Guidelines in the Verification of Housing, Travel Representation Entertainment and Advertising Expenses, and Other Deductions from Taxable Income

April 23, 1987 REVENUE AUDIT MEMORANDUM ORDER NO. 1-87 SUBJECT : Guidelines in the Verification of Housing, Travel Representation Entertainment and Advertising Expenses, and Other Deductions from Taxable Income TO : All Internal Revenue Officers and Others Concerned 1. Background There are claimed business expenses the verification of which has given cause for misunderstanding between the examiner and the taxpayer. To minimize areas of conflict between the Bureau and the taxpaying public, the following guidelines are issued for the observance of all concerned effective with the examination of tax returns for the year 1986 - provided that any affected taxpayer who would want to amend his returns to conform with these said guidelines may file an amended return without penalty on or before September 30, 1987. casia These guidelines shall be used in connection with the interpretation of Sec. 30 of the NIRC and in particular the words "ordinary and necessary expenses", reasonable allowance for salaries and other compensation" and all other expenses that have heretofore been the subject of improper interpretation of the part of the taxpayer and/or the examiner. Unless otherwise provided, substantiation, i.e. (a) receipts or adequate records (b) amount of expense (c) date and place of expense (d) purpose of expense (e) professional or business relationship of expense, must support each claimed business or professional expense otherwise it shall be disallowed. 2. Housing and Meals 2.1 If an employee receives a remuneration for services salaries and/or allowances and in addition thereto living quarters and/or meals, the value to such person of the quarters and meals so furnished shall be added to the remuneration otherwise paid for the purpose of determining the amount of compensation subject to withholding tax. 2.2 The value of lodging furnished to an employee by or on behalf of the employer shall be excluded from the employee's gross income, if the lodging is furnished in the business premises of the employer; and the employee is required to accept such lodging as a condition of his employment. 2.3 The value of meals furnished to an employee by or on behalf of his employer shall be excluded from the employee's gross income if the meals are furnished on the business premises of the employer and the meals are furnished for the convenience of the employer. Meals furnished without charge to an employee as regarded as furnished for the convenience of the employer where they are furnished to the employee during his work day to have the employee available for work during his meal period. 2.4 Business premises of the employer means the place where the employee performs a significant portion of his duties or where the employer conducts a significant portion of his business. In case of doubt, the criteria to be used shall be (a) time, more than 50% of the employee's work time or (b) value of business, more than 50% of the production of the said employee. 2.5 Notwithstanding the provisions of the preceding paragraphs, if an employee is provided by his employer with company housing or living quarters outside the business premises, and such employee, because of his position in the employer-company, also uses said house or living quarters for the benefit of the latter, like entertaining and putting up houseguests and guest of the employer-company, then fifty percent (50%) of such allowance, rental value, or depreciation if the living quarters are owned by the employer, shall be added to the compensation paid to such employee and be subject to the withholding tax on wages. The employer may deduct the said housing expense as a business expense. 2.6 Privileges such as "courtesy discounts" on purchases of company merchandise of a value not to exceed 1/2 basic month's salary of an employee or an officer shall not be added to the remuneration of the employee. cdt 2.7 Entertainment of and 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 one 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. 3. Transportation, Representation and Other Allowances 3.1 Transportation, representation and other allowances, which are received by an employee in addition to the regular compensation fixed for his position or office is compensation subject to withholding tax. 3.2 However, reimbursement for transportation, representation or entertainment expenses shall not constitute taxable compensation if: a) it is for necessary traveling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade or business of the employer, and b) the employee is required to, and does, make an accounting/liquidation for such expense in accordance with the specific requirements of substantiation for each category or expense. Advances in excess of actual expenses, if not returned to the employer constitutes taxable compensation. 3.3 Foreign Travelling Expenses. 3.3.1 The cost of foreign travel away from the Philippines in pursuit of the trade or business of the employer shall not constitute taxable compensation to the employee to the extent that it does not exceed the cost of a business class plane ticket for such travel or its equivalent. The excess over the cost of a business plane ticket or its equivalent, whether paid directly by the employer to the airline company or reimbursed to the employee, shall not be deductible by the employer from its taxable income. 3.3.2 Allowances which are pre-computed by the employer on a daily basis or reimbursement for cost of meals and lodging en route to one's foreign destination in pursuit of employer's trade or business and during the duration of the stay thereat to the extent that they do not exceed one hundred fifty United States dollars (US$150.00) per day for trips to the United States, Australia, Canada, Europe, Middle East and Japan, and one hundred United States dollars (US$100.00) for other places, shall not be considered taxable compensation to the employee. Any excess shall not be deductible to the employer even if substantiated. 3.3.3 Reimbursements for travel taxes, airport fees and other charges, if duly receipted or substantiated, shall not constitute taxable compensation and may be deductible by the employer as a business expense. 3.3.4 The foregoing rules shall apply to similar expenses incurred within a one-day period before arrival at the foreign destination and after departure therefrom. 3.3.5 Subject to the preceding rules, expenses incurred in attending two (2) foreign professional conventions a year shall constitute a deductible expense and shall not constitute taxable compensation. 3.3.6 Subject to the foregoing expenses limits and rules of substantiation the home leave of an expatriate employee shall be considered a deductible expense of the employer and shall not form part of compensation income. If the family expenses of the employee is paid for by the employer the employer may opt not to deduct the same as a business expense or to deduct the same as such as expense in which case the same shall constitute taxable compensation of the employee. 3.3.7 The cost of maintaining and operating company vehicles needed in the pursuit of the company's business such as delivery or tank trucks, sales representation unit, maintenance other motor vehicles and the like shall be a tax deductible expense but only one vehicle can be assigned to the use of any company officer or employee, to qualify as such an expense and shall not constitute taxable income for the employee or officer. 3.4 Representation and Entertainment Expenses 3.4.1 Reimbursements for expenses relating to entertainment shall be excluded from compensation income and shall be deductible by the employer, if (i) used primarily for the furtherance of employer's trade or business (ii) only to the extent allowable, the same is directly related to the active conduct of the employer's trade or business and (iii) subject to the rule of substantiation. 3.4.2 Dues paid to any one social, athletic, or sporting club or organization per officer shall not be considered compensable income and may be deductible as a business expense. This does not include, however, purchase of proprietary shares and playing rights nor does it include expenses in the said club or organization unless said expense complies with the rules on substantiation. These rules do not cover dues on company memberships which constitute deductible expense. 3.4.3 Dues or fees paid to professional or business organizations and civic club such as Lions, Rotary, Kiwanis shall not be taxable to the employee and shall be taxable deductible to the employer to the extent of one club. 3.4.4 Unless fully substantiated as incurred exclusively in the pursuit of trade or business, reimbursements for grocery, market, drugstore, department store and similar expense shall be considered taxable income subject to withholding and shall not be deductible to the employer. 4. Advertising and Promotional Expenses As a general rule, the company or business concerned shall decide the kind and size of advertising and/or promotional expense that has to be expended to promote its product or image subject to the following special requirements if the taxpayer intends to deduct said expense as a tax deductible expense: a) The rules on substantiation must be followed. b) All payments for the purchase of promotional giveaways, contest prizes, or similar material must be properly receipted. c) All payments for services such as radio and TV time, print ads, talent fees, advertising expertize or knowhow must be subject to withholding tax. Otherwise, the same cannot be claimed as a deductible expenses. cd (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue