Chapter 3-Income Taxation PDF

Preview

Summary

CHAPTER 3FRINGE BENEFIT TAXCOMPENSATION- Salaries, wages, amoluments and honoraria, allowances, commission, director’s fee - Taxable pensions and reirement pay and income of similar nature, it consitute compensaion income FRINGE BENEFIT - goods, service, or other beneits granted by employer in addii...

Description

CHAPTER 3 FRINGE BENEFIT TAX COMPENSATION - Salaries, wages, amoluments and honoraria, allowances, commission, director’s fee - Taxable pensions and retirement pay and income of similar nature, it constitute compensation income FRINGE BENEFIT - goods, service, or other benefits granted by employer in addition to basic salaries to supplement stated pay for performance of service FRINGE BENEFIT TAX - given to managerial or supervisory - fringe benefit tax does not cover benefits which are part of taxable compensation income because it is subject to withholding tax

MANAGERIAL EMPLOYEES – has powers to lay down and execute management policies to hire, transfer, suspend, lay-off, recall discharge, assign/discipline employees, or recommend managerial actions RANK & FILE – all employees not falling within managerial employees NATURE OF FRINGE BENEFIT TAX FRINGE BENEFIT TAX - monetary burden granted by employer, in addition to basic salaries, to individual employee other than rank and file - @ 35% on grossed-up monetary value (GUMV) - Collected by employer at firm’s level - Effective whether employer is professional partnership or corporation (regardless whether corp. is taxable or not), government or its instrumentalities - Paid by employer on or before the last day (25th if Electronically filed) of month following the calendar quarter - Employer is the one liable to pay FBT ITEMS OF FRINGE BENEFITS SUBJECT TO TAX 1. Housing 2. Expense Account 3. Vehicle 4. Household Personnel 5. Interest on loan at less than market rate (market rate – actual rate) 6. Membership fees in social and athletic clubs etc.

7. Expenses for foreign travel 8. Holiday and vacation expense 9. Educational assistance to employee or his dependent 10. Life or health insurance and other premiums TAX EXEMPT FRINGE BENEFIT 1. FB authorized and exempted from income tax under special law:  SSS (private)  GSIS (government)  Similar contributions existing under an existing law  Premiums for group insurance 2. If FB is required by nature or necessary to trade, business, or profession 3. De minimis benefits 4. If benefit is for convenience of employer COMPUTATION OF FRINGE BENEFIT - In general, FBT is 35% - FBT rate for nonresident alien not-engaged in trade or business is 25% 1. Evaluate value of benefit or determine monetary value 2. determine proportion or percentage of benefit subject to FBT 3. Gross-up monetary value (GMV) = monetary value of FB/gross monetary value factor 4. GMV x FB rate FBT RATES - Value depending on how employees are taxed

Grossed-up monetary value = net amount of money received (“monetary value”) + FBT received - Align tax treatment of FB with salaries and wages - represent entire income earned by employees - Compensation income are at gross amount (Income tax payable is included) therefore gross-up is needed so that income tax is also considered as part of total benefit VALUATION OF FRINGE BENEFITS - if money, value is the amount granted - If property is transferred to employee, fair market value of property - If property is not transferred to employee, depreciation value of property DEDUCTIBLE EXPENSES OF EMPLOYER If FB for rank & file and supervisory/managerial employee is not subject to FBT

- deduction for employer is monetary value if FB for supervisory/managerial employee is subject to FBT - deduction is grossed-up monetary value of FB (fringe benefit expense +fringe benefit tax) DE MINIMIS BENEFITS ILLUSTRATION Fringe Benefit Tax = 975,000 1. What should be the appropriate Journal entry in books of employers? fringe benefit expense fringe benefit tax expense Cash Monetary Value Divide by: GMV factor Grossed-up Monetary Value X FBT rate FRINGE BENEFIT TAX

975,000 525,000 1,500,000 975,000 65%____ 1,500,000 35%____ 525,000

2. Assume cash FB is not subject to FBT, What is the Journal entry of employer? fringe benefit expense 975,000 cash 975,000 Facilities and privileges (entertainment, medical services, “courtesy” discount on purchases) - Not considered compensation subject to income tax and withholding tax, if relatively small value and offered as means of promoting health, goodwill, contentment or efficiency of employees De minimis benefits not subject to income tax as well as withholding tax: 1. Monetize unused Vacation leave credits of private employees not exceeding 10 days - If exceeds 10 days and payment of “sick” leave shall be added to “other benefits” with 90,000 ceiling - If exceeds the 90,000, shall be subject to basic and creditable withholding tax on compensation income 2. Monitized value of vacation and sick leave credits paid to government officials and employees - Payment of monetize unused vacation and sick leave credits to government officials/employees shall be exempt on tax and compensation income 3. medical cash allowance the dependence of employees not exceeding 1500 per semester or 250 a month 4. rice subsidy not more than 2000 per month or 1 sack per month 5. uniforms not exceeding 6000 per annum 6. Actual medical assistance not exceeding 10,000 per annum -

