October 24, 2007

BIR RULING [DA-561-07]

Sections 32, 33 & 78

Salvador Guevara & Associates

815-816, Tower One & Exchange Plaza
Ayala Triangle, Ayala Avenue
Makati City

Attention: Atty. Edmundo P. Guevara

Atty. Maria Rosario L. Bernardo
Atty. Josiebeth P. Basa

Gentlemen :

This refers to your letters dated December 4, 2006 and April 10, 2007
requesting on behalf of your client, Accenture, Inc. (the "Company") for
confirmation of your opinion that the following incentives and allowances granted
by the Company to its employees are exempt from fringe benefits tax (FBT),
income and withholding taxes on compensation income: EHaCTA

1. Performance Incentive Awards;

2. Health Bonus; and

3. Hazard Pay consisting of meal and transportation allowances.

As represented, the Company is a domestic corporation duly organized and

existing by virtue of the laws of the Philippines, and was incorporated on
December 13, 1991. Its principal office is located in Makati City, although the
Company maintains office premises at its different project locations in the country.

The Company provides management consulting, management information

consulting, global business outsourcing and information technology services
through its Manila Delivery Center for its clients worldwide. THcEaS

Since its clients are located in different time zones, the Company is required

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 to operate 24 hours a day and 7 days a week, with the employees working at
different shifts throughout the day until nighttime. Employees may also be required
to work overtime, if urgently required for the completion of a particular project.

To ensure the regular and efficient delivery of its services, the Company
presently grants the following monetary rewards and bonuses to its qualified
rank-and-file, supervisory, and managerial employees:

1. Performance incentive awards, consisting of a cash award, the

amount of which varies depending on the accomplishment of the
project to which an employee is assigned to work;

2. Health benefit or bonus given to employees who have utilized a

maximum of three (3) days of their sick leave entitlement; and

3. Hazard pay consisting of meal and transportation allowances.

A. Performance Incentive Award

The recipients of the performance incentive awards and the corresponding

value of the awards are determined by the Company based on the satisfactory
accomplishment of a particular project. Since it is dependent on the project, the
performance incentive award varies in amount and frequency. The performance
incentives granted by the Company may reach PhP15,000. SITCEA

In granting the performance incentive awards to its employees, the

Company is promoting both the efficiency and contentment of its employees by
giving due recognition to the employees' individual contributions to the completion
of each project. In turn, the increased efficiency of its employees enables the
Company to meet its project objectives.

B. Health Benefit or Bonus

The Company also grants a health bonus to those employees who have used
only a maximum of three (3) days of their sick leave entitlement during the fiscal
year. The amount of the health benefit or bonus given to an employee is based on
the number of sick leave days taken by the employee, and ranges from PhP2,000 to
PhP15,000 per annum. AaCEDS

C. Hazard Pay

The Company's manner of operation has given rise to added risks on the
part of the Company's employees who commute to and from work at nighttime. To
alleviate the risk, the Company has adopted a policy of granting what it terms as

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 "hazard pay" or allowances on account of nighttime and/or overtime work. Under
the Company's policy, the "hazard pay" includes meal allowance and transportation
allowances of P150.

C.1. Meal Allowance

The Company applies the following guidelines in granting meal allowance

to its employees: TcDIaA

a) All Company employees who work overtime for a minimum of three

(3) hours from Mondays to Fridays or during regular workdays are
entitled to a meal allowance of PhP150. Additional overtime work
rendered for the next succeeding five (5) hours will entitle the
employee to a second meal allowance of PhP150. The maximum
meal allowance that can be claimed by an employee on a regular
weekday is PhP300 per day.

b) For work done on designated rest days such as weekends (or as

otherwise designated by the project) and holidays, an employee who
works for a minimum of five (5) hours can claim meal allowance of
PhP150 per day. For the next succeeding five (5) hours of overtime
work, the employee will be entitled to a second meal allowance of
PhP150. The maximum meal allowance that can be claimed by an
employee on weekends and holidays is PhP450 per day. HIEAcC

The meal allowance is intended to provide a partial subsidy to employees

working overtime to alleviate the burden of extra meal expenses incurred during
nighttime or overtime work when regular canteen facilities are no longer open, and
which the employees would not have spent had they not been required to render
overtime service.

