Compensation Income (notes).docx

TAX ON COMPENSATION INCOME Basic & Supplementary Compensation Income → Taxable in Full 1. Basic salary 2. Fixed cost-of-living allowances 3. Fixed transportation allowances 4. Overtime pay 5. Hazard pay 6. Night shift differential pay 7. Holiday pay 8. 9. 10. 11.

Commissions Honoraria Meals Profit-sharing bonuses

13th Month Pay & Other Benefits → Taxable in Excess of ₱ 90,000 1. 13th, 14th, 15th month pay 2. Christmas bonus (usually received by private employees) 3. Cash gift other than Christmas/anniversary gifts (usually received by private employees) 4. Excess of de minimis over statutory limitations 5. “Other Benefits”

Non-Taxable / Exempt Compensation 1. Basic pay, overtime pay, hazard pay, night shift differential pay and holiday pay of minimum wage earners 2. De minimis benefits within statutory ceilings 3. 13th month pay and other benefits not exceeding ₱ 90,000 4. Benefits from SSS / GSIS

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DE MINIMIS BENEFITS De minimis benefits are facilities or privileges given or offered by an employer to its employees, provided such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of its employees. De minimis benefits within statutory ceilings are NOT subject to income tax as well as to withholding tax on compensation income of both managerial and rank-and-file employees. When given to employees, no deduction for taxes will be made by the employer; thus, the employee profits from the whole amount of the benefit. The following are considered de minimis benefits for private employees: Benefit

TRAIN LAW Limit

NIRC Limit

Monetized unused vacation leave credits of private employees

Not exceeding 10 days during the year

--- same ---

Monetized value of vacation and sick leave credits paid to government officials and employees

No limit

No limit

Medical cash allowance to dependents of employees

P 1,500 per employee per semester or P 250 per month

P750 per employee per semester or P125 per month

Rice subsidy

P 2,000 or one 50-kg sack of rice per month worth not more than P2,000

P 1,500 or one 50-kg sack of rice per month worth not more than P1,500

Uniforms and clothing allowance

P 6,000 per annum

P 5,000 per annum

Actual medical assistance

P 10,000 per annum

--- same ---

Laundry allowance

P 300 per month

--- same ---

Employees’ achievement awards, which must be in the form of tangible personal property other than cash or gift certificates

Annual monetary value not exceeding P10,000

--- same ---

Gifts given during Christmas and major anniversary celebrations

P 5,000 per employee per annum

--- same ---

Daily meal allowance for overtime work and night/graveyard shift

Not exceeding 25% of the basic minimum wage

--- same ---

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Benefits received by an employee by virtue of a Collective Bargaining Agreement (CBA) and productivity incentive schemes

The total monetary value received from both CBA and productivity incentive schemes combined do not exceed P 10,000 per year.

--- same ---

Note that the implementing rules of the TRAIN Law increased certain benefits on the list. The medical cash allowance increased from P 750 to P 1,500 per semester; the rice subsidy increased from P 1,500 to P 2,000 per month; and the clothing allowance was increased from P 4,000 to P 6,000 per annum. It is also worth mentioning that any amount of de minimis benefits in excess of the threshold can still be exempt as “other benefits,” together with the employees’ 13th month pay, but not to exceed P 90,000 (under the NIRC, the exemption ceiling is P 82,000). Thus, providing de minimis benefits can also be a way of fully exhausting the P 90,000 tax exemption. Ref: Don’t miss the de minimis, http://www.grantthornton.com.ph

Summary of Rules on the Taxability of De Minimis Benefits

Scenario

Tax Treatment

De Minimis Benefits within the ceiling

Tax-exempt

Excess of De Minimis (over the ceiling), to be added to the 13th month pay and other benefits

Tax-exempt if the total does not exceed P 90,000

Excess De Minimis Benefits + 13th month pay and other benefits in excess of P 90,000 --- If received by a rank-and-file employee

Subject to Normal Tax on compensation

--- If received by a managerial employee

Subject to Fringe Benefits Tax

Ref: Non Taxable Employee Benefits – “DE MINIMIS” Benefits, dacpa.ph

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FRINGE BENEFITS Revenue Regulations (RR) No. 8-2018 defines “fringe benefits” to mean any good, service or other benefit granted in cash or in kind, other than the basic compensation, by an employer to an individual employee, such as, but not limited to housing; expense accounts; vehicles; household personnel (maid, driver); interest on loans at less than market rate; club membership fees; expenses for foreign travel; holiday and vacation expenses; education assistance; and life or health insurance and other non-life insurance premiums. As fringe benefits are helpful in increasing employees’ productivity, they are generally considered by employers as ordinary and necessary trade, business or professional expenses. However, for fringe benefit expenses to be allowed as a deduction, it is necessary for employers to pay the fringe benefit tax (FBT).