7. laundry allowance not exceeding 300 per month 8. Employees achievement awards 9. Christmas and need your anniversary celebration gifts not exceeding 5000 per employee per annum 10. Daily meal allowance play overtime and night/graveyard shift not exceeding 25% of basic minimum wage on per region basis - Meal allowance and lodging are exempt from tax if for “advantage or convenience of employer” 11. benefits by virtue of collective bargaining agreement (CBA) and productivity incentive scheme provided that total annual monetary value do not exceed 10,000 per employee per taxable year. 90,000 CEILING FOR 13TH MONTH PAY/BONUSES AND “OTHER BENEFITS” 13th MONTH PAY - Exempt from income tax and creditable withholding tax provided it did not exceed 90,000 - if it exceeds 90,000, excess would form part of individuals gross income and would be subject to income tax and creditable withholding tax OTHER BENEFITS - The 90,000 exclusion shall not apply to other compensation such as basic salary and other allowances  Christmas bonus  productivity incentive bonus  loyalty award  gifts in cash or in kind and other benefits of similar nature - The exclusion from gross income is not applicable to: 1. self-employed individuals 2. income generated from business EXCESS OF DE MINIMIS BENEFITS OVER THEIR RESPECTIVE CEILINGS - The amount of de minimis benefits should not be considered in determining the 90,000 ceiling of “other benefits” - Excess of the de minimis benefits over their ceiling shall be considered part of other benefits subject to tax in excess of 90,000 - All other benefits not included in enumeration of de minimis benefits shall be classified “other benefits” end subject to 90,000 ceiling FIXED OR VARIABLE ALLOWANCES - reasonable amounts of reimbursements/ advancements for traveling and entertainment expenses which are precomputed on daily basis and paid to employee while on an assignment or duty - Subject to income tax and creditable withholding tax on compensation income

Examples: transportation, representation, communication, living away from home allowances BUSINESS RELATED EXPENSES/ALLOWANCE SUBJECT TO LIQUIDATION - Advances or reimbursements for traveling, representation and other ordinary and necessary expenses in the performance of duty, are not compensation subject to withholding, if: 1. It is ordinary and necessary expenses paid in pursuit of trade, business, or profession 2. Employee is required to account/liquidate the expenses in accordance with requirements of substantiation REPRESENTATION AND TRANSPORTATION ALLOWANCE - Grand Theft two officials and employees of government - reimbursement for expenses incurred in performance of duty rather than as additional compensation - if excess is not returned to employer, it will constitute taxable compensation income - Reimbursements/advances that is precomputed on a daily basis and paid to employees while on assignment should not be considered compensation subject to withholding tax - if it is fixed amount and regularly received by employee as part of monthly compensation, it is subject to basic tax COMMUNICATION ALLOWANCE - Not subject from fringe benefits tax end tax on compensation because it is required in nature of job -

ILLUSTRATION (SPECIAL RULES IN COMPUTING MONETARY VALUE) Case A Domestic Corporation paid for monthly rental of residential House of its branch manager amounting to 156,000. (Assume no transfer of ownership) 1. Monetary value of benefit = 78,000 2. Grossed-up monetary value of benefit = 120,000 3. fringe benefit tax = 42,000 4. total deductible from its gross income = 198,000 Rental payment 156,000 X 50%___ monetary value 78,000 / 65% __ GUMV 120,000 X fringe benefit tax rate 35% __ monthly fringe benefit tax expense 42,000 add: rental paid 156,000 total deductible expense 198,000

TABLE 3-4: Special rules in computing the monetary value of housing benefits Employer leases residential Monetary value: property for use of employee Rental paid x 50% Employer owns residential Monetary value: FMV or zonal whichever is higher x property for use of employee 5% x 50% ** Monetary value: Employer purchases residential property in acquisition costs, exclusive of installment for use of interest x 5% x 50% *** employee Employer purchases Monetary value of benefit: Higher between acquisition costs residential property and or zonal as determined by CIR transfer ownership to employee Employer purchases Monetary value: residential property and higher between FMV or zonal as transfer ownership to determined by CIR - cost to employee on lesser amount employee

