BIR Ruling [DA-469-06]

August 1, 2006 BIR RULING [DA-469-06] Sections 32 and 33; DA-081-2003 SGV & Co. 6760 Ayala Avenue 1226 Makati Attention: Atty. Rafael C. Vinzon Partner, Tax Division Gentlemen : This refers to your letter dated February 16, 2005 requesting on behalf of your client, NEC Tokin Electronics (Philippines), Inc. ("NEC Tokin" for brevity) for confirmation of your opinion that premiums for the group hospitalization benefits it provides to its non-rank and file employees under a Health Maintenance Organization (HMO) are not subject to fringe benefits tax (FBT) under Sec. 2.33 (B)(10) of Revenue Regulations No. 3-98. CHDAEc The facts, as represented, are as follows: 1. NEC Tokin is a corporation duly organized and existing under and by virtue of the laws of the Philippines. Its principal office address is at 1 Ring Road, Light Industry & Science Park (LISP) II, Barangay La Mesa, Calamba, Laguna. It is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise pursuant to its Certification of Registration No. 02-043. Under the Registration Agreement, the company's registered activity "shall be limited to the manufacture of electro mechanical device as relay and others, and the importation of raw materials, machinery, equipment, tools, goods, wares, articles or merchandise directly used in its registered operations." 2. NEC Tokin provides group hospitalization benefits to its non-rank and file employees under a HMO plan provided by Health Maintenance, Inc. The company shoulders the entire amount of HMO premiums covering its non-rank and file employees pursuant to this group health insurance. The plan is compulsory, meaning that the employee has no option not to be covered by the group health insurance plan. However, the HMO plan has no paid-up value to the employee. 3. Furthermore, under the arrangement with Health Maintenance, Inc., a maximum of three (3) dependents of the non-rank and file employees are enrolled under the HMO plan. In the case of assistant managers, NEC Tokin shoulders the entire amount of the HMO premiums covering their dependents. In the case of supervisors, NEC Tokin advances the HMO premiums covering their dependents and collects the same through salary deductions over a period of one year. In connection therewith, you now request for a confirmation that: 1. Premium payments made by NEC Tokin to Health Maintenance, Inc. pursuant to its group health insurance plan for its employees are not subject to FBT. 2. Premium payments made by NEC Tokin to Health Maintenance, Inc. pursuant to its group health insurance plan for the dependents of its assistant managers to the extent of P 1,500 per employee per year are not subject to FBT. 3. Premium payments made by NEC Tokin to Health Maintenance, Inc. pursuant to its group health insurance plan for the dependents of its supervisors, which payments are later paid by said employees, are not subject to FBT. In reply thereto, please be informed as follows: 1. On the first issue Section 33(C) of the 1997 Tax Code provides that: "(C) Fringe Benefits Not Taxable. The following fringe benefits are not taxable under this Section: (1) Fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner." (emphasis supplied) Revenue Regulations No. 3-98, which implements the above provision of the Tax Code, provides that the cost of group life insurance premiums borne by the employer for his employee shall be considered as a non-taxable fringe benefit. Section 2.33(B)(10) of the said regulation states that: "(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employee shall be treated as taxable fringe benefit, except the following: HEacAS (a) contributions of the employer for the benefit of the employee, pursuant to the provisions of existing law, such as under the Social Security System (SSS), (R.A. No. 8282, as amended) or under the Government Service Insurance System (GSIS) (R.A. No. 8291), or similar contributions arising from the provisions of any other existing law; and (b) the cost of premiums borne by the employer for the group insurance of his employees. " (emphasis supplied) Although technically a health maintenance organization (HMO) is not an insurance company subject to registration and regulation by the insurance Commission, the service rendered by such HMOs are akin to the service provided by insurance companies. Thus, in Revenue Memorandum Circular No. 04-03, dated December 31, 2002, in defining insurance and pension funding companies, this is clarified, to wit: "(ii) Insurance and pension funding companies refer to those engaged in life and non-life insurance business as defined under the Insurance Code AND pre-need companies, including health maintenance organizations. Their gross receipts shall mean actual or constructive receipts representing: net retained premiums (gross premiums net of returns, cancellations, and premiums ceded)/ gross premium or collection from planholders; membership fees (in the case of HMOs) ; xxx xxx xxx" (emphasis supplied) Being considered as a pre-need company, premium payments to HMOs by a corporation under a group insurance plan are not subject to fringe benefit tax. 2. On the second issue Section 33(C)(4) of the 1997 Tax Code states that de minimis benefits are not subject to fringe benefit tax. This is further implemented by Section 2.33(C) of Revenue Regulations No. 3-98 ( supra ), which states that: "(C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits tax shall not be imposed on the following fringe benefits: (1) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not: (4) De minimis benefits as defined in these Regulations ; (5) If the grant of the 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." (emphasis supplied) As defined in the regulations, de minimis benefits are clarified to be: "The term " DE MINIMIS " benefits which are exempt from the fringe benefit 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 such as the following: xxx xxx xxx (2) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month ; xxx xxx xxx" (emphasis supplied) On the basis of the foregoing, BIR Ruling No. DA-364-03 , dated October 13, 2003, states that: "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 2. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month : AICDSa xxx xxx xxx (emphasis supplied) "In view of the foregoing, the medical cash allowance to dependents of employees not exceeding P 750.00 per employee per semester or P 125.00 per month and actual yearly medical benefits not exceeding P 10,000 per annum if given to the rank and file and managerial employees are considered de minimis benefits and therefor 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)." (emphasis supplied) In your supplemental letter to this Office, it is stated that the annual premium paid for dependents of assistant managers is P9,890.00 and for dependents of supervisors, P7,831.00, depending on the age of the dependent, and that the premium payment is not shouldered by NEC Tokin, but is paid by employee-supervisor through salary deduction. Applying the rate of P 125.00 per month to an annual basis, the annual ceiling for de minimis benefits given as cash allowance to dependents of employees is P 1,500.00 per employee per year. To this extent, therefore, the premiums paid to HMOs by NEC Tokin are not subject to fringe benefits tax, income tax, nor to withholding tax on compensation. However, any amount in excess of the ceiling may further be considered as part of other benefits, provided that the total benefits shall not exceed P30,000.00. Further still, that the amount in excess of the P30,000.00 threshold of the total of "other benefits" shall be included as part of the taxable compensation of the employer-taxpayer. 3. On the third issue The premiums initially paid by NEC Tokin to Health Maintenance, Inc. on behalf of the dependents of its supervisors pursuant to the group insurance plan do not constitute fringe benefits or income to said supervisors. The amount of the premiums is paid by the supervisors as salary deductions. NEC Tokin merely includes their dependents in the group insurance package as an accommodation. In any case, any benefit that the supervisors derive from this accommodation does not exceed the amount of P 1,500.00 per employee per year. As discussed in the preceding section, such benefit, if any, is neither subject to fringe benefit tax nor to income and withholding tax. 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 considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service