7 Features of Staff Leasing in the Philippines

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By: Garry Pagaspas, CPA

Taking into account the advantages of Filipino talents (e.g. English speaking, attitude towards work, manpower cost, and work efficiency, among others) Philippines has become a top pick for back-office support operations of foreign accounting and consulting firms abroad and that of business process outsourcing (BPO) operations in Philippines dealing directly with foreign clients, if not with the parent entity for the delivery of quality services.

Approaches for Philippine set-up could vary depending on many factors such as a more long-term set-up or a short-term exploratory set-up. For a long-term set-up, setting up a local entity in the Philippines could be good, while for short-term exploratory set-up, some would resort to special arrangements with staffing or manpower agencies, Business Process Outsourcing (BPO) in Philippines, accounting firms or local consulting firms for staff leasing in Philippines, or sometime referred to under professional employer organization (PEO) or employer of record (EOR) in Philippines.

Notably, there seems no prescribed guidelines issued by government agencies specifically applicable to staff leasing in the Philippines or professional employer organization (PEO) or employer of record (EOR) in Philippines but it seems to simply adopt the labor laws, rules, and regulations related to it. Accordingly, let me share my personal views on some features of these staff leasing arrangements in Philippines that you may find useful for your Ph set-up:

1. Binding legal agreement for staff leasing in Philippines

For the purpose, legal agreement should be executed to formalize the staff leasing arrangement by and between your company abroad or using their parent entity abroad – e.g. Singapore or Hong Kong entity and the staff leasing entity in Philippines. Some would use a direct Staff Leasing Agreement setting forth the terms and conditions – staff leasing entity as employer housing employees on its office (unless under work from home arrangement) and your company abroad utilizing the team for your outputs and paying prescribed fees – e.g. set-up fees, monthly fees, and termination fees.

The rest would take the arrangement with the staff leasing entity as service provider for some defined output with the staff leasing employees handling delivery of the services under the supervision of your company representatives abroad.

2. Local entity as staff leasing employer in Philippines

Normally, under staff leasing agreement in Philippines, the staff leasing entity in Philippines acts as employer of your team in Philippines and for this, staff leasing is at times termed as “employer of record” (EOR) or “professional employer organization” (PEO) in Philippines. Employment status may vary under the rules – e.g. probationary employment, regular employment, contractual basis, or project-based employee depending on the terms agreed upon. Other terms and conditions of employment could likewise be imposed by the employer and could be arranged based on your preferences, to the extent that it is aligned with the local labor rules.

As an employer, they are under obligation to its employees as imposed by the Labor Code of the Philippines, as amended, such as on payment of wages and benefits mandated by law, dealing with mandatory contributions, and security of tenure, among others. On this scope, they take their risk relative to such obligations.

3. Compensation, fees and charges for staff leasing in Philippines

Under staff leasing arrangement, your company abroad utilizing staff leasing employees in Philippines would undertake to pay employee compensation – those owing to the employee for every payroll period; employer share on mandatory contributions for social security, housing and health insurance; and related employee benefits imposed by labor rules such as 13th month pay, leave credits, maternity benefits, among others. On top of that, some arrangements would impose a one-time set-up fee for each employee for hiring and other related works, a monthly administrative fee as a percentage of monthly compensation or a fixed amount that could cover their time charges for recurring works like payroll computations and government remittances, applicable local taxes, if any, and at times, a termination fee upon your decision to end the arrangement.

4. Staff Leasing employee’s disciplinary action under local entity

In Philippines, security of tenure is given much emphasis under our labor rules, and employees could only be terminated on justifiable reasons – e.g. just or authorized causes specifically provided by the rules along with prescribed due process and cannot simply be terminated at will of the employer like in other countries. If you intend to discipline staff leasing employees in Philippines, closely coordinate with the staff leasing employer in Philippines for proper handling – e.g. sending of memorandum to employees, hearing out employees’ side for the required opportunity to be heard under the rules, and sending management decision on the alleged violation of the staff leasing employees. Failure to comply with the rules could be a ground for staff leasing employees to file a case for illegal termination in Philippines or any appropriate case with the labor department.

5. Mandatory Philippine reporting compliance for staff leasing employees

Employers in the Philippines carries certain obligations such as withholding taxes on compensation every payroll period along with remitting them monthly to the tax authorities and filing related quarterly and annual reports; withholding employee welfare contributions for social security, housing mutual fund, and health insurance along with remitting them monthly and filing related quarterly reports with such respective government agencies; and such other reports required such as 13th month pay reporting to the labor department. These obligations are normally undertaken by the local staff leasing company in the Philippines and they would ensure compliance, otherwise, penalties would be imposed for failure to comply.

6. Doing business in Ph/ Permanent Establishment implications

One concern of the foreign company abroad entering into staff leasing arrangement is whether or not the same would create a permanent establishment in Philippines under the applicable tax treaty or would be tantamount to doing business in the Philippines that is required to register with the Securities and Exchange Commission (SEC) under the Revised Corporation Code (RCC) and applicable foreign investment laws. This could be a technical legal area, and such implication could depend on the terms and conditions of the staff leasing in the Philippines.

7. Setting-up own entity and employing your staff leasing team

As soon as you realize the long-term advantages of your Philippine team, you may then decide to set-up your own entity in the Philippines and take them out from the staff leasing arrangement so they become employees of your Ph entity taking into account the experience and familiarity that they have working on your account. Normally, staff leasing arrangement would have termination provisions which could vary from a simple notification to some monetary considerations to be allowed to convert them as your employees. For the purpose, please pay attention the termination provisions to avoid issues that could lead to legal battle and more headaches.

Author’s Profile:

Garry Pagaspas, CPA is a currently the Managing and Tax Partner of G. Pagaspas Partners & Co. CPAs (independent member firm of Allinial Global, 2^nd largest accounting association worldwide based on International Accounting Bulletin’s 2023 released survey) based in Makati City with Global Outsourcing offices in Kalibo, Aklan. He is likewise the President at Tax and Accounting Center, Inc., the training and consulting company he founded in relation to his passion for teaching and helping out Ph entrepreneurs and foreign investors to Philippines.

Views in this article is personal to the author, not equivalent to a professional opinion and does not represent that of the organizations he is connected with. For your feedback or related concerns on staff leasing or employer of record in Philippines, you may send mail at info(@)taxactgcenter.ph (please exclude open and close parenthesis on the @ sign.

The Certificate of Compensation Payment/Tax Withheld (CCPTW), also known as BIR Form 2316, is an essential part of the Philippine tax system. BIR Form No. 2316 summarizes all the employees’ earnings, deductions, and taxes withheld, if there are any. In this article, we will delve into the details of BIR Form No. 2316, its purpose, and its importance for both employers and employees. 

1. Goal and Relevance of BIR Form No. 2316

BIR Form No. 2316 serves as a summary of an employee’s compensation income, tax withheld, and other relevant information for a particular calendar year. It assists both the company and the employee by ensuring transparency and compliance with tax laws. BIR Form No. 2316’s main goals and significance include the following: 

• Proof of Income: It serves as a record of the wages an employee received from a certain employer during the year. 
• Tax compliance: By displaying the right amount of taxes withheld by the employer, BIR Form No. 2316 makes it easier to calculate the employee’s yearly income tax liability. 

2. Components of BIR Form No. 2316 

• Information on the Employee and the Employer: This section contains the name, address, and taxpayer identification number (TIN) of the Employee and the Employer. 
• Compensation Income: This section of the form comprises the employee’s annual compensation income, which includes their basic salary as well as any additional taxable benefits such as allowances, bonuses, commissions, and other related compensation income. 
• Non-taxable/Exempt Compensation Income: BIR Form No. 2316 accounts for the tax-exempt or non-taxable compensation that lowers taxable income, such as the minimum wage earner’s basic pay, holiday pay, overtime pay, and night shift differential; de minimis benefits; 13^th month pay and other benefits (maximum of Php 90,000.00); and other non-taxable compensation. 
• Taxes Withheld: The entire amount of taxes that the employer withheld from the employee’s compensation income is stated in this section. 
• Other required fields:  
  The signature portion of the employer and employee, in which the certificate has been made in good faith, verified, and, to the best of their knowledge, true and correct, gives consent to the processing of information as contemplated under the Data Privacy Act of 2012 (Republic Act No. 10173) for legitimate and lawful purposes.  
  The signature portion of the employer and employee to be accomplished under substituted filing. An employee is qualified under substituted filing of the Income Tax Return (BIR Form No. 1700) if he or she received purely compensation income from only one employer in the Philippines for the calendar year and if his or her taxes have been correctly withheld by the employer (tax due equals tax withheld). 

3. Employer’s Responsibilities 

• Accuracy and Completeness: Employers are responsible for making sure the data on the form reflects the employee’s pay, taxes withheld, and other pertinent information. 
• Release: Employers must deliver a copy of BIR Form No. 2316 to each employee by January 31st of the following year, except if the employee is separated before the calendar year ends. The employee will receive a copy of BIR Form No. 2316 upon release of the final payment. 
• Submission: Employers must provide BIR Form No. 2316 and the alphalist to the Bureau of Internal Revenue (BIR) no later than February 28th of the following year. 

4. Employee’s Responsibilities 

• Verification: Employees should thoroughly go over the form to make sure that all the information—including compensation income, taxes deducted, and exemptions—is accurate. 
• Record-keeping: For future reference, potential BIR audits, and supporting documents with their personal application in banks or other agencies, employees should keep a copy of their BIR Form No. 2316 and other pertinent tax papers. 

Therefore, BIR Form No. 2316 is an essential form that permits correct income tax calculation and compliance for both the employer and employees. Employers must provide this form to their employers as proof of their income for the year. Understanding the purpose, contents, and responsibilities associated with BIR Form No. 2316 ensures transparency, smooth tax operations, and adherence to tax laws.

Every payday, employees are elated to receive their monthly compensation. Once employees check their payslips, some wonder if their deductions are correctly calculated and properly deducted from their salary. To help employees and companies be informed of the associated rules and regulations, non-taxable compensation in the Philippines is briefly discussed in this article.

As a general rule, all forms of compensation are taxable, except for those specifically provided under the laws, rules, and regulations in the Philippines. The following are the non-taxable compensations:

• MINIMUM WAGE EARNERS

No withholding tax shall be required for those employees who are identified as minimum wage earners in the private or public sectors as defined in RR 2-98, as amended by RR 11-2018. There’s no effect on the net taxable compensation unless it exceeds the PHP 90, 000 annual limit of the 13th-month pay and other benefits and unless the annual net taxable income exceeds PHP 250, 000.00 during the year. Statutory minimum wages that are non-taxable are the following:

1. Basic Minimum Wage
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay

• 13th MONTH PAY AND OTHER BENEFITS (MAXIMUM OF P90,000)

13th-month pay is required by law to provide additional compensation to low-income earners to protect the level of real wages from the ravages of global inflation. This is to show concern for the masses so that they can properly celebrate Christmas and the New Year. Employers are required to pay their rank-and-file employees their 13th month’s pay, regardless of the nature of their employment and irrespective of the methods by which their wages are paid. An employee at the management level is not entitled to the 13th month’s pay unless it is provided and granted by the company. The employee should work for at least one month during a calendar year to be entitled to a 13th-month pay benefit, and the computation will be further discussed in another article.

13th-month pay and other benefits will be treated as non-taxable as long as they do not exceed the PHP 90,000 annual limit. Other benefits may include those that are not expressly stated in the non-taxable deduction in BIR Form 2316. Examples of other benefits include communication allowance, transportation allowance, birthday bonus, performance incentive, loyalty award, referral incentive, and other related employee benefits.

• DE MINIMIS BENEFITS NOT SUBJECT TO WITHHOLDING TAX

De minimis benefits are facilities and privileges of relatively small value. This is not subject to income tax as well as withholding tax on the compensation income of both managerial and rank-and-file employees. De minimis benefits up to the maximum amount do not require an official receipt or sales invoice unless expressly stated in the regulation. The enumeration of the tax-exempt de minimis benefits under Train RA 10963 will be discussed in another article.

• SSS, GSIS, PHIC, and PAG-IBIG CONTRIBUTIONS AND UNION DUES (EMPLOYEE SHARE ONLY)

One of the exclusions from gross compensation and exemption from taxation is the mandatory employee share of the SSS, GSIS, PHIC, and Pag-IBIG contributions. Non-taxable compensation is up to the prescribed maximum amount of contributions; contributions in excess of those declared to government agencies will be treated as taxable compensation. SSS provides benefits and social security in the event of unemployment, maternity, sickness, disability, retirement, funeral, and death benefits. PHIC, otherwise known as PhilHealth, provides health insurance coverage and ensures affordable, acceptable, available, and accessible healthcare services for its members. HDMF, popularly known as Pag-IBIG, offers its members a savings program, short-term loans, and access to housing programs.

• SALARIES AND OTHER FORMS OF COMPENSATION

These are other non-taxable salaries and compensation that do not fit the definition of de minimis benefits and non-taxable other benefits. Some are still questioning whether dependents are still personal and whether additional exemptions for employees are deductible in compensation. Under the TRAIN Law, the PHP25,000 exemption per dependent up to 4 dependents, or a maximum of PHP100,000 per taxpayer, was removed. However, the threshold amount for personal tax exemption was raised to PHP250,000 of annual income from PHP50,000 under the previous regulation.

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A payroll register is a report filled with employee information and payroll figures for a specific payroll cut-off and payout period. A payroll register is composed of the following: 

1. Employee name, number, and position 

2. Payroll cut-off and payout period 

3. Basic rates on a monthly, daily, and hourly basis 

4. Tardiness, undertime, and absences, if applicable 

5. Overtime, night shift differential, premium, and holiday pay, if applicable. 

6. Non-taxable and taxable allowances, if applicable 

7. Gross, non-taxable, and net taxable compensation 

8. Withholding tax on compensation 

9. Loans and cash advances, if applicable,  

10. Net pay 

In every country, there are different labor rules and regulations that need to be followed. In the Philippines, to get the net pay of employees, employees’ basic rates should be identified initially using the factor suggested and determined in the Handbook on Workers’ Statutory Monetary Benefits (WSMB). The following are the common equivalent number of days per year: 

1. 365: Employees who are paid every day of the month, including unworked rest days, special days, and regular holidays 

2. 394.40: Employees who work every day, including rest days, special days, and regular holidays 

3. 313: Employees who do not work and are not considered paid on one rest day per week 

4. 261: Employees who do not work and are not considered paid on two rest days per week 

First, identify the factor to be used in calculating the daily and hourly rates. Second, compute the employee’s daily and hourly basic rates by multiplying the monthly salary by 12 to get the annual salary, then divide it by the factor. Then, divide the daily rate by 8 regular working hours to get the hourly rate. 

For example, A works from Monday to Saturday, earning PHP 15,000.00. Since A is working six days a week and has an unpaid rest day, his factor is 313 days per year.  

Calculation: Daily rate:  (15,000 * 12) / 313 = PHP 575.00 

       Hourly rate:  PHP 575/8 = PHP 71.88  

The amount of tardiness, undertime, and absences are to be deducted from the employees’ semi-monthly/monthly basic salary. To compute the hourly rate, multiply the hourly rate by the number of hours of tardiness, undertime, and absences. 

When calculating the employees’ overtime pay, night shift differential pay, premium pay, and holiday pay, basic rates are required. The WSMB determines the rates to be used, which will be discussed in another article. The determined amount will be added to the net basic pay to get the gross compensation for employees. 

Gross compensation less non-taxable compensation equals net taxable compensation is the standard formula used to determine the withholding tax on remuneration. Unless otherwise excluded by the Code, gross compensation refers to all actual payments made by the employer for services rendered by an employee under an employment contract. Non-taxable compensation enumerated in BIR Form 2316 will be tackled in another article. Net taxable compensation will be the basis for calculating the employee’s withholding tax on the compensation. 

Figure 1: 2023 Revised Withholding Tax Table 

Figure 1 illustrates the withholding tax table that is composed of the mode of payment, compensation range, and the prescribed withholding tax. Employees are exempt from withholding tax on compensation if their annual taxable income is PHP 250,000 or less, and if exceeded, they are subject to tax rates ranging from 15% to 35% based on the withholding tax table. 

Figure 2: 2023 Annual Revised Withholding Tax Table 

Figure 2 illustrates the tax table used for annualization or during the calculation of the annual withholding tax of employees. The same rationale applies to Figure 1, except for the timing of the calculation of withholding tax. More details about the annualization will be discussed in another article. 

When calculating the net pay, the normal equation is gross compensation less the total deduction. Total deductions would include some of the following: 

1. Government contributions from employees 

2. Withholding tax on compensation 

3. Cash advances 

4. Loans  

5. Other related adjustments 

The different components are based on the different rules and regulations of payroll-related government agencies. Understanding these components will help generate an accurate and reliable payroll register for company and employee use.

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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 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. 29-2025 dated October 27, 2025, amending Revenue Regulations No. 2-1998, as amended (previously amended by Revenue Regulations No. 11 – 2018 (RR 11-2018) implementing the 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 twelve (12) (previously 10) days during the year (as amended by RR 29-2025).

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 P2,000 (previously P1,500) per employee per semester or P333 (previousy P250) per month (as amended by RR 29-2025).

4. Rice subsidy of P2,500 (previously P2,000) or one (1) sack of rice 50 kilogram rice per month amounting to not more than P2,500 (previously P2,000) (as amended by RR 29-2025).

5. Uniform and clothing allowance not exceeding P8,000 (previously P6,000) per annum (as amended by RR 29-2025).

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 P12,000 (previously P10,000) per annun (as amended by RR 29-2025).

7. Laundry allowance not exceeding P400 (previously P300) per month (as amended by RR 29-2025).

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 P12,000 (previously P10,000) received by the employee under an established written plan which does not discriminate in favor of highly paid employees (as amended by RR 29-2025).

9. Gifts made during Christmas and major anniversary celebrations not exceeding P6,000 (previously P5,000) per employee per annum (as amended by RR 29-2025).

10. Daily meal allowance for overtime work and night/graveyard shift not exceeding thirty percent (30%) ( previously 25%) of the basic minimum wage on a per region basis (as amended by RR 29-2025) .

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 P12,000 (previously P10,000.00) per employee per taxable year (as amended by RR 29-2025).

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

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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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By: Tax and Accounting Center Philippines

As we are all aware, employees are being subjected to withholding tax on compensation in the Philippines every payday. Withholding of payroll taxes in the Philippines is the liability of the employer (individual engaged in trade or business, of a juridical entity like corporation) because the employer is automatically appointed by tax rules as withholding agent for the withholding tax on compensation in the Philippines. The following are the Tax Code provisions imposing such obligations:

• Section  80(A)  of  the  National  Internal  Revenue  Code  (Tax  Code),  as  amended, provides that the employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld.
• Section 79(H) of the Tax Code, provides that on or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of  the succeeding year.

Under Revenue Memorandum Circular No. 21-2010 (RMC No. 21-2010), the tax authorities reiterate the applicable penalties for employers who fail to do the following:

• withhold income taxes on compensation;
• remit withholding taxes on compensation;
• do the year-end adjustments or annualization; and,
• refund employees the excess withholding taxes on compensation

Failure to comply with the provisions relative to withholding taxes on compensation and its year-end adjustment may result in the following violations of the employer/withholding agent in the Philippines:

1. Non-withholding of tax – when employer fails to withhold the tax on the taxable income of the employee.
2. Underwithholding  –  when  employer  fails  to  correctly  withhold  the  tax  which should be equal to the tax due of the employee for the taxable year.
3. Non remittance – when employer fails to remit total amount withheld.
4. Underremittance – when employer fails to correctly remit total amount withheld or when the total amount of remittance is lesser than the total amount withheld.
5. Late remittance – when employer remits the correct amount withheld beyond the prescribed due date.
6. Failure to refund excess taxes withheld – when employer fails/refuses to refund excess taxes withheld to its employees.

The applicable penalties for non-compliance with the existing tax laws and regulations relative to withholding are as follows:

Additions to the tax (Title X, Chapter I of the Tax Code, as amended)

Surcharge under Sec.  248  –  a  penalty equivalent  to  twenty-five  percent  (25%)  of  the amount due for failure to file any return and pay the tax due thereon as required on the date prescribed; in case of willful neglect to file the return within the period prescribed, or in case a false or fraudulent return is willfully made, the penalty shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any payment has been made on the basis of such return before the discovery of the falsity or fraud.

Interest under Sec. 249 – interest at the rate of twenty percent (20%) per annum on any unpaid amount of tax, from the date prescribed for payment until the amount is fully paid.

Liability equal to amount it should have withheld under Sec. 251 – for failure of any person required to withhold, account for, and remit any tax imposed or who willfully fails to withhold such tax, or account for and remit such tax, or aids or abets in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties, be liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted.

Liability equal to amount refundable under Sec. 252– for failure or refusal of any employer/withholding agent to refund excess withholding tax shall, in addition to the penalties, be liable to a penalty equal to the total amount of refunds which was not refunded to the employee  resulting  from  any  excess  of  the  amount  withheld  over  the  tax actually due on their return.

Criminal Liabilities (Title X, Chapters II, III & IV of the Tax Code, as amended)

a.  Sec. 255 of the Tax Code– for failure of any person required to pay any tax, make a return,  keep  any  record,  or  supply  correct  the  accurate  information,  who willfully fails to pay such tax, make such return, keep such record, or supply correct and accurate information, or withhold or remit taxes withheld, or refund excess taxes withheld on compensation, at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but not more than ten (10) years.

b. Sec. 256 of the Tax Code – in the case of corporations, the penal liabilities of any corporation, association or general co-partnership liable for any of the acts or omissions penalized under the Tax Code, in addition to the penalties imposed upon the responsible corporate officers, partners, or employees shall, upon conviction for each act or omission, be punished by a fine of not less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000).

c.   Sec. 272 of the Tax Code – in case of public officers, the penalties imposed on every officer or employee of the Government of the Republic of the Philippines or any of its agencies and instrumentalities, its political subdivisions, as well as government-owned or controlled corporations, including the Bangko Sentral ng Pilipinas (BSP), who is charged with the duty to deduct and withhold any internal revenue tax and to remit the same is guilty of failing or causing the failure to deduct, withhold, remit, file withholding tax return or statement within the  time  prescribed,  shall,  upon  conviction  for  each  act  or  omission  be punished by a  fine of not less than Five thousand pesos (P5,000) but not more than Fifty thousand pesos (P50,000) or suffer imprisonment of not less than six (6) months and one (1) day but not more than two (2) years, or both.

d.  Sec. 275 of the Tax Code – provides that any person who violates any provision of the Code or any rule or regulation promulgated by the Department of Finance, “for which no specific penalty is provided by law, shall, upon conviction for each act or omission, be punished by a fine of not more than One thousand pesos (P1,000) or suffer imprisonment of not more than six (6) months, or both.”

e. In certain instances as provided under Revenue Memorandum Order No. 19-2007 a compromise penalty in lieu of criminal liability may be imposed and collected.

Non-deductible salaries expense for not withholding

No wonder, compensation to employees in the Philippines is a business expense and deductible from gross income for income tax in the Philippines. However, under Section 34(K) of the Tax Code, if an expense is subject to withholding and for which no withholding tax was made, the same shall not be allowed as a deduction for income tax purposes until the same has been made. As such, another notable penalty for not withholding by employers of withholding tax on compensation in the Philippines is non-deductibility of such salaries expense for income tax purposes.

Summary

In sum, compliance with withholding tax on compensation is a must to avoid the above penalties. A simple failure may waste employer’s money so compliance would be far better that failure to withhold taxes on compensation. Withholding tax on compensation rules may only take a while to learn and properly apply and cost of education is far cheaper than the above penalties.

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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 please send mail at in**@************er.org.

Under the Tax Code of the Philippines, separation fees and benefits in the Philippines are exempted from income tax, and consequently, withholding taxes on compensation for separations from employment because of death, sickness or other physical disability or any other causes beyond employee’s control.

No one may not really like it being separated from work in any of those circumstances but at times, it comes unexpectedly. This is normally an unfortunate event in one’s employment as this would mean finding new employment to support one’s financial needs to himself and to the family, if any. The Labor Code of the Philippines provides for separation benefits for these unfortunate employees separated from employment. The amount of separation fees in the Philippines would depend on the following factors:

1. The amount of salary prior to separation;
2. The cause of separation – death, sickness, physical disability or other causes;
3. Length of service which must be

Separation fees under the above factors are either based on a one-month salary for every year of service or on-half month for every year of service covering the time of employees engagement up to the time of separation, and a fraction of at least six months is considered as on year. Aside from the amount of separation fees, the more important consideration is the taxability of separation fees in the Philippines.