C.2. Transportation Allowance

The Company applies the following criteria or guidelines in granting the

transportation allowance:

a) Employees must work a minimum of five (5) hours overtime, which

overtime work must be rendered until 10:30 p.m. or beyond.
However, if the employee travels home with his co-employees, only
one employee is entitled to claim the transportation allowance.

b) The transportation allowance is equivalent to PhP150 or actual taxi

fare if in excess of PhP150. cATDIH

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 c) If the employee uses a private car, he may claim a transportation
allowance at the rate of PhP10 per kilometer of the distance from the
office to the employee's residence.

d) Where the employee is assigned an alternative work schedule (i.e.,

compressed workweek schedule or core hours), the minimum of 5
hours is waived as long as the staff works continuously until 10:30
p.m. or until 5:30 a.m.

e) During designated rest days such as weekends (or as otherwise

designated by the project) and holidays, employees who render
overtime work for a minimum of four (4) hours may claim a
two-way transportation allowance in the amount of P10 per
kilometer as actual taxi fare or PhP300, whichever is higher.

f) When claiming allowance using kilometrage as basis, it is required

that the origin and destination of the employee's travel be included in
the employee's time report submitted to the Company, as well as the
number of kilometers between origin and destination. The number of
kilometers is subject to confirmation by the Company as required.
DEScaT

The Company gives its employees from the managerial level and below a
transportation allowance at a minimum amount of PhP150. The transportation
allowance is intended to alleviate the risk incurred by the Company's employees
who work during the nighttime and on overtime and to enable them to secure safe
transportation in commuting to and from work at nighttime.

C.3. Fixed Allowance for Call Center Employees

On the other hand, the Company's call center employees are granted a fixed
meal and transportation allowance of PhP150 per day for every full workday
worked, with or without overtime, and regardless of whether the day worked is a
regular working day, rest day or holiday. ECAaTS

These amounts will enable the employees to report on time for their
designated work hours during nighttime. In case of overtime work, the
transportation allowance will enable them to commute from work in comfort and
safety by taking taxicabs if they are too fatigued to take other public transportation,
or if other public transportation is no longer available at the time they leave work.

In reply, please be informed as follows:

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 1) Performance Incentive Award

Under Section 32 (B) (7) (e) (iv) of the Tax Code of 1997, "other benefits"
include all benefits other than the 13th month pay, such as, productivity incentives
and the annual Christmas bonus given by private offices, 14th month pay, mid-year
productivity incentive bonus, gifts in cash or in kind and other similar benefits and
refer to those benefits received by an official or employee for one (1) calendar
year, the total amount of which including the 13th month pay does not exceed
P30,000. Section 32 (B) (7) (e) (iv) of the Tax Code of 1997 reads: ISTECA

"(B) Exclusions from Gross Income. — The following items shall

not be included in gross income and shall be exempt from taxation under
this Title:

xxx xxx xxx

(e) 13th Month Pay and Other Benefits. — Gross benefits

received by officials and employees of public and private entities:
Provided, however, That the total exclusion under this subparagraph shall
not exceed Thirty thousand pesos (P30,000) which shall cover:

xxx xxx xxx

(iv) Other benefits such as productivity incentives and Christmas

bonus: Provided, further, That the ceiling of Thirty thousand pesos
(P30,000) may be increased through rules and regulations issued by the
Secretary of Finance, upon recommendation of the Commissioner, after
considering, among others, the effect on the same of the inflation rate at
the end of the taxable year. SCaTAc

xxx xxx xxx"

Moreover, Section 2.78.1 (B) (11) (b) of Revenue Regulations (RR) No.
2-98, as amended provides viz:

"(B) Exemptions from withholding tax on compensation. — The

following income payments are exempted from the requirement of
withholding tax on compensation:

xxx xxx xxx

(11) Thirteenth (13th) month pay and other benefits. —

xxx xxx xxx

(b) Other benefits such as Christmas bonus, productivity

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 incentive bonus, loyalty award, gifts in cash or in kind and other benefits
of similar nature actually received by officials and employees of both
government and private offices. DcTAIH

The above stated exclusions (a) and (b) shall cover benefits paid or
accrued during the year provided that the total amount shall not exceed
thirty thousand pesos (P30,000.00) which may be increased through rules
and regulations issued by the Secretary of Finance, upon recommendation
of the Commissioner, after considering, among others, the effect on the
same of the inflation rate at the end of the taxable year.

xxx xxx xxx"

In view of the foregoing, the performance incentive awards given by the

Company to its employees may be considered as falling within the contemplation
of "other benefits" provided for under Section 32 (B) (7) (e) (iv) of the Tax Code
of 1997, and therefore, need not form part of the employees' taxable compensation
income subject to withholding tax on wages under Section 79 in relation to Section
24 (A), both of the Tax Code of 1997, provided, however, that such "other
benefits," inclusive of allowances/benefits, shall not, in the aggregate, exceed
P30,000 when added to the 13th month pay. Any amount in excess of the P30,000
ceiling shall be taxable to the employee receiving the benefits. DHITCc

Further, Section 33 (C) of the Tax Code of 1997 as implemented by Section

2.33 (C) of Rev. Regs. No. 3-98, as amended by RR. No. 8-2000 and as further
amended by RR No. 10-2000, provides, to wit:

"(C) Fringe Benefits Not Subject to Fringe Benefits Tax — In

general, the fringe benefits tax shall not be imposed on the following
benefits: DIHETS

xxx xxx xxx

(3) Benefits given to the rank and file, whether granted under a
collective bargaining agreement or not;

xxx xxx xxx

(6) If the grant of the fringe benefits is for the convenience of the
employer." (BIR Ruling No. 001-2007 dated January 10, 2007)

Accordingly, the performance bonus is likewise not subject to the FBT

since it addresses the Company's concern in promoting contentment and efficiency
among its employees enabling the Company to meet its project objectives which in
effect redounds to the convenience of the employer.

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 2) Health Benefit or Bonus

Section 2.78.1 of RR No. 2-98, as amended re: Withholding Tax on

Compensation Income, implementing the Tax Code of 1997 provides, viz: HICSaD

"Section 2.78.1. Withholding Tax on Compensation Income. —

(A) Compensation Income Defined — In general, 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.

The name by which the remuneration for services is designated is

immaterial. 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 Section 33
of the Code; taxable pensions and retirement pay, and other income of a
similar nature constitute compensation income. ATcaHS

xxx xxx xxx"

Based on the foregoing, "bonus" per se if given to employees as incentives

are considered compensation income, hence, subject to income tax under Section
24 (A) of the Tax Code of 1997, and consequently to withholding tax prescribed
under RR No. 2-98, as amended (BIR Ruling No. 172-91 dated September 5, 1991
and BIR Ruling No. 89-95 dated June 15, 1995).

However, health benefit or bonus may be considered de minimis medical

benefits exempt from withholding tax. Section 2.33 (B) of RR No. 3-98, as
amended by RR No. 8-2000 and RR 10-2000 implementing Section 78 of the Tax
Code of 1997 are illustrative and non-exclusive in the enumeration of what
constitutes de minimis benefits (BIR Ruling No. 023-02 dated June 21, 2002).
Accordingly, health benefit or bonus may still be added in the above enumeration.
But in terms of de minimis threshold for actual yearly medical benefits not
exceeding PhP10,000 per annum, the ceiling for benefits of similar nature under
RR No. 8-2000 should be used as guidelines. Such being the case, health benefit or
bonus may be considered de minimis medical benefits if the employee actually got
sick and incurred actual medical expenses not exceeding PhP10,000 per annum
and therefore, tax exempt. The excess of the health benefit or bonus given over the
de minimis ceiling shall still be exempt provided that it, together with the total
amount of "other benefits", shall not exceed PhP30,000. SHCaEA

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 Since health benefit or bonus is being given to provide incentive to
employees to maintain their good health and efficiency and promote a reduction in
the absences of employees on account of sickness which redounds to the benefit of
the Company, said actual health benefit is not subject to FBT pursuant to Section
33 (C) of the Tax Code of 1997 as implemented by Section 2.33 (C) of RR No.
3-98, as amended by RR No. 8-2000 and as further amended by RR No. 10-2000.

3) Hazard Pay

In BIR Ruling No. 266-93 dated June 18, 1993, this Office had occasion to
rule that hazard pay forms part of the gross compensation income, hence, subject
to withholding tax, viz: aSAHCE

". . . hazard pay is embraced within the term compensation, which means
all remunerations for services performed by an employee for his employer
unless specifically excepted under Section 27, 28(b) and 71 of the Tax
Code, as amended. Compensation income includes all income payments
received as a result of employer-employee relationship, such as salaries,
wages, honoraria, bonus, taxable pensions, allowances, fringe benefits,
fees, and other income of similar nature."

Applying the above ruling, hazard pay given to the employees of the
Company is considered compensation subject to withholding tax on compensation.

You mentioned BIR Ruling DA-023-06 dated January 27, 2006 as your
basis in submitting that hazard pay is exempt from income tax, and consequently,
from withholding tax. The same BIR Ruling No. DA-023-06 cited BIR Ruling No.
DA-350-04 dated June 25, 2004 as its basis. We noted that the issue in BIR Ruling
No. DA-350-04 is transportation allowance. Nowhere was hazard pay mentioned
in BIR Ruling No. DA-350-04. The latest precedent on hazard pay is BIR Ruling
No. 266-93 which considered hazard pay as compensation subject to withholding
tax. Accordingly, hazard pay per se is considered compensation subject to
withholding tax. IaHCAD

Nevertheless, you represented that hazard pay being given to the employees
of Accenture, Inc. consists of meal and transportation allowances. Meal allowance
may be tax-exempt subject to the standards set for de minimis thresholds for fringe
benefits under RR No. 3-98, as amended by RR No. 8-2000 and as further
amended by RR 10-2000 and to the conditions set for the benefits to be exempt
pursuant to the tests of convenience of the employer and the promotion of health,
goodwill, contentment, or efficiency of the employees under Section 2.78.1 (A) (2)
and (3) of RR 2-98, as amended. Pursuant to RR No. 8-2000, as amended, meal
allowance not exceeding 25% of the daily minimum wage may only be considered

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 de minimis meal benefit and therefore, tax exempt if the employee is working
overtime. The excess over this amount shall be considered "other benefits" as
contemplated under Section 32 (B) (7) (e) (iv) of the Tax Code of 1997. The
excess of the meal allowance given over the de minimis ceiling shall still be
exempt provided that it, together with the total amount of other benefits, shall not
exceed PhP30,000 (BIR Ruling No. DA-264-2004 dated May 17, 2004).
Accordingly, that portion of the hazard pay consisting of the meal allowance not
exceeding 25% of the daily minimum wage may be considered de minimis meal
benefit exempt from income tax and consequently, from withholding tax on
compensation. cEHSTC

Moreover, since hazard pay consisting of meal allowance is being given to

the employees to provide a partial subsidy to the employee working overtime to
alleviate the burden of extra meal expenses incurred during nighttime or overtime
work when regular canteen facilities are no longer open, which redounds to the
benefit of the Company, it is, therefore, not subject to fringe benefits tax pursuant
to Section 33 (C) of the Tax Code of 1997 as implemented by Section 2.33 (C) of
RR No. 3-98, as amended by RR No. 8-2000 and as further amended by RR No.
10-2000. HEAcDC

On the other hand, fixed or variable transportation allowance received by an

officer or employee, in addition to the regular compensation fixed for his position
or office, is compensation subject to withholding. However, it is not considered
compensation subject to withholding if (1) it is an ordinary and necessary expense
incurred or reasonably expected to be incurred by the employee in the performance
of his duties and in the pursuit of the business of his employer; and (2) he is
required to account/liquidate for the expense in accordance with the specific
requirements of substantiation pursuant to Section 34 of the Tax Code of 1997.
The excess of actual expenses over advances made shall constitute taxable income
if such amount is not returned to the employer. (Section 2.78.1 (A) (6), RR No.
2-98, as amended by RR No. 8-2000)

It appears that transportation allowance is given only to employees who

work a minimum of four (4) or five (5) hours overtime, as the case may be. Also,
the amount of transportation allowance varies depending on whether the employee
uses a private or public transportation. In case of the employee who uses a private
transportation, the amount is equivalent PhP10 per kilometer. In the case of the
employee who uses public transportation, the amount is equivalent to
PhP150/PhP300 (as the case may be) or actual fare, whichever is higher. Such
being the case, and provided that the employees account for or liquidate it,
transportation allowance is exempt from income tax and consequently, from
withholding tax on compensation. Likewise, it is not subject to fringe benefits tax

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 because it enables the employees to report on time for their designated work hours
during nighttime which redounds to the benefit of the Company. cAaETS

However, transportation allowance given to the Company's call center

employees, shall be treated as allowances which shall form part of their taxable
compensation income subject to income tax and consequently to the withholding
tax prescribed under Section 79 of the Tax Code of 1997 since the same are fixed
in amounts and are regularly received as part of their monthly compensation
income.

This ruling is being issued on the 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 as null and void. ADEaHT

Very truly yours,

(SGD.) GREGORIO V. CABANTAC

Deputy Commissioner
Bureau of Internal Revenue

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