Income Taxation (TAX 301) PDF

Income Taxation TAX 301 Christian Maranan Main Topic 4: Fringe Benefits Tax and De Minimis Benefits  INTRODUCTION This module introduces the students to the fringe benefit tax and its de minimis benefits. Topics included in this module are...

Income Taxation TAX 301 Christian Maranan Main Topic 4: Fringe Benefits Tax and De Minimis Benefits  INTRODUCTION This module introduces the students to the fringe benefit tax and its de minimis benefits. Topics included in this module are representation and transportation definition of fringe benefits, allowances, scope of fringe benefits, special rules in computing the monetary items of fringe benefits subject to tax, value of housing benefits, fringe benefits tax base and rate, rules in computing the monetary value of motor vehicles and special rules in de minimis benefits, computing fixed or variable allowances, monetary value. business related expenses, These topics will give students knowledge and understanding about the fringe benefits in accordance with the TRAIN Law. BACKGROUND OF FRINGE BENEFIT TAX The only form of employee income that were effectively taxed were those which were given in cash. This was because an income tax was automatically withheld and collected at source by the government. Additional compensation which was given in the forms of perks and other non-cash benefits were virtually untaxed giving rise to inequity in the distribution of the tax burden. The Fringe Benefits Tax (FBT) was proposed to enhance the progressivity of the income tax and to broaden the tax base.  Fringe Benefits Tax (FBT) It is a monetary burden imposed by the sovereignty on 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, other than a rank-and- file employee. The FBT is a final withholding tax on the grossed-up monetary value of the fringe benefit granted by the employer to an employee who holds a managerial or supervisory position. This tax is effective regardless of whether the employer is an individual, professional partnership or a corporation (regardless of whether the corporation is taxable or not).  Examples of Fringe Benefits Tax (FBT) HEV - HIM - HELF 1) Housing; 2) Expense Account; 3) Vehicle of any kind; 4) 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 the 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) Holiday and vacation expenses: 8) Educational assistance to the employee or his dependents; 9) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows; and 10) Expenses for foreign travel; TAX TREATMENT OF FRINGE BENEFITS Under current tax rules, however, items of fringe benefits in the strict sense are treated differently depending on their nature. For example: 1. Fringe benefits that are fixed every payroll period are considered regular compensation. (example: fixed transportation allowance) 2. Fringe benefits that are variable and performance-based are considered supplemental compensation. (example: commission, profit-sharing, and overtime pay) 3. Fringe benefits in the form of incentives are considered 13th month pay and other benefits 4. Fringe benefits furnished for the employer’s convenience or necessity are exempt from income tax. Other Fringe Benefits Other fringe benefits not included or classifiable as items of compensation income and which are not exempted under the law are treated as follows: 1. For rank-and-file employees – included as “other benefits” under 13th month pay and other benefits 2. For managerial and supervisory employees – excluded in compensation income and are subjected to final fringe benefits tax  Fringe Benefits Non-Taxable Taxable Managerial/ Rank & File Supervisory Exempt Basic Tax Fringe Benefits Tax SCOPE OF THE FRINGE BENEFITS TAX The fringe benefits tax covers only the taxable fringe benefits of managerial or supervisory employees. For purposes of the fringe benefits, RR 3-98 clarifies that taxable fringe benefits exclude those items considered as compensation income. Hence, an excellent understanding of the items of compensation income is extremely important in highlighting the bounds between compensation income and the fringe benefits subject to fringe benefits tax.  SCOPE OF THE FRINGE BENEFITS TAX The Labor Code distinguishes a rank-and-file employee from a managerial 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 to hire, transfer, suspend, lay-off, recall discharge, assign or discipline employees, or to effectively recommend such managerial actions. All employees not falling within this definition are considered rank-and-file employees. Section 3(m) of RR 8-2018 defines rank and file employee as an employee holding neither managerial nor supervisory position. GENERAL CATEGORIES of Fringe Benefits subject to FINAL TAX 1. Management perquisite benefits 2. Employee personal expenses shouldered by the employer 3. Taxable de minimis benefits a. Excess de minimis over their limits b. Benefits not included in the de minimis list Management perquisite benefits Perquisite benefits, also called “management perks” are highly privileged incentives given only to a special group of employees. These benefits are non-performance based and are given as incentives to management employees. Perquisite benefits are not considered as compensation income, but as fringe benefits subject to fringe benefits tax. Employee personal expenses When an expense takes the nature of an employee personal expense or expenditure and is paid or assumed by the employer in default of a proximate business necessity, it is deemed a fringe benefit in its entirety even if the expense is receipted in the name of the employer. ILLUSTRATION Mr. Lockwood, a managerial expatriate employee, was granted by his employer a P30,000 monthly housing allowance in addition to his regular salary. The actual monthly rent of Mr. Lockwood’s residence is P25,000. The P25,000 personal expense assumed by the employer constitutes a taxable fringe benefit subject to fringe benefits tax. The monthly fixed P5,000 excess is a taxable additional compensation (BIR Ruling No. 512- 2011). Hybrid expenses When the employer incurs expenses which is purported partly for business and partly for employee’s incentive, only 50% of the expense representing the employee incentive is subject to fringe benefits tax. ILLUSTRATION 1 The University of Caceres pays for the P50,000 monthly rental of the residential unit of its President. -The amount of taxable fringe benefits shall be P25,000 computed as 50% x P50,000. ILLUSTRATION 2 A manufacturer and distributor of consumer products all over the Philippines leases cars and other vehicles for the use of its employees. The company requires employees to share at least 40% of the monthly rental deductible through their payroll while the company books the 60% as rent expense. -The BIR opined that only 10% of the monthly rental is taxable fringe benefit since employees shouldered 40% of their 50% counterpart (BIR Ruling No. 009-2000). Hybrid expenses The following are hybrid expenses under RR 3-98: 1.Housing benefits in the form of rental accommodation When an employer leases a residential unit for the use of the employee and the business, the rental expense is deemed half business expense and half fringe benefit to the employee. 2.Allowing an employee free use of business property When the employer allows its employees to use business properties, the rental value or depreciation value of the business property over the period of usage is deemed half business expense and half fringe benefit to the employee. Exempt fringe benefit The following benefits are exempt from the fringe benefit tax: 1.Fringe benefits which are authorized and exempted from tax under special laws Examples: Employer’s contribution to SSS, Philhealth, HDMF, or group insurance except excess over the mandatory amounts set by law. 2.Benefits required by the nature of, or necessary to the trade, business or profession of the employer 3.Benefit given for the convenience or advantage of the employer Exempt fringe benefit 4.Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans 5.Benefit given to rank and file employees whether or not granted under a collective bargaining agreement 6.The taxable fringe benefits of rank and file employees are exempt from fringe benefit tax, but are subject to regular income tax as part of compensation income. 7.De minimis benefits within their legal limits "Necessity or convenience of the employer" rule If an expense is necessitated by the nature of the trade, business, or profession of the employer, or is furnished principally for the employer's convenience or advantage, it is an ordinary business expense. The personal advantage of the employee is merely incidental to the expense. These fringe benefits are not viewed as taxable fringe benefits under the NIRC. Examples of exempt benefits under this rule: 1.Scholarship program for an employee to study and acquire competence for future use of the business 2.Car incentives to medical doctors so they will be available for duty anytime 3.Free transportation services to employees working at distant facilities 4.Mobile phone allowance to corporate secretaries who are required to handle off duty client inquiries 5.Sleeping quarters to field engineers and staffs working on remote facilities Examples of exempt benefits under this rule: 6.Helicopters assigned to fishing employees for locating schools of fish offshore or to mining engineers for mineral exploration purposes 7.Personal aircraft to a chief executive officer managing business affiliates and subsidiaries spread across different countries 8.Car incentive to a travelling company salesman 9.Sleeping quarters near the camp furnished to military personnel so they will be available for duty at any time of insurgency 10.Housing units for an employee and his family near the employer's place of business to ensure the employees availability anytime when the employer needs him CHARACTERISTICS OF THE FRINGE BENEFIT TAX 1.Final tax The fringe benefit tax is a final tax which is withheld by the employer at source. Thus, the employee need not report the fringe benefits in his income tax return. 2.Tax upon the fringe benefits of managerial or supervisory employees The fringe benefit tax is not a tax to the employer. It is a tax upon the fringe benefit realized by the managerial or supervisory employee. It is a tax to the employee; hence, it applies regardless of the identity of the employer. Therefore, it applies even if the employer is a sole proprietor, partnership, corporation whether taxable or exempt, or the government. CHARACTERISTICS OF THE FRINGE BENEFIT TAX 3.Paid by the employer As a final tax, the tax is presumed withheld at source and remitted by the employer to the government. 4.Grossed-up tax The monetary value or the amount of fringe benefit realized or taken home by the employee is effectively net of the final tax which is to be withheld at source. Hence, the monetary value is first grossed-up by the complement percentage of the applicable fringe benefit tax rate before the fringe benefit tax rate is applied. 5.Due quarterly The fringe benefit tax is due for remittance quarterly based on the accounting period (fiscal or calendar) selected by the employer. The monetary value of each taxable fringe benefit is determined and reported quarterly through BIR form 1603Q. The quarterly fringe benefit tax is due on or before the last day of the month following the quarter in which withholding was made. RULES ON VALUATION OF FRINGE BENEFITS 1.Benefits paid in cash When benefit is given in cash or paid for in cash, the monetary value is the amount paid for in cash. Note: The only exception here is when the employer pays for the rent of the residence of the employee. Monetary value is 50% of the rental payment. RULES ON VALUATION OF FRINGE BENEFITS 2.Benefits paid in kind When benefit is given in kind, the monetary value is the fair value of the thing given unless its book value is higher. Book value is the cost less any provision for depreciation for depreciable properties. Simply stated, the monetary value is the fair value or the book value of the thing given, whichever is higher. When ownership over the property is transferred to the employee, the monetary value is the entire fair value of the property even if the property is partially used in the business of the employer. 3.Benefits that are furnished When the benefit is given in the form of free use of the employer's property, the monetary value is 50% of the rental value of the property. If the property has no available rental value, the depreciation value is used. For purposes of the depreciation value, the presumptive useful lives of the property are: a. 20 years for real properties. -Hence, the depreciation value is computed as 1/20 or 5% of the value of the property. b.5 years for movable properties. -Hence, the depreciation value is computed as 1/5 or 20% of the value of the property.  Since the fringe benefit tax is paid quarterly, the valuation and reporting of monetary value is also done quarterly. In case of use of employer properties, the reporting of monetary value ceases from the month the free use is discontinued. ILLUSTRATION Determination of depreciation value A partnership transferred the use of a property with a fair value of P2,000,000 to its supervisor. The annual depreciation value shall be: 1.If the property is an immovable such as a residential unit, the annual depreciation value shall be P100,000 computed as P2,000,000 x 5%. 2.If the property is movable such as a car or other motor vehicles, the annual depreciation value shall be P400,000 computed as P2,000,000 x 20%. In quarterly reporting of the fringe benefit tax, the quarterly monetary value is determined by dividing the annual value by 4. PROCEDURES IN COMPUTING THE FRINGE BENEFIT TAX 1.Determine the monetary value. Monetary value refers to the taxable amount of benefits taken home or realized by the managerial or supervisory employee. The monetary value is presumed net of the final tax. 2.Determine the gross-up rate and fringe benefit tax rate applicable for the taxpayer. The gross up rate is the complement of the fringe benefit tax rate. If the fringe benefit tax rate is 35%, the gross-up rate is (100% less 35%) or 65%. If the fringe benefit tax rate is 25%, the gross-up rate is 75%. 3.Determine the grossed-up monetary value by dividing the monetary value by the gross-up rate. 4.Determine the fringe benefit tax by multiplying the fringe benefit tax rate to the grossed-up monetary value. Computation of FBT ILLUSTRATION Determine the grossed-up monetary value and the fringe benefit tax of the following (if applicable) for 2023 taxable year: 1.P39,000 grocery allowance for the personal consumption of an executive of ABC Corporation. Monetary Value 39,000.00 Divide by Gross Monetary Value Factor 65% Grossed-Up Monetary Value 60,000.00 Multiply by FBT Rate 35% Fringe Benefits Tax 21,000.00 ILLUSTRATION 2.P40,800 expenses paid by an executive of ABC Corporation duly received in the name of ABC Corporation and is not in the nature of personal expense. GUMV=P40,800; FBT=P0 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. 