BIR Ruling [DA-655-99]

November 29, 1999 BIR RULING [DA-655-99] SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: C . P . Noel Tax Division Gentlemen : This refers to your letter dated July 27, 1999 requesting on behalf of your client, Philippine Geothermal, Inc . (PGI), for a ruling that the following benefits, to wit: "1. Annual foregone interest on calamity loaning an amount equal to P3,000.00 per employee; "2. Annual forgone interest on one-month salary loan the average amount per employee of which is equal to P2,640.00; and "3. Annual foregone interest on Unified Loan Assistance the average amount per employee of which is equal to P3,000.00" granted to the rank and file employees as well as supervisors and managers of PGI under the Collective Bargaining Agreement, which are of "relatively small value", do not constitute additional income to such employees and are therefore exempt from income and withholding taxes and/or fringe benefit tax. LibLex It is represented that PGI is a corporation organized and existing under the laws of California, U.S.A. and duly authorized to do business in the Philippines with its principal office located in Makati City; that it is engaged in the operation of geothermal facilities and has two (2) geothermal plants in Tiwi, Albay and Mak-Ban, Bay, Laguna; that as a means of promoting the health and goodwill of its employees and in order to provide the necessary additional funds to finance the emergency expenses of its workers, PGI granted the following types of loan to its employees: "1. Calamity Loan This one-time loan is made available only to employees assigned to the plant sites devastated by calamities, i.e. typhoon, and is aimed at helping affected employees rebuild their damaged houses and other properties. The total amount is P50,000.00 payable in two (2) years without any interest. Based on the threshold interest of 12%, the total foregone interest on the calamity loan is P3,000.00 a year per employee. LexLib "2. One-Month Salary Loan As part of their regular benefits, employees of PGI may avail of a one-month salary loan each year. The average amount of the loan is P22,000.00 per rank-file employee payable in one (1) year. The loan is also interest free. Based on the threshold interest rate of 12%, the average annual foregone interest on the salary loan is P2,640.00 per rank and file employee. On the other hand, the average annual foregone interests on the salary loan of supervisors and managers are P6,000.00 and P13,000.00 respectively based on an average monthly salary of P55,000.00 for supervisors and P100,000.00 for managers." "3. Unified Loan Assistance A unified loan assistance is available to all employees of PGI equivalent to five (5) to twelve (12) months salary depending on the service credit earned by the employee and is payable in five (5) to seven (7) years. An interest of 5.5% is charged on the portion of the loan in excess of the amount equal to 5 months salary. The average annual foregone interests are P3,000.00 for rank and file employees and P16,000.00 for supervisors and managers based on the threshold interest of 12%." Based on the foregoing, you now request for a ruling that the aforementioned benefits shall not be subject to the withholding tax and/or to the fringe benefit tax. In reply, please be informed that Section 2.78.1(A) of Revenue Regulations No. 2-98 defines compensation as 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 Tax Code of 1997; taxable pensions and retirement pay, and other income of a similar nature constitute compensation income. Moreover, Sec. 2.33(B) of Revenue Regulations No. 3-98 defines fringe benefit as any good, service or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in the said regulations). It includes, among others, interest on loan at less than market rate to extent of the difference between the market rate and actual rate granted. Such being the case, the foregone interests on the calamity loan, unified loan assistance as well as the foregone interest of 6.5% of the one-month salary loan availed by the supervisory and managerial employees are considered as fringe benefits subject to the fringe benefit tax imposed under Section 33 of the Tax Code of 1997 and implemented by Rev. Regs. No. 3-98. llcd With regard to the foregone interest on the one-month salary loan availed by the rank and file employees, such foregone interests on calamity loan, unified assistance loan as well as the one-month salary loan shall be considered as part of compensation income subject to income tax and consequently to the withholding tax under Section 79 of the Tax Code of 1997. (BIR Ruling No. 061-99 dated May 5, 1999) Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)