Punongbayan & Araullo

September 8, 2009 BIR RULING [DA-(ECB-021) 503-09] DA350-04 Punongbayan & Araullo 20th Floor, Tower I, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Atty. Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your letter dated January 5, 2007 and April 30, 2007 requesting for confirmation of your opinion that the benefits granted by Astec International Limited ROHQ, Astec International Limited Philippine Branch, Astec Agencies Limited ROHQ, Astec Power Philippines, Inc., Fisher Rosemount Systems, Inc. Philippine Branch, and Emerson Electric (Asia) Limited ROHQ, to its employees are not subject to fringe benefits nor to withholding tax on compensation because they are either a) considered as de minimis benefits; b) required by the nature of, or necessary to the trade, business or profession of the employer; or c) granted for the convenience of the employer. As represented, Astec International Limited ROHQ ("AIL-ROHQ"), Astec International Limited Philippine Branch ("AIL-PB"), Astec Agencies Limited ROHQ ("AAL-ROHQ"), Astec Power Philippines, Inc. ("AAPI"), Fisher Rosemount Systems, Inc. Philippine Branch ("FRSI-PB") and Emerson Electric (Asia) Limited ROHQ ("EEAL-ROHQ") (collectively referred to as "the Companies") are members of the Emerson Group of Companies; that Emerson Group of Companies is under the umbrella of Emerson Electric Company, a corporation duly organized and existing under the laws of the United States of America. AIL-ROHQ was registered with the Securities and Exchange Commission on August 22, 2000 as regional operating headquarters of Astec International Ltd. ("AIL"), a company organized and existing under the laws of Hong Kong. Its registered address is located at the 33rd Floor Orient Square Bldg., F. Ortigas Jr. Avenue, Ortigas Center, Pasig City. It provides back-office support functions like general administration, planning and coordination, management, research and development services, product development, technical support and maintenance, data processing, communication and business development for the affiliates, subsidiaries or branches of AIL in the Asia Pacific Region. caIEAD AIL-PB was registered with the SEC on June 18, 2003 as a branch office of AIL. Its registered address is located at the 3rd & 4th Floors of the Techno Plaza One Bldg., Orchard Road, Eastwood City Cyberpark, Bagumbayan, Quezon City. The activities of the branch include engineering design services (research design and development) of switch mode power supply products and IT research and development for affiliates, subsidiaries and branches of AIL in the Asia Pacific Region. It is a PEZA-registered entity. AAL-ROHQ was registered with the SEC on November 27, 2002 as a regional operating headquarters of Astec Agencies Ltd. ("AAL"), a company organized and existing under the laws of Hong Kong. Its registered address is located at the 34th Floor, Orient Square Bldg., F. Ortigas Jr. Avenue, Ortigas Center, Pasig City. It provides back-office support functions like logistic services and sourcing, procurement of raw materials and components for the affiliates, subsidiaries and branches of AAL in the Asia Pacific Region. AAPI is a domestic company which was registered and operating under the laws of the Philippines. It was registered with the SEC on December 19, 2002 to engage primarily in the manufacture and repair of electronic power conversion products. It is registered with PEZA as a pioneer export zone enterprise and located in the Cavite Economic Zone, Main Road cor. Road J, PEZA Rosario, Cavite. It is wholly owned by Astec Power Inc. ("API"), a British Virgin Islands company, which is in turn wholly owned by AIL. FRSI-PB was registered with the SEC on April 2, 2004 as a branch office of Fisher Rosemount Systems, Inc. a corporation organized and existing under the laws of Delaware, USA. Its registered address is located at the 47th Floor of the One San Miguel Avenue Condominium Bldg., San Miguel Ave., cor. Shaw Boulevard, Pasig City. The activities of the Branch include providing worldwide technical services for process control systems, developing and testing of hardware/software and providing services in design and configuration of control systems based on customer specifications. cCSEaA EEAL-ROHQ which was registered with the SEC No. FS200703133 on February 28, 2007. After the setting up of this ROHQ, some employees who were currently employed by AIL-ROHQ were transferred to EEAL-ROHQ, and the employees' current benefits were carried forward. EEAL-ROHQ became the regional operating headquarters of Emerson Electric (Asia) Limited ("EEAL"), a company organized and existing under the laws of Hong Kong. It provides back-office support functions like general administration, planning and coordination, corporate finance advisory services, market control, sales promotion, training and personnel management, research and development services, product development, technical support and maintenance, data processing, communication and business development for the affiliates, subsidiaries or branches of EEAL worldwide. Under the Companies' policies, several types of benefits and privileges of relatively small amount are furnished to the employees with the aim of promoting the health, goodwill, contentment or efficiency of the employees and/or for the convenience of the Companies. Among these benefits are as follows: 1. Reimbursement of Taxi Fare The Companies are required to deliver services to customers located within the Asia Pacific Region and the United States of America which have different time zones, thus necessitating the employees to work beyond 10:00PM. For AIL-PB, AAL-ROHQ, APPI, although performing normal work shift hours, conference calls with customers/clients are made even beyond 10:00PM. For FRSI-PB and EEAL-ROHQ, employees are subject to a 24-hour rotation work system providing services to US customers/clients all in support of their customers within the Asia Pacific region. The reimbursement of taxi fare is not given automatically and is provided to rank-and-file employees. Such reimbursement may be claimed by the Companies' employees only upon filing their Overtime Application forms in their system indicating the actual taxi fare subject to the approval of the immediate supervisor and forwarded to the HR Department which shall in turn validate whether the employee in fact rendered overtime work beyond 10PM. The reimbursement is intended to cover the additional transportation expenses of the employees who are forced to use taxis for security and health reasons due to the scarcity of public transportation during those hours. ECaSIT 2. Perfect Attendance Incentive A rank-and-file employee who does not incur any absence in a one-month period is given incentive equivalent to his/her one day pay. The amount of incentive depends upon the salary of a particular employee and constitutes only a percentage of the monthly salary equivalent to 4.6% (1 day/21.75 days). 