Further Amending the “De Minimis” Benefits Provisions of Revenue Regulations No. 2-98, as Amended, Increasing the Clothing Allowance pursuant to Republic Act No. 11975, the Fiscal Year 2024 General Appropriations Act, and Employees Achievement Awards
Pursuant to Sections 4 and 244 in relation to Section 33 of the Tax Code of 1997, these regulations are hereby promulgated to further amend RR Nos. 2-98, as amended, with respect to “De Minimis” benefits which are exempt from income tax on compensation as well as from income tax on compensation a well as from fringe benefit tax in relation to the implementation of Republic Act No. 1146.
Section 1. Section 2.78.1 of RR No. 2-98, as last amended by RR No. 11-2018, is hereby further amended to read as follows:
“Section 2.78.1. Withholding of Income Tax on Compensation Income
Section 2. Repealing Clause – All existing rules and regulations and other issuances or parts thereof which are inconsistent with the provisions of these Regulations are hereby amended, modified or repealed accordingly.
Section 3. Effectivity – These Regulations shall take effect after fifteen (15) days following its publication in the Official Gazette or in the BIR Official Website, whichever comes first.
“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.
“(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:
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
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*********@*****ov.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.
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.
De minimis benefits are benefits of relatively small values provided by the employers to the employee on top of the basic compensation intended for the general welfare of the employees. Being of relatively small values, the same is not being considered as a taxable compensation and as such, not subject to income tax and withholding tax on compensation. The amount of de minimis provided is a deductible salaries expense, while for the employee, it would constitute as an additional salary that is not deducted withholding tax on compensation.
To further appreciate the tax exemptions, below is the updated list of de minimis benefits in the Philippines both to managerial and rand-and-file employees with some items updated in amounts by Revenue Regulations No. 11 – 2018 (RR 11-2018), the implementing rule of Tax Reform for Acceleration and Inclusion (TRAIN) or Republic Act No. 10963 effective January 1, 2018 for guidance and easy reference.
1. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year.
2. Monetized value of vacation and sick leave credits paid to government official and employees .
3. Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester or P250 per month (as amended by RR 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 (as amended by RR 11-2018).
5. Uniform and clothing allowance not exceeding P6,000 per annum (as amended by RR 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 annun.
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 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 twenty-five percent (25%) of the basic minimum wage on a per region basis.
11. Benefits received by an employee by virtue of a collective bargaining agreement (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.
As further provided under Revenue Regulations No. 15-2011 that has become effective starting the year 2011, all other benefits given by employers which are not included in the above enumeration shall not be considered “de minimis benefits, and hence, shall be subject to income tax as well as withholding tax on compensation income. Please note also of the limitations as to amount because it is material to qualify for exemptions. If you provide more than the limitations, the amount in excess of the limit would be taxable and subject to withholding tax on compensation, if the recipient employee is a rank-and-file, or fringe benefits tax (FBT) of 32% if a supervisory or managerial employee. This is however subject to the rule on the P90,000 amount for 13th month pay and other benefits where excess de minimis benefits may not be taxable if the total of such excess plus the 13th month pay and other benefits is within the P90,000 limitation.
References:
Revenue Regulations No. 15-2011
Revenue Regulations No. 8-2012
Revenue Regulations No. 1-2015
Revenue Regulations No. 11 – 2018 – TRAIN or R.A. No. 10963
Disclaimer: This article is for general conceptual guidance only and is neither an expert opinion, nor a substitute for an expert opinion in itself. Please consult your preferred tax expert or consultant for the specific details applicable to your circumstances.
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De minimis benefits are benefits of relatively small values provided by the employers to the employee on top of the basic compensation intended for the general welfare of the employees. Being of relatively small values, the same is not being considered as a taxable compensation. This concept has initially been introduced by Revenue Regulations No. 8-2000 sometime in year 2000 amending Revenue Regulations 3-98, and underwent a number of amendments, to include a material impact under Revenue Regulations No. 15-2011 dated March 16, 2011, and Revenue Regulations No. 8-2012 dated May 11, 2012. As of this writing, the latest amendment is Revenue Regulations No. 1-2015 dated January 5, 2015.
For the employer, the amount of de minimis provided is a deductible salaries expense, while for the employee, it would constitute as an additional salary that is not deducted withholding tax on compensation. To further appreciate the tax exemptions, let us enumerate the 2015 updated list for guidance and easy reference.
3. Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester or P250 per month (as amended by RR 11-2018 on TRAIN RA 10963).
4. Rice subsidy of P2,000 or one (1) sack of rice 50 kilogram rice per month amounting to not more than P2,000 (as amended by RR 11-2018 on TRAIN RA 10963).
5. Uniform and clothing allowance not exceeding P6,000 per annum (as amended by RR 11-2018 on TRAIN RA 10963).
As further provided under Revenue Regulations No. 15-2011 that has become effective starting the year 2011, all other benefits given by employers which are not included in the above enumeration shall not be considered “de minimis benefits, and hence, shall be subject to income tax as well as withholding tax on compensation income. Please note also of the limitations as to amount because it is material to qualify for exemptions. If you provide more than the limitations, the amount in excess of the limit would be taxable and subject to withholding tax on compensation, if the recipient employee is a rank-and-file, or fringe benefits tax (FBT) of 32% if a supervisory or managerial employee. This is however subject to the rule on the P30,000 amount for 13th month pay and other benefits where excess de minimis benefits may not be taxable if the total of such excess plus the 13th month pay and other benefits is within the P30,000 limitation.
Prior to this provision, the previous regulation has a catch all provision for other similar benefits that may be considered as de minimis benefits. As a matter of fact, there was a BIR Ruling on cell phone load allowance as a tax-exempt de minimis benefits. We were expecting that this will become a formal addition to the above list because at present generations, every employee has mobile phones and communications with their respective employers is almost always a must. Unfortunately, with the above new provision, the enumeration has been made exclusive and no other shall be added. We will just wait and see how this will develop in the near future, because who knows the tax authorities might again consider revising the list and making more employee-friendly additions.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.
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The Bureau of Internal Revenue (BIR) has issued Revenue Regulations No. 8-2012 – “Further amends Revenue Regulations 2-98 and 3-98, as last amended by Revenue Regulations 5-2008 and 5-2011, with Respect to de minimis benefits” or “RR No. 8-12“.
Under RR 8-12, uniform allowance of P4,000 a year had been increased to P5,000 a year effective January 1, 2012. Being a deminis benefits, or provisions to employees of relatively small value for their general welfare, the same is exempted from withholding tax on compensation.
To qualify for tax-exemptions, it is not required that the employer-taxpayer prescribes a particular company-wide uniform. What is required is that the employer-taxpayer actually provides such uniform allowance as a matter of policy. It could be given one-time of P5,000.00 anytime during the taxable year or at a uniform monthly rate of P416.67 (P5,000 divided by 12 months).
In effecting such de minimis benefits in BIR Form No 1601-C, the total amount of non-taxable de minimis benefits shall be indicated so that the amount of total compensation on the financial statements and on the withholding tax on compensation returns shall tally with its other, or at least reconcilable. Doing so would avoid the issue of under withholding during tax examination.
Reference:
RR No. 8-2012 from BIR website.
Comment:
This increase is of tax-exempt limit on uniform allowance is much welcomed because uniform or clothing is indispensable for an employee’s daily reporting for work amidst the increase in clothing prices. We would likewise invite the attention of the BIR in reviewing other amounts on the enumeration of de minimis benefits under the regulations to provide a more equitable and realistic ceilings. Meantime, lets be grateful for the increase in the uniform allowance.
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