Carag de Mesa & Zaballero Law Offices

June 25, 2010 BIR RULING [DA-(ECB-001) 110-10] Sec. 33 (A); BIR Ruling 013-02; DA 350-04; DA 023-06; DA-323-07; DA-013-08 Carag de Mesa & Zaballero Law Offices Suite 2602, 26th Floor, The Atlanta Centre No. 31 Annapolis Street, 1500 Greenhills, San Juan City Attention: Attys. Priscilla F. Zaballero Maria Theresa C. San Pablo Gentlemen : This refers to your letter dated January 19, 2010 requesting confirmation of your opinion that the allowances given by your client, Top Express Infrastructure Limited ("Top Express") , to its Technical Support Specialists, Project Managers and Senior Managers are non-taxable fringe benefits and hence, not subject to fringe benefits tax or income tax and consequently, withholding tax on compensation. It is represented that Top Express, with TIN 270-818-498-000, is a company created under the laws of the Hong Kong Special Administrative Region and licensed to do business in the Philippines. It is engaged in the business of installation and commissioning of telecommunications equipment and network as well as providing other technical assistance, support, training and testing, advisory, research and development services related to telecommunications. Top Express maintains a sizeable number of employees whose functions are either highly technical or managerial in nature. Since the company's clients who are in the telecommunications industry maintain their equipment and infrastructure in remote areas all over the Philippines, the presence of the company's employees in said areas is required. Hence, Top Express sends its technical and managerial employees to various project sites all over the country for telecommunications-related technical support and training to its clients, with each field assignment lasting for weeks or months depending on the complexity of the task that needs to be undertaken. During their field assignment, these employees necessarily incur expenses for food, transportation and lodging which, as a company policy, are shouldered by Top Express. In addition, the company gives a fixed amount of Outstation or Out-of-Town allowance as support to these employees who are sent to various locations beyond Metro Manila in the following amounts: Position Daily Allowance Technical Support Specialist P700.00 Senior Technical Support Specialist 700.00 Senior Manager 600.00 Project Manager 600.00 Technical Support Trainee 400.00 The Outstation Allowance is intended to cover meals and other trip-related expenses in connection with the employees' off-site assignments including, but not necessarily limited to, baggage services, laundry expenses, parking fees, toll fees, telephone fees and other incidental expenses. HSTAcI Based on the foregoing, you are requesting confirmation that: 1. Given that the Outstation Allowance granted to the employees of Top Express who go on work assignments outside of Metro Manila is required by the nature of or necessary to the trade or business of Top Express, and is granted mainly for the convenience of Top Express, no fringe benefits tax shall be imposed thereon. 2. Further, since the Outstation Allowance given by Top Express to its employees who work on field assignments outside Metro Manila is pre-computed on a daily basis and is paid to employees while they are on assignment or duty, it is not subject to substantiation and to any withholding pursuant to Revenue Regulations No. 2-98, as amended. In reply, please be informed that as a general rule, Section 33 (A) of the Tax Code of 1997 imposes a final withholding tax of 32% on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees) by the employer, whether an individual or a corporation. This general rule is not, however, without exception. In BIR Ruling No. 013-02 dated April 5, 2002, this Office discussed the situations where no fringe benefits tax may be imposed on fringe benefits granted to an employee, to wit: "Section 2.33 (C) of Revenue Regulations No. 3-98, as amended, sets forth two scenarios wherein no fringe benefit tax will be imposed, i.e., (1) when the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The said section provides in part that: (C) Fringe Benefits Not Subject to Fringe Benefit Tax. In general, the fringe benefits tax shall not be imposed on the following fringe benefits: xxx xxx xxx (5) If the grant of 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 fringe benefits to the employee is for the convenience of the employer." In the said ruling, this Office was asked to confirm the position that the Outstation Allowance given by an employer to its managerial and supervisory employees are not subject to fringe benefits tax. This Office ruled thus: "The Outstation Allowance as you claimed, is given by PGMC to its managerial and supervisory employees who will be away from this office site for at least 8 hours to visit lotto franchise holders for repairs and/or inspection of equipment for at least 8 hours to visit lotto franchise holders for repairs and/or inspection of equipment leased by the latter from the PCSO. The same is intended to cover meals and trip-related expenses of the employees in connection with their off-site visit including, but not limited to baggage services, laundry expenses, parking fees, toll fees, telephone fees and other incidental expenses. The Outstation Allowance, therefore, is clearly required by the nature of or necessary to the trade or business of PGMC. Accordingly, this Office opines and so holds that the Outstation Allowance by PGMC to its managerial and supervisory employees are not subject to the fringe benefits tax prescribed in Section 33(A) of the said Code. Thus, the Outstation Allowance, not being part of the compensation income of the employee, is not subject to income tax and consequently to withholding tax." This Office notes that the facts of the instant case are in all fours with the facts of the above ruling. First, the Outstation Allowance is given by Top Express to its managerial and supervisory and managerial employees who are often deployed to various off-site locations outside Metro Manila to install and commission telecommunication networks as well as provide backbone telecommunications support services to its clients. Second, the same is intended to cover meals and trip related expenses of the employees in connection with their off-site visit including, but not limited to baggage services, laundry expenses, parking fees, toll fees, telephone fees and other incidental expenses. TcCSIa As such, this Office finds that the Outstation Allowance is required by the nature of or necessary to the trade or business of Top Express. Accordingly, this Office is of the opinion and so holds that the Outstation Allowance by Top Express to its technical and managerial employees is not subject to the fringe benefits tax prescribed in Section 33 (A) of the said Code. Thus, the Outstation Allowance, not being part of the compensation income of the employee, is not subject to income tax and consequently to withholding tax. By the same token, as held in various BIR Rulings, the Outstation Allowance which may be incurred or expected to be incurred by the aforesaid employee in the performance of his duties cannot be considered as part of compensation subject to withholding tax even if the employee fails to account/liquidate the same considering that said expense is pre-computed on a daily basis and is paid to an employee while he is on an assignment or duty. (BIR Ruling No. 013-02, supra; DA 350-04 dated June 25, 2004; DA 023-06 dated January 27, 2006; DA-323-07 dated June 1, 2007; DA-013-08 dated January 16, 2008) Section 2.78.1 (A) (6) (b) of Revenue Regulations No. 8-2000 provides that "(6) Fixed or variable transportation, representation and other allowances. xxx xxx xxx (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 paid for 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 foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Section 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not required 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." In view of the foregoing, this Office hereby confirms your opinion that the Outstation Allowance granted by Top Express to its Technical Support Specialists, Project Managers and Senior Managers is non-taxable fringe benefit and hence, not subject to fringe benefits tax pursuant to Section 2.33 (C) of Revenue Regulations No. 3-98, as amended. Moreover, since the said allowance is pre-computed on a daily basis and is paid to the employees while they are on assignment or duty, it is not subject to the requirements of substantiation and therefore 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 null and void. DcITHE Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group