How is FBT computed? Payment of the FBT is the responsibility of the employer, the rate of which is at 35 percent on the grossed-up monetary value (GMV) of the fringe benefits granted to an employee. The GMV, on the other hand, is determined by dividing the actual monetary value of the fringe benefit by 65 percent. To illustrate, Mr. Z is a Filipino Executive Vice President of ABC Inc., a local advertising company. Apart from his basic salary, the company pays for the monthly wages of Mr. Z’s driver at P 10,000. How much is the FBT that ABC Inc. is liable for each month? GMV = actual monetary value of the fringe benefit divided by 65 percent GMV = P 10,000 / 65 percent = P 15,384.61 FBT = 35 percent X GMV FBT = 35 percent X P 15,384.61 = P 5,384.61 per month Note that in computing for the GMV, the 65 percent divisor may actually vary, depending on the applicable tax rate of the individual granted the fringe benefit. In the previous example, if we were to assume that Mr. Z is a non-resident alien not engaged in trade or business in the Philippines, the FBT will be computed as follows: GMV = actual monetary value of the fringe benefit divided by 75 percent (100 percent less 25 percent) GMV = P 10,000.00 / 75 percent = P 13,333.33 FBT = 25 percent X GMV FBT = 25 percent X P 13,333.33 = P 3,333.33 Note that under the Tax Code, the income tax rate for a non-resident alien not engaged in trade or business in the Philippines is 25 percent (final tax). Reference: Aranas, ML. The Manila Times, March 18, 2018

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Fringe Benefits of Rank-and-File Employee Fringe benefits to rank-and-file employees are not taxable with fringe benefit tax, but instead are taxable as compensation income subject to normal income tax rate.

Taxable Fringe Benefits 1. Expense accounts (e.g. purchase of groceries, payment of house helper, payment of utility bills) 2. Educational assistance to the employee or his dependents a. Must not be directly connected with the employer’s trade or business, and must not have return service provisions. b. For the employee’s dependents, must not be obtained through a competitive scheme. 3. Expenses of foreign travel a. If with documentary requirements --i. Inland travel expenses (food and local transportation) in excess of US$ 300 per day shall be subject to FBT. ii. 30% of the cost of first class airplane tickets shall be subject to FBT. b. If without documentary requirements --i. The whole cost of the ticket, hotel accommodations, and other expenses shall be treated as taxable fringe benefits

Special Rules on the Valuation of Fringe Benefits Housing PRIVILEGE

MONETARY VALUE

Lease of residential property

Rental payments x 50%

Assignment of residential property (employerowned)

FMV in real property declaration or ZV (whichever is higher) x 5% x 50%

Purchase of residential property on installment bases

Acquisition cost (exclusive of interest) x 5% x 50%

Purchase of residential property and ownership transferred in the name of the employees

Acquisition Cost or ZV (whichever is higher)

Nontaxable Housing Fringe Benefits 1. Housing unit inside or adjacent (within 50 meters) from the perimeter of the business premises. 2. Temporary housing for a stay in the housing unit for three (3) months or less. 3. Housing privileges for military personnel.

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Motor Vehicle PRIVILEGE

MONETARY VALUE

Purchase of vehicle in the employee’s name

Acquisition cost

Cash is given to the employee for the purchase in the employee’s name

Cash received by the employee

Employer shoulders a portion of the price, ownership in the employee’s name Purchase of car on installment in the employee’s name

Amount shouldered by the employer Acquisition cost exclusive of interest / 5 yrs

Employer own and maintains a fleet of vehicles

(Acquisition cost / 5) x 50%

Employer leases a fleet of vehicles

Rental payment x 50%

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