BIR Ruling [DA-421-03]

November 20, 2003 BIR RULING [DA-421-03] 31 (B) (7) (e), RR 2-98, RR 10-00, 180-92, DA-262-92, DA-329-00, DA-262-92 Cadiz Carag & De Mesa Law Offices Suite 2602, 26th Floor, The Atlanta Centre No. 31 Annapolis Street, Greenhills 1500 San Juan, Metro Manila Attention: Attys. Othelo C. Carag and Anna Liza M. Ang-Co Gentlemen : This refers to your letter dated November 3, 2003 requesting for a confirmation of your opinion that the following items of employee compensation paid by United Coconut Chemicals, Inc., hereinafter referred to as "Cocochem", a corporation organized and existing under the laws of the Philippines, are not subject to withholding income tax: 1. Monetized value of unused vacation leave credits; 2. Monetized value of unused sick leave credits; 3. Financial grants; 4. Extra duty allowances; and 5. Profit shares and bonuses ( i.e. 13th-Month Pay, 14th-Month Pay, etc.). It is represented that Cocochem was incorporated in the Philippines on December 18, 1981 and duly registered as an export enterprise with the Philippine Economic Zone Authority; that it is involved in the manufacture of fatty acids, fatty alcohol and glycerine, utilizing coconut oil as the principal raw material, and in the sale, marketing and distribution of such products in the Philippines and anywhere in the world; that as part of the compensation package, its employees are paid the monetized value of unused sick/vacation leave credits, extra duty allowances, profit shares and bonuses; and finally, that it likewise extends financial grants to its employees. In reply thereto, we proceed to rule as follows: 1) Pursuant to Section 2 of Revenue Regulations No. 8-2000, as amended by Revenue Regulations No. 10-2000, the monetized unused vacation leave credits of employees not exceeding 10 days during the year form part of de minimis benefits and are not subject to withholding tax on compensation income of both managerial and rank and file employees (BIR Ruling Nos. DA-329-00 dated August 28, 2000 and 262-92 dated September 16, 1992) . HCaDET However, if the employer pays more than 10 days of monetized unused vacation leave credits, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30,000 ceiling of "Other Benefits" provided under Section 32(B)(7)(e) of the Tax Code of 1997. Accordingly, the monetized unused vacation leave credits exceeding 10 days paid by Cocochem shall be taxable to the employee receiving the benefits to the extent of the amount exceeding P30,000 and Cocochem shall be required to withhold income tax therefrom. 2) The monetized sick leave credits, however, is subject to income tax and consequently to the withholding tax (BIR Ruling Nos. DA-329-00 dated August 28, 2000; 180-92 dated May 29, 1992, and DA 262-92 dated September 16, 1992) . The revenue regulations do not include the monetized value of unused sick leave credits as part of the de minimis benefits not subject to withholding tax on compensation income. Hence, the monetized value of unused sick leave credits paid by Cocochem to its employees, regardless of the number of days and the amount thereof, is subject to withholding income tax. 3) On the subject of financial grants extended by Cocochem to its employees, in Revenue Regulations No. 3-98, it is provided that if an employer lends money to an employee interest free or at an interest lower than twelve percent (12%), the twelve percent (12%) foregone, or the difference between the assigned rate and the twelve percent (12%) shall be subject to fringe benefit tax or to withholding tax on compensation, depending on whether the grantee is a managerial or a rank and file employee, respectively (BIR Ruling DA-189-03 dated June 12, 2003) . 4) Section 2.79(B) of Revenue Regulations No. 2-98 categorizes taxable compensation income into regular taxable compensation income and supplementary compensation income. Under said regulations, regular taxable compensation income includes basic salary, fixed allowances for representation, transportation and allowances paid to an employee per payroll period. Supplementary compensation is defined by the same regulations as payments made to an employee in addition to regular compensation such as commission, overtime pay, taxable retirement pay, taxable bonus and other taxable benefits, with or without regard to a payroll period. In view of the foregoing extra duty allowances, by their nature, are payments to an employee in addition to the regular compensation received for extra duties assumed in the course of his employment. Accordingly, these are supplementary compensation subject to withholding income tax (BIR Ruling DA-123-03 dated April 21, 2002) . 5) Finally, under Section 32(B)(7)(e) of the Tax Code of 1997, 13th Month pay and Other benefits not exceeding P30,000.00 are excluded from gross income. The profit shares and bonuses paid to the employees form part of the other benefits referred to above. Thus, profit shares and bonuses are exempt from income tax to the extent of P30,000.00 but is subject to withholding income tax on any excess thereof (BIR Ruling DA-238-03 dated July 23, 2003) . 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. DACIHc Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service