Income TAX Fringe Benefits TAX Chapter 3 PDF

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Fringe Benefits Given to:Part of Basic Salaries or Taxable CompensationSubject to Withholding Tax and CWT on compensationSubject to Fringe Benefit Withholding TaxRank and File Yes Yes No Supervisory/Managerial No No YesTax Treatment of Fringe BenefitsINCOME TAXATION ( CHAPTER 3 )FRINGE BENEFIT TAXCO...

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INCOME TAXATION ( CHAPTER 3 )

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FRINGE BENEFIT TAX

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COMPENSATION 

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The term “compensation” under Section 2.78.1(A) of RR 2-98, as amended, means all remuneration for services performed by an employee for his employer under employeeemployer relationship, unless excluded by the Code The name for remuneration services is immaterial. Salaries, wages emoluments and honoraria, allowances, commissions, fees including director fees if the director at the same time is an employee of the corporation Taxable bonuses and fringe benefit except those which are subject to fringe benefit tax under Section 33 of the Code; Taxable pensions and retirement pay and other income similar in nature

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NATURE OF FRINGE BENEFIT TAX 

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FRINGE BENEFIT 

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Under Section 2(f) of RR 8-2018 as any goods, service or other benefits furnished or granted by an employer in cash or in kind, other than the basic compensation, by an employer to an individual employee (except rank and file employee as defined in Section 3 of RR-2019). It is a form of pay which may be in the form of property, services, cash or cash equivalent to supplement a stated pay for the performance of services. Under the tax code, fringe benefit subject to benefit tax cover only those benefit given or furnished to managerial or supervisory employee. The regulations do not cover those benefits which are part of taxable compensation income because such income is subject to withholding tax in compensation in accordance with RR 298, as amended.

TAX TREATMENT OF FRINGE BENEFIT

The Labor Code distinguishes a rank and file employee. It provides that a managerial employee is one who is vested with powers of prerogatives to lay down and execute management policies and/or hire, transfer, suspend, lay-off recall, discharge, assign or discipline employees, or to effectively recommend such managerial action. All employees not falling within this definition are considered rank and file employee

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Fringe Benefit tax is a monetary burden imposed by the sovereignty on any good, service, or other benefit furnished or granted by an employer, in cash or kind, in addition to basic salaries, to an individual employee, other than a rank and file employee. The fringe benefit tax is a final tax imposed on the employee withheld by the employer, computer as 35% (beginning January 1, 2018 or upon effectivity of the TRAIN law on the Grossed-up monetary value (GUMV) of the fringe benefit granted by the employer to an employee who holds managerial or supervisory position. Being a final tax, the Fringe Benefit tax is collected or withheld at source by the employer, meaning at the firm’s level rather than at taxpayer’s level to facilitate tax administration. FBT is effective regardless of whether the employer is an individual, professional partnership or corporation. FBT shall be withheld and paid by the employer or on before the last day of the month of calendar quarter.

ITEMS OF FRINGE BENEFITS SUBJECT TO TAX          

Housing Expense account Vehicle of any kind Household personnel, such as maid, driver and others Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted Membership fees, dues and other expenses borne by employer for the employee in social and athletic clubs and similar organizations Expenses for foreign travel Holiday and vacation expenses Educational assistance to the employee or his dependents Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.

TAX EXEMPT FRINGE BENEFITS FRINGE BENEFIT

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Fringe benefits which are authorized and exempted from income tax under any special law:  Contributions required under SSS law  Contributions required under GSIS law  Similar contributions under an existing law  Premiums for group insurance of employees 2. If the grant of fringe benefit to the employee is required by the nature thereof, or necessary to the trade, business, or profession of the employer. 3. De minimis benefits 4. If the grant of benefits is for the convenience or advantage of the employer.

COMPUTATION OF FRINGE BENEFIT TAX  

In general, fringe benefit tax rate is 35% (beginning January 1, 2018 or upon the effectivity of TRAIN law). The FBT for non-resident alien not engaged in trade or business is 25%.

COMPUTATION OF FRINGE BENEFIT TAX 1.

Evaluating the value of the benefit granted or determining the monetary value 2. Determining the proportion or percentage (gross monetary factor) of benefit which is subject the FBT. 3. Determining the gross up monetary value of the benefit by dividing the monetary value of the fringe benefit by the gross monetary factor. 4. Multiplying the grossed-up monetary value factor by the FBT rate.  MONETARY VALUE – refers to the taxable amount of benefit taken home or realized by the managerial or supervisory employee.  It is presumed net of final tax.  The GROSS UP RATE is the complement of the fringe benefit tax rate.  If the fringe benefit is 35%, the gross-up rate is (100%-35%) or 65%. If the fringe benefit tax is 25%, the gross-up rate is 75%.

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Solution:

1.

P40,800 expenses paid by an executive of ABC Corp. duly receipted for in the name of ABC Corp and is not in the nature of personal expense. 2. P40,800 expenses incurred by an executive of ABC Corporation in connection with attending business meeting or convention 3. P40,800 grocery allowance for the personal consumption of one of the ABC Corporations rank and file employees. Answers : 1, 2, 3 = 0 EXPLANATION: 

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For 1 and 2, the expenditure is not in the nature of personal expense of the company’s executive, hence, it is not a fringe benefit taxable to the employee. It is an ordinary business expenditure of ABC corporation. For item 3, the expenditure is subject to basic tax.

VALUATION OF FRINGE BENEFIT   

If granted in money, the value is the amount granted If granted in property and ownership is transferred to the employee, the value is the fair market value of the property If granted in property but ownership is not transferred to the employee, the value is equal to the depreciation value of the property.

DE MINIMIS BENEFITS 

FRINGE BENEFIT TAX RATES 

ILLUSTRATION:

P 39,000 grocery allowance for the consumption of an executive (citizen) of ABC corporation

These are facilities and privileges such as entertainment, medical services, or so called “courtesy” discounts on purchases. Other benefits furnished or offered by an employer to his employees are not considered as compensation subject to income tax and consequently to withholding tax if such facilities or privileges are relatively small value and are offered merely as means of promoting health, goodwill, contentment or efficiency of his employees.

DE MINIMIS BENEFITS NOT SUBJECT TO WITHHOLDING TAX

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Monetized unused vacation leave credits to employees not exceeding ten (10) days during the year; Monetized value of vacation and sick leave credits paid to government officials and employees; Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester of P250 per month; Rice subsidy of P2,000 or one sack of 50kg rice per month amounting to not more than P2,000; Uniform and clothing allowance not exceeding P6,000 per annum; Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum; Laundry allowance not exceeding P300 per month; Employees achievement awards, e.g. for length of service or safety achievement, which in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage; Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed ten thousand pesos (Php 10,000.00)per employee per taxable year;

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EXCESS OF DE MINIMIS BENEFIT THEIR RESPECTIVE CEILINGS 

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BIR RULING NO. 293-2015 (CBA/CAN and PRODUCTIVITY INCENTIVE PAY)  

If not more than P10,000 – considered as de minimis If more than P10,000 – the entire amount shall be included in the “other benefits” with P90,000 ceiling.

employees of public and private entities are exempt from income tax and creditable withholding tax on compensation, provided however that beginning January 1, 2018, the total exclusion shall not exceed P90,000. Otherwise, the excess would form part of an individual’s gross income and would be subject to income tax and applicable creditable withholding tax. RR 3-2015, as amended, provides that the amount of P90,000 exclusion (as amended) shall only apply to 13th month pay and other benefits prescribed under the provisions of 2.78 1 (b)(11 “a and b”) of received by an employee under an employer-employee relationship such as basic salary and other allowances. Other benefits includes: o Christmas bonus o Productivity incentive bonus o Loyalty awards o Gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices Further, RR 3-2015 emphasized that this exclusion from gross income is not applicable to: o Self-employed individuals o Income generated from business

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OVER

The amount of de minimis benefit conforming to the ceiling of de minimis shall not be considered the P90,000 ceiling of “other benefits” excluded from gross income. The excess of de minimis benefit over their respective ceilings under RA 10963 shall be considered as part of other benefits subject to tax only on the excess over the P90,000 ceiling. All other benefits given by employers which are not included in the enumeration of de minimis benefits shall not be considered de minimis benefits but should fall the classification of “other benefits” and is therefore subject to the P90,000 ceiling. The excess of the benefits over the P90,000 limit would form part of the individual’s gross income and would be subject to income tax and applicable creditable withholding taxes.

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This ruling shall apply only to benefits under CBA and productivity incentives schemes. CBA may also referred to as CNA or Collective Negotiation Agreement.

P90,000 Ceiling for 13th month pay/bonuses and “other benefits” 

Section 32 of the Tax Code related to PD 851 as amended by RA 10963 provides that 13th month pay and other benefits received by officials and

FIXED OR VARIABLE ALLOWANCES 

In general, fixed or variable allowances which are received by a public officer or employee of officer or employee of private entity in addition to the regular compensation fixed for his

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position or office is compensation subject to income tax and consequently creditable withholding taxes on compensation income. Fixed or variable allowances are transportation allowances, representation allowances, communication allowances, living away from home allowance, etc. Reasonable amount of reimbursements/advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on duty need not be subject to the requirement of substantation and withholding.

