Four (4) Features of PhP90,000 Tax Exempt 13th Month Pay and Other Benefits in Philippines

“Happy Holidays!”, one of the most common expressions we heard every December in the Philippines as the Yuletide season is fast approaching. Employees in Philippines are inclined to expect to receive the 13th month pay, Christmas Bonus, and the likes. As they receive the last payslip during the year, the employees understand that employers withheld taxes as part of its obligation to the nation and to help to the coffers of the Philippine government. You might be wondering what are the tax implications of this benefits received from the employer, is it taxable and up to what extent?

Under the withholding tax rules, 13th-month pay and other benefits are exempted from income tax, and hereunder quoted:

“(B) Exemption from withholding tax on compensation. – The following income payments are exempted from the requirements of withholding tax on compensation but may be subject to income tax depending on the nature/sources of income earned by the individual recipient.
xxx xxx xxx
(11) Thirteenth-month pay and other benefits. –
(a) Thirteenth month pay equivalent to the mandatory one (1) month basic salary of official and employees of the government (whether national or local), including government-owned or controlled corporations, and/or private offices received after the twelfth-month pay.
(b) Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift in cash or in kind, and other benefits of similar nature actually received by officials and employees of both government and private offices, including the Additional Compensation Allowance (ACA) granted and paid to all officials and employees of the National Government Agencies (NGAs) including State Universities and Colleges (SUCs), Government-Owned and/or Controlled Corporations (GOCCs), Government Financial Institutions (GFIs) and Local Government Units (LGUs)”

Based on the above, let me share the following basic features of the Tax Exempt benefits given by the employer in the Philippines.

Republic Act (R.A.) No. 10963 classified 13th month and other benefits with an amount not exceeding P90,000 as income tax exempt in the Philippines. Prior to this, in 1994, R.A. No. 7833 provides that tax exempt other benefits of not exceeding P12,000 is integrated with 13th month and other benefits which the aggregate should not exceed P30,000. In 1998, R.A. No. 8424 removed the limitation of P12,000 from other benefits and that the 13th month and other benefits of not exceeding P30,000 is considered tax exempt. The amount was later increased to P82,000 in R.A. No. 10653 in 2015 and currently to P90,000 by R.A. No. 10963.

1. Payment of 13th month pay is mandatory under the law

Presidential Decree (P.D.) No. 851, as amended by Memorandum Order No. 28, provides that all employers are required to pay their rank-and-file employees, thirteenth (13th) month pay regardless of the nature of their employment and irrespective of the methods by which their wages are paid, provided they worked for at least one (1) month during a calendar year and the same shall be paid not later than December 24 of each year. As this 13th month pay in Philippines is a mandatory imposition by law, failure of the employer to pay its employees is sanctioned by the Department of Labor and Employment (DOLE) in Philippines.

Notably, not every employee classification is entitled to 13th-month pay as managerial employees as defined by labor rules are excluded by law. Further, it is the actual work performed, and not the job title, that is controlling to determine whether the employee is holding a managerial position.

2. Coverage of tax-exempt 13th-month pay and other benefits

Under the rules, 13th-month pay is defined as equivalent to the mandatory one (1) month basic salary of officials and employees of the government (whether national or local), including government-owned or controlled corporations, and/or private offices received after the twelfth-month pay.”

“Basic salary” of an employee shall include all remunerations or earning paid by this employer for services rendered. Salary-related benefits should be included as part of the basis salary in the computation of the 13th month pay if by individual or collective agreement, company practice or policy, the same are treated as part of the basic salary of the employee. However, it does not include allowances and monetary benefits which are not considered or integrated as part of the regular or basic salary, such as:

• cash equivalent of unused vacation and sick leave credits,
• overtime,
• premium,
• night differential,
• holiday pay, and
• cost-of-living allowances.

On the other hand, other benefits seems a catch-all term and is defined as follows: “Other benefits” – such as Christmas bonuses, productivity incentives, loyalty award, gift in cash or in kind, and other benefits of similar nature actually received by officials and employees of both government and private offices, including the Additional Compensation Allowance (ACA) granted and paid to all officials and employees of the National Government Agencies (NGAs) including State Universities and Colleges (SUCs), Government-Owned and/or Controlled Corporations (GOCCs), Government Financial Institutions (GFIs) and Local Government Units (LGUs)

In one interpretation, the BIR ruled the caption of “Other benefits such as productivity incentives and Christmas bonus. . .” is not an exclusive enumeration but only provides examples of “other benefits” an employee may receive. Accordingly, other benefits other than the 13th month pay, such as annual Christmas bonus, the 14th month pay, the mid-year productivity incentive bonus, gifts in cash or in kind and other similar benefits, and referring to those benefits received by an official or employee for one (1) calendar year, the total amount of which, including the 13th month pay, does not exceed P82,000. (now P90,000).

Bonus and 14th month pay – Management Prerogative and Discretionary. In the case of Philippine Education Co., Inc. v. CIR, G.R. No. L-5103, December 24, 1952, a bonus is an amount granted and paid to an employee for his industry and loyalty which contributed to the success of the employer’s business and made possible the realization of profits. It is an act of generosity of the employer for which the employee ought to be thankful and grateful. It is also granted by an enlightened employer to spur the employee to greater efforts for the success of the business and the realization of bigger profits. And the occasion for it grant and payment is usually during the time of the year when people are more generous and inclined to give. This is the Christmas holiday. From the legal point of view, a bonus is not a demandable and enforceable obligation. It is so when it is made a part of the wage or salary or compensation. In such a case, the latter would be fixed and the former would be a contingent one dependent upon the realization of profits.

