Quiason Makalintal Barot Torres Ibarra & Sison

November 18, 2008 BIR RULING [DA-(ECB-008) 435-08] 33; RR 2-98; RR 3-98; RR 8-2000; 10-2000; # 55-99; # 61-99; DA-13-2002; DA-238-2003; DA-350-2004; DA-233-2007; DA-013-2008 Quiason Makalintal Barot Torres Ibarra & Sison 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue corner Pedro Poveda St. Ortigas Center, Pasig City Attention: Atty. Ruelito Q. Soriano Atty. Benedict R. Tugonon and Atty. Mark S. Gorriceta Gentlemen : This refers to your letter dated April 16, 2008 requesting on behalf of your clients, ePERFORMAX INTERNATIONAL, INC., ("eP International") and its operating subsidiaries, ePerformax Contact Centers Corp. ("eP Manila") and ePerformax Contact Center (Cebu) Corp. ("eP Cebu") (collectively, "ePERFORMAX"), for confirmation of your opinion that: HEcTAI 1) The meal, transportation, and mobile phone allowances being given by eP Manila and eP Cebu to its service agents do not form part of the taxable compensation or fringe benefits paid to the service agents; and 2) The said allowances are exempt from any withholding tax pursuant to Revenue Regulations No. 2-98, as amended, and are not subject to any substantiation requirement. As represented, the facts are as follows: eP International is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with address at the 2nd Floor Mary Bachrach Building, Railroad corner A.C. Delgado Sts., Port Area, Manila City. eP International, through its wholly-owned subsidiaries eP Manila and eP Cebu, operates business processes related primarily to contact center operations and customer service support for U.S. clients through its operations located in the Philippines. ePERFORMAX is a pioneering Philippine provider of inbound customer care, inbound customer retention and renewal, inbound sales and cross-selling, website technical support, and outbound data verification supporting its base of clients consisting of large U.S.-based Fortune 500 Corporations. ePERFORMAX is one of the key players in the very competitive Business Process Outsourcing ("BPO") industry in the Philippines. eP Manila and eP Cebu are corporations duly organized and existing under and by virtue of the laws of the Republic of the Philippines. Both corporations are incorporated with the primary purpose of engaging in the business of information technology (IT) services, including contact center operations, software developments, internal access and e-commerce services, back-office processing and system integration. CSIDEc ePERFORMAX employs more than 2,000 contact center agents and customer service support agents (collectively " Service Agents ") to service the requirements of its clients which are all based in the United States of America ("US") ePERFORMAX operates twenty-four (24) hours a day, seven (7) days a week. Its peak hours are from 9:00 P.M. to 9:00 A.M. Philippine time, which coincides with the day time in the various time zones in the US, where all of the clients of ePERFORMAX are located. In order to efficiently run its operations and consequently meet and exceed clients' expectations, ePERFORMAX requires its employees to strictly adhere to their work schedules. Specifically, employees are made to work at designated hours and are required to work overtime to the extent necessary in order to immediately address the clients' requirements. In this regard, and in order to ensure the efficiency and well-being of its employees ePERFORMAX provides Transportation Allowance, Meal Allowance and Mobile Phone Allowance in order to deliver the best available service to its clients. meal allowance of P100.00 to P150.00 per day to supervisory; transportation allowance amounting to P150.00 per day for employees working on day shift and P300.00 per day for employees working on night shift; and Mobile phone allowance amounting to P25.00 to P75.00 per day. We reply, as follows: Meal Allowance Section 2.78.1 (a) (3) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 8-2000 and 10-2000 reads "The following shall be considered as 'de minimis' benefits not subject to INCOME TAX AS WELL AS withholding tax on compensation income of both managerial and rank and file employees: xxx xxx xxx (j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage. xxx xxx xxx" This Office had the occasion to rule in BIR Ruling No. 023-2002 dated June 21, 2002 that the above regulations are illustrative and non-exclusive in the enumeration of what constitutes de minimis fringe benefits. The Commissioner held that although the meal and food benefits granted were not intended to be used for overtime work, they may still be added in the above enumeration. However, in terms of de minimis threshold for regular meal and food benefit, the ceiling for benefits of similar nature under RR No. 8-2000 should be used as guidelines. Such being the case, meal and food benefits not exceeding 25% of the daily minimum wage may be considered de minimis meal benefit and therefore, tax exempt. 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 and food 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. In one case, a call center providing technical support service with 24 hours operation daily planned to provide its graveyard shift employees PhP100.00 meal allowance for every night's work. This Office held "In view of the foregoing, the PhP100.00 meal allowance given to your graveyard shift employees which is not intended to be used for overtime work may still be added in the enumeration of de minimis fringe benefits. The portion of the meal allowance not exceeding 25% of the daily minimum wage may be considered de minimis meal benefit, and therefore, tax exempt. The excess over this amount shall be considered as "other benefits" as contemplated under Sec. 32(B)(7)(e)(iv) of the Tax C od e 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-238-2003 dated July 23, 2003)." On the issue of whether the meal allowance is exempt from fringe benefits tax, Section 33 (C) of the Tax Code of 1997, as amended, provides viz. : "(C) Fringe Benefits Not Taxable under this Section. The following fringe benefits are not taxable under this Section: (1) . . . (2) . . . (3) . . . (4) De minimis benefits as defined in these Regulations; (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 the fringe benefit is for the convenience of the employer." Accordingly, this Office holds that meal allowance being given by Eperformax to its service agents not exceeding 25% of their respective daily minimum wage may be considered de minimis meal benefit pursuant to RR Nos. 8-2000 and 10-2000 and therefore, tax exempt. 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, as amended. 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 when added to the 13th month pay. If the employer pays more than the ceiling prescribed by the Regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the PhP30,000.00 ceiling ( cited in BIR Ruling No. 001-2007 dated January 20, 2007 ). The said meal allowance is not subject to fringe benefits tax since it is specifically exempted from the application thereof pursuant to Section 33 (C) (4), (5) and (6) of RR No. 3-98 implementing Section 33 (C) of the Tax Code, as amended. ( BIR Ruling No. 61-1999 dated May 5, 1999 ). Neither is it subject to substantiation requirement. Transportation Cash allowances given to employees as incentives are generally considered compensation income subject to income tax and withholding tax, pursuant to Section 2.78.1 of Revenue Regulations (RR) No. 2-98, as amended. However, transportation allowance is not subject to the fringe benefits tax since it is required by the nature of the business of ePERFORMAX and under the convenience of the employer rule pursuant to Section 33 (C) of the Tax Code of 1997 as implemented by RR No. 3-98, viz. : "(C) Fringe Benefits Not Taxable under this Section. The following fringe benefits are not taxable under this Section: (1) . . . (2) . . . (3) . . . (4) . . . (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 the fringe benefit is for the convenience of the employer." As stated above and pursuant to Section 33 (C) of the Tax Code of 1997, as amended, and being implemented by RR No. 3-98, any amount paid specifically, either as advances or reimbursements for transportation 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, provided that the transportation allowance is paid or incurred by the employee in the pursuit of the trade, business or profession of the employer and that 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 Tax Code of 1997, as amended. 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 Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 3-98, 8-2000 and 10-2000). Accordingly, since the transportation allowances given by ePERFORMAX to its service agents are used to ensure the efficiency and well-being of its employees, when they are made to work at designated hours which are between 9:00 p.m. to 9:00 a.m., and may also be required to work overtime to the extent necessary in order to immediately address the clients' requirements, said transportation allowance clearly redounds to the benefit and convenience of ePERFORMAX as the employer. As such, said transportation allowance is not compensation subject to withholding tax because the same is paid or incurred by the employee in the pursuit of the trade, business or profession of the employer and that the employee is required to account/liquidate said transportation expense in accordance with the specific requirements of substantiation for each category of expenses pursuant to Section 34 of the Tax Code of 1997, as amended. Mobile Phone Allowance As stated earlier, cash allowances given to employees as incentives are generally considered compensation income subject to income tax and withholding tax pursuant to Section 2.78.1 of RR No. 2-98, as amended. However, in one case, a company operating a power plant was compelled to provide housing facility to ensure 24-hour access to skilled workers as power failure and trouble shooting may be required at any time of the day. This Office has ruled in the said case that ". . . fringe benefits means any goods, service or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an employee (except rank and file employee) such as housing. Section 33(a) of the Tax C od e of 1997 stipulates that fringe benefits which are 'required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer' are not subject to the fringe benefit tax. If the living quarters are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of compensation income subject to withholding. . . . HDTSCc xxx xxx xxx . . . considering that it is a fringe benefit for the convenience and advantage of the employer, it shall not be included as part of compensation income of the employee subject to withholding neither will it be subject to the fringe benefits tax under Sec. 33 of the Tax C od e of 1997 as implemented by Revenue Regulations No. 3 - 98." (BIR Ruling No. 055-99 dated April 23, 1999) In another case, a company gives a fixed amount of outstation allowance for meals, baggage services, laundry expenses, parking fees, toll fees, telephone fees and other incidental expenses to employees who are sent to locations beyond Metro Manila. The Commissioner held that ". . . as a general rule, Section 33(A) of the Tax C od e 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 corporation. 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. DHacTC xxx xxx xxx 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 grant of 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 C od e. Consequently, 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, 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. Section 2 (6) (b) (ii) of Revenue Regulations No. 8-2000 specifically states that: '(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 Sec. 34 of the C od e. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned 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.'"(BIR Ruling No. 013-02 dated April 5, 2002) In view of the foregoing, mobile phone allowance being given by ePERFORMAX, which redounds to the convenience and benefit of the company is a fringe benefit but shall not be included as part of compensation income of the concerned employees subject to withholding tax prescribed under Section 79 of the Tax Code of 1997 neither will it be subject to the fringe benefits tax under Section 33 of the Tax Code of 1997, as implemented by RR No. 3-98, as amended, provided that only those mobile phone allowances given to its directors, managers and supervisors are not considered as compensation income nor fringe benefits subject to withholding tax. Further, the mobile allowance is not subject to the requirement of substantiation. cEHSIC 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. aAHSEC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service