Development Bank of the Philippines

August 18, 2009 BIR RULING [DA-(C-183) 469-09] RR 2-98; DA-131-91 Development Bank of the Philippines Sen. Gil J. Puyat Avenue cor. Makati Avenue Makati City Attention: EVP Benedicto Ernesto R. Bitonio, Jr. Chief Development Officer & Concurrent Head, HRM Gentlemen : This refers to your letters dated June 18, 2009 and March 10, 2009 requesting confirmation of the Development Bank of the Philippines' (DBP) treatment of the monthly stipend given to trainees under the DBP's Management Associates Program (MAP) as non-taxable. It is represented that DBP is a government financial institution created and operating pursuant to Executive Order No. 81, as amended by Republic Act No. 8523; that the MAP is DBP's special recruitment program that aims to provide opportunity to bright and young people of superior aptitude to nurture their career in a government financial institution; that a MAP trainee has to pass a rigid pre-qualifying exam and a panel interview before undergoing an intensive one-year training program; that under the MAP, the trainees are given a monthly stipend of P25,000.00 to cover the cost of housing, daily transportation expense within Metro Manila and meals for the duration of the program; and that after successful completion of the program, the trainees shall then be recommended for hiring as DBP regular employees. In reply, please be informed of the following: Section 2.78.1 of Revenue Regulations No. 2-98 defined compensation viz. : "Section 2.78.1. Withholding Tax on Compensation. (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. IACDaS 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 Sec. 33 of the Code; taxable pensions and retirement pay; and other income of similar nature constitute compensation income. xxx xxx xxx" In BIR Ruling No. 131-91 dated July 8, 1991, this Office ruled: "stipends are considered compensation for services performed by an employee for his/her employer hence, the same are subject to the withholding tax on wages. (Sec. 2, Revenue Regulations No. 6-82) However, it is noted that in the instant case, the monthly stipends and living allowance which both of you received are being paid by the World Rehabilitation Fund, Inc., New York, U.S.A. through the University of Santo Tomas Hospital, as the sponsor of the Two Year Training Program on Physical Medicine & Rehabilitation at Santo Tomas University Hospital, to which you were both accepted. Such being the case, said allowances are not considered as compensation for services performed by an employee for his/her employer, considering that an employee-employer relationship between both of you individually and the WRF does not exist. The said stipends and living allowance being received by both of you are not therefore, subject to the withholding tax on wages prescribed under Section 72 of the Tax Code, as amended, which requires as a condition for its imposition that an employee-employer relationship exist between the income payor and the recipient of such income. Moreover, they are not subject to the creditable withholding tax imposed under Revenue Regulations No. 6-85, as amended, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations implementing Section 50(b) of the Tax Code, as amended, considering that under said Revenue Regulations, only payments to persons enumerated therein are subject to the expanded withholding tax. Since payments of stipends and living allowances to trainees in sponsored medical program are not among those specified in said Regulations, the above payments are not, therefore, subject to the expanded withholding tax." CAaDSI Applying the same ruling to the instant case and considering that no employer-employee exists between DBP and the MAP's trainees, the said stipends and living allowance being received by them are not therefore, subject to the withholding tax on wages prescribed under Section 79 of the Tax Code of 1997, as amended. 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, this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service