Deductibility of Payments Made by PRC as a Business Expense

July 22, 1981 BIR RULING NO. 116-81 30-1-A 000-00 116-81 Siguion Reyna, Montecillo & Ongsiako A. Soriano Bldg., Ayala Avenue, Makati Attention: Atty . Hector A . Martinez Gentlemen : This refers to your letter dated December 18, 1980 requesting a ruling as to whether or not the payments to be made by your client, the Philippine Refining Co. (PRC) in favor of the National Grains Authority (NGA) in accordance with a Memorandum of Agreement to be entered into by and between PRC and NGA pursuant to General Order No. 47 requiring private corporations to provide the cereal requirements of its employees are deductible from its gross income. cdtech It is represented that PRC is required to provide for the cereal requirements of its employees under General Order No. 47; that pursuant thereto, PRC and NGA proposes to enter into a Memorandum of Agreement whereby NGA shall manage, operate and cultivate a farm for agricultural production; that PRC shall pay NGA an amount based on P1,400.00 per employee subject to the following draw downs, to wit: (a) P100,000.00 upon signing of the agreement and (b) the balance to be paid in installments mutually agreed upon by NGA and PRC within a period of 72 months starting from an agreed date; that the earnings of the farm and profits arising from the project shall inure to the benefit of and be distributed to the PRC Retirement Trust Fund; that all profits received by PRC shall immediately be turned over to the PRC Retirement Trust Fund it being understood that PRC shall merely act as a conduit and shall have no interest of whatever nature and kind over the profits arising from the project; and that in case PRC ceases to be covered by General Order No. 47 the amounts already paid by PRC to NGA may remain with NGA or the right thereto may be sold or transferred to other parties and any amount realized by PRC from the sale or transfer thereof shall inure to the benefit of and be immediately turned over to the PRC Retirement Trust Fund. cd In reply thereto, I have the honor to inform you that payments to be made by PRC in favor of NGA pursuant to the abovementioned Memorandum of Agreement are deductible as a business expense in computing the net income of PRC pursuant to Section 30(1)(A) of the Tax Code. Moreover, the fair market value of the cereals received and not paid for by the employees is considered additional income; hence part of their gross income for income tax purposes. Consequently, said fair market value shall be included in wages subject to withholding. (Sec. 2, Revenue Regulations No. V-8, as amended) Very truly yours, RUBEN B. ANCHETA Acting Commissioner