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As featured on PhilStar:   Taxing per diems

The Philippines, much like the rest of the world, is opening its borders for business and leisure travelers. Businesses are now able to send employees and personnel to close business deals and provide services in person. One issue that these businesses may encounter is whether to tax allowances or per diems that they provided to their field employees. 

This question may arise because under Revenue Regulations (RR) No. 2-98, as amended, or the Withholding Tax Regulations, compensation is defined as all remuneration for services performed by an employee, including, among others, fixed or variable allowances for transportation, representation and other allowances received by a public officer or employee in addition to their regular compensation.

In a recent Bureau of Internal Revenue (BIR) ruling (BIR Ruling 008-2023), the BIR tackled this same question: whether per diems given to field engineers should be subjected to withholding tax on compensation (WTC) or fringe benefits tax (FBT).  

The ruling involves a domestic company that deploys engineers to a client's site, whether local or abroad, to provide technical support services. The company provided per diems to its field engineers and the per diems are for meals and other expenses incidental to the business.

The BIR held that while the per diems received by the field engineers may be considered remuneration for services performed under an employer-employee relationship, the per diems are incurred in the performance of the employee's duties and are considered ordinary and necessary expenses of the taxpayer. Hence, the BIR held in the ruling that the per diems paid to employees should not be subject to WTC or FBT.

The ruling cites as basis RR No. 2-98, as amended, which provides that any amount paid as advances or reimbursement for travel, representation, and other bona fide ordinary and necessary expenses incurred by the employee, whether rank and file or managerial, in the performance of his duties, are not compensation subject to WTC provided that the conditions laid down under the rules are complied with. These conditions are:

i.   It is for ordinary ­and necessary traveling and representation, or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business, or profession; and

ii.  The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Tax Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. The employer may also opt to set a pre-computed (daily) reasonable amount for reimbursements/advances for traveling and entertainment expenses to be paid to an employee while on assignment or duty, which does not need to comply with the substantiation requirements and is not subject to withholding.

Further, for managerial employees, RR No. 3-98 provides that allowances received by these employees that are necessary to the trade or business or for the convenience of the employer are fringe benefits not subject to FBT.

With the return to business as usual, the BIR ruling is a helpful reminder for employers on when travel and other allowances given to employees are subject or not subject to WTC or FBT. It may also be prudent to maintain sufficient records to document the amount, purpose, and conditions of the per diems given to employees so that in the event of a tax audit, the company can readily explain to the tax authorities.


Vianca Marie M. Simbahan
KPMG in the Philippines

Vianca Marie M. Simbahan is an Associate from the Corporate Tax Compliance Group under the Tax Group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Vianca Marie M. Simbahan or Mary Karen E. Quizon-Sakkam through ph-kpmgmla@kpmg.com, social media or visit www.home.kpmg/ph.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.