BIR Ruling No. 512-11

December 20, 2011 BIR RULING NO. 512-11 Section 33; RR 3-98; 2-98; BIR Ruling No. 025-01 Punongbayan & Araullo 19th Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City 1200 Attention: Edward L. Roguel Partner Tax Advisory & Compliance Gentlemen : This refers to your letter submitted on December 9, 2010 requesting on behalf of your client, SIEMENS, INC. for the confirmation of your opinion that: (1) the housing allowances furnished to its managerial/supervisory employees, mostly expatriates, shall be treated as fringe benefit subject to fringe benefit tax (FBT) pursuant to the provisions of the Revenue Regulations No. 3-98, as amended, to the extent of the actual rent paid by the said employees on the residential property that the employee leases in the Philippines; and (2) the excess amount of the housing allowances, if any, over the actual rent shall be taxable as compensation income subject to withholding tax under Section 33 of the 1997 Tax Code and implementing rules and regulations. It is represented that SIEMENS, INC. is a domestic corporation, with Tax Identification Number (TIN) 001-668-824, duly organized and existing under and by virtue of the laws of the Philippines, with Securities and Exchange Commission (SEC) Registration No. ASO92-3153, with principal office located at 17/F Salcedo Tower, 169 H.V. Dela Costa St., Salcedo Village, Makati City; and that it is engaged primarily "to develop, conceptualize, produce, manufacture, install, commission, user-train, maintain, service, render specialty technical services, import, export, sell and distribute without engaging in retail trade, of all kinds of electrical, electronic, mechanical and software products and systems, their combinations, derivatives, accessories, auxiliary materials and components." It is further represented that SIEMENS, INC. provides housing allowances to its managerial/supervisory employees' (herein referred to as "key employees"), mostly expatriates, as part of their benefit package. Pursuant to Sec. 5.2.2 of the SIEMENS, INC.'s Global HR Policies and Procedures, the housing allowance to be furnished to key employees, especially to an expatriate for an international assignment, shall be computed on the basis of the "upper rent limits" for each location derived from the information obtained by accredited real estate broker of the company taking into consideration the number of accompanying family members and the function of the employee in the host country. In addition, the housing allowance shall be furnished to a key employee, provided that the latter has existing house/condo lease contract under the delegated contract arrangement provision specified in SIEMENS, INC.'s existing local policy. The maximum limit of the housing allowance is Php150,000.00 per month, thus, if there are other housing related costs over and above the maximum limit shall be for the account of the key employee concerned. Currently, the maximum limit above-mentioned, per SIEMENS, INC.'s Global HR Policies and Procedures, tend to be more than the amount of rental actually paid for the key employees to their respective lessors in the Philippines, as per corresponding lease contracts. This is due to the relatively lower amount of rental in the Philippines as compared with other countries. Consequently, the amount of housing allowance granted by SIEMENS, INC. to its key employees, mostly expatriates, could be classified into two: (1) amount of housing allowance to the extent of actual rental per lease contract; and (2) excess of the fixed amount of housing allowance per month over the amount of actual rental per month. AIaHES Based on the foregoing, you now request the confirmation of your opinion that the housing allowance to the extent of actual rental is subject to fringe benefits tax, and that any excess of the fixed housing allowance per month over the amount of actual rental per month is subject to withholding tax on compensation. In support of your request, you have submitted the following documents: 1) Letter request for tax exemption; 2) Certified true copy of SEC Certificate of Registration; 3) Certified true copy of SEC Amended Articles of Incorporation; 4) Certified true copy of SEC Amended By-laws; 5) Copy of BIR Certificate of Registration; 6) Copy of relevant portions of SIEMENS, INC.'s Global HR Policies and Procedures; and 7) Special Power of Attorney authorizing Punongbayan & Araullo to represent SIEMENS, INC. relative to its tax ruling application with the BIR. 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: (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. DICcTa Applying the foregoing, the housing privilege granted by SIEMENS, INC. to its expatriate employees holding managerial and supervisory positions in the form of a fixed monthly allowance to the extent of the actual rent paid by the said employees, in the maximum amount of Php150,000.00, shall be treated as fringe benefit subject to the fringe benefit tax imposed under Section 33 of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 3-98. However, where the actual amount of housing allowance granted under SIEMENS, INC.'s existing policy exceeds the actual amount of rent, the excess shall be treated as part of the expatriate employees' compensation subject to income tax and consequently to the withholding tax prescribed under Section 79 of the Tax Code of 1997. 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. (BIR Ruling No. 025-01 dated June 13, 2001) In view of the foregoing, this Office confirms your opinion that the housing allowance furnished by SIEMENS, INC. to its managerial/supervisory employees, mostly expatriates, to the extent of actual rental is subject to fringe benefits tax, and that any excess of the fixed housing allowance per month over the amount of actual rental per month shall be taxable as compensation income subject to withholding tax. This ruling is being issued on 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