** Annual benefit = FMV or zonal, whichever is higher x 5% Monetary value of benefit = FMV or zonal, whichever is higher x 5% x 50% ***Annual benefit = acquisition costs exclusive of interest x 5% Monetary value of benefit = acquisition cost exclusive of interest x 5% x 50% TABLE 3-5: Rules in computing the monetary value of motor vehicles Employer owns and maintain Monetary value: motor vehicles for use of Acquisition cost not normally used for business/5 x 50% business and employees Employer leases/maintains Monetary value: motor vehicle for use of Rental payments not normally used for business x 50% business and employees Employer purchases vehicle in Monetary value: Acquisition cost the name of employee Employer provides employee Monetary value: with cash for the purchase and Cash received ownership is in name of employee Employer purchases on Monetary value: installment and ownership is Acquisition costs exclusive of interest / 5years in name of employee Employer shoulders portion of Monetary value:

purchase price and ownership is in name of employee

Amount shouldered by employer

5. Journal entry to record provision of benefit Fringe benefit expense 156,000 fringe benefit tax expense 42,000 cash 156,000 FB tax payable 42,000 CASE B Domestic Corporation owns condo unit. In 2018, granted residential use for Assistant Vice President. FMV per BIR is 10M while FMV in current Real Property Declaration is 8M 1. Monthly monetary value of benefit = 20,833 2. monthly gross-up monetary value of benefit = 32,051 3. monthly fringe benefit expense = 0 *Fringe benefit tax expenses is already the amount deductible from employer's gross income as fringe benefit expense. Employer shall not further claim other deduction because the use of residential property has been recovered as deduction from gross income under depreciation expense 4. monthly fringe benefit tax expense = 11,218 5. total deductible by employer for the month = 11,218 FMV per BIR (higher) 10,000,000 X 5%_______ Value of benefit 500,000 X 50%______ annual monetary value 250,000 / 12 months_ Monthly monetary value 20,833 / 65%______ Grossed-up monetary value (annual) 32,051 X fringe benefit tax rate 35%______ fringe benefit tax for the year 11,218 deductible by employer for the year 11,218 6. Journal entry to record provision of above benefit Fringe Benefit Tax Expense 11,218 Fringe Benefit Tax Payable 11,218 CASE C: Same data in Case B and assuming acquisition cost of property is 5M with remaining useful life of 10 years. How much is monthly fringe benefit expense? FMV per BIR assessment (higher) 10,000,000 Less: cost (5,000,000) Excess of FMV Less over cost 5,000,000 / remaining life 10 years__ Fringe Benefit Expense 500,000 / 12 months Monthly fringe benefit expense 41,667___ * If zonal value is greater than cost subject to depreciation, excess shall be used in computing additional depreciation allowed as fringe benefit expense and shall be amortized in remaining life Fringe Benefit Expense 41,667 Fringe Benefit Tax Expense 11,218 Income Constructively Realized 41,667 Fringe Benefit Tax Payable 11,218

NON-TAXABLE HOUSING BENEFIT

1. Housing unit inside or adjacent (within 50 meters) from perimeter of business premises. A housing unit is considered to be for “convenience or advantage of employer” if it is within 50 meters of business premise and employees are required to be on call due to the nature of job. 2. Temporary housing for a stay of 3 months or less 3. Housing privilege of military officials of AFP OTHER FRINGE BENEFITS 1. Expense account a. taxable as fringe benefit - Spencer imbursed by employer (such as personal expenses like groceries) are taxable fringe benefit - if expenses are receipted by employer and do not partake “personal expenses” it Should be included in determination of individual taxpayer’s taxable compensation income b. Not treated as taxable fringe benefit - ex. representation and transportation allowance given regularly are not taxable fringe benefit but taxable as compensation income subject to basic tax 2. Expenses for foreign travel - expenses in business meeting or convention such as food, beverages and transportation at an average of $300 per day are not fringe benefit tax - Cost of economy and business class airplane ticket is not fringe benefit tax - 30% of cost of 1st class airplane ticket shall be subject to fringe benefit tax - Traveling expenses of family of employee are taxable fringe benefit 3. educational assistance to employee or dependents - In general, it is treated as taxable fringe benefit except: a. when directly connected with employer’s trade, business or profession, or there is written contract that employee is under obligation to remain in employee of employer for a period of time b. when dependents is under scholarship program of company 4. Membership dues or fees in social and athletic clubs 5. life or health insurance and other nonlife insurance premiums are taxable benefits 6. should not be treated as taxable fringe benefit: a. fringe benefit authorized and exempted from income tax or under special law b. fringe benefit is required to trade, business or profession of employer

c. fringe benefit for convenience or advantage of employer d. contributions for the benefit of employee to retirement, insurance and hospitalization e. benefits to rank and file employees f. nontaxable housing benefits g. other nontaxable benefits USE OF AIRCRAFT AND HELICOPTERS - Not a taxable fringe benefit but treated as business expense FILING OF RETURNS - Paid on or before the last day (25th if Electronically filed) of month following the calendar quarter...