BIR Ruling [DA-382-00]

November 7, 2000 BIR RULING [DA-382-00] 33; 79; 183-95; 067-95 Joaquin Cunanan & Co. 14/F Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Ms . Tomasa H . Lipana Gentlemen : This refers to your letter dated December 20, 1999 requesting on behalf of your client, Ford Motor Company Philippines, Inc. (FMCP), for a ruling that the discount on Ford vehicles to be sold to FMCP employees and their relatives by an authorized Ford dealer does not constitute taxable compensation to the employee nor fringe benefit subject to the fringe benefit tax. It is represented that FMCP, in coordination with authorized Ford dealers (Dealer), is contemplating to adopt a car sales plan designed to achieve the following objectives: to enhance visibility of Ford products, to develop customer headset, and to enable eligible persons to buy Ford vehicles from authorized dealers at a discounted price; that dealers are separate entities and unrelated to FMCP; that eligible persons who can participate in the car sales plan include FMCP regular employees, his/her legal spouse, parents, sons and daughters, brothers and sisters; that the whole family unit is allowed to purchase two (2) vehicles within a 12-month period, and the vehicles must be retained for a period of not less than one year; that under the plan, a discount of 10-15% on the suggested retail price may be provided upon the discretion of the Dealer to eligible FMCP employees and their families; and that the discount is determined as follows: Normal Retail Price (from Dealer to customer) P655,000 Discount (15% of retail price) 98,250 Net Selling Price to Eligible Persons P556,750 In reply, please be informed that Sec. 2.33(A) of Revenue Regulations No. 3-98 provides for the imposition of a final withholding tax on the grossed-up monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees . (Emphasis ours) Moreover, the existence of an employer-employee relationship is a condition sine qua non before the benefits received by a person from another be considered as part of the former's compensation income which shall be subject to income tax and consequently to the withholding tax pursuant to Section 79 of the Tax Code of 1997 or be subject to the fringe benefit tax imposed under Section 33 of the same Code. acIHDA The word discount shall be considered as a deduction from gross income for income tax purposes and from the gross sales for value-added tax or other percentage tax purposes. [Sec. 2(i), Revenue Regulations No. 2-94) As aptly applied under the generally accepted accounting principles, "discounts" are treated as follows: "1. The discount can be recorded as a reduction from gross sales. "2. The discount can be recorded as an expense of the period. "3. Sales revenue can be initially recorded at the net amount after deduction of the discount. Amounts received from customers who do not take the discount would then be recorded as additional revenue." (p.142, Accounting, Text and Cases by Anthony and Reece, 1979 Edition) [BIR Ruling Nos. 183-95 dated December 6, 1995; 067-95 dated April 11, 1995) The allowance of a discount reduces the amount received from sales. Thus, sales discounts appear as a deduction from sales. (p. 189, Chapter 5, Financial Accounting, Third Edition (1980), Walter B. Sleigs and Robert F. Meigs) In view of the foregoing, this Office is of the opinion as it hereby rules that the fringe benefit tax prescribed under Section 33 of the Tax Code of 1997 as implemented by Revenue Regulations No. 3-98 is imposed on the fringe benefit furnished, granted or paid by the employer to the employee, and the existence of an employer-employee relationship is a condition sine qua non for the fringe benefit to be considered subject to the fringe benefit tax. Thus, since there is no employer-employee relationship between the Ford Dealers and FMCP employees, the discount granted by authorized Ford Dealers to employees and eligible relatives of FMCP relative to their purchase of Ford vehicles shall not form part of their compensation income nor be subject to the fringe benefit tax under Section 33 of the Tax Code of 1997. 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. DSATCI Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group