CHAPTER 3 FRINGE BENEFITS TAX AND DE MINIMIS BENEFITS Objectives: Identify the nature of fringe benefit tax Define the income tax of an estate and income of a trust Fringe benefit tax The term “compensation under section 2.78.1 of RR 2*98, as amended, means all remuneration for services performed by an employee for his employer ender an employer-employee relationship, unless specifically excluded by the Code. Fringe benefit is defined under section 2(f) of RR 8*2018 as any goods, service or other benefits furnished or granted by an employer in cash or kind, other than the basic compensation, by an employer to an individual employee. Fringe benefit tax (FBT) is a monetary burden imposed by the sovereignty on any good, service, or other benefit furnished or granted by an 1 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 tax on the employee withheld by the employer, computed at 35% (beginning January 1, 2018 or upon the effectivity of TRAIN Law) on the grossed-up monetary value (GUMV) of the fringe benefit granted by the employer to an employee who holds a managerial or supervisory position. Tax exempt fringe benefits 1. Fringe benefits which are authorized and exempted from income tax under any special law such as: a. Contributions required under SSS law b. Contributions required under GSIS law c. Similar contributions under an existing law d. Premiums for group insurance of employees 2. If the grant of fringe benefits to the employee is required by the nature of, 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. 2 Table 3:2 Fringe Benefit Tax Base and Rate CIT., RA, Classification of taxpayers NRAET Monetary value Pxx NRANETB Pxx Divide by gross monetary value factor 65% 75% Grossed-up monetary value Pxx Pxx x FBT rRate 35% 25% Fringe benefit tax (FBT) Pxx Pxx De minimis benefits Facilities and Privileges such as entertainment, medical services, or so called “courtesy” discounts on purchases, otherwise known as “De minimis 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 of relatively small value and are offered or furnished by the employer merely as means of promoting the health, goodwill contentment or efficiency of his employees. The following shall be considered de minimis benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees: 3 a. Monetized unused vacation leave credits of private employees not exceeding “10 days” during the year. b. Monetized value of vacation and sick leave credits paid to government officials and employees. c. Medical cash allowance to dependents of employees not exceeding P1,500 per semester or P250 a month d. Rice subsidy of not more than P2,000 per month or 1 sack (50) kg rice per month e. Uniforms given to employees by the employer not exceeding P6,000 per annum (as amended by RR 8-2018). f. Actual medical assistance given not exceeding P10,000 per annum such as medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance and routine consultations. g. Laundry allowance not exceeding P300 per month. h. Employees achievement awards (e.g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate with annual monetary value not exceeding P10,000 under an established written plan which does not discriminate in favor of highly paid employees). i. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum. j. 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 benefit is given on account of overtime work or if given to 4 employees on night/graveyard shift. k. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentives schemes provided that the total annual monetary value received from the two (2) items above combined, do not exceed P10,000 per employee per taxable year. BIR Ruling No. 293-2015(CBA/CAN and Productivity Incentive Pay) - If more than P10,000 – considered de minimis - If more than P10,000 – the entire amount shall be included in the “other benefits” with P90,000 ceiling P90,000 Ceiling for 13th month pay/bonuses and “Other Benefits” Section 32(B)(7)(E) of the tax coded in relation to PD 851 as amended by RA10653 provides that 13 th month pay and other benefits received by officials 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). Oher benefits under these regulations include: 5 a. Christmas bonus b. Productivity incentive bonus c. Loyalty awards d. Gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. Representation and Transportation Allowance Representation and transportation allowances (RATA) granted under section 34 of the General Appropriations Act to certain officials and employees of the government are considered reimbursements for the expenses incurred in the performance one’s duties rather than as additional compensation. Communication allowance Communication allowance (phone allowance) granted to employees are not subject from fringe benefit tax and tax on compensation on the basis that communication allowance is deemed required by the nature of the job of the employees and deemed necessary to business and redounds to the convenience and benefit. Non-taxable housing benefits The following housing benefits shall not be considered taxable fringe 6 benefits (Section 33 – tax code) 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 months or less. 3. Housing privilege of military officials of the Armed Forces of the Philippines. Other fringe benefit a. Expense account b. Expenses for foreign travel c. Educational assistance to the employer or his dependents d. Membership dues or fees of employees borne by employer in social and athletic clubs or other similar organizations e. Life or health insurance and other non-life insurance premiums 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. 