Centrolink Service Corporation

June 19, 2008 BIR RULING [DA-374-08] Revenue Regulations No. 2-98; BIR Ruling No. 55-99; 61-99; DA-13-02; DA-350-04; DA-223-07 Centrolink Service Corporation Unit 1005 The Pearlbank Centre 146 Valero St. Salcedo Village Makati City Attention: Ma. Parizia A. Reyes Managing Director Gentlemen : This refers to your letter dated March 17, 2008 requesting for confirmation of your opinion: 1) That the transportation, meal and mobile phone allowances being given to Centrolink Service Corporation (CSC for brevity) staffs/officers are not subject to income tax either as compensation or fringe benefits; and 2) That there is no substantiation requirement for the said transportation, meal, and mobile phone allowances. The facts as you represented are as follows: CSC is a corporation duly organized and existing under Philippine laws with principal address at Unit 1005 The Pearlbank Centre, 146 Valero Street, Salcedo Village, Makati City. It is primarily engaged in the business of selling health care services of Health Maintenance Organizations. As required by the nature of its business, CSC staffs/officers often work outside the office to primarily provide intermediary or coordination of services between the principal HMO and the concerned client/member at 24/7/52 and to attend client meetings, marketing/promotion, business development, and sales presentation activities, which activities also normally extend beyond the normal working hours. To ensure that they maintain the 24/7/52 service level standard requirements of their clients and to arrive on time for their scheduled activities/meetings, CSC staffs/officers use taxis, car rental services, or their personal vehicles to reach their destinations. ISTDAH Furthermore, to enable it to efficiently run its operations, meet and satisfy clients' service level standard expectations, and attain its monthly revenue targets, CSC also requires its staffs/officers to strictly adhere to their work schedules and render overtime work in most instances. In consonance with the demands of the work, CSC provides its staffs/officers the following: 1. Maximum transportation allowance of PhP3,000.00 per month to employees holding an officer position; 2. Maximum transportation allowance of PhP1,500.00 per month to rank and file employees; 3. Meal allowance of PhP100.00 per day to all employees; and 4. Mobile phone allowance of PhP1,500 per month to CSC managers and directors. The transportation allowance being given by CSC to its staffs/officers performing the abovementioned activities/meetings is pre-computed on a daily basis and is paid to the said employee while on an assignment or duty. It is being given to promote the efficiency and well being, as well as the safety of its employees and is necessary to enable the said employees to come on the scheduled activities/meetings on time without any untoward incident taking into account the prevailing security situation in the country. The meal allowance is being granted for use by the employees during the times that they are required to work overtime and would therefore incur meal expenses. Finally, the mobile phone allowance is being granted to the managers/directors considering that the same is required by the nature of their high-level position and the need to be easily accessible to client needs. In reply, please be informed as follows: EAcTDH Transportation Allowance Cash allowances given to employees as incentives are generally considered compensation income subject to income tax and withholding tax pursuant to Section 2.78.01 of Revenue Regulations No. 2-98, as amended. However, this Office ruled in BIR Ruling No. DA-350-04 dated June 25, 2004 the BIR held that ". . . if the transportation allowance . . . given to your customer service representatives and . . . to your coaches are provided for Parlance's and Vocative's convenience and benefit, the said transportation allowance is 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. 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 traveling 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 Section 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 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) DHCcST In view of the foregoing, this Office confirms your opinion that the transportation allowance being given by your subsidiaries, Parlance Systems, Inc. and Vocative Systems, Inc. to its customer service representatives are not compensation subject to income tax and consequently, to withholding tax on wages in accordance with Revenue RegulationsNo.2-98, as amended. Moreover, since the transportation allowance is pre-computed on a daily basis and are paid to the employee while on an assignment or duty, the said transportation allowance is not subject to the requirements of substantiation and to withholding pursuant to Revenue RegulationsNo.2-98, as amended." Applying the above ruling, this Office confirms your opinion that since the transportation allowance being given to CSC's staffs/officers is an ordinary and necessary expense paid or incurred by the employees in the pursuit of the business of the company, the said allowance is not considered compensation, hence, not subject to withholding tax (BIR Ruling No. DA-233-07 dated April 17, 2007). However, the said transportation allowance shall be subject to substantiation requirements as provided for under Sec. 34 (A) (b) of the 1997 Tax Code. Moreover, transportation allowance is not subject to the fringe benefits tax since it is required by the nature of the business of CSC and under the convenience of 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." HAICTD 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 occasion to rule in BIR Ruling No. 023-02 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. On the issue of whether the meal allowance is exempt from fringe benefits tax, Section 33 (C) of the Tax Code of 1997 as implemented by RR No. 3-98 provides: "(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 or, 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." CTDAaE Accordingly, this Office holds that the meal allowance being given across all CSC staffs/officers not exceeding 25% of their respective daily minimum wage may be considered de minimis meal benefit pursuant to RR No. 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. 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 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 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 3-98 implementing Section 33 (C) of the Tax Code. (BIR Ruling No. 61-99 dated May 5, 1999). Neither is it subject to substantiation requirement. Mobile Allowance As stated earlier, such 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. The BIR 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 of profession of the employer, or when the fringe benefit if 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. . . . EHTADa 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 Regulations No. 3-98." (BIR Ruling No. 055-99 dated April 23, 1999) 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 BIR 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. ACaTIc 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 of 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)" In view of the foregoing and since you represented that the mobile phone allowance is being granted to directors and managers because the nature of their jobs requires them to be on call 24 hours a day which is necessary to the business of CSC and redounds to the convenience and benefit of the company, said fringe benefit shall not be included as part of the 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 (BIR Ruling No. DA-233-07 dated April 17, 2007). 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. SAHEIc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service