TAX ON COMPENSATION INCOME

Basic & Supplementary Compensation Income → Taxable in Full

1. Basic salary
2. Fixed cost-of-living allowances
3. Fixed transportation allowances
4. Overtime pay
5. Hazard pay
6. Night shift differential pay
7. Holiday pay
8. Commissions
9. Honoraria
10. Meals
11. Profit-sharing bonuses

13th Month Pay & Other Benefits → Taxable in Excess of ₱ 90,000

1. 13th, 14th, 15th month pay
2. Christmas bonus (usually received by private employees)
3. Cash gift other than Christmas/anniversary gifts (usually received by private employees)
4. Excess of de minimis over statutory limitations
5. “Other Benefits”

Non-Taxable / Exempt Compensation

1. Basic pay, overtime pay, hazard pay, night shift differential pay and holiday pay of
minimum wage earners
2. De minimis benefits within statutory ceilings
3. 13th month pay and other benefits not exceeding ₱ 90,000
4. Benefits from SSS / GSIS

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DE MINIMIS BENEFITS

De minimis benefits are facilities or privileges given or offered by an employer to its

employees, provided such facilities or privileges are of relatively small value and are offered
or furnished by the employer merely as a means of promoting the health, goodwill,
contentment, or efficiency of its employees.

De minimis benefits within statutory ceilings are NOT subject to income tax as well as to
withholding tax on compensation income of both managerial and rank-and-file
employees. When given to employees, no deduction for taxes will be made by the
employer; thus, the employee profits from the whole amount of the benefit.

The following are considered de minimis benefits for private employees:

Benefit TRAIN LAW Limit NIRC Limit

Monetized unused vacation leave Not exceeding 10 days
--- same ---
credits of private employees during the year

Monetized value of vacation and

sick leave credits paid to
No limit No limit
government officials and
employees

P 1,500 per employee P750 per employee per

Medical cash allowance to
per semester or P 250 semester or P125 per
dependents of employees
per month month
P 2,000 or one 50-kg P 1,500 or one 50-kg
sack of rice per month sack of rice per month
Rice subsidy
worth not more than worth not more than
P2,000 P1,500
Uniforms and clothing allowance P 6,000 per annum P 5,000 per annum
Actual medical assistance P 10,000 per annum --- same ---
Laundry allowance P 300 per month --- same ---
Employees’ achievement awards,
which must be in the form of Annual monetary value
--- same ---
tangible personal property other not exceeding P10,000
than cash or gift certificates
Gifts given during Christmas and P 5,000 per employee
--- same ---
major anniversary celebrations per annum
Not exceeding 25% of
Daily meal allowance for overtime
the basic minimum --- same ---
work and night/graveyard shift
wage

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 The total monetary
value received from
Benefits received by an employee
both CBA and
by virtue of a Collective Bargaining
productivity incentive --- same ---
Agreement (CBA) and productivity
schemes combined do
incentive schemes
not exceed P 10,000
per year.

Note that the implementing rules of the TRAIN Law increased certain benefits on the list.
The medical cash allowance increased from P 750 to P 1,500 per semester; the rice
subsidy increased from P 1,500 to P 2,000 per month; and the clothing allowance was
increased from P 4,000 to P 6,000 per annum.

It is also worth mentioning that any amount of de minimis benefits in excess of the threshold
can still be exempt as “other benefits,” together with the employees’ 13th month pay, but
not to exceed P 90,000 (under the NIRC, the exemption ceiling is P 82,000). Thus, providing
de minimis benefits can also be a way of fully exhausting the P 90,000 tax exemption.

Ref: Don’t miss the de minimis, http://www.grantthornton.com.ph

Summary of Rules on the Taxability of De Minimis Benefits

Scenario Tax Treatment

De Minimis Benefits within the ceiling Tax-exempt

Excess of De Minimis (over the ceiling), to be
Tax-exempt if the total does not exceed
added to the 13th month pay and other
P 90,000
benefits
Excess De Minimis Benefits + 13th month pay
and other benefits in excess of P 90,000

--- If received by a rank-and-file employee Subject to Normal Tax on compensation

--- If received by a managerial employee Subject to Fringe Benefits Tax

Ref: Non Taxable Employee Benefits – “DE MINIMIS” Benefits, dacpa.ph

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FRINGE BENEFITS

Revenue Regulations (RR) No. 8-2018 defines “fringe benefits” to mean any good, service or
other benefit granted in cash or in kind, other than the basic compensation, by an employer to
an individual employee, such as, but not limited to housing; expense accounts; vehicles;
household personnel (maid, driver); interest on loans at less than market rate; club membership
fees; expenses for foreign travel; holiday and vacation expenses; education assistance; and life
or health insurance and other non-life insurance premiums.

As fringe benefits are helpful in increasing employees’ productivity, they are generally
considered by employers as ordinary and necessary trade, business or professional expenses.
However, for fringe benefit expenses to be allowed as a deduction, it is necessary for
employers to pay the fringe benefit tax (FBT).

How is FBT computed?

Payment of the FBT is the responsibility of the employer, the rate of which is at 35 percent on
the grossed-up monetary value (GMV) of the fringe benefits granted to an employee.

The GMV, on the other hand, is determined by dividing the actual monetary value of the
fringe benefit by 65 percent.

To illustrate, Mr. Z is a Filipino Executive Vice President of ABC Inc., a local advertising
company. Apart from his basic salary, the company pays for the monthly wages of Mr. Z’s driver
at P 10,000. How much is the FBT that ABC Inc. is liable for each month?

GMV = actual monetary value of the fringe benefit divided by 65 percent

GMV = P 10,000 / 65 percent = P 15,384.61

FBT = 35 percent X GMV

FBT = 35 percent X P 15,384.61 = P 5,384.61 per month

Note that in computing for the GMV, the 65 percent divisor may actually vary, depending on the
applicable tax rate of the individual granted the fringe benefit.

In the previous example, if we were to assume that Mr. Z is a non-resident alien not engaged
in trade or business in the Philippines, the FBT will be computed as follows:

GMV = actual monetary value of the fringe benefit divided by 75 percent (100 percent less 25
percent)
GMV = P 10,000.00 / 75 percent = P 13,333.33
FBT = 25 percent X GMV
FBT = 25 percent X P 13,333.33 = P 3,333.33

Note that under the Tax Code, the income tax rate for a non-resident alien not engaged in trade
or business in the Philippines is 25 percent (final tax).

Reference: Aranas, ML. The Manila Times, March 18, 2018

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Fringe Benefits of Rank-and-File Employee

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.

Taxable Fringe Benefits

1. Expense accounts (e.g. purchase of groceries, payment of house helper, payment of
utility bills)
2. Educational assistance to the employee or his dependents
a. Must not be directly connected with the employer’s trade or business, and must
not have return service provisions.
b. For the employee’s dependents, must not be obtained through a competitive
scheme.
3. Expenses of foreign travel
a. If with documentary requirements ---
i. Inland travel expenses (food and local transportation) in excess of US$
300 per day shall be subject to FBT.
ii. 30% of the cost of first class airplane tickets shall be subject to FBT.
b. If without documentary requirements ---
i. The whole cost of the ticket, hotel accommodations, and other expenses
shall be treated as taxable fringe benefits

Special Rules on the Valuation of Fringe Benefits

Housing

PRIVILEGE MONETARY VALUE

Lease of residential property Rental payments x 50%

Assignment of residential property (employer-
owned)
Purchase of residential property on
installment bases
Purchase of residential property and
ownership transferred in the name of the
employees
FMV in real property declaration or ZV
(whichever is higher) x 5% x 50%
Acquisition cost (exclusive of interest) x 5%
x 50%
Acquisition Cost or ZV (whichever is higher)

Nontaxable Housing Fringe 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 privileges for military personnel.

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 Motor Vehicle

PRIVILEGE MONETARY VALUE

Purchase of vehicle in the employee’s name Acquisition cost

Cash is given to the employee for the
Cash received by the employee
purchase in the employee’s name
Employer shoulders a portion of the price,
Amount shouldered by the employer
ownership in the employee’s name
Purchase of car on installment in the
Acquisition cost exclusive of interest / 5 yrs
employee’s name

Employer own and maintains a fleet of

(Acquisition cost / 5) x 50%
vehicles
Employer leases a fleet of vehicles Rental payment x 50%

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