Quisumbing Torres

March 20, 2009 BIR RULING [DA-(ECB-008) 169-09] RR 2-98 Quisumbing Torres 17th Floor Net One Center 26th Street cor. 3rd Avenue Crescent Park West, Bonifacio Global City Taguig, Metro Manila Attention: Atty. Dennis G. Dimagiba Atty. Maria Ana Camila C. Jacinto Gentlemen : This refers to your letter dated December 18, 2008 requesting on behalf of your client, W.R. Grace Philippines (WRGP) for confirmation of your opinion that A. The meal and transportation reimbursements for overtime or weekend work, and travel allowances provided to supervisory and managerial employees are not subject to the fringe benefit tax (FBT) and withholding tax since it is furnished for the convenience and benefit of WRGP pursuant to Section 2.33 (C) of Revenue Regulations (RR) No. 3-98; and B. The meal and transportation reimbursements for overtime or weekend work, and travel allowances are not subject to the requirements of substantiation and any withholding tax pursuant to RR No. 2-98, as amended, and Section 2.33 (C) of RR No. 3-98, as amended. As represented, WRGP is organized as a domestic corporation and is duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 28188. WRGP is engaged in the sale and manufacture of specialty chemicals for use in the food packaging and construction industry, and is a subsidiary of W.R. Grace Singapore (Pte) Ltd. (GRACE). WRGP has an authorized capital stock of P23,600,000.00, consisting of 59,000 common shares with a par value of PhP400.00 per share. WRGP's supervisory and managerial employees are provided the following: Meal and transportation reimbursement for a minimum of two (2) hours overtime, given as PhP150/meal and actual transportation or mileage reimbursement when made to work overtime or on weekends to serve project requirements and/or to attend telephone conference calls with other Grace sites because it recognizes the added risk that its employees take on to commute to and from work during the night and those who extend their working hours during weekends or during holidays; and EcHIAC Travel allowance of USD10 per day for overseas training and USD25 per day for official business abroad computed based on actual number of days of travel and paid via payroll and, thus, made subject to income tax. In reply, please be informed that allowances given to employees are generally considered compensation income subject to income tax and withholding tax prescribed under Section 79 of the Tax Code, as implemented by Section 2.78.1 of Revenue Regulations (RR) No. 2-98 (BIR Ruling No. 025-2001 dated June 13, 2001). Section 2.78.1 (A) (6) of RR No. 2-98, as amended by RR No. 8-2000 specifically provides that "(i)n 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 tax. Accordingly, if the transportation allowance is fixed in amount and regularly received by the employees as part of their monthly compensation income, the same 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 (BIR Ruling No. DA-159-2003 dated May 14, 2003, DA-335-03 dated October 7, 2003, and DA-169-04 dated April 5, 2004). On the other hand, 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: (1) It is 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 (2) 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 advances made over actual expenses shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts 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 (Section 2.78.1 (A) (6) (b) of RR No. 2-98, as amended by RR No. 3-98, RR No. 8-2000 and RR No. 10-2000) Moreover, and as a general rule, Section 33 (A) of the Tax Code 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 corporation. aETAHD This general rule is not, however, without exception. The aforequoted section sets forth two scenarios wherein no fringe benefits 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. On the basis of the foregoing and following the pertinent Revenue Regulations on the matter, we proceed to rule on the particular issues raised for our consideration: 1) Pursuant to RR No. 2-98, as amended by RR 3-98, RR 8-2000 and RR 10-2000, meal allowance not exceeding 25% of the daily minimum wage may be considered de minimis meal benefit and therefore, tax exempt. For the meal allowance provided by WRGP to its supervisory and managerial employees to be considered de minimis benefit, only such daily meal allowance for overtime work not exceeding 25% of the basic minimum wage, on a per region basis shall be recognized and allowed. The elements of the benefit are as follows: i. The meal allowance is being given on the occasion of overtime work; ii. The amount must be computed on a daily basis; and iii. The amount must not exceed 25% of the minimum wage applicable in the area (BIR Ruling No. DA 250-02 dated December 18, 2002). The excess over this amount shall be considered "other benefits" as contemplated under Section 32 (B) (7) (e) (iv) of the Tax Code. 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 PhP30,000.00. 2) Since the actual transportation or mileage reimbursement given to supervisory and managerial employees, when made to work overtime or on weekends to serve project requirements and/or to attend telephone conference calls with other Grace sites, are not fixed in amount or regularly received as part of the employees' monthly compensation income, the reimbursement shall not be considered as taxable compensation income subject to withholding tax. However, such expenses shall have to be substantiated as prescribed under Section 34 of the Tax Code (BIR Ruling No. DA-302-2008 dated May 19, 2008). 3) Travel allowance of USD10 per day for overseas training and USD25 per day for official business abroad computed based on actual number of days of travel, may be considered as ordinary and necessary expenses paid or incurred by the employees in the pursuit of the business of the company and, therefore, not considered as compensation subject to withholding tax. However, the said travel allowance is subject to the requirements of substantiation. Hence, official receipts or other adequate records must be submitted for purposes of being considered valid deductible expenses on the part of WRGP. 4) Since the abovementioned meal and transportation reimbursements and travel allowances are required by the nature of or necessary to the trade or business of WRGP, the grant of the aforesaid benefits by WRGP to its supervisory and managerial employees are not subject to the FBT prescribed in Section 33 (A) of the Tax Code. 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. ASDCaI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service