In the Philippine corporate and legal landscape, the granting of per diem allowances and the subsequent requirement for liquidation are governed by a combination of the Labor Code, National Internal Revenue Code (NIRC), and prevailing jurisprudence from the Supreme Court. Understanding these rules is essential for both employers seeking compliance and employees ensuring their rights and tax obligations are met.

I. Definition and Nature of Per Diem

A per diem (Latin for "by the day") is a daily allowance granted to an employee to cover personal expenses—typically cost of living, food, and lodging—incurred while on an official business trip or a special assignment away from their primary station of work.

Not Part of Basic Salary: Generally, a per diem is considered a "traveling allowance" rather than a payment for services rendered. Therefore, it is usually excluded from the computation of 13th-month pay, retirement pay, and overtime pay, provided it is reasonable and used for its intended purpose.
Supplement vs. Salary: If the per diem is given regardless of whether the employee travels or incurs expenses (i.e., a fixed monthly "per diem"), the Bureau of Internal Revenue (BIR) and the courts may treat it as part of the basic salary and, consequently, taxable income.

II. Taxability of Per Diem Allowances

Under the Tax Reform for Acceleration and Inclusion (TRAIN) Law and existing BIR Revenue Regulations (RR No. 2-98, as amended), the tax treatment of per diem depends on its characterization:

1. De Minimis Benefits

If the per diem is small and given to promote the health, goodwill, or efficiency of the employee, it might fall under "De Minimis" benefits, which are exempt from both income tax and withholding tax on compensation. However, per diems are not explicitly listed in the standard list of De Minimis benefits (like rice subsidies or medical cash allowances), so they must usually pass the "Actual Expense" test.

2. The "Accounted For" Rule (Representation and Transportation Allowances)

Per diems are not taxable if they meet the following criteria:

They are received by the employee in the pursuit of the employer’s trade or business.
The employee is required to, and does, make an accounting/liquidation of the expenses to the employer.
The amount is reasonable (not excessive).

3. Excess Per Diem

If the amount of per diem granted exceeds the actual expenses incurred and the employee is allowed to keep the difference without liquidating it, the excess amount is considered taxable income subject to withholding tax.

III. Liquidation Requirements

Liquidation is the process by which an employee submits proof (receipts, invoices, and travel reports) to show that the per diem or cash advance was used for its authorized business purpose.

1. Substantiation Requirement

The NIRC requires that for an expense to be deductible for the employer and non-taxable for the employee, it must be substantiated by:

Official Receipts (ORs) or Sales Invoices (SIs) issued in the name of the employer.
Travel orders or mission orders signed by authorized officials.
Liquidation reports summarizing the total spend versus the advance received.

2. Timelines

While the Labor Code does not set a specific statutory deadline for liquidation, company policies usually dictate a period (e.g., 5 to 30 days upon return from a trip). Failure to liquidate within the prescribed period can lead to:

Salary Deductions: The employer may deduct the unliquidated amount from the employee’s next paycheck.
Disciplinary Action: Habitual failure to liquidate may be categorized as "willful disobedience" or "gross neglect of duty," which are just causes for termination under Article 297 of the Labor Code.

IV. Per Diems in the Government Sector

For government employees, the rules are stricter and governed by COA (Commission on Audit) Circulars and Executive Order No. 77 (s. 2019).

Fixed Rates: Government per diems are strictly pegged to specific rates based on the destination (Region/Category).
Components: The allowance is typically split: 50% for lodging, 30% for meals, and 20% for incidental expenses.
Strict Liquidation: Government personnel must submit a Certificate of Appearance, travel tickets, and a liquidation report. Unspent balances must be returned immediately to the National Treasury or the agency’s cashier.

V. Jurisprudence and Employer Policy

The Supreme Court has consistently ruled that the "right to specify the method of payment and the conditions of allowances" falls under Management Prerogative.

Refusal to Liquidate: In Philippine Airlines vs. NLRC, it was affirmed that an employee’s persistent refusal to account for cash advances/per diems constitutes a valid ground for dismissal, as it involves the handling of company funds.
Non-Diminution of Benefits: If an employer has a long-standing practice (years) of giving per diems without requiring liquidation, and then suddenly requires it, employees may argue a "diminution of benefits." However, this rarely succeeds if the requirement is implemented to comply with new BIR tax regulations.

Summary Table: Private vs. Public Sector

Feature	Private Sector	Government Sector
Basis of Rate	Company Policy / Contract	Executive Order No. 77
Taxability	Tax-exempt if liquidated	Tax-exempt within COA limits
Requirement	Receipts (usually required)	Receipts + Certificate of Appearance
Overages	Usually kept by employee (taxable)	Must be returned to the agency