Whether Modest Gift to be Granted Only Once to Employees Can be Deductible Expense to the Company

May 19, 1992 BIR RULING NO. 152-92 29 (a) 000-00 152-92 Philippine Airlines Post Office Box 954 Manila, Philippines Attention: Mr . Feliciano Belmonte, Jr . President and CEO Gentlemen : This refers to your letter dated January 20, 1992 requesting a ruling that modest gift, to be granted only once to your employees, can be deductible expense to your company; and not includible in the employee's taxable income. In reply, please be informed that pursuant to Section 29(a) of the Tax Code, all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a "reasonable allowance for salaries or other compensation" for personal services actually rendered are deductible, Revenue Audit Memorandum Order No. 1-87 dated April 23, 1987, clarified this provision to mean among others, "2.7. Entertainment of the gifts to company officers and employees shall not be a deductible expense except for Christmas and major anniversary celebrations (e.g. 25th year of company's establishment), sports tournament, company picnics not to exceed once a year provided that the value of the gift when it is not a service award for length of service shall not exceed in value of 1/2 month's of the basic salary of the employee receiving the gift." Clearly, the conclusion to be drawn therefrom is that a gift to the employees in connection with your anniversary celebration (the 25th year of your establishment) which does not exceed in value one-half month of your employees basic salary to reward them for their splendid performance for fiscal year 1991- 1992 is a deductible expense to your company. The same provision however should not be extended further to exempt the gift from income tax. In other words, such gift is taxable to the employee receiving the gift pursuant to Section 28 (a) of the Tax Code. The kind of gift which is excludible from gross income under Section 28 (b) (3) of the same Code is one that arises entirely from the giver's generosity and for which gift or donor's tax shall have been imposed. Furthermore, under Section 2 of Revenue Regulations No. 12-86, the "gift of small value" that is income tax-exempt refers only to facilities and privileges relating to medical services, entertainment and the so-called courtesy discounts on purchases to promote the health, goodwill and contentment of employees. Your anniversary gifts to employees not to exceed 1/2 of their basic salaries do not fall under the foregoing tax-exempt situations. adc Very truly yours, JOSE U. ONG Commissioner