1 The incentive is given by the Companies to foster improvement and enhance employee performance, productivity and efficiency by preventing the employees from being tardy or for feigning sickness which in turn benefits the Companies. 3. Death Aid An employee who loses an immediate member of his/her family is given P5,000 as death assistance. For married employees, it is limited to parents, spouse and children while for single employees, it is limited to parents and siblings. Said minimal amount of assistance is given to at least alleviate the grief that the employee is undergoing by reason of family member's death, not to mention the need for giving a departed relative a decent burial. 4. Maternity/Paternity Benefits A female employee who gives birth, or a male employee whose wife gives birth, is given a gift amounting to P5,500 for normal delivery or P7,000 for caesarian delivery. The benefit is only limited to up to four deliveries and must be with the legal spouse (for male employees). This is provided to an employee as a token in lieu of flowers, fruits, or other similar items on account of birth of a baby. In reply, please be informed that Section 2.33 (C) of Revenue Regulations No. 3-98 provides: (C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits tax shall not be imposed on the following fringe benefits: (1) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law; aDSAEI (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not; (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. xxx xxx xxx "The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees . . . ." Section 2.78.1 (A) (3) of Revenue Regulations No. 3-98 states: "(3) Facilities and privileges of relatively small value. Ordinarily, facilities and privileges (such as entertainment, medical services, or so-called "courtesy discounts" on purchases), otherwise known as " de minimis benefit", furnished or offered by an employer to his employees, are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees." SacTCA Further, Section 2.78.1 (A) (6) (b) of Revenue Regulations No. 3-98 provides: (6) Fixed or variable transportation, representation and other allowances (a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a public officer or employee or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding. (b) Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bonafide 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 for ordinary and necessary travelling 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 Sec. 34 of the Code. 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 travelling 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 requirement of substantiation and to withholding. aDTSHc In view of the foregoing, the tax consequences of each of the benefits provided by the Companies to their employees are as follows: 1. The reimbursement of actual taxi fare shall not form part of the taxable compensation income, and therefore not subject to withholding tax on compensation. Neither is it a taxable fringe benefit subject to fringe benefit tax for this benefit is granted as assistance to the employees who are forced to take taxis because of the difficulty and risks in taking other forms of public transportation late at night in traveling to and from the office. Considering that the taxi fares are not fixed in amounts and are not received by the employees as part of their regular compensation but represents reimbursements of actual transportation expenses incurred by the employees in the performance of their duties, the said taxi fares do not form part of the taxable compensation of the employees. (BIR Ruling [DA-350-04], dated June 25, 2004; BIR Ruling [DA-023-06], dated January 27, 2006) Moreover, in BIR Ruling No. DA-013-08, dated January 16, 2008, the BIR ruled that the Overtime/Transportation Allowance given by Metrobank Card Corporation (MCC) to its employees who work at designated hours including night time and employee who may have to work overtime even after their shift ends, are exempt from withholding and fringe benefits tax since such are given for the convenience of MCC and are required by the nature of, necessary to the trade or business of MCC. Please note that such exemption is given not only to night shift employees but also to regular shift employees rendering overtime. Accordingly, the reimbursement of taxi fare by the Companies' employees who work overtime should also be exempted from withholding tax and fringe benefits tax since benefit is given for the convenience of and are required by the nature of, necessary to the trade or business of the Companies. 2. The perfect attendance incentive is not considered as a fringe benefit considering that this is granted only to rank-and-file employees and therefore it is not subject to fringe benefits tax. Moreover, since the incentive is given to promote the contentment and efficiency of the employees by encouraging them to limit their a * absences through a reward system and the value thereof is relatively small, said incentive shall be considered as de minimis benefit. Since it is considered de minimis benefit, it is likewise not subject to income tax as well as to withholding tax on compensation income of the rank-and-file employees. Finally, it is not considered in computing the P30,000 ceiling of "other benefits" provided under Sec. 32 (B) (7) (e) of the Tax Code of 1997, since it is exempt from withholding tax on compensation. (BIR Ruling [DA-159-05], dated April 14, 2005) ACDIcS 3. The death aid, which is a token of goodwill gesture in keeping with the Filipino tradition of condoling with the family, and maternity/paternity benefits given on the occasion of childbirth, are considered as de minimis benefits and therefore not subject to fringe benefits tax and to withholding tax on compensation. The enumeration under Sec. 2.33 (C) of Revenue Regulations No. 3-98 and Sec. 2.78.1 (A) (3) of Revenue Regulations 2-98 is merely illustrative and non-exclusive. (BIR Ruling No. 023-02, dated June 21, 2002). Accordingly, any facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of employees are considered de minimis benefits. 4. The Maternity/Paternity Benefits, as described above, are considered as de minimis benefits and therefore not subject to fringe benefits tax and to withholding tax on compensation. WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that the foregoing benefits are not subject to fringe benefits nor to withholding tax on compensation because they are either a) considered as de minimis benefits; b) required by the nature of, or necessary to the trade, business or profession of the employer; or c) granted for the convenience of the employer. 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 Footnotes 1. The Companies' regular working days within the month constitute 21.75 days.