Diaz Murillo Dalupan and Company

December 4, 2009 BIR RULING [DA-(ECB-025) 733-09] RR 10-2000; RR 5-2008; DA (ECB-004) 061-2009; DA-374-08; DA-275-08; DA-153-08; DA-233-2007 Diaz Murillo Dalupan and Company Unit 504, Cebu Holdings Center Cebu Business Park Cebu City Attention: Atty. Bethuel V. Tanupan Partner Gentlemen : This refers to your letter dated February 16, 2009 requesting on behalf of your client, Cebu Mitsumi Inc. (CMI) for confirmation of opinion relative to the grant of de minimis benefits to its employees. It appears that CMI is an Ecozone Export Enterprise and is located at MRI Special Economic Zone, Sabang, Danao City, Cebu. The registered activity of CMI is the production of magnetic heads, floppy disk drives, connectors, flexible printed circuit, digital audio tape deck mechanism for data streamers, magnetic drums, optical heads for CD-ROM drives, CD-ROM drives, membrane switch unit, reel motor, pressed and molded parts, spindle motor, floppy disk adapter, DC micro motor, IC module, camera module and monolithic integrated circuit. As the biggest employer in the Province of Cebu, it currently has an estimate of around 16,000 employees. CMI is currently granting monthly allowances to its employees termed as rank allowance for the following employees: Existing Rank Allowance Rank Amount 2 1,000.00 3A 2,000.00 3B 3,000.00 3C 4,000.00 4A 5,000.00 4B 6,000.00 5A 7,000.00 58 8,000.00 With the continuing increase in oil prices, the management of CMI instead of granting salary increase, has decided to convert the existing rank allowance to the following de minimis benefits to its employees in order to cope up with the rising inflation rates: CcaDHT 1. Yearly Rice Allowance of P18,000. 2. Yearly Medical Benefits for Dependents of P1,500. 3. Yearly Medical Personal Benefits of P10,000. 4. Yearly Clothing Allowance of P4,000. 5. Yearly Laundry Allowance of P3,600. 6. Monetized Vacation Leave (10 days/year). 7. Employees Achievement Award of P10,000. 8. Yearly Christmas Gift of P5,000. Aside from the above de minimis benefits, the company will still give the mandatory 13th Month Pay to employees. Furthermore, CMI shall be granting Cellular Phone Allowance to the following employees: Rank Monthly Cellphone Allowance 3C PhP500.00 4A 1,000.00 4B 1,500.00 5A 2,000.00 5B and above 2,500.00 These allowances are already included in the existing rank allowance granted to employees. The above-stated employees are either supervisory or managerial level. Considering that CMI is engaged in manufacturing activity that requires frequent communication to meet order deadlines and that CMI's manufacturing area is more than one hectare, the Cell Phone Allowance benefit to the above-stated employees are necessary to the business of CMI. However, any excess from the application of the de-minimis benefits shall form part of the employees income to be subjected to withholding tax on compensation. In reply, please be informed that Section 2.78.1 of Revenue Regulations (RR) No. 2-98, as amended by RR 3-98, 8-2000 and 10-2000 provides and as further amended by RR 5-2008, viz. : DIHETS "Sec. 2.78.1. Withholding of Income Tax on Compensation Income. (A) . . . (1) . . . (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 benefits,' 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 means of promoting the health, goodwill, contentment, or efficiency of his employees. 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: (a) Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees; (b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month; (c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,500.00 ; (as amended by RR 5-2008) (d) Uniform and clothing allowance not exceeding P4,000.00 per annum; (as amended by RR 5-2008) (e) Actual yearly medical benefits not exceeding P10,000.00 per annum; (f) Laundry allowance not exceeding P300.00 per month; (g) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; aACHDS (h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum; (i) Flowers, fruits, books or similar items given to employees under special circumstances e.g., on account of illness, marriage, birth of a baby, etc., and (j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage. xxx xxx xxx The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000 ceiling of 'other benefits' provided under Section 32(B)(7)(e) of the Code. However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30,000 ceiling. Provided, further, that any amount given by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer. xxx xxx xxx" The de minimis ceiling prescribed in the Regulations are independent and separate from the P30,000 "other benefits" ceiling under Section 32 (B) (7) (e) (iv) of the Tax Code of 1997. The excess over the de minimis limit prescribed under the Regulations shall be considered, along with the "other benefits" under Section 32 (B) (7) (e) (iv) of the Tax Code of 1997, in determining whether or not the P30,000 threshold has been exceeded. The amount in excess of the P30,000 threshold of "other benefits", after applying the de minimis limit to the available balance or unused portion of the P30,000 shall become taxable to the employee receiving the benefits. In BIR Ruling No. DA-418-2007 dated July 27, 2007 this Office opines that the ceiling of all "de minimis" items is independent from the P30,000 ceiling of "other benefits". Hence, any excess over the de minimis ceiling may be exempt if it is covered by the unused portion of the P30,000.00 non-taxable "other benefits." Otherwise, any amount in excess of the P30,000.00 threshold becomes subject to tax. Accordingly, the grant by CMI to its employees of the yearly rice allowance of P18,000, annual medical benefits in the amount of P10,000, as well as the P1,500 medical benefits to employees dependents, the annual clothing allowance of P4,000, laundry allowance of P3,600 in a year, the 10 days monetized unused vacation leave credits and also the P5,000 Christmas gifts, in lieu of the existing rank allowance are not subject to tax. cIHCST Nevertheless, the grant of employee's achievement award of P10,000 is subject to withholding tax. Furthermore, since you represented that the cellular phone allowance will be granted to managers and supervisors because the nature of their jobs are necessary to the business of CMI which requires them to have frequent communication to meet order deadlines and as such redounds to the convenience and benefit of the company, said fringe benefit 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. (BIR Ruling Nos. DA-374-2008 dated June 19, 2008, DA-275-08 dated May 2, 2008 and DA-233-07 dated April 17, 2007) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service