BIR Ruling No. 070-12

February 10, 2012 BIR RULING NO. 070-12 RR 02-1998, as amended; 000-000 ABC Asia Pacific Business Legal Consulting 2nd Floor, Bldg. B, Mactan Marina Mall Mactan Economic Zone 1, Lapulapu City Attention: Atty. Ramonito G. Antig Partner Gentlemen : This refers to your letter dated August 8, 2005 requesting on behalf of your client, NEC Telecom Software Philippines, Inc. (NSP) ,for a ruling on its plan to change the accounting and tax treatment of personal allowance granted to its Japanese expatriates, from fringe benefits to its salaries. HIESTA It appears that NSP is a domestic corporation and existing under Philippine laws, with principal office at Asiatown I.T. Park, Apas, Cebu City; that it is duly registered with the Securities and Exchange Commission under SEC Registration No. C199901065, dated November 4, 1999; that NSP is also duly registered with PEZA as an Economic I.T. enterprise with PEZA Certificate of Registration No. 01-018-IT dated December 21, 2001 and currently subject to the 5% preferential tax rate; that NSP is a wholly-owned subsidiary of NEC Communication System Ltd. (NCOS) ,a Japanese corporation which is likewise a subsidiary of NEC Corporation (NEC),another Japanese corporation with head office located in Tokyo, Japan; that NEC has various subsidiaries worldwide which include both NCOS and NSP, and all these subsidiaries regularly make their periodic financial reports to NEC, being the parent company; that when NSP started its operations in the year of 2000, NCOS dispatched expatriate officers to NSP for administrative and technical management functions; that these expatriates are provided certain personal allowances which were and until the present reported as fringe benefits; that recently, NCOS has advised NSP that if possible, it should stop the treatment of personal allowances given to its expatriate officer as fringe benefits and instead report it as salaries in order to conform with the accounting treatment for the said personal allowances required by the parent company; and that this is for the purpose of uniformity of accounts both for the subsidiaries and parent company. In reply, please be informed the pursuant to Section 2.78.1 (A) of Revenue Regulations 2-98, as amended, and Section 33 (B) of the both Tax Code of 1997, as amended, to wit: " SEC. 2.78.1. Withholding of Income Tax on Compensation Income . (A) Compensation Income Defined . In general, 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. The name by which the remuneration for services is designated is immaterial. 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." (underscoring supplied) "SEC. 33. Special Treatment of Fringe Benefit. (A) ... (B) Fringe Benefit defined. For purposes of this Section, the term ' fringe benefit ' means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: EcATDH 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." Such being the case, NSP can legally change the accounting and tax treatment of personal allowances from fringe benefits to salaries, which shall from part of the gross compensation income of the recipient employee subject to withholding tax imposed under Section 79 of the Tax Code of 1997, as amended, in relation to Section 25 of the same Code, provided that the personal allowances referred to herein are not among the fringe benefits enumerated under Section 33 of the Tax Code of 1997, as amended. EcHIAC 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue