Fringe Benefits Tax in the Philippines

Fringe benefit is a special form of benefits you provide your employees on in addition to their salaries and wages.  It means any good, service or other benefit furnished or granted in cash or in kind by an employer – corporate or sole proprietor, to an individual employees. Providing the employees with such fringe benefits may be based on your company policy, or based on the contract with your employees. It could be a business related expense tending to personally benefit the employee like a vehicle to be used for business meetings and for personal travels, or a purely personal expense intended to benefit the employee like housing personnel – house maid or family drivers.  In either case, they are treated as business expenses because they represents your expense payments relative to their employment. However, you have to pay fringe benefits tax in order for you to be allowed to claim the amount of fringe benefit and the amount of tax paid.

Hereunder are the sample fringe benefits that your may provide your employees but is not exclusive and you may still provide other benefits not enumerated herein:

• Housing
• Expense account
• Vehicle of any kind
• Housing personnel, such as maid, driver and others
• Interest on loan at less than the market rate to the extent of the difference between the market and actual rate granted
• Membership fees, dues and other expenses borne by the employer for the employees in social athletic clubs or other similar organizations
• Expenses for foreign travel
• Holiday and vacation expenses
• Educational assistance to the employee or his dependents; and
• Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows

Taxability of Fringe Benefits

Fringe benefits provided to managerial and supervisory employees are subject to 32% fringe benefit tax and you will withhold and pay the same as an employer. This means that the employee is no longer liable for the fringe benefit tax (FBT) and in case of non-payment, the Bureau of Internal Revenue (BIR) will run after you and not your managerial or supervisory employees. You base the 32% FBT on the grossed-up monetary value of fringe benefit in accordance with the valuation guidelines provided by the Bureau of Internal Revenue (BIR) in Revenue Regulations No. 13-1998. Please go through the regulations for more details on the valuation and computations. As employer , you will file FBT on a quarterly basis using BIR Form No. 1603 (Click to download form).

For special managerial or supervisory employees not covered by the 5-32% income tax rules, the FBT rates would vary depending on house they are taxes. The reason is that the FBT tends to recover the income tax of the employee so the rate follows the income taxation of such employees as follows:

• Non-resident alien employees not engaged in trade or business – 25% FBT
• Special alien employees of ROHQ, RHQ, etc. – 15% FBT

If an employee is a rank-and-file, then, you apply withholding tax on compensation rules and not FBT rules. Likewise, please note the following fringe benefits which are not taxable when provided by you as employer to your managerial and supervisory employees:

• Fringe benefits which are authorized and exempted from tax under special laws
• Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization plans;
• Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and
• De minimis benefits

Summary

Providing fringe benefits is a management consideration that you should consider. One it would benefit the employee so as to boost him to perform, and, the other is you can claim more expenses. However you have to pay fringe benefits tax, where, applicable.

References:

• Section 33 of the Tax Code, as amended
• Revenue Regulations 3-1998 – Fringe Benefits Tax Regulations

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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Withholding tax is the most basic tax type that each and every taxpayer engaged in trade or business or in the practice of profession must learn. Upon registration of their respective business entities, withholding tax type is a must and it may come in three (3) tax types as sub classifications as follows:

1. Expanded withholding tax (EWT) or Creditable withholding tax (CWT) under monthly BIR Form No. 1601E and annual BIR Form No. 1604E with Alphalist of Payees;
2. Withholding tax on compensation (WC) under monthly BIR Form No. 1601C and part of annual BIR Form No. 1604CF with Alphalist of Employees;
3. Final withholding tax (FWT) under monthly BIR Form No. 1601F and part of annual BIR No. 1604CF with Alphalist of Employees/Payees;

To develop a deeper understanding of the withholding tax system in the Philippines, let us discuss some of its basic features.

1. Automatic constitution of resident payor of income as withholding agents.

By force of the law, a Philippine resident payor of specific income payments are mandated by law to withhold, whether he likes it or not. Non-resident foreign corporations and non-resident alien payors are not included because of obvious logical reasons – Philippine government does not have jurisdiction over them, and could not run after in case of non-compliance. Specific items of income payments are enumerated in the regulations and once the payment is made upon such items, withholding taxes applies. Example, if a taxpayer pays a rental for its office space, it is mandated to withhold 5% of the gross rental payment.

2. A system of advance collection of payee’s income tax liability

What is withheld is the income tax liability of the payee upon actual payment or upon accrual. Income tax returns are filed quarterly and annual and under pay-as-you-file system, income taxes are paid upon filing. However, with the withholding tax, the government gets the income tax on the 10^th day of the month following the month of payment or accrual, ahead of the quarterly payment of payees income. Example, Company A pays Atty. A professional fees amounting to P100,000 on January 2012 and the applicable withholding tax of 15% or P15,000 was withheld.  Atty. A is required to file and pay quarterly income tax (BIR Form No. 1701Q) on April 15, 2012, but, before he could file and pay, the government already collected in advance the P15,000 that was remitted by A Company not later than February 10, 2012 (BIR Form 1601E).

3. Amount withheld is a trust fund for the government

At provided in Section 57(A) of the Tax Code, the taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers. The withholding agent, as trustee of the funds withheld cannot use the funds in any other purpose, but should remit the same to the Bureau of Internal Revenue (BIR) through the authorized agent banks (AABs) or other payment facilities.

4. Amount withheld is creditable or final income tax due of the payees.

Expanded withholding tax rates are carefully studied and crafted to reasonably estimate payee”s income tax liability depending on the industry type and nature of payment. This is the reason why withholding tax rates are varying and is challenging to memorize for proper application. Upon filing of quarterly and/or annual income tax of the payee, the amount withheld will be deducted from its income tax liabilities and there would be fewer amounts due because of the withholding tax duly supported by creditable withholding tax certificates – BIR Form No. 2307/2316. On the other hand, final withholding taxes are the same rates imposed in the Tax Code for specific payments. As such, they constitute full payment of payees income tax and no additional tax liabilities would arise under final withholding tax on top of the amount withheld.

5. Check and balance mechanism

Monthly withholding tax returns of the payor attaches a monthly alphalist of payees (MAP) with the details of the payee and the income payments – the name address of payee, and the amounts of income payment and corresponding tax withheld. When the payee files a quarterly and annual income tax returns, it attaches the summary alphalist of  withholding taxes (SAWT) with the details of the payor and the income payment.  With these reports, the BIR could easily determine whether or not the payee declared the income payment, or whether or not the payor correctly declared the expense. As such, this becomes an easy tool in the third party information procedures of the BIR to catch up tax evaders.

6. A mandatory requirement for deductibility of an expense.

In effect, Section 34(K) of the tax Code, as amended, provides that if an expense is subject to withholding tax, it will not be allowed as a deduction for income tax unless it could be shown that withholding taxes has been paid to the BIR. This explains why assessment of withholding tax has a dual effect – disallowance of expense deduction in income tax computation for failure to withhold, and assessment for withholding tax liabilities. Upon payment of withholding taxes, the income tax assessment based on failure to withhold is automatically dropped.

7. Exclusive enumeration of items subject to withholding taxes.

Revenue Regulations 2-98, as amended, is the main regulation enumerating the income payments subject to creditable withholding tax. Enumeration of expanded withholding tax therein is exclusive and whatever is not included is deemed not subject to creditable withholding tax. This means to say that as a rule, not all expenses are subject to withholding. Exception to this rule is the rule on Top Twenty Thousand Corporation (TTC) or Top Five Thousand Individuals duly selected and notified as such by the BIR. On top of those enumerated in Revenue Regulations 2-98, as amended, they are mandated to withhold on income payments to regular supplies of goods – 1% or of services – 2%, and from casual purchases amounting to P10,000 in a single transaction.

Failure of the taxpayer to comply the obligation to withhold would expose a taxpayer-agent with the following consequences:

• Non-deductibility of a business expense for income tax computation for failure to withhold until after payment of the withholding tax and related penalties;
• Payment of the basic withholding tax that should have been withheld;
• One-time surcharge of 25%, or 50% for willful neglect or fraudulent filing;
• Interest on 20% on annual basis based on the basic withholding tax that should have been withheld;
• Compromise penalties ranging from P200 to P50,000 based on the amount of basic withholding tax that should have been withheld;
• Or worst, criminal prosecution and imprisonment for willful neglect or fraudulent filing of withholding tax returns

You would not enjoy paying the above penalties, and wasting your hard earned money from your business undertakings and simple ignorance of the above obligation. It’s the proper time now to educate and you have all the time and opportunity to do it before it is too late.

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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