7 Co-ownership, Estates and Trusts There is co-ownership when two or more heirs or beneficiaries inherit an undivided property from a decedent, or when a donor makes a gift of an undivided property in favor of two or more donees. Inheritance is subject to “Estate Tax” while donation is subject to “Donor’s Tax”. Income tax of an estate Income tax of an estate refers to the tax on income received by the estate during the period of administration or settlement, An “estate” is a mass of all property, rights, and obligations of a deceased person which are not extinguished by his death, including those which have accrued thereto since the opening of succession. A transfer tax is a tax on gratuitous transfer or property either through gift/donation (subject to donor’s tax) or through inheritance (subject to estate tax). A transfer tax is not an income tax because there is no taxable income realized from the passage of property to the heirs upon the death of the decedent. Administrative or Settlement Period refers to the period when title to the properties left by a decedent is not yet finally transferred to the heirs/beneficiaries. At this period, the executor named by the deceased in 8 his “last will or testament”, if any, or the administrator appointed by the court, as the case may be, is temporarily in-charge of the administration of the estate until such time that the estate is finally distributed to the rightful heirs. Deductions from estate’ gross income Deductions from the estate’s gross income are the same items of deductions (business expenses) allowed for individual taxpayers under Section 34 of the tax code. However, in addition to the usual allowable business expenses, the amount of income of the estate for the taxable year which is property paid or credited during such year to any legatee, heir, or beneficiary should be deducted (also known as special deduction) in the determination of the estate’s taxable income. Taxation of Trust’s Trust is a right on property, real or personal, held by one party for the benefit of another. It may be arranged inter-vivos or created by will under which title to a property is passed to another for conservation or investment with the income therefrom and ultimately the corpus (principal) to be distributed in accordance with the directions of the creator as expressed in the governing instrument. Parties to a Trust: Trustor – person who establishes a trust. Trustee – one in whom confidence is reposed as regards property for the benefit of another person. 9 Beneficiary – person whose benefit trust is created. Fiduciary – any person or corporation that holds in trust an estate of another person or persons. A fiduciary may exist only if a legal trust is created. Classification of trust 1. Ordinary trust – the income and corpus of the trust do not revert to the grantor. The trust income is accumulated and held for distribution to the beneficiaries. 2. Revocable trust (Section 63-NIRC) – a trust where at any time, the power to revest in the grantor, title to any part of the corpus of the trust is vested: a. In the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus of the income therefrom; or b. In any person not having a substantial adverse in the disposition of such part of the corpus or the income therefrom. 3. Employee’s trust – income tax shall not apply to employee’s trust which forms part of pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all of his employees. Filing of income tax returns The following persons acting in any fiduciary capacity shall file the income tax return for an estate or trust (Section 65-NIRC) 10 - Guradians - Trustees - Executors/administrators - Receivers - Conservators - All other persons or corporations acting in any fiduciary capacity The return may be filed in - Authorized agent banks - Revenue district officer - Collection agent - Duly authorized city or municipal treasurer in which the taxpayer has his legal residence or principal place of business. For further discussion please refer to the link provided: Fringe Benefit Tax https://www.youtube.com/watch?v=i2RIxPd8-cc For further discussion please refer to the link provided: De Minimis Benefit https://www.youtube.com/watch?v=FxcB_83tjww For further discussion please refer to the link provided: Principles of Estate Tax https://www.youtube.com/watch?v=qYqX3FupbQs Reference Book: Income Taxation (with special topics and properly filled BIR forms) By: Enrico D. Tabag, 2020 Edition 11
