The 2009 Philippine Blog Awards

Tuesday, April 21, 2009

CORPORATE CHATS: Taxability of Meals provided by Employer During Overtime Work


Facts:

-Company for the past 7 years provide meals routinely to those who worked overtime whether exempt or non-exempt employees.

- A local policy was agreed upon allowing payment of meals only if there was prior approval from the department manager and only in instances where the manager asked the employee to work overtime for late hours.

- The company standard chart of accounts reflects an Account Code - Employee Meals (Employee Benefits). The account's definition is: "Payment for employees meals incurred during overtime, or where required by law. Must be approved and for the benefit or at the request of the Church entity, or required by law."

Issue:

Whether or not there is any income tax liability to the Employee-recipients of the meal benefit if the Company would charge the Meals against the account Employees Meals/Employees Benefits?

Legal Opinion:

No. Since the meals during overtime are given by the Employer within the business premises and is furnished to have the employees available for work during his meal period, the same is EXEMPT from Employer's FRINGE BENEFITS TAX (FBT) as well as from Employees GROSS INCOME and hence NON- TAXABLE as INCOME OF EMPLOYEES.

The issue on OVERTIME MEALS have two implications relative to the issue of its taxability: First, is Fringe Benefits Tax payable by the Employer and Secondly, the income tax on the equivalent value received by the Employees.

Employer's Exempt from FBT

Under the NIRC, the Fringe Benefits granted to the employee (other than rank and file employee) is taxable to the employer unless exempted. (Sec. 33 (A) NIRC). As a general rule fringe benefits are subject to a final tax to be paid by the employer unless exempted. The rate is: 32% effective Jan. 1, 2000 and thereafter, based on the grossed - up monetary value of the fringe benefit furnished or granted to the employee by the employer, whether an individual or corporation unless EXEMPTED.

Based on the law, there are kinds of fringe benefits that are NOT TAXABLE or NOT SUBJECT TO FBT.

a) Fringe benefits which are authorized and exempted from income tax under the tax code or special law.
b) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans.
c) Benefits granted to the rank and file employees.
d) De Minimis benefits as defined in the Rules and Regulation of the Secretary of Finance upon BIR recommendation.

The Company can claim for exception under item c and d.

The overtime meals provided to rank and file are exempt from fringe benefit tax. And the remaining amount, could qualify as De Minis benefits and hence not subject to the said fringe benefits tax.

The term "de minimis" benefits which are exempt from fringe benefits tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employees.

With this, the Company in providing the overtime meals will not be subject to FBT. However, the exemption of any fringe benefit from FBT shall not be interpreted to mean exemption from any other income tax imposed under the NIRC except if the same is likewise EXPRESSLY EXEMPT from any other income impose under the same Code or under any other existing law.

Value of the Meal received by the employees Not Part of Employees' Income

Under the law, the value to the employee of such meals so furnished shall be added to his compensation income for tax purposes. (Sec 2.78.1(2) Rev. Regs. No. 2-98) except when the same is furnished for the convenience of the employer. The convenience of the employer rule is considered as a basis for exemption both for the fringe benefits tax as well as for fringe benefits that are subject to compensation income.

There are two conditions for application of Convenience of Employer Rule where employer furnished MEALS not considered part of the Employee's Gross Income:
a) Furnished on the Employer's business premises
b) Furnished for the Convenience of the Employer ( To have the Employee available for work during his meal period) (No.2.3, RAMO N. 1-87)

Based on the foregoing, I am of the opinion that the overtime meals provided by the Company for those Employees During Overtime Work are exempt from either the Employer's Fringe Benefit Tax or from Employees Gross Compensation income. Thus, the Company can charge the expense on the Employees Meal/Employees Benefit.

Tuesday, April 7, 2009

PERSONAL PICK: Hedge Fund, Risk Arbitrage and Mutual Fund

One of the tasks in the book "2001 Things To Do Before You Die" is to "Be able to explain a hedge fund, risk arbitrage, and a mutual fund".

I find this interesting and something I can do since I am a lawyer and I am interested in securities regulation stuff. In fact, I authored a law school textbook entitled "Securities Regulation Code: With Annotation." This was published in September 2002, and a Second Edition is to come out hopefully by June of this year. I submitted the manuscript already last September 2008.

This is what I learned from Wikipedia.

Risk arbitrage, or merger arbitrage, is an investment or trading strategy often associated with hedge funds.

Translated to investment: Hypothetically, if "Joe's" taco shop was publicly traded at $50.00 per share, and "Sam's" taco shop moved to take over Joe's taco shop at a proposed $65.00 per share, this means Joe's taco shop's shares are instantly worth $65.00 per share. The game comes into play because those same shares are currently trading at only $50.00 per share, should the buyout occur. If the early trades (restricted or non-retail trades) elevate the value up to $60.00 per share, there exists the $5.00 difference. This is the entrance of risk arbitrage. The risk may be easily illustrated that there is a chance that the acquisition may not be completed, and in this case the price per share will reduce to the original $50.00 per share.

A hedge fund is an investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of activities than other investment funds and also pays a performance fee to its investment manager. Each fund will have its own strategy which determines the type of investments and the methods of investment it undertakes. Hedge funds as a class invest in a broad range of investments extending over shares, debt, commodities and so forth.

As the name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling. However, the term "hedge fund" has come to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase rather than reduce risk, with the expectation of increasing return.

Hedge funds in the United States are pooled investment funds with loose SEC regulation and should not be confused with mutual funds. Some hedge fund managers are required to register with SEC as investment advisers under the Investment Advisers Act. [13] The Act does not require an adviser to follow or avoid any particular investment strategies, nor does it require or prohibit specific investments. Hedge funds typically charge a management fee of 1% or more, plus a "performance fee" of 20% of the hedge fund's profits. There may be a "lock-up" period, during which an investor cannot cash in shares. A variation of the hedge strategy is the 130-30 fund for individual investors.

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities.[1] The mutual fund will have a fund manager that trades the pooled money on a regular basis. Currently, the worldwide value of all mutual funds totals more than $26 trillion.[2]

Since 1940, there have been three basic types of investment companies in the United States: open-end funds, also known in the US as mutual funds; unit investment trusts (UITs); and closed-end funds. Similar funds also operate in Canada. However, in the rest of the world, mutual fund is used as a generic term for various types of collective investment vehicles, such as unit trusts, open-ended investment companies (OEICs), unitized insurance funds, and undertakings for collective investments in transferable securities (UCITS).