Christmas Bonus in the CBA is not equivalent to 13th month pay. In the case of Universal Corn Products v. NLRC, G.R. No. L-60337, August 21, 1987, it was held that the provision in the Collective Bargaining Agreement (CBA) for the payment of Christmas bonuses to all regular employees in the bargaining unit with at least one (1) year of continuous services is not equivalent to 13th-month pay but is regarded as an addition to the legal requirement that accords a reward for loyalty to certain employees.

To sum up, the tax-exempt 13th-month pay and other benefits of up to PhP90,000.00 covers those 13th-month pay mandated by law and catch all other benefits to the extent of PhP90,000.00 a year. Any excess of the P90,000 will be subject to graduated income tax at a rate of 15%-35% depending on their taxable compensation income.

3. 13th month pay and other benefits exemption is separate from de minimis benefits and other exemptions

The PhP90,000 tax exempt 13th month and other benefits in the Philippines does not include de minimis benefits within the threshold. De minimis benefits are provided by generous employers for facilities or privileges that are relatively small value and are offered or furnished merely as a means of promoting the health, goodwill, contentment, or efficiency of its employees commonly known as de minimis benefits. You may check this link for the list of de minimis benefits.

In COURAGE v. CIR, G.R. Nos. 213446 & 213658, July 3, 2018, it was explained that all other benefits given by the employer which are not included in the said list, although of relatively small value, shall not be considered as de minimis benefits, hence, shall be subject to income tax as well as withholding tax on compensation income, for rank and file employees, or fringe benefits tax for managerial and supervisory employees, as the case may be.

In BIR Ruling No. 001-07 dated January 10, 2007, the BIR clarified that “other benefits” and “de minimis” are not the same. For purposes of determining the P30,000.00 (now P90,000) ceiling in “other benefits”, the two are treated in that the amount of “de minimis” benefits conforming to the limits prescribed shall not be considered in determining the P30,000.00 (now P90,000) ceiling of “other benefits” and does not provide for a ceiling with regard to “de minimis” benefits. However, it provides for a limit in the amount of each “de minimis” benefit such that if the employer gives more than the limit prescribed, the excess of the P30,000 (now P90,000) ceiling/limit shall be taxable to the employee receiving the benefits. Both “other benefits” and “de minimis” benefits do not form part of the employees’ taxable compensation income and are, therefore, not subject to withholding tax on wages.

Further, under Revenue Regulation (RR) No. 2-98, as amended by RR No. 11-2018 and as clarified in Revenue Memorandum Circular No. 50-2018, de minimis benefits in excess of the limit (e.g., rice allowance of P3,000 per month which is P1,000 is the excess over the limit of P2,000), 13th month and other benefits (e.g., Christmas Bonus, 14th month pay, performance bonus) is tax exempt up to P90,000. Any excess of the P90,000 shall form part of taxable compensation income that will be subject to income tax, and consequently, to the withholding tax on compensation.

Fringe Benefits Treatment. Fringe Benefit means good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee. Under the rules, fringe benefits received by managerial and supervisory employees are subject to Fringe Benefits Tax of 35% (for employee citizen/resident alien/non-resident alien engaged in trade or business in the Philippines) or 25% (for employee non-resident alien not engaged in trade or business within the Philippines) based on gross-up monetary value of fringe benefits granted or furnished by the employer unless required by the nature of or necessary to the trade, business or profession of the employer, or where such fringe benefit is for the convenience and advantage of the employer which shall not be subject to fringe benefits tax; while fringe benefits given to rank and file employees are subject to withholding tax on compensation.

In BIR Ruling No. 041-02 dated November 14, 2002, the BIR clarified that Section 2.78.1(A) of Revenue Regulation No. 2-98, as amended, includes fringe benefits as part of compensation income “except those which are subject to fringe benefit tax under Section 33 of the Code,” which means that if the recipient of the fringe benefits is a managerial or supervisory employee, then the provisions of Section 33 of the Tax Code shall apply with respect to the imposition of a final tax on fringe benefits. But if the recipient is a rank-and-file employee, the fringe benefit will still be subject to withholding tax on compensation and consequently, to income tax, but not to final tax on fringe benefits.

4. Tax compliance related to 13th month pay and Other Benefits

• Reported in Annual Alphalist of Employees

The amount of the 13th-month and other benefits of each employee is to be reported by the employer in the Annual Alphalist List (Alphalist) of Employees to be submitted through es*********@bi*.ph on or before January 31 of the succeeding calendar year. Exempt 13th-month pay and other benefits of up to P90,000 shall be properly reported under the exemptions while the excess or the taxable amount shall be reported under taxable 13th-month pay.

• Reflected in the BIR Form No. 2316

In general, the annualized compensation income including the 13th month and other benefits are reflected in the Certificate of Compensation Payment and Tax Withheld (BIR Form No. 2316) furnished by every employer to the employee on or before January 31 of the succeeding calendar year, or if terminated, on the day on which the last payment of compensation is made. Exempt 13th-month pay and other benefits of up to P90,000 shall be properly reported under the exemptions while the excess or the taxable amount shall be reported under taxable 13th-month pay.

Employees who are disqualified for substituted filing (e.g., two or more employers during the year, tax due and tax withheld are not the same) are required to file their own separate Annual Income Tax Return (AITR) on or before April 15 of the succeeding calendar year and claim the tax withheld in the BIR Form No. 2316 as tax credit in the AITR.

Summary:

Employees should be aware of the existing tax laws, rules, and regulations to secure that their rights as a taxpayer are protected. Compensation is to be regarded as hard-earned money and fruits of labor. After all, what we want is to have a take-home pay in this coming Yuletide season while contributing to society by means of paying the correct taxes.