Tax Treatment of Certain Benefits Granted to Expatriate Employees Holding Managerial/Supervisory Positions

June 13, 2001 BIR RULING NO. 025-01 Punongbayan & Araullo 6/F, Vernida IV Bldg. Alfaro St., Salcedo Village 1200 Makati City Attention: Atty . Vic C . Mamalateo Tax Partner Gentlemen : This refers to your letter dated May 12, 1999 requesting on behalf of your client, Burmeister & Wain Scandinavian Contractor Mindanao, Inc . (BWSCMI) , for a ruling on the tax treatment of certain benefits granted to its expatriate employees holding managerial/supervisory positions, namely: 1. Fixed monthly housing allowance of P28,000.00; and 2. Fixed monthly vehicle maintenance allowance of P5,000.00. It is represented that BWSCMI is a Philippine Corporation wholly owned by Burmeister & Wain Scandinavian Contractor A/S (BWSC Denmark), a corporation organized under the laws of Denmark; that its primary purpose is to construct, operate, rehabilitate and/or manage industrial and power-generating plants and related facilities for the conversion into electricity of coal and other fuel provided by and under contract with the Government of the Republic of the Philippines, or any of its agencies; that it is engaged in the actual operation and maintenance of the two 100-megawatt power barges of National Power Corporation; that the service is being rendered by BWSCMI for the foreign Consortium composed of BWSC Denmark, and the following non-resident Japanese Corporations: Mitsui Engineering & Shipbuilding, Inc. (MES) and Mitsui & Co. Ltd. (Mitsui), which own the contract of service with NAPOCOR for a fifteen-year term; that BWSCMI employed the services of expatriates holding managerial/supervisory positions who, as specifically stated under their employment contract, are receiving, in addition to their salaries, the following: 1. Fixed-monthly housing allowance of P28,000.00; and 2. Fixed monthly vehicle maintenance allowance of P5,000.00 that you mentioned that there are expatriates who have (1) lease contracts for housing entered in the name of BWSCMI; (2) no existing lease contracts; and (3) who have houses of their own; that the expatriate employees receive the fixed monthly housing allowance of P28,000.00 subject to their free disposal and any excess thereof is not returned to the company; that BWSCMI provides each expatriate a motor vehicle, which ownership is retained by the company, for his use which he can bring to his home and use for personal reasons; that each expatriate is provided transportation due to the special nature of the business operations of BWSCMI, i.e. in maintaining and operating power barges, the expatriate has to be "on call", which means that he should have easy transportation access in going to the power barges in case of repairs, breakdowns or other emergencies requiring his immediate presence in the barges; and that an expatriate is also provided with a fixed monthly motor vehicle maintenance allowance amounting to P5,000.00. In reply, please be informed that pursuant to Section 2.33 (B) of Revenue Regulations No. 3-98, the term "fringe benefit" means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations), such as, but not limited to the following: AScHCD (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. On the other hand, Section 2.78.1 of Revenue Regulations No. 2-98 provides that the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. Thus, salaries, wages, emoluments and honoraria, allowances, commissions ( e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. The housing privilege in the form of a fixed monthly allowance in the amount of P28,000.00 granted by BWSCMI to its expatriate employees holding managerial and supervisory positions, shall be treated as follows: (1) Re: Monthly Housing Allowance of P28,000.00 (a) Where the expatriate leases a residential property under the name of his employer, BWSCMI: Section 2.33(B)(1)(a) of Revenue Regulations 3-98 provides that if the employer leases a residential property for the use of his employee and the said property is the usual place of residence of the employee, the value of the benefit shall be the amount of rental paid thereon by the employer, as evidenced by the lease contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. Such being the case, the amount of the rent shall be treated as fringe benefit subject to the fringe benefit tax imposed under Section 33 of the Tax Code of 1997 as implemented by Revenue Regulations No. 3-98. However, where the amount of the lease is less than P28,000.00, only the actual amount of the lease shall be treated as fringe benefit subject to the fringe benefit tax and the difference shall be treated as part of compensation subject to income tax and consequently to the withholding tax prescribed under Section 79 of the Tax Code of 1997. (b) Where the lease contract is entered into between the expatriate and the lessor: Revenue Regulations 3-98 did not distinguish between a lease contract entered under the name of the employer or under the name of the employee. As long as the grant of the housing allowance was given in addition to the basic salary of the employee, such benefit shall be considered as a fringe benefit subject to the fringe benefit tax. Such being the case, the housing allowance granted to the expatriates where the lease contract is between the expatriate and the lessor shall still constitute as a fringe benefit subject to the fringe benefit tax. However, where the amount of the lease is less than P28,000.00, only the actual amount of the lease shall be treated as fringe benefit subject to the fringe benefit tax and the difference shall be treated as part of compensation subject to income tax and consequently to the withholding tax prescribed under Section 79 of the Tax Code of 1997. (c) Where the expatriates have houses of their own: If the expatriates have their own houses, the housing allowance granted by BWSCMI shall no longer be considered as a fringe benefit subject to the fringe benefit tax imposed under Section 33 of the Tax Code of 1997. However, it shall be considered as part of compensation subject to income tax and consequently to the withholding tax under Section 79 of the Tax Code of 1997. (2) Re: Monthly Vehicle Maintenance Allowance of P5,000.00 The fixed monthly vehicle maintenance allowance of P5,000.00 granted by BWSCMI to its expatriate employees holding managerial and supervisory positions shall be treated as allowances which shall form part of their compensation income subject to income tax and consequently to the withholding tax prescribed under Section 79 of the Tax Code of 1997. 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 as null and void. EcASIC Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue