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It is compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items.
In COURAGE et al v. CIR et al, the Supreme Court reiterated such definition and stated that “every
form of compensation for personal services received by all employees arising from employer-employee
relationship is deemed subject to income and, consequently, to withholding tax, unless specifically exempted
or excluded by the Tax Code.
Whatever Sources.
The phrase “all income derived from whatever source” in Chapter VI, Computation of Gross
Income, Section 32 (A) of the 1997 National Internal Revenue Code discloses a legislative policy to include
all income not expressly exempted as within the class of taxable income under our laws.
Consequently, for employment income purposes, the fact that it is not mentioned or expressly
provided as part of taxable compensation income does not automatically exclude the same from taxability
(especially with respect to government employees who automatically assumes that because the government is
its employer, it has either preferential tax treatment as a protected class or exemption because of the
principles of fiscal autonomy or the rule on non-diminution of benefits). In the Courage case, the Supreme
Court did not accept any of these reasons, stating that existing tax rules embraces both private and public
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sector, including organizations exempt from income taxes. The fact that these tax rules are directives to the
Government itself, did not, in any manner or form, alter or amend the provisions of the Tax Code, for or
against the Government or its employees. The Supreme Court reminded government employees of Nitafan v.
Commissioner of Internal Revenue where the Supreme Court stated “that all citizens should bear their
aliquot part of the cost of maintaining the government and should share the burden of general income
taxation equitably.”
As provided in the CREBA v. Romulo, the requisites of income, as it has been, remains unchanged,
to wit:
1. there must be gain;
2. the gain must be realized or received and
3. the gain must not be excluded by law or treaty from taxation.
Unless an employee, whether from the public or private sector, can provide a law or treaty that
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exempts anything he receives from his employment, it is considered taxable compensation income, subject to
existing rules.
converted into cash instead of being availed of ? • For minimum wage earners, it is exempt as this is
considered a part of basic salary.
• If it is converted into cash, then it becomes de
minimis benefits with a threshold of 10 days only
(private sector). Excess leaves converted into cash
shall be considered part of “other benefits”
excluded from gross income under 13th Month
Pay and other benefits subject to the threshold of
P90,000. For public sector, there is no threshold.
• Note: It is part of basic salary for the
computation for 13th Month Pay.
8. The Labor Code covers 3 types of parental • These leaves are payment for work missed due to
leaves: maternity leave, paternity leave & solo- stated reasons.
parent leave. Other leaves like gynecological • These leaves are part of gross compensation
leave and Leave for Women & Children who income and taxable.
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Under Section 32(B)(7)(e), NIRC as amended, 13th Month Pay and Other Benefits as part of
exclusions from gross income, to wit:
“13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of
public and private entities: Provided, however, That the total exclusion under this
subparagraph shall not exceed ninety thousand pesos (P90,000) which shall cover:
i. Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 6686;
ii. Benefits received by employees pursuant to Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
iii. Benefits received by officials and employees not covered by Presidential Decree No. 851,
as amended by Memorandum Order No. 28, dated August 13, 1986; and
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There is a fundamental distinction between salary as compensation for services rendered and 13th
Month Pay and Other Benefits as the former includes every form of compensation for services including
mandated wages provided by the Labor Code and any other payments for services rendered, whether paid in
cash or in kind, which are not subject to any threshold requirements. 13th Month Pay and Other Benefits are
part of compensation income subject to the threshold of P90,000. They are given to “secure better services”
from its employees.
Other Benefits.
Under Section 32(B)(7)(e)(iv) of the Tax Code of 1997, “other benefits” include all benefits other
than the 13th month pay, such as, productivity incentives and the annual Christmas bonus given by private
“Other benefits” for compensation income purposes, are given to secure better services and subject
to the P90,000 threshold as it is a part of the 13th Month Pay provisions under Section 32(B)(7)(e), NIRC as
amended. But if the benefits are for services rendered, i.e., overtime pay, holiday pay, night-shift differential
and other labor mandated wages, which are only given if work is done, then it will be part of compensation
income in general and not subject to the P90,000 threshold under exclusions from gross income under
Section 32(B)(7)(e), NIRC as amended.
Fringe Benefits & DMB.
Aside from Compensation Income and 13th Month Pay and Other Benefits, an employee may also
receive the following:
1. Fringe Benefits. Any goods, service or other benefit furnished or granted in cash or in kind by an
employer to an individual employee (except rank & file employees).
2. De Minimis Benefits. De Minimis Benefits have the purpose to promote the well-being and
efficiency of employees and are limited to facilities or privileges of relatively small size. It is the
employer’s prerogative to grant these types of benefits.
The tax treatment of fringe benefits in general will depend on who the recipient is, to wit:
a. If the recipient is supervisory or managerial employee, the law provides that it is subject to fringe
benefits taxes and excluded from compensation of the recipient.
b. If the recipient is a rank & file employee, it is part of other benefits subject to the threshold of
P90,000.
De Minimis Benefits (“DMB”) Threshold.
Every DMB has its own threshold and cannot be aggregated. RMC 50-2018 provided the most
recent threshold for DMB, as follows:
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1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the
year.
2. Monetized value of vacation & sick leave credits paid to government official & employees.
3. Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per
semester or P250 per month (Rev. Regs. No. 11-2018).