BUSINESS RELATED EXPENSES SUBJECT TO LIQUIDATION 

Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bonafide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied: o It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of trade, business or profession o The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantation for each category of expenses pursuant to Sec. 24 of the tax code

REPRESENTATION ALLOWANCE 

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TRANSPORTATION

Representation and transportation allowance (RATA) granted under Section 34 of the General Appropriations Act to retain officials and employees of the government are considered reimbursements for the expenses incurred in the performance of one’s duties rather than as compensation. However, the excess of RATA if not returned to the employer constitutes taxable income of the employee. Under several rulings issued by the BIR, the foregoing rule shall likewise apply to reasonable amounts reimbursements or advances for travelling and representation of private employees which are pre-computed on a daily basis and which are paid to any employee while on assignment or duty. Such allowance should not be considered compensation subject to withholding tax. Transportation and representation allowance which are fixed on amount and are regularly received by the employees as part of their monthly compensation are subject to basic tax.

ILLUSTRATION: CASE A: In 2018, a domestic corporation paid for the monthly retail of a residential house of its branch manager, Mr. dela Cruz amounting to P156,000. (Assume there is no transfer of ownership). 1. What is the monetary value of the benefit? 2. What is the grossed-up monetary value of the benefit? 3. How much is the fringe benefit? 4. What is the total deductible by the employer from its gross income? 

Answers:

1. P78,000 2.P120,000 3. P42,000 4.P198,000

NON-TAXABLE HOUSING 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 privilege of military officials of the Armed Forces of the Philippines OTHER FRINGE BENEFIT 1. ILLUSTRATION: 

CASE B: A domestic corporation owns a condominium unit. In 2018, the said corporation furnished and granted the same property for the residential use of its assistant Vice President. The fair market value of the property per BIR assessment amounts to P10,000,000, while the fair market value as shown in its current real property declaration amounts to P8,000,000. Determine the following: 1. Monthly monetary value of the benefit 2. Monthly Grossed –up monetary value 3. Fringe benefit tax for the month

Expense account may be taxable as fringe benefits or treated as compensation income depending on the nature of the expense account provided to employees. a.

Taxable fringe benefits- Expense accounts paid for or reimbursed by employer. However, if the expenses were receipted in the name of the employer and do not partake the nature of “personal expenses” attributable to employees, such expense accounts should not be taxable as fringe benefits. It should neither be included in the determination of the individual taxpayer’s taxable compensation income. b. Not treated as taxable fringe benefits Representation and transportation allowance given regularly on a monthly basis are not taxable fringe benefits but taxable compensation income subject to basic tax under Sec. 24 of the Tax Code.

Answers : 1.) P20,833 2.) P32,051 3) P11,218

ILLUSTRATION: 

CASE C: Using the same data in Case B and assuming that the acquisition cost of the property is P5,000,000 with a remaining useful life of 10 years. How much is the monthly fringe benefit expense? Answer: P41,667

Expense account

2. Expenses for foreign travel  Expenses in connection with attending business meeting or convention (inland travel expenses) such as food, beverages, and transportation during foreign travel (except lodging cost in a hotel) at an average of $300 per day are considered reasonable expenses and shall not be subject to fringe benefit tax.  The cost of economy and business class airplane ticket shall not be subject and business class airplane tickets shall not be subject to fringe benefit tax.  However, 30% of the first class airplane ticket shall be subject to fringe benefit tax.  In the absence of documentary evidence showing that the employee’s travel abroad was in connection with business meeting or convention, the entire cost of ticket, including cost of hotel accommodations and other expenses shouldered by employer shall be treated as taxable fringe benefits.  Travelling expense of family members of employees paid for by employer shall be treated as taxable fringe benefit. 3.

Educational assistance to the employee or his dependents

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In general, cost of educational assistance is treated as taxable fringe benefit except: a. When the study is directly connected with the employer’s trade, business or profession and there is a written contract between the employee and employer that the former is under obligation to remain in the employ of the employer for a period of time. b. When given to employee’s dependents through a competitive scheme under scholarship program of the company.

4. Membership dues or fees of employees borne by employer in social and athletic clubs or other similar organizations. 5. Life or health insurance and other non-life insurance premiums are treated as taxable benefits. USE OF AIRCRAFT AND HELICOPTERS 

The use of aircraft and helicopters owned and maintained by the employer is not a taxable fringe benefit but treated as business expense of the employer.

FILING OF RETURNS 

The tax return shall be filed and the tax paid/remitted not later than the last day of the month following the close of the quarter during which withholding tax was made.

ILLUSTRATION: 

Assume an employer furnished cash fringe benefit subject to fringe benefit tax amounting to P975,000 during the first 2020 of the taxable year....