Section 32(B)(6)(b) of the National Internal Revenue Code of the Philippines (NIRC) provides as follows:

“Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for causes beyond control of the said official or employee”

The above tax exemptions provide the following requirements:

1. Separation from service due to death, sickness or other physical disability, or for causes beyond the control of said employee; and,
2. The official or employee or his heirs receives any amount from employer on account of such separation.

In availing the exemptions, the Bureau of Internal Revenue (BIR) provides under Revenue Memorandum Order No. 26-2011 dated 13 June 2011 the following relative to the availment of such tax exemptions on separation fees in the Philippines

A. Certificate of Tax Exemption

Certificate of Tax Exemption is issued by the Regional Director of employer’s BIR registration for separation because of death, sickness, or other physical disability. The following basic requirements will be filed with the Revenue District Office of BIR Registration who will evaluate the same and submit recommendation to the Regional Director:

1. Letter Request for Certificate of Exemption of separation benefits from income tax and withholding tax on compensation;
2. For separation because of death – Certified True Copy of the Death Certificate;
3. For separation because of sickness/physical disability:

•  Sworn affidavits of employer’s physician or employees attending physician and the Head of Office or representative;
• Clinical record of the employee indicating history of illness/physical disability and initial diagnosis; and,
• Laboratory examination confirming the illness suffered by the employee or medical certificate confirming physical disability

B. BIR Ruling from the Law Division

BIR Ruling from the Law Division of BIR National Office for causes beyond the control of the employee such as the following:

1. Retrenchment
2. Redundancy
3. Cessation of business

The process of the above requirements may take a little while but it is worth the wait for a tax exempt separation fees in the Philippines.

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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 please send mail at in**@************er.org.

By: Garry S. Pagaspas

Under the Tax Code, fringe benefits subject to fringe benefits tax in the Philippines means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank-and-file employees) such as but not limited to the following:

• Housing,
• Expense account,
• Vehicle of any kind,
• Household personnel, such as maid, driver and others,
• Interest on loans at less than market rate to the extent of the difference between the market rate and actual rate granted,
• Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations,
• Expense 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

The above enumeration are sample taxable fringe benefits given by the employer to the employee who is either a managerial employee or supervisory employee.  Benefits of similar nature are also subject to fringe benefits tax in the Philippines but does not necessarily mean every benefit is taxable.  The following benefits are not subject to fringe benefits tax:

1. Fringe benefits which are authorized and exempted from tax under special laws;

This reservation gives due respect to the other provisions of tax and other special laws tending to provide non-taxable benefits. This applies to those benefits that may have been existing as of the effectivity of fringe benefits tax in the Philippines last January 1998, and those that may later be legislated.

2. Contributions of the employer for the benefit of the employees to retirement, insurance and hospitalization benefit plans;

This is in relation to the private retirement benefits under a reasonable private benefit plan and the retirement benefits provided by the Labor Code of the Philippines. These provisions are covered by another set of rules for taxation so the fringe benefits tax does not apply.

3. Benefits given to rank and file employees, whether granted under a collective bargaining agreement or not;

If the recipient employee is a rank-and-file employee, then, the benefit is not subject to fringe benefits tax, but to withholding tax on compensation. It is but logical because rank-and-file employees are the least possible recipients. If I am a business owner, I might not be in my right state of mind if I will provide a housing or a car to my messenger more than my managers.

4. De minimis benefits

This are benefits of relatively small values provided by the employer to the employees for their general welfare. While they will benefit the employees, their immateriality did not warrant taxability under fringe benefits tax in the Philippines. At the moment, their are ten (10) tax-exempt de minimis benefits. See related article…

5. Benefits required by the nature of or necessary to the conduct of trade or business or profession

This one describes the nature of fringe benefits – one that is beneficial to the employee. As such, benefits that are required by the nature of business, or necessary to the conduct of trade or business is not taxable because they tend to work for the business and not for the managerial or supervisory employee.

6. Benefits under employer convenience rule

This refers to a benefit provided by the employer for the employee but which would be more beneficial to the employer than to the employee.  As such, they are not considered as taxable.

Example: Mr. De la Cruz is a technician manager of a refrigeration plan in Laguna where a single power loss of 5mins would bring about millions of losses. To prevent such losses, Mr. De la Cruz was provided a housing benefit  in Laguna because it would take him two (2) hours to travel from his Bulacan residence to Laguna plant.

I believe this scenario would tend to benefit the employer than the employee. Accordingly, the same is no longer subject  to fringe benefits tax in the Philippines.

The best part of the above benefits exempt from fringe benefits tax is the fact that they remain to be a deductible expense without the need to pay the 32% fringe benefits tax in the Philippines.

Related article

Fringe Benefits Tax in the Philippines

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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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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

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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 National Internal Revenue Code of 1997 (Tax Code) under Republic Act No. 8424, as amended or the Tax Reform Act of 1997 enumerates the internal revenue taxes imposed and administered by the Bureau of Internal Revenue (BIR) under Section 21 as follows:

SEC. 21. Sources of Revenue. – The following taxes, fees and charges are deemed to be national internal revenue taxes:

(a) Income tax;
(b) Estate and donor’s taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue.

For better understanding, let us give you an overview of each of them. These taxes are of general tax classifications, and may contain sub classifications. In classrooms, these taxes are divided in two (2) parts – Part I for Income Taxes, and Part II – for Transfer and Business Taxes. For Accounting (BSA) and Law (LLB) course, a third part is added for the tax review covering all the two (2) parts.

Income tax. This is an annual tax on the income generated from the trade, business, profession, employment or office, dealings on property, and all other instances of flow of wealth to the taxpayer other than mere return of capital. Income tax base would depend on the nature of income, the classification of individual or corporate taxpayer, and the income tax type applicable. Income tax type is a broad classification, and sub-classifications would include – capital gains tax (CGT), minimum corporate income tax (MCIT), final taxes on passive income (FWT), withholding tax on compensation (WC), creditable or expanded withholding tax (CWT or EWT), and even stock transaction tax for sale of listed shares through the local stock exchange would fall under this classification. Read more on the following articles…Basic Income Taxation of Corporations, and Overview of Deductible Expenses in the Philippines

Estate Tax. This is levied, assessed, collected and paid upon the transfer of the net estate of every decedent, whether resident or nonresident of the Philippines based on the value of the net estate.

Donor’s Tax. This is a tax levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property (whether real or personal, tangible or intangible) by gift – direct or indirect. This is imposed on donations or gifts to another who accepts the same. Tax would depend on the citizenship or residence of donor, the relationship to the donee, and the nature of the property. Donations to relatives by a single donor is exempt to the extent of P100,000.00 within every calendar year. Read more on the Overview of Donor’s Tax in the Philippines.

Value-added tax. This is imposed upon any person, who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods. This is an indirect tax and is normally passed on to the buyer. As a consumption tax, the ultimate consumer shoulders that VAT imposed on the goods or service along the distribution line. Read more on the Overview of Value Added Tax in the Philippines.

Other percentage tax. Is a business tax like value-added tax (VAT) that is imposed upon persons whose business is normally subject to VAT, but, whose gross sales or receipts does not exceed P1,919,500.00 within 12 months. This is likewise imposed upon specific entities selected by law like banks, common carriers irregardless of gross sales or gross receipts within the 12-month period.Read more on the Overview of Percentage Tax in the Philippines.

Excise tax. This tax apply to certain goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and things imported. This is imposed in addition to the value added tax. Examples of this are sin taxes imposed on cigars, cigarettes, and alcoholic products.

Documentary stamp tax. This is a tax imposed upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers or the obligation, right or property incident thereto. Either of parties to the taxable document may be held liable and if one is exempt, the other shall be held liable. Example of this is the documentary stamp tax (DST) on lease agreements of office space, business loans and advances, sales of real properties in the Philippines, issuance of shares of stock. Read more on the Overview of Documentary Stamp Tax in the Philippines.

Other taxes. This is a catch all enumeration for those taxes that may later be imposed.

The above are enumeration of internal revenue taxes imposed by the Bureau of Internal Revenue under the National Internal Revenue Code. Some taxes may apply to your business, but the same may be administered by other government agencies like Bureau of Customs on import and export transactions, and the Local Government Units like on business taxes, real property taxes.

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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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