3.P40,800 grocery allowance for the personal consumption of one of ABC Corporation’s rank and file employees. GUMV=P40,800 same with monetary value FBT=P0; subject to basic tax because of rank-and-file employee  Question 1 How much is the allowable deduction from business income of a domestic corporation which granted and paid Php 162,500 fringe benefits to its key officers in 2023? Journal Entry (dr) Fringe Benefits (Expense) 162,500 (dr) Fringe Benefits Tax (Expense) 87,500 (cr) Cash 250,000 DE MINIMIS BENEFITS The following shall be considered de minimis benefit not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees: 1.Monetized unused vacation leave credits of private employees not exceeding “10 days” during the year. Payment of monetized unused “vacation” leave credits exceeding 10 days as well as payment of “sick” leave, regardless of number of days shall be added to “other benefits” with a P90,000 ceiling. not subject to income tax as well as withholding tax 2.Monetary value of vacation and sick leave credits paid to government officials and employees. Compared to employees in the private sector, payment of monetized unused “vacation and sick” leave credits to government officials/employees regardless of the number of days shall be exempt from tax on compensation income. not subject to income tax as well as withholding tax 3. Medical cash allowance to dependents of employees not exceeding P1,500 per semester or P250 a month. 4. Rice subsidy of not more than P2,000 per month or 1 sack (50kg.) rice per month. 5. Uniforms given to employees by the employer not exceeding P6,000 per annum (as amended by RR 8-2012) not subject to income tax as well as withholding tax 6. Actual medical assistance given not exceeding P10,000 per annum such as medical allowance to cover medical and health care needs, annual medical/executive check-up, maternity assistance and routine consultations. 7. Laundry allowance not exceeding P300 per month. 8. Employees’ achievement awards (example, for length of service or safety achievement which must be in the form of tangible personal property other than cash or gift certificate with and annual monetary value not exceeding P10,000 under an established written plan which does not discriminate in favor of highly paid employees.) 9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum. 10. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis provided such benefits is given on account of overtime work or if given to employees on night/graveyard shift. 11.RR 1-2015 dated January 5,2015 includes as non-taxable “de minimis benefits” the following; 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 the two (2) items above combined, do not exceed P10,000.00 per employee per taxable year. EXCESS OF DE MINIMIS BENEFITS OVER THEIR RESPECTIVE CEILINGS The amount of de minimis benefits conforming to the ceiling of de minimis benefits shall not be considered in determining the P90,000 ceiling of “other benefits” excluded from the gross income under Section 32B(7)(e) of the Code as amended by RA10963-TRAIN Law (previously P82,000 under RA10653; RR 3-2015). On the other hand, the excess of the de minimis benefits over their respective ceilings prescribed under this regulation shall be considered as part of other benefits subject to tax only on the excess over the P90,000 ceiling. P90,000 Ceiling for 13th month pay/bonuses and “Other Benefits” Section 32(B)(7)(E) of the Tax Code in relation to PD 851 as amended by RA10653 provides that 13th month pay and other benefits received by officials and 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(RA 10963-TRAIN Law). Otherwise, the excess would form part of an individual’s gross income and would be subject to income tax and applicable creditable withholding taxes. “Other Benefits” under these regulations include: -Christmas bonus -Productivity incentive bonus -Loyalty awards -Gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. ILLUSTRATION Alexandria, a private employee who is paid a P600 daily rate, received the following benefits during the year: Required: Determine the taxable amount of de minimis benefits. Monetized unused vacation leave credits 9 days Monetized unused sick leave credits 9 days Medical assistance P7,000 Rice subsidy (P2,500 per month) P30,00 0 Clothing allowance 9,000 Laundry allowance 6,000 Solution Actual Limit Excess Monetized unused VL P5,400 P6,000 - Monetized unused SL P5,400 - P5,400 Medical assistance P7,000 P10,000 - Rice subsidy P30,000 P24,000 P6,000 Clothing allowance P9,000 P6,000 P3,000 Laundry allowance P6,000 P3,600 P2,400 Note: Private employee 1.The actual value of the monetized unused VL was computed at P600 x 9 days while the limit was P600 x 10 days 2.The 10-day rule applies only to vacation leaves. Monetization of sick leaves of private employees is taxable. (BIR Ruling 227-2013, June 20, 2013) 3.The rice subsidy and laundry allowance were likewise annualized by multiplying their monthly limit by 12. The de minimis benefits within the limits are exempt from income tax. 4.The total excess shall be treated as “other benefits” which is subject to limit of P90,000. End