affidavit attesting to the fact of loss of the original receipt in order that the certified true copy of the same may be admissible as evidence of your claimed deductible expense (BIR Ruling No. 027-01 dated June 20, 2001). 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. IACDaS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group