Outstation Allowance to Managerial/Supervisory Employees Considered as Non-taxable Fringe Benefits

April 5, 2002 BIR RULING NO. 013-02 000-00 Punongbayan & Araullo 20th Floor, Tower I, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Ms. Marivic C. Espano Tax Partner Gentlemen : This refers to your letter dated May 3, 2001 requesting for a confirmatory opinion that the Outstation Allowance given by your client, PHILIPPINE GAMING MANAGEMENT CORPORATION (PGMC for brevity), to its managerial/supervisory employees shall be considered as non-taxable fringe benefits and therefore, not subject to the fringe benefit tax or withholding tax on compensation. You represent that PGMC is a domestic corporation organized to act as manager or managing agent of persons, firms, associations, corporations, partnerships and other entities, to provide management, investment and technical advice for commercial, industrial, manufacturing and other kinds of enterprises; and to undertake, carry on, assist or participate in the promotion, organization, management, liquidation or reorganization of corporations, partnerships and other entities, except the management of funds, securities, portfolio or similar assets of the managed entities or corporation. On January 25, 1995, PGMC entered into an Equipment Lease Agreement with the Philippine Charity Sweepstakes Office (PCSO for brevity) covering lease of PGMC's on-line lottery equipment. Some of these equipment are leased by PCSO to lotto franchise holders. On December 1, 1995, PGMC subsequently agreed to provide maintenance and repair services for the leased equipment. PGMC sends its employees to regularly visit lottery franchise holders in different parts of the Philippines to check whether the equipment they are leasing from PCSO are in top condition. They likewise attend to requests of franchise holders for repairs of equipment. As a company policy, PGMC pays for the actual hotel/lodging accommodations and transportation expenses of the employees assigned to inspect the equipment. In addition, it gives a fixed amount of Outstation Allowance as support to its employees who are sent to locations beyond Metro Manila, with the rates differentiated as follows: i) Full allowance given when the employee assigned is away from the head office for at least 16 to 24 hours. Vice President P770/day Supervisors/Managers P700/day ii) Day allowance given when the employee is away from the office for more than 8 hours but less than 16 hours: Vice President P400/day Supervisors/Managers P330/day In reply, please be informed that as a general rule, Section 33 (A) of the Tax Code 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 a corporation. This general rule is not, however, without exception. The aforequoted section sets forth two scenarios wherein no fringe benefit 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. The Outstation Allowance, as you claimed, is given by PGMC to its managerial and supervisory employees who will be away from the office site for at least 8 hours to visit lotto franchise holders for repairs and/or inspection of equipment leased by the latter from the PCSO. The same is intended to cover meals and trip-related expenses in connection with their off-site visit to franchise holders including, but not limited to baggage services, laundry expenses, parking fees, toll fees, telephone fees and other incidental expenses. 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 Code. 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 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 traveling and entertainment expense 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. " (Emphasis supplied.) 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 void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue