BIR Ruling [DA-490-05]

December 6, 2005 BIR RULING [DA-490-05] RMC 60-91, RR 2-98, RR 3-98, RR 8-00 & RR 10-00 National Nutrition Council Villamor Interchange, South Superhighway Makati City Attention: Ms. Elsa M. Bayani Executive Director Gentlemen : This refers to your letter dated August 12, 2005 requesting for a ruling on whether or not the representation and transportation allowance (RATA) for government employees is taxable; and whether RATA can be released on the first week of the month without subjecting it to withholding tax. As represented, RATA of NNC officials is granted in accordance with the annual General Appropriations Act which provides that "...while in the actual performance of their respective functions ...(officials and those of equivalent rank) are hereby granted monthly commutable representation and transportation allowances ...." In reply, please be informed that Section 2.78.1 of Revenue Regulations (Rev. Regs.) No. 2-98, as amended by Rev. Regs. No. 3-98, 8-2000 and 10-2000 provides "Sec. 2.78.1. Withholding of Income Tax on Compensation Income . (A) ... aSADIC (6) Fixed or variable transportation, representation and other allowances. (a) In general, fixed or variable transportation, representation and other allowances which are received by a public officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding. Provided, however, that representation and transportation allowance (RATA) granted to public officers and employees under the General Appropriations Act and the personnel economic relief allowance (PERA) which essentially constitute reimbursement for expenses incurred in the performance of Government personnel's official duties shall not be subject to income tax and consequently to withholding tax .... (b) 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 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 expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of the advances made over actual expenses shall constitute taxable income if 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." This Office had occasion to rule in BIR Ruling No. DA367-00 dated October 23, 2000 that pursuant to RMC No. 60-91 dated July 9, 1991, RATA granted in accordance with the GAA is in fact a reimbursement of the expenses incurred in the performance of one's duties and is, therefore, not compensation subject to withholding tax pursuant to Section 79 of the Tax Code of 1997, provided, that substantiation requirements have been complied with. In view of the foregoing, the amount of RATA of NNC officials pursuant to the GAA is not subject to withholding tax. However, the excess of RATA, if not returned to the employer, constitutes taxable income which should be declared in the recipient's income tax return for the year in which the RATA is received by him. Any amount of tax withheld from RATA received by your qualified officials shall not be refunded but shall be credited against their income tax due for the taxable year or when the annualized withholding tax is determined in accordance with Rev. Regs. No. 2-98, as amended. The issue of whether RATA can be released on the first week of the month without subjecting it to withholding tax has become moot and academic considering that RATA is not subject to income tax 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 be considered as null and void. acHDTA Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue