Salvador Guevara & Associates

October 24, 2007 BIR RULING [DA-561-07] Sections 32, 33 & 78 Salvador Guevara & Associates 815-816, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Atty. Edmundo P. Guevara Atty. Maria Rosario L. Bernardo Atty. Josiebeth P. Basa Gentlemen : This refers to your letters dated December 4, 2006 and April 10, 2007 requesting on behalf of your client, Accenture, Inc . (the "Company") for confirmation of your opinion that the following incentives and allowances granted by the Company to its employees are exempt from fringe benefits tax (FBT), income and withholding taxes on compensation income: EHaCTA 1. Performance Incentive Awards; 2. Health Bonus; and 3. Hazard Pay consisting of meal and transportation allowances. As represented, the Company is a domestic corporation duly organized and existing by virtue of the laws of the Philippines, and was incorporated on December 13, 1991. Its principal office is located in Makati City, although the Company maintains office premises at its different project locations in the country. The Company provides management consulting, management information consulting, global business outsourcing and information technology services through its Manila Delivery Center for its clients worldwide. THcEaS Since its clients are located in different time zones, the Company is required to operate 24 hours a day and 7 days a week, with the employees working at different shifts throughout the day until nighttime. Employees may also be required to work overtime, if urgently required for the completion of a particular project. To ensure the regular and efficient delivery of its services, the Company presently grants the following monetary rewards and bonuses to its qualified rank-and-file, supervisory, and managerial employees: 1. Performance incentive awards, consisting of a cash award, the amount of which varies depending on the accomplishment of the project to which an employee is assigned to work; 2. Health benefit or bonus given to employees who have utilized a maximum of three (3) days of their sick leave entitlement; and 3. Hazard pay consisting of meal and transportation allowances. A. Performance Incentive Award The recipients of the performance incentive awards and the corresponding value of the awards are determined by the Company based on the satisfactory accomplishment of a particular project. Since it is dependent on the project, the performance incentive award varies in amount and frequency. The performance incentives granted by the Company may reach PhP15,000. SITCEA In granting the performance incentive awards to its employees, the Company is promoting both the efficiency and contentment of its employees by giving due recognition to the employees' individual contributions to the completion of each project. In turn, the increased efficiency of its employees enables the Company to meet its project objectives. B. Health Benefit or Bonus The Company also grants a health bonus to those employees who have used only a maximum of three (3) days of their sick leave entitlement during the fiscal year. The amount of the health benefit or bonus given to an employee is based on the number of sick leave days taken by the employee, and ranges from PhP2,000 to PhP15,000 per annum. AaCEDS C. Hazard Pay The Company's manner of operation has given rise to added risks on the part of the Company's employees who commute to and from work at nighttime. To alleviate the risk, the Company has adopted a policy of granting what it terms as "hazard pay" or allowances on account of nighttime and/or overtime work. Under the Company's policy, the "hazard pay" includes meal allowance and transportation allowances of P150. C.1. Meal Allowance The Company applies the following guidelines in granting meal allowance to its employees: TcDIaA a) All Company employees who work overtime for a minimum of three (3) hours from Mondays to Fridays or during regular workdays are entitled to a meal allowance of PhP150. Additional overtime work rendered for the next succeeding five (5) hours will entitle the employee to a second meal allowance of PhP150. The maximum meal allowance that can be claimed by an employee on a regular weekday is PhP300 per day. b) For work done on designated rest days such as weekends (or as otherwise designated by the project) and holidays, an employee who works for a minimum of five (5) hours can claim meal allowance of PhP150 per day. For the next succeeding five (5) hours of overtime work, the employee will be entitled to a second meal allowance of PhP150. The maximum meal allowance that can be claimed by an employee on weekends and holidays is PhP450 per day. HIEAcC The meal allowance is intended to provide a partial subsidy to employees working overtime to alleviate the burden of extra meal expenses incurred during nighttime or overtime work when regular canteen facilities are no longer open, and which the employees would not have spent had they not been required to render overtime service. C.2. Transportation Allowance The Company applies the following criteria or guidelines in granting the transportation allowance: a) Employees must work a minimum of five (5) hours overtime, which overtime work must be rendered until 10:30 p.m. or beyond. However, if the employee travels home with his co-employees, only one employee is entitled to claim the transportation allowance. b) The transportation allowance is equivalent to PhP150 or actual taxi fare if in excess of PhP150. cATDIH c) If the employee uses a private car, he may claim a transportation allowance at the rate of PhP10 per kilometer of the distance from the office to the employee's residence. d) Where the employee is assigned an alternative work schedule (i.e., compressed workweek schedule or core hours), the minimum of 5 hours is waived as long as the staff works continuously until 10:30 p.m. or until 5:30 a.m. e) During designated rest days such as weekends (or as otherwise designated by the