Fringe Benefits: Tax Treatment

STATUTORY DEFINITION OF FRINGE BENEFITS

In the Philippines, fringe benefits are defined and regulated in Section 33 of the National Internal Revenue Code (NIRC), as amended, and the Revenue Regulations 3-1998 re:  “Implementing Section 33 of the National Internal Revenue Code, as Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits”.

Section 33(B) of the NIRC defines Fringe Benefits as “any good, service, or other benefit furnished or granted by an employer, in cash or in kind, in addition to basic salaries, to an individual employee such as, but are not limited to the following:

1.    Housing;

2.    Expense account;

3.    Vehicle of any kind;

4.    Household personnel, such as maid, driver and others;

5.    Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;

6.    Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;

7.    Expenses for foreign travel;

8.    Holiday and vacation expenses;

9.    Educational assistance to the employee or his dependents; and

10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.”

Revenue Regulations No. 3-1998(B) further explains the composition of each on the list above, the rules, and the valuation of the fringe benefits.

RATIONALE OF GRANTING FRINGE BENEFITS

One reason why fringe benefits are granted by the employer to the employee is to provide incentive to encourage employee’s productivity and loyalty to the employer. It could be in form of vehicle to be used for business meetings and personal travels, or personal benefits like providing for house maids and family drivers. During financial difficulties, the employer may decrease or discontinue previously given fringe benefits. The employer may increase the fringe benefits in times of economic boom.

RULES ON FRINGE BENEFITS

Under the Tax Code, fringe benefits are taxable. As an employer, you have to withhold tax for the fringe benefits in order for it to become deductible from business income in computing income tax. The following rules apply to fringe benefits:

1.) 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 in Section 24(A) of the NIRC, except for “de minimis benefits” and benefits provided for the convenience of the employer. A rank-and-file employee is an employee not holding a managerial or a supervisory position.

2.) Fringe benefits to managerial and supervisory employees are taxable with the 32% fringe benefit tax, which is a final tax and is the subject of this article, except  for “de minimis benefits” and benefits provided for the convenience of the employer. A managerial employee is one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. Supervisory employees are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment.

The fringe benefit tax is computed only to those granted with managerial and supervisory positions. Other than that, the income is subject to normal income tax rate.

Those allowances that are received by an employee in fixed amounts and regularly received by the employee as part of his salaries shall not form part of the taxable fringe benefit but shall be treated as compensation income.

There are fringe benefits under Section 33(C), however, that are not taxable as the following:

1.    Fringe benefits which are authorized and exempted from tax under special laws;

2.    Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;

3.    Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and

4.    De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

5.    If the grant of fringe benefits to the employee is required in the nature of, or necessary to the trade, business or profession of the employer;

6.      If the grant of the fringe benefit is for the convenience of the employer.

COMPUTATION OF THE FRINGE BENEFIT TAX

Fringe benefits provided to managerial and supervisory employees  are subject to the 32% fringe benefit tax. According to Section 33(A) of the NIRC, fringe benefit is a final tax on employee’s income to be withheld by the employer. It is the company that is liable for the fringe benefit tax and not the employee. As an employer, you are required to file fringe benefit tax remittances using BIR Form 1603 on a quarterly basis.

The tax base of fringe benefits is based on the grossed-up monetary value (GMV) of the fringe benefits granted by the employer to the employees (except those rank-and-file employees). The GMV of the fringe benefit is determined by dividing the monetary value of the fringe benefits by 68% effective January 1, 2000 (RR 3-1998). The rates of the fringe benefit tax that shall be applied  is 32% effective January 1, 2000 and thereafter (RR 3-1998). The grossed-up monetary value of the fringe benefit represents the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property which has been received plus the amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of his employee.

For a non-resident individual who is not engaged in trade or business in the Philippines, the fringe benefit tax is 25% imposed on the grossed-up monetary value of the fringe benefit. The tax base shall be computed by dividing the monetary value of the fringe benefits by 75%.

The fringe benefit tax of 15% shall be imposed on the grossed-up monetary value of the fringe benefit and a tax base of 85% for the following individuals:
1.  An alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company.

2.     An alien individual employed by an offshore banking unit of a foreign bank established in the Philippines.
3.  An alien individual employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines.
4. Any of their Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees.ILLUSTRATIONThe employer granted P85,000 cash benefit representing reimbursement of the personal expenses of his employee that is the manager of the subsidiary. How much is the taxable amount of fringe benefit, the fringe benefit tax, and the allowed deductible fringe benefit expense of the employer?

The taxable amount of the fringe benefit is computed as follows. This amount will be used as our tax base when computing the fringe benefit tax.

Monetary value of the fringe benefit (cash payment)	85,000
Divided by the Grossed-Up Monetary Value	68%
Taxable Amount of  the Fringe Benefit	125,000

The taxable amount of the fringe benefit tax multiplied by the applicable tax rate will be our fringe benefit tax.

Taxable Amount of the Fringe Benefit	125,000
Multiplied by the Fringe Benefit Tax Rate	32%
Fringe Benefit Tax	40,000

The deductible fringe benefit expense for income tax purposes is the sum of the cash payment and the fringe benefit tax. For income tax purposes, the total amount of the deductible fringe benefit expense is a deductible expense from business income.

Cash Payment of the Personal Expenses	85,000
Plus The Fringe Benefit Tax	40,000
Deductible Fringe Benefit Expense	125,000

In the books of the company upon payment of the fringe benefit to the employee, the total deductible fringe benefit is debited to fringe benefit expense and cash is credited to the amount of payment to the employee and the withholding tax payable for the fringe benefit tax computed.

Source: Tax Treatment of Fringe Benefits by dacpa.ph