Verification of Gross Compensation Income of Employees of Private Firms

October 26, 1984 REVENUE MEMORANDUM ORDER NO. 36-84 SUBJECT : Verification of Gross Compensation Income of Employees of Private Firms TO : All Sector Operations Divisions, Regional Directors and Revenue District Officers We have received reports that employers escape compliance with existing revenue regulations regarding the collection at source of income tax on compensation income of their employees, by designating a substantial portion of the latter's compensation income as "reimbursements" for alleged expenses incurred in pursuit of company business. They support this scheme by asking the employees to submit receipts which may either be fake or fabricated. This is not only a leak in our income tax collections effort, but is outright tax evasion which must be stopped immediately. Accordingly, all Internal Revenue Officers concerned are directed to exert special effort in verifying the true gross compensation income of employees of private firms and to enforce strictly the provisions RR 6-82, as amended by RR 9-83 on the accounting and substantiation of reimbursements/advances for travelling, representation or entertainment expenses. For this purpose the following guidelines are hereby issued for the observance of all concerned: 1. Look into all documents to ascertain if the true compensation income of employees were subjected to withholding. Go as far as company by-laws, board resolutions, "201" files or similar confidential or personal folders of the employees kept by the company or employer, invoking Sec. 7 of the Tax Code which empowers the Commissioner or his authorized representative to obtain information, examine, summon and take testimony in order to determine the liability of any person for any internal revenue tax or to collect any such liability. 2. For advances/reimbursements of transportation and representation expenses claimed as business expense, ascertain in all of the following conditions are present. a) the nature of duties of employees require the expenditure of travelling and transportation expenses. b) the expenses for which the reimbursements were made are ordinary and necessary. Inherent in the term "ordinary and necessary" is the element of reasonableness, that is, the expense is not lavish or excessive under the circumstances. c) travelling and representation expenses are paid or incurred by the employee in the pursuit of trade or business of the employee. This condition requires a direct connection between the expense and the carrying on of trade or business of the employer and such expense is necessary and appropriate to the development and maintenance of the business or trade of the employer. d) the employee made an accounting/liquidation for such expense by submitting to his employer an expense account/report, together with the documentary evidence supporting each element of expenditure: (1) amount, (2) time it was incurred, (3) place and (4) business purpose. Any violation of existing revenue regulations on the collection of income tax at source and substantiation of business expenses should immediately be subjected to the applicable penalties and surcharges, provided under said regulations. cd This Memorandum Order takes effect immediately. (SGD.) RUBEN B. ANCHETA Acting Commissioner