Puyat Jacinto & Santos

July 22, 2009 BIR RULING [DA-(ECB-019) 389-09] Sections 33 & 34 (A), RR 3-98; BIR Ruling No. 159-84, DA 197-97, 13-02, DA-027-08 & DA-302-2008 Puyat Jacinto & Santos 12th Floor, Manilabank Bldg. 6772 Ayala Avenue, Makati City Philippines Attention: Atty. Virginia B. Viray Atty. Arnaldo M. Cario Gentlemen : This refers to your letter dated May 5, 2009 on behalf of your client, Hewlett-Packard AP (Hong Kong) Limited ("HPAP" for brevity), requesting for confirmation of your opinion on the following: 1. The expenses paid for by HPAP for the foreign travel of its employees are not subject to fringe benefit tax (FBT), income tax, and withholding tax; and 2. The said travel expenses is an allowable deduction from HPAP's gross income pursuant to Section 34 (A) (1) (a) (ii) of the 1997 Tax Code. As represented, Hewlett-Packard Company ("HP") is a multinational corporation organized and existing under and by virtue of the laws of Delaware U.S.A. engaged in the business of manufacturing, assembling, and trading of computer and electronic components and parts, computer systems and equipment. On August 1, 2003, HP established a regional operating headquarters (HPAP) in the Philippines and registered the same with the Securities and Exchange Commission (SEC) under SEC Registration No. A200300061. Under its license, HPAP may engage in general administration and planning, business planning and coordination, corporate finance advisory services, marketing control and sales promotion, training and personnel management, logistics services, research and development services, and product development, technical support and maintenance, data processing and communication, and business development. IHAcCS HPAP was established in the Philippines to render any or all of the above services to its affiliates, branches and subsidiaries in the Philippines, in the Asia Pacific Region and other foreign markets. As a regional operating headquarters, HPAP normally requires its employees to travel abroad for business and training purposes. Under existing HPAP policy, the following foreign travel expenses are paid for by HPAP on behalf of its employees: 1. Economy or business class airline ticket; 2. Visa Fees (for countries which require a Visa); 3. Hotel accommodation; 4. Airport tax; 5. Passport and/or driving license (if necessary); 6. Travel insurance cover; and 7. Warm Clothing Allowance (if necessary for cold weather countries). In addition to the foregoing expenses, HPAP gives the traveling employee a daily allowance (per diem) in the amount not exceeding Three Hundred US Dollars (US$300) per day to cover the employee's meal and other miscellaneous expenses. In case the employee incurs other ordinary and necessary business expenses ( i.e., laundry, communication charges, customer business entertainment, medicine and/or vaccination) which are not included in the abovementioned list, HPAP reimburses the employee for the said amount provided there is proper liquidation of the foregoing expenses. The foreign travel expenses incurred by HPAP are substantiated by the following documents: Travel Expense Documentation 1. Economy or business class airline Official Receipts/Invoices from Travel ticket Agent 2. Visa Fees Official Receipts/Invoices 3. Hotel Accommodation Hotel Billings/Official Receipts 4. Airport Tax Official Receipts 5. Passport and/or driving license Official Receipts 6. Travel Insurance Cover Official Receipts/Invoices 7. Warm Clothing Allowance Official Receipts/Invoices 8. Daily Allowance Official Receipts 9. Other reimbursements Official Receipts or Invoices On the basis of the applicable laws and the pertinent Revenue Regulations on the matter, we proceed to rule on the particular issues raised for our consideration. cSICHD Foreign travel expenses are not subject to FBT, income tax and withholding tax. 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. 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. Section 2.33 (B) (7) of Revenue Regulations (RR) No. 03-98 provides: "(7) Expenses for foreign travel (a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions. The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit tax. (b) In the absence of documentary evidence showing that the employee's travel abroad was in connection with business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business meetings shall be evidenced by official communications from business associates abroad indicating the purpose of the meetings. Business conventions shall be evidenced by official invitations/communications from the host organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee." 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: SHDAEC (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) Foreign travel expenses (including daily allowance in the amount not exceeding US$300.00 per day) incurred by the employee for the purpose of attending business meetings or conventions may be considered as ordinary and necessary expenses paid or incurred by the employee in the pursuit of the business of the company which shall not be considered as compensation subject to fringe benefit tax, income tax, and consequently, withholding tax. However, the said foreign travel expenses are 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 HPAP. HPAP shall be allowed to deduct the said travel expenses from its gross income. Pursuant to Section 34 (A) (1) (a) (ii) of the Tax Code, travel expenses incurred by a corporation in the pursuit of trade or business shall be allowed as a deduction from its gross income "Sec. 34. Deductions from Gross Income . Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be allowed the following deductions from gross income: (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses. (a) In General. there shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: SIaHTD (i) . . . (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) . . ." Citing the cases of Atlas Consolidated Mining & Development Corporation vs. Commissioner of Internal Revenue , L-26911 and Commissioner of Internal Revenue vs. Atlas Consolidated Mining & Development Corporation , L-26924, January 27, 1981, 102 SCRA 246, the Court of Tax Appeals in the case of Alfonso T. Yuchengco vs. Commissioner of Internal Revenue , CTA Case No. 3429, January 6, 1988, held that the taxpayer must not only meet the business test but must substantially prove by evidence or records the deductions claimed under the law otherwise, the same will be disallowed: "The requisites for the deductibility of traveling expenses are: (1) the expenses must be reasonable and necessary traveling expenses as that term is generally understood; (2) the expenses must be incurred while away from home; and (3) the expenses must be incurred in the pursuit of a trade or business. (See Section 30 (a)(1) Internal Revenue Code; 1955 P.H. Fed. Tax Course, Par. 1827.) Under Section 66, Revenue Regulations No. 2, 'a taxpayer claiming the benefit of the deduction for traveling expenses must attach to his return a statement showing (1) the nature of the business in which he is engaged; (2) the number of days away from home during the taxable year on account of business; (3) the total amount of expenses incident to meals and lodging while absent from home and business during the taxable year; (4) the total amount of other expenses incident to travel and claimed as a deduction. Claim for the deductions referred to herein must be substantiated, when required by the Commissioner of Internal Revenue by record showing in detail the amount and nature of the expenses incurred.' xxx xxx xxx . . . To restate a recognized rule, 'Deductions are a matter of legislative grace and the taxpayer in every instance has the burden of justifying the allowance of any deduction claimed'. (Mertens, Law of Federal Income Taxation, Vol. 4a, Chapter 25, pp. 9-10.) Having failed to carry his burden, petitioner loses his right to the claimed deduction." In view of the foregoing and considering that the abovementioned travel expenses paid for by HPAP are reasonable business expenses incurred in the pursuit of its trade and business, the same shall be allowed as deduction from its gross income. The submission of the abovementioned documents ( i.e. , official receipts/invoices from travel agent, hotel billings) by HPAP shall be deemed sufficient compliance with the substantiation requirements provided for under Section 34 (A) (1) (b) of the Tax Code. EcIaTA 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service