project) and holidays, employees who render overtime work for a minimum of four (4) hours may claim a two-way transportation allowance in the amount of P10 per kilometer as actual taxi fare or PhP300, whichever is higher. f) When claiming allowance using kilometrage as basis, it is required that the origin and destination of the employee's travel be included in the employee's time report submitted to the Company, as well as the number of kilometers between origin and destination. The number of kilometers is subject to confirmation by the Company as required. DEScaT The Company gives its employees from the managerial level and below a transportation allowance at a minimum amount of PhP150. The transportation allowance is intended to alleviate the risk incurred by the Company's employees who work during the nighttime and on overtime and to enable them to secure safe transportation in commuting to and from work at nighttime. C.3. Fixed Allowance for Call Center Employees On the other hand, the Company's call center employees are granted a fixed meal and transportation allowance of PhP150 per day for every full workday worked, with or without overtime, and regardless of whether the day worked is a regular working day, rest day or holiday. ECAaTS These amounts will enable the employees to report on time for their designated work hours during nighttime. In case of overtime work, the transportation allowance will enable them to commute from work in comfort and safety by taking taxicabs if they are too fatigued to take other public transportation, or if other public transportation is no longer available at the time they leave work. In reply, please be informed as follows: 1) Performance Incentive Award Under Section 32 (B) (7) (e) (iv) of the Tax Code of 1997, "other benefits" include all benefits other than the 13th month pay, such as, productivity incentives and the annual Christmas bonus given by private offices, 14th month pay, mid-year productivity incentive bonus, gifts in cash or in kind and other similar benefits and refer to those benefits received by an official or employee for one (1) calendar year, the total amount of which including the 13th month pay does not exceed P30,000. Section 32 (B) (7) (e) (iv) of the Tax Code of 1997 reads: ISTECA "(B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (e) 13th Month Pay and Other Benefits . Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: xxx xxx xxx (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. SCaTAc xxx xxx xxx" Moreover, Section 2.78.1 (B) (11) (b) of Revenue Regulations (RR) No. 2-98, as amended provides viz: "(B) Exemptions from withholding tax on compensation . The following income payments are exempted from the requirement of withholding tax on compensation: xxx xxx xxx (11) Thirteenth (13th) month pay and other benefits. xxx xxx xxx (b) Other benefits such as Christmas bonus, productivity incentive bonus , loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. DcTAIH The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. xxx xxx xxx" In view of the foregoing, the performance incentive awards given by the Company to its employees may be considered as falling within the contemplation of "other benefits" provided for under Section 32 (B) (7) (e) (iv) of the Tax Code of 1997, and therefore, need not form part of the employees' taxable compensation income subject to withholding tax on wages under Section 79 in relation to Section 24 (A), both of the Tax Code of 1997, provided, however, that such "other benefits," inclusive of allowances/benefits, shall not, in the aggregate, exceed P30,000 when added to the 13th month pay. Any amount in excess of the P30,000 ceiling shall be taxable to the employee receiving the benefits. DHITCc Further, Section 33 (C) of the Tax Code of 1997 as implemented by Section 2.33 (C) of Rev. Regs. No. 3-98, as amended by RR No. 8-2000 and as further amended by RR No. 10-2000, provides, to wit: "(C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits tax shall not be imposed on the following benefits: DIHETS xxx xxx xxx (3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not; xxx xxx xxx (6) If the grant of the fringe benefits is for the convenience of the employer." (BIR Ruling No. 001-2007 dated January 10, 2007) Accordingly, the performance bonus is likewise not subject to the FBT since it addresses the Company's concern in promoting contentment and efficiency among its employees enabling the Company to meet its project objectives which in effect redounds to the convenience of the employer. 2) Health Benefit or Bonus Section 2.78.1 of RR No. 2-98, as amended re: Withholding Tax on Compensation Income, implementing the Tax Code of 1997 provides, viz: HICSaD "Section 2.78.1. Withholding Tax on Compensation Income . (A) Compensation Income Defined In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Section 33 of the Code; taxable pensions and retirement pay, and other income of a similar nature constitute compensation income. ATcaHS xxx xxx xxx" Based on the foregoing, "bonus" per se if given to employees as incentives are considered compensation income, hence, subject to income tax under Section 24 (A) of the Tax Code of 1997, and consequently to withholding tax prescribed under RR No. 2-98, as amended (BIR Ruling No. 172-91 dated September 5, 1991 and BIR Ruling No. 89-95 dated June 15, 1995). However, health benefit or bonus may be considered de minimis medical benefits exempt from withholding tax. Section 2.33 (B) of RR No. 3-98, as amended by RR No. 8-2000 and RR 10-2000 implementing Section 78 of the Tax Code of 1997 are illustrative and non-exclusive in the enumeration of what constitutes de minimis benefits (BIR Ruling No. 023-02 dated June 21, 2002). Accordingly, health benefit or bonus may still be added in the above enumeration. But in terms of de minimis threshold for actual yearly medical benefits not exceeding PhP10,000 per annum, the ceiling for benefits of similar nature under RR No. 8-2000 should be used as guidelines. Such being the case, health benefit or bonus may be considered de minimis medical benefits if the employee actually got sick and incurred actual medical expenses not exceeding PhP10,000 per annum and therefore, tax exempt. The excess of the health benefit or bonus 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. SHCaEA Since health benefit or bonus is being given to provide incentive to employees to maintain their good health and efficiency and promote a reduction in the absences of employees on account of sickness which redounds to the benefit of the Company, said actual health benefit is not subject to FBT pursuant to Section 33 (C) of the Tax Code of 1997 as implemented by Section 2.33 (C) of RR No. 3-98, as amended by RR No. 8-2000 and as further amended by RR No. 10-2000. 3) Hazard Pay In BIR Ruling No. 266-93 dated June 18, 1993, this Office had occasion to rule that hazard pay forms part of the gross compensation income, hence, subject to withholding tax, viz: aSAHCE ". . . hazard pay is embraced within the term compensation, which means all remunerations for services performed by an employee for his employer unless specifically excepted under Section 27, 28(b) and 71 of the Tax Code, as amended. Compensation income includes all income payments received as a result of employer-employee relationship, such as salaries, wages, honoraria, bonus, taxable pensions, allowances, fringe benefits, fees, and other income of similar nature." Applying the above ruling, hazard pay given to the employees of the Company is considered compensation subject to withholding tax on compensation. You mentioned BIR Ruling DA-023-06 dated January 27, 2006 as your basis in submitting that hazard pay is exempt from income tax, and consequently, from withholding tax. The same BIR Ruling No. DA-023-06 cited BIR Ruling No. DA-350-04 dated June 25, 2004 as its basis. We noted that the issue in BIR Ruling No. DA-350-04 is transportation allowance. Nowhere was hazard pay mentioned in BIR Ruling No. DA-350-04. The latest precedent on hazard pay is BIR Ruling No. 266-93 which considered hazard pay as compensation subject to withholding tax. Accordingly, hazard pay per se is considered compensation subject to withholding tax. IaHCAD Nevertheless, you represented that hazard pay being given to the employees of Accenture, Inc. consists of meal and transportation allowances. Meal allowance may be tax-exempt subject to the standards set for de minimis thresholds for fringe benefits under RR No. 3-98, as amended by RR No. 8-2000 and as further amended by RR 10-2000 and to the conditions set for the benefits to be exempt pursuant to the tests of convenience of the employer and the promotion of health, goodwill, contentment, or efficiency of the employees under Section 2.78.1 (A) (2) and (3) of RR 2-98, as amended. Pursuant to RR No. 8-2000, as amended, meal allowance not exceeding 25% of the daily minimum wage may only be considered de minimis meal benefit and therefore, tax exempt if the employee is working overtime. 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 (BIR Ruling No. DA-264-2004 dated May 17, 2004). Accordingly, that portion of the hazard pay consisting of the meal allowance not exceeding 25% of the daily minimum wage may be considered de minimis meal benefit exempt from income tax and consequently, from withholding tax on compensation. cEHSTC Moreover, since hazard pay consisting of meal allowance is being given to the employees to provide a partial subsidy to the employee working overtime to alleviate the burden of extra meal expenses incurred during nighttime or overtime work when regular canteen facilities are no longer open, which redounds to the benefit of the Company, it is, therefore, not subject to fringe benefits tax pursuant to Section 33 (C) of the Tax Code of 1997 as implemented by Section 2.33 (C) of RR No. 3-98, as amended by RR No. 8-2000 and as further amended by RR No. 10-2000. HEAcDC On the other hand, fixed or variable transportation allowance received by an officer or employee, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding. However, it is not considered compensation subject to withholding if (1) it is an ordinary and necessary expense incurred or reasonably expected to be incurred by the employee in the performance of his duties and in the pursuit of the business of his employer; and (2) he is required to account/liquidate for the expense in accordance with the specific requirements of substantiation pursuant to Section 34 of the Tax Code of 1997. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. (Section 2.78.1 (A) (6), RR No. 2-98, as amended by RR No. 8-2000) It appears that transportation allowance is given only to employees who work a minimum of four (4) or five (5) hours overtime, as the case may be. Also, the amount of transportation allowance varies depending on whether the employee uses a private or public transportation. In case of the employee who uses a private transportation, the amount is equivalent PhP10 per kilometer. In the case of the employee who uses public transportation, the amount is equivalent to PhP150/PhP300 (as the case may be) or actual fare, whichever is higher. Such being the case, and provided that the employees account for or liquidate it, transportation allowance is exempt from income tax and consequently, from withholding tax on compensation. Likewise, it is not subject to fringe benefits tax because it enables the employees to report on time for their designated work hours during nighttime which redounds to the benefit of the Company. cAaETS However, transportation allowance given to the Company's call center employees, 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 since the same are fixed in amounts and are regularly received as part of their monthly compensation income. 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. ADEaHT Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner