Bir Ruling Da 469 06

Copyright 1994-2015 CD Technologies Asia, Inc. Taxation 2014 1

August 1, 2006

BIR RULING [DA-469-06]

Sections 32 and 33; DA-081-2003

SGV & Co.6760 Ayala Avenue1226 Makati

Attention: Atty. Rafael C. VinzonPartner, Tax Division

Gentlemen :

This refers to your letter dated February 16, 2005 requesting on behalf ofyour client, NEC Tokin Electronics (Philippines), Inc. ("NEC Tokin" for brevity)for confirmation of your opinion that premiums for the group hospitalizationbenefits it provides to its non-rank and file employees under a Health MaintenanceOrganization (HMO) are not subject to fringe benefits tax (FBT) under Sec. 2.33(B)(10) of Revenue Regulations No. 3-98. CHDAEc

The facts, as represented, are as follows:

1. NEC Tokin is a corporation duly organized and existing underand by virtue of the laws of the Philippines. Its principal officeaddress is at 1 Ring Road, Light Industry & Science Park(LISP) II, Barangay La Mesa, Calamba, Laguna. It is registeredwith the Philippine Economic Zone Authority (PEZA) as anEcozone Export Enterprise pursuant to its Certification ofRegistration No. 02-043. Under the Registration Agreement,the company's registered activity "shall be limited to themanufacture of electro mechanical device as relay and others,and the importation of raw materials, machinery, equipment,tools, goods, wares, articles or merchandise directly used in itsregistered operations."

2. NEC Tokin provides group hospitalization benefits to itsnon-rank and file employees under a HMO plan provided byHealth Maintenance, Inc. The company shoulders the entire


amount of HMO premiums covering its non-rank and fileemployees pursuant to this group health insurance. The plan iscompulsory, meaning that the employee has no option not to becovered by the group health insurance plan. However, theHMO plan has no paid-up value to the employee.

3. Furthermore, under the arrangement with Health Maintenance,Inc., a maximum of three (3) dependents of the non-rank andfile employees are enrolled under the HMO plan. In the case ofassistant managers, NEC Tokin shoulders the entire amount ofthe HMO premiums covering their dependents. In the case ofsupervisors, NEC Tokin advances the HMO premiumscovering their dependents and collects the same through salarydeductions over a period of one year.

In connection therewith, you now request for a confirmation that:

1. Premium payments made by NEC Tokin to HealthMaintenance, Inc. pursuant to its group health insurance planfor its employees are not subject to FBT.

2. Premium payments made by NEC Tokin to HealthMaintenance, Inc. pursuant to its group health insurance planfor the dependents of its assistant managers to the extent of P1,500 per employee per year are not subject to FBT.

3. Premium payments made by NEC Tokin to HealthMaintenance, Inc. pursuant to its group health insurance planfor the dependents of its supervisors, which payments are laterpaid by said employees, are not subject to FBT.

In reply thereto, please be informed as follows:

1. On the first issue

Section 33(C) of the 1997 Tax Code provides that:

"(C) Fringe Benefits Not Taxable. — The following fringe benefitsare not taxable under this Section:

(1) Fringe benefits which are authorized and exemptedfrom tax under special laws;

(2) Contributions of the employer for the benefit of theemployee to retirement, insurance and hospitalization benefit plans;


(3) Benefits given to rank and file employees, whethergranted under a collective bargaining agreement or not; and

(4) De minimis benefits as defined in the rules andregulations to be promulgated by the Secretary of Finance, uponrecommendation of the Commissioner." (emphasis supplied)

Revenue Regulations No. 3-98, which implements the above provision ofthe Tax Code, provides that the cost of group life insurance premiums borne bythe employer for his employee shall be considered as a non-taxable fringe benefit.Section 2.33(B)(10) of the said regulation states that:

"(10) Life or health insurance and other non-life insurance premiumsor similar amounts in excess of what the law allows. — The cost of life orhealth insurance and other non-life insurance premiums borne by theemployer for his employee shall be treated as taxable fringe benefit, exceptthe following: HEacAS

(a) contributions of the employer for the benefit of theemployee, pursuant to the provisions of existing law, such as underthe Social Security System (SSS), (R.A. No. 8282, as amended) orunder the Government Service Insurance System (GSIS) (R.A. No.8291), or similar contributions arising from the provisions of anyother existing law; and

(b) the cost of premiums borne by the employer for thegroup insurance of his employees." (emphasis supplied)

Although technically a health maintenance organization(HMO) is not an insurance company subject to registration andregulation by the insurance Commission, the service rendered bysuch HMOs are akin to the service provided by insurance companies.Thus, in Revenue Memorandum Circular No. 04-03, dated December31, 2002, in defining insurance and pension funding companies, thisis clarified, to wit:

"(ii) Insurance and pension funding companies refer to thoseengaged in life and non-life insurance business as defined under theInsurance Code AND pre-need companies, including healthmaintenance organizations. Their gross receipts shall mean actual orconstructive receipts representing: net retained premiums (grosspremiums net of returns, cancellations, and premiums ceded)/grosspremium or collection from planholders; membership fees (in thecase of HMOs);

xxx xxx xxx" (emphasis supplied)


Being considered as a pre-need company, premium payments to HMOs bya corporation under a group insurance plan are not subject to fringe benefit tax.

2. On the second issue

Section 33(C)(4) of the 1997 Tax Code states that de minimis benefits arenot subject to fringe benefit tax. This is further implemented by Section 2.33(C) ofRevenue Regulations No. 3-98 (supra), which states that:

"(C) Fringe Benefits Not Subject to Fringe Benefits Tax — Ingeneral, the fringe benefits tax shall not be imposed on the following fringebenefits:

(1) Fringe benefits which are authorized and exemptedfrom income tax under the Code or under any special law;

(2) Contributions of the employer for the benefit of theemployee to retirement, insurance and hospitalization benefit plans;

(3) Benefits given to the rank and file, whether grantedunder a collective bargaining agreement or not:

(4) De minimis benefits as defined in these Regulations;

(5) If the grant of the fringe benefits to the employee isrequired by the nature of, or necessary to the trade, business orprofession of the employer; or

(6) If the grant of the fringe benefit is for the convenienceof the employer." (emphasis supplied)

As defined in the regulations, de minimis benefits are clarified to be:

"The term "DE MINIMIS" benefits which are exempt from the fringebenefit tax shall, in general, be limited to facilities or privileges furnished oroffered by an employer to his employees that are of relatively small valueand are offered or furnished by the employer merely as a means ofpromoting the health, goodwill, contentment, or efficiency of his employeessuch as the following:

xxx xxx xxx

(2) Medical cash allowance to dependents of employees notexceeding P750 per semester or P125 per month;

xxx xxx xxx" (emphasis supplied)


On the basis of the foregoing, BIR Ruling No. DA-364-03, dated October13, 2003, states that:

"The following shall be considered as de minimis benefits not subjectto income tax as well as withholding tax on compensation income of bothmanagerial and rank and file employees:

xxx xxx xxx

2. Medical cash allowance to dependents of employees notexceeding P750.00 per employee per semester or P125 per month:AICDSa

xxx xxx xxx (emphasis supplied)

"In view of the foregoing, the medical cash allowance to dependentsof employees not exceeding P 750.00 per employee per semester or P 125.00per month and actual yearly medical benefits not exceeding P 10,000 perannum if given to the rank and file and managerial employees are consideredde minimis benefits and therefor not considered as compensationincome/wages and which are not subject to either fringe benefits tax, incometax, or withholding tax on compensation. (Revenue Regulations No. 2-98, asamended)." (emphasis supplied)

In your supplemental letter to this Office, it is stated that the annualpremium paid for dependents of assistant managers is P9,890.00 and fordependents of supervisors, P7,831.00, depending on the age of the dependent, andthat the premium payment is not shouldered by NEC Tokin, but is paid byemployee-supervisor through salary deduction. Applying the rate of P 125.00 permonth to an annual basis, the annual ceiling for de minimis benefits given as cashallowance to dependents of employees is P 1,500.00 per employee per year. Tothis extent, therefore, the premiums paid to HMOs by NEC Tokin are not subjectto fringe benefits tax, income tax, nor to withholding tax on compensation.However, any amount in excess of the ceiling may further be considered as part ofother benefits, provided that the total benefits shall not exceed P30,000.00. Furtherstill, that the amount in excess of the P30,000.00 threshold of the total of "otherbenefits" shall be included as part of the taxable compensation of theemployer-taxpayer.

3. On the third issue

The premiums initially paid by NEC Tokin to Health Maintenance, Inc. onbehalf of the dependents of its supervisors pursuant to the group insurance plan donot constitute fringe benefits or income to said supervisors. The amount of thepremiums is paid by the supervisors as salary deductions. NEC Tokin merely


includes their dependents in the group insurance package as an accommodation. Inany case, any benefit that the supervisors derive from this accommodation doesnot exceed the amount of P 1,500.00 per employee per year. As discussed in thepreceding section, such benefit, if any, is neither subject to fringe benefit tax nor toincome and withholding tax.

This ruling is being issued on the basis of the foregoing facts asrepresented. However, if upon investigation, it will be disclosed that the facts aredifferent, then this ruling shall considered null and void.

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JAMES H. ROLDANAssistant Commissioner

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Bir Ruling Da 469 06