4. Rice subsidy of P2,000 or one (1) sack of rice 50 kilogram rice per month amounting to not
more than P2,000 (Rev. Regs. No. 11-2018).
5. Uniform and clothing allowance not exceeding P6,000 per annum (Rev. Regs. No. 11-2018).
6. 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 per annum.
7. Laundry allowance not exceeding P300 per month
8. Employees achievement awards, e.g. for length of service or safety achievement, which must be
in the form of tangible personal property other than cash or gift certificate, with an annual
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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.
9. Gifts made 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.
11. Benefits received by an employee by virtue of a CBA and productivity incentive schemes
provided that the total monetary value received from both CBA and productivity incentive
schemes combined do not exceed P10,000.00 per employee per taxable year.
DMB received by employees regardless of their status as such are tax-exempt as long as it is within
the threshold provided by law. If the DMB given is in excess of the threshold, the law provides that the DMB
remains tax-exempt but the excess will be treated as other benefits subject to the threshold of P90,000.
These rules (Fringe Benefits & DMB Rules) will be set aside if the fringe benefits were given under
the following guise under Section 33(C), NIRC:
a. Fringe benefits which are authorized and exempted from tax under special laws.
b. Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans.
c. Fringe benefit is required by the nature of, or necessary to the trade, business or profession of
the employer.
d. Fringe benefit is for the convenience or advantage of the employer.
Certain Allowances.
There are certain allowances or benefits that do not fit the category of 13th Month Pay or other
benefits or is not considered fringe benefits or DMB (as it is not either listed or has been delisted). The law
provides that if it is fixed in amount and regularly received as part of the employees’ monthly compensation
income, then the allowance shall be considered as taxable compensation income subject to income taxes. On
the other hand, if the allowance are not fixed in amount or regularly received as part of the employees’
monthly compensation income, the allowances shall not be considered as taxable compensation income
subject to tax. It must, however, be substantiated as prescribed under Section 34, NIRC.
Bonus or Gift.
In a general sense, when we talk about bonus or gift for employment purposes, the discussion under
Commissioner v. LoBue (on Doctrine of Proprietary Interest) comes to mind, to wit: “When assets are
transferred by an employer to an employee to secure better services, they are plainly compensation. It makes
no difference that the compensation is paid in stock, rather than in money. Section 22(a) taxes income derived
from compensation ‘in whatever form paid.’”
Any economic benefit an employee receives from his employer, as a general rule, is compensation for
services rendered. Without a discernible indication of generosity (or donative intent), the only assumption
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which maybe had is that the economic benefit is because of employment or the desire of the employer for
better services by making them part proprietors of his business (proprietary interest). Of course, if the
employee has been able to prove that the acquisition of the “supposed benefits” are under an “arms-length
transaction,” it will not be considered taxable income on the part of the employee.
In Philippine jurisdiction, while the LoBue case under the Doctrine of Proprietary Interest was
adapted (including the exception relative to arms-length transaction or where there is clear donative intent),
the use of bonus or gift has special distinction as Rep. Act No. 8441 provides that government employees
shall be given a Christmas bonus equivalent to one month basic salary and additional cash gift of P5,000,
while bonus or gift for private employees are designated under the last paragraph of Section 32(B)(7)(e)(iv),
NIRC as “other benefits.” But while there is a clear designation, the Tax Code wholly classified them
according to the following:
a. Bonus or Gift as De Minimis Benefits. Gifts made during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per annum, the tax treatment of which means
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While the foregoing rules and discussion are all applicable to government employees, the “Salary
Standardization Law” and different designation of benefits, allowances and other benefits received by
government employees necessitated a thorough discussion and consideration. That is why in COURAGE et
al v. CIR et al, the Supreme Court reiterated the foregoing discussion but as applied to government
employees. The foregoing rules relative to private employees are also applicable to government employees.
What will change the determination of their benefits in terms of taxability is if the law expressly provided
that the benefit is exempt from income taxes. Consequently, under the Courage case, in general, the additional
allowances, bonuses and benefits of any government employees are part of the 13th Month Pay exclusion
In the Courage case, the Supreme Court stated that while RMO 23-2014 is indeed valid and
applicable to government employees as mere interpretation of provisions of the Tax Code as applied to
government employees and whatever they have receive as allowances, bonuses and other benefits, the
allegation relative to the fact that a certain benefit is taxable fringe benefits, DMB or excluded by law, is a
question of fact best left to the determination of courts and administrative agencies. Below are the tax
treatment of each benefit in general:
Problem I. Compensation Income. Taxpayer is a resident citizen, 41 years old, and a Faculty Member of UST
Faculty of Civil Law. He had the following tax information, with a monthly income of P68,000:
Additional Information:
1. Under RMC 50-2018, the de minimis benefits given are all within the threshold provided by law,
except for the Christmas Bonus where the threshold is pegged at P5,000.00.
2. Holiday pay is inclusive of the monthly compensation income.
Required: If the taxpayer is a Tenured Faculty Professor, residing in the City of Manila, with a wife and 3
sons as dependents, what is his income tax due at the end of the taxable year?
Individuals 1.1.18 – 12.31.22
Graduated Level Basic Tax Additional Tax
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