Medical Allowance Without Actual Substantiation Not Considered “De Minimis" Benefits

May 9, 2002 BIR RULING NO. 019-02 RR 10-2000 Fernandez, Santos & Lopez Certified Public Accountants 8th Floor, Philbank Building 6778 Ayala Avenue, Makati City Attention: Eliseo A. Fernandez Chairman/Senior Managing Partner Gentlemen : This refers to your letter dated February 14, 2000 requesting on behalf of your client, Maersk Filipinas, Inc.,for a confirmation of your opinion that the medical allowance to be given to all its employees, irrespective of position as well as to the employees of its affiliates, (Maersk-Filipinas Crewing, Inc.,Mercantile-Filipinas, Inc. and Mercantile Ocean Maritime Co. (Fil.),Inc.),in the amount of Seven Thousand Pesos (P7,000.00),shall be considered as: (1) a de minimis benefit and therefore not subject to the fringe benefits tax and/or that the same is for the benefit of the employer, as well as for the welfare of the employee; and (2) not taxable as additional compensation on the part of the employee. It is represented that Maersk Filipinas, Inc. is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines; that it plans to give each of its employees, irrespective of position, an annual medical allowance of Seven Thousand Pesos (P7,000.00);that the annual medical allowance is pegged at P7,000.00, to be given, at the option of the taxpayer, at the beginning of each year in lump sum, or quarterly at P1,750.00, or monthly at P583.33 and the employee will not be required to reimburse the company for the unspent amount, and should such medical expenses exceed P7,000.00, the company will not be liable for the excess; that present practice calls for the employees to request for reimbursement of their medical expenses by submitting receipts for medical expenses (medicines and consultations) not exceeding P7,000.00 a year; and that Maersk Filipinas, Inc. feels that the cost/expenses in the administration of the reimbursement type of program will be minimized, if not totally eliminated, by converting the manner of disbursement of the medical allowance to an annual, quarterly or monthly payment. In reply, please be informed that under Section 1 (A) (3) (e) of Revenue Regulations No. 10-2000, which provides to wit: Section 1. Section 2.78.1(A)(3), (6)(b)(ii) and (7) of Revenue Regulations No. 2-98, as last amended by Revenue Regulations No. 8-2000, is hereby further amended to read as follows: "Section 2.78.1. Withholding of Income Tax on Compensation Income. "(A) ... "(1) Compensation paid in kind. ... "xxx xxx xxx "(3) Facilities and privileges of relatively small value. "xxx xxx xxx "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) ... "(b) ... "(c) ... "(d) ... "(e) Actual yearly medical benefits not exceeding P10,000.00 per annum; xxx xxx xxx. in order that the yearly medical benefits of both managerial and rank & file employees be considered as "de minimis" benefits which are exempt from the fringe benefits tax and income tax, as well as withholding tax on compensation, medical allowances and benefits furnished or offered by an employer to his employees must not exceed P10,000.00 per annum and it must be ACTUALLY USED OR UTILIZED for medical reasons. The term "actual" connotes something that exists in fact or existing in reality as distinct or contrasted with something that is potential, possible or a mere expectancy. Your client, Maersk Filipinas, Inc. will provide its employees, irrespective of position, an annual medical allowance of Seven Thousand Pesos (P7,000.00) and the employees will neither be required to reimburse the company for the unspent amount nor will the company be liable for the excess. Such an arrangement is not in harmony with the mandate of Revenue Regulations No. 10-2000 because the aforesaid medical allowance may or may not be utilized actually for medical purposes. EaScHT To be considered as "de minimis" medical allowance that will neither be subject to fringe benefits tax in the case of managerial employees, or to income tax and consequently, withholding tax on compensation, in the case of rank-and-file employees, in accordance with Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 10-2000, the following conditions must concur: 1. The amount given to the employee shall be for his own medical expenses for a given taxable year; 2. The amount actually given and actually spent shall not exceed P10,000.00 in any given calendar year; and 3. The employee must fully substantiate with official receipts in his name the medical allowance so granted, on or before the annualization of withholding taxes in any given calendar year. On the basis of the above, this Office is of the opinion as it hereby holds that the annual medical allowance to be furnished by Maersk Filipinas, Inc. to its employees can not be considered as "de minimis" benefits in the absence of actual substantiation made to completely establish that the amount shall be exclusively utilized by the employee for his medical needs. Such being the case, the amount granted to the employees, without differentiation, are considered as compensation subject to income tax and consequently, to withholding tax. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue