Supplemental Regulations to Revenue Regulations No. 6-82

October 24, 1983 REVENUE REGULATIONS NO. 09-83 SUBJECT : Supplemental Regulations to Revenue Regulations No. 6-82 TO : All Internal Revenue Officers, Withholding Agents and Others Concerned SECTION 1 . Scope . Pursuant to Section 326 of the National Internal Revenue Code, these supplemental regulations are promulgated to prescribe the guidelines on the accounting and substantiation of reimbursements/advances for travelling, representation or entertainment expenses, and the manner by which additional income tax shall be deducted and withheld from compensation incomes. SECTION 2 . Section 2(c) of Revenue Regulations No. 6-82 is amended to read as follows: "(c) . . . "Amounts paid specifically either as advances or reimbursements for travelling, representation and other bona-fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied: "1) It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade or business of the employer. "2) 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 of expense. However, if the reimbursements or advances exceed the actual expenses, the excess if not returned to employer constitutes taxable compensation. acd " Ordinary and necessary expenses. The term "ordinary" does not imply that the employee must incur a certain type of expense. Rather, it means normal, usual, or customary (in size and character) for the employer's trade or business. The main point is that it must be normal type of expenditure for the type of business involved. "An expenditure is "necessary" if it is appropriate and helps develop and maintain the employer's business. It must be reasonable to expect business benefits to result from the expense. "Inherent in the phrase "ordinary and necessary" is the element of reasonableness, which is related to the amount of expense. An expense is reasonable if it is not lavish, extravagant or excessive under the circumstances. "To account/liquidate means to submit to his employer an expense account/report or other required written statement to the employer showing the business nature and the amount of all the employee's expenses (including those charged directly or indirectly to the employer through credit cards or otherwise) broken down into such broad categories as travel, transportation, meals and lodging, representation or entertainment expenses, and to support by sufficient documentary evidence each element of expenditure. "Documentary evidence is a receipt, paid bill, or similar evidence to support an expenditure. Sufficient or adequate documentary evidence will ordinarily disclose the amount, date, place and the essential character of the expenditure. "Invoices" or "tapes" issued by cash register machines duly registered with the Bureau, as well as "expense vouchers" provided by employers for the use of employees to support small amounts of expenses for services, the suppliers of which cannot issue regular invoices, are deemed adequate documentary evidences, provided that, in the latter case, the said "expense voucher" is signed by the supplier of the services. "Reasonable amounts of reimbursement/advances for travelling and entertainment expenses which are precomputed on daily basis, paid to an employee while on special assignment or duty need not be subject to this requirement. cd i "A. Travelling Expenses "1) Meaning of travelling expenses . It refers to the ordinary and necessary expenses of foreign or domestic travel away from home in pursuit of the trade or business of the employer. In general, it may include meals and lodging en route and at one's destination; baggage services; air, rail, and bus fare; cost of transporting sample cases or display materials; laundry expenses; telephone and telegram expenses; cost of getting to or from airports, stations, or hotels or from one customer or place of work to another or from restaurant and hotels to work; automobile and other similar expenses incident to travel. "In addition to the substantiation requirements, the following conditions must be satisfied: "(i) The expense must be reasonable and necessary travelling expense, as that term is generally understood. This includes such item as transportation fares and food and lodging expenses incurred while travelling. "(ii) The expenses must be incurred while away from home, except automobile expenses, jeepney, bus or taxi fares to and from family residence to office or place of work, while in the pursuit of the business of the employer. "(iii) The expenses must be incurred in pursuit of business. This means that there must be a direct connection between the expenditure and the carrying on of the trade or business of the employer. Moreover, such expenditure must be necessary or appropriate to the development and pursuit of the business or trade. "Tax home for travelling expenses purposes, is the place of employment, station, or post of duty. The term "away from home" is limited to travel from post or station or place of employment to points where business transactions are made. "Common automobile expenses include cost of gasoline, oil, repairs, batteries, insurance, depreciation, interest to purchase the car, taxes, registration fees, car washes, garage, rent, parking fees and toll fees. "If the reimbursement/advance payment satisfies the conditions prescribed herein, the employee may choose, in lieu of complying with the substantiation requirements, to claim the percentage of business use of an automobile, which shall in no case exceed seventy per cent (70%) of the reimbursement/advance in the case of salesmen or field personnel (see Labor Code) and thirty per cent (30%) in case of other employees required to travel. "The rule shall apply irrespective of whether the vehicle is owned by the employee or provided for by the employer under any arrangement, except that in the latter case, the total amount of the automobile expenses to the employer shall be the basis of the limitation. "2) Substantiation requirements . Reimbursements or advances for travel expenses shall be considered part of compensation income unless the employee proves and substantiates the following: "(a) the amount of each separate expenditure such as the cost of transportation or lodging. The daily cost of taxpayer's meals and other incidental elements may be totalled, if they are grouped in reasonable categories such as meals and taxi fares; "(b) the dates of departure and return home for each trip and the number of days spent on business; "(c) the destination or locality of travel described by the name of city or town, or other similar designation; "Each element of expenditure must be supported by sufficient documentary evidence. Approximations will not suffice." "B. Representations or Entertainment Expenses "1) Meaning of representation and entertainment expenses. - Representation and entertainment are synonymous terms. They mean activities which are of the type generally considered to constitute entertainment, amusement or recreation. "With respect to an activity, the item must be directly related to, or, in the case of an item directly preceding or following a substantial and bonafide business discussion (including business meeting at a convention or otherwise), that such item was associated with the active conduct of the employer's trade, profession or business. cd i "With respect to a facility used in connection with an activity, the facility was used primarily for the furtherance of the employer's trade or business, and that the item was directly related to the active conduct of such trade or business. "An expenditure for entertainment is considered directly related to the active conduct of the employer's trade or business if it is established that the expenditure meets all of the three following requirements: "(a) there must be an expectation of some business benefit; "(b) the principal character of the combined business and entertainment must be for the active conduct of trade or business; "(c) the item of entertainment, amusement or recreation is not contrary to law or public morals. "Another expenditure which may be considered as directly related entertainment is one occurring in a clear business setting directly in the furtherance of employer's trade or business. It will not be considered in a clear business setting unless the employee establishes that the recipient of the entertainment would have reasonably known that the employee have no significant motive in incurring the expenditure other than directly furthering the trade or business of his employer. Examples: (a) "hospitality room" at a convention at which goodwill is created through discussion or display of employer's products; (b) entertainment of business representative at the introduction of new consumer or industrial products or theatrical presentations. "As a general rule, entertainment which did not occur on the same day of business discussion will not be considered to have met the "directly preceding or following " requirement. However, all the relevant facts and circumstances must be considered as when entertainment of business associates from out of town on the evening prior to or following the day of the discussion. "Whether any meeting, negotiation or discussion constitutes a "substantial and bonafide business discussion", it must be shown that the employee attended a business meeting, negotiation, discussion or other bonafide transaction, other than entertainment, for the purpose of obtaining income or other specific trade or business benefit for the employer. "Reimbursements from expenses relating to entertainment facilities may be excluded from compensation income if (i) facility is used primarily for the furtherance of employer's trade or business and (ii) only to the extent allocable to the use of the facility which is directly related to the active conduct of the employer's trade or business. "Facilities in general also apply to dues or fees paid to any social, athletic, or sporting club or organization. It does not include, however, purchase of proprietary shares and playing rights. "(2) Requirements Reimbursements or advances for representation and entertainment expenses shall not form part of compensation income if - "(a) the employer requires the employee to make the expenditure for its benefit; "(b) the expenses are ordinary and necessary; and "(c) that each of the following elements of expenditure are adequately substantiated: "(i) the amount of such expense; "(ii) the date and place of entertainment, amusement or recreation; (iii) the profession or business purpose of the expense; and (iv) the business relationship to the person entertained. SECTION 3 . Section 7 of Revenue Regulations No. 6-82 is amended by adding subsection (g) to read as follows: "(g) When husband and wife are employed with separate employers, or an employee has multiple employers, etc. 1) Either employed husband or wife may request in writing his or her employer to withhold an additional amount of tax representing the excess of income tax computed on their consolidated compensation income of the preceding taxable year over the sum of the tax currently being withheld by their respective employers. cd "The request shall be accomplished in triplicate and filed with the employer: original, for employers requested to make additional withholding; duplicate, to be attached by the employer to the BIR Form W-1 for the quarter the additional tax withheld is remitted; and triplicate, for file of the requesting employee. "The additional amount of tax requested to be withheld shall be specifically stated in the request without the necessity of indicating the basis of the computation. "Example 1. H & W, married with two qualified dependents are employed with separate employers. They receive monthly compensation of P3,000 and P2,000 on which the amounts of P127.92 and P109.66 are currently being withheld by their respective employers. The income tax due on their joint return of last year is P3,600.00 . Computation. P3600 12 = P300.00 Less: current w.t. (P127.92 + P109.66) 237.58 ___ Additional w.t. P 62.42 ====== "2) The employee with multiple employers may also request his main employer (employer from whom he receives his biggest compensation) in writing in the same manner and form as in the case of husband and wife with different employers under subparagraph (1) hereof, to withhold the additional amount of tax representing the excess of the income tax on his income of the preceding taxable year over the sum of tax currently being withheld from him by all his employers. " EXAMPLE . "Employee X, married with two qualified dependents is employed by employers A, B & C. A is his main employer. The tax due on his consolidated compensation income in the preceding taxable year is P12,000 . Presently, his compensation income and withholding taxes per month and per employee are as follows: Employer Income Withholding Tax A P 5,000 P 381.35 B 3,000 219.66 C 2,000 109.66 ___ ___ Computation. P 10,000 P 710.67 P12,000 12 Less: = P 1,000.00 current w.t. from all employers (P381.35 + P219.66 + P109.66) 710.00 Additional w.t. ___ P 289.33" ___ "3) In like manner, any other employee may request his employer to deduct and withhold from his compensation an amount of tax in addition to the tax determined in accordance with the prescribed tax tables." In all these instances in paragraphs 1, 2 and 3, the employer shall, for the requesting employee, no longer reconcile the tax required to be withheld and the tax withheld in the year-end adjustment. It shall consider the additional tax requested to be withheld as part of the tax required to be withheld. cd SECTION 4 . Effectivity . These regulations shall take effect immediately. CESAR E.A. VIRATA Minister of Finance Recommending Approval: RUBEN B. ANCHETA Acting Commissioner TAN-A5239-J1139-A-D R E Q U I R E M E N T Elements to be Factors to be Proven Substantiation Substantiated (a) Amount Amount of each separate expenditures Receipts for lodging/meals for transportation, lodging, and Tickets for public meals. Permissible to aggregate transportation. incidental expenses in reasonable Diary or log for incidental categories, such as gasoline and expenses. oil, taxis, daily meals for traveller, etc. (b) Time Dates of departure and return for Lodging receipts. each trip, and number of days Tickets for public attributable to business activities. transportation. Diary or log. (c) Place Destination by name of city or other Letter/order from appropriate designation. employer. (d) Business Purpose Business reason for travel or nature Letter/order from employer. of business benefit derived or Contracts or other written expected to be derived. evidence of business transacted. REPUBLIKA NG PILIPINAS MINISTRI NG PANANALAPI KAWANIHAN NG RENTAS INTERNAS Lungsod ng Quezon March 22, 1983 MEMORANDUM FOR: The Prime Minister Attached is the draft of the proposed regulations amending Revenue Regulations No. 16-77. Its approval is recommended to improve the withholding of tax on money payments by government offices or agencies as it simplifies the procedure of withholding and orients the forms to computer-processing. RUBEN B. ANCHETA Acting Commissioner TAN: A5239-J1139-A-O EXAMPLE An employee married with one qualified dependent, receives P1,500 a month. COMPUTATION 1. Using the supplementary withholding tax table for monthly income of P1,667 or less: Monthly salary P1,500 Less: Compensation level 1,416 ___ Excess P 84 ====== Tax on P1,416 P 2.08 Tax on excess (P84 x .03) 2.52 ___ Withholding Tax P 4.60 ======