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    Chapter 11 - Income Tax

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    estamorabin
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    Chapter 11 - Income Tax

    Uploaded by

    estamorabin
    5 views5 pages
    income tax

    Original Title

    CHAPTER 11_INCOME TAX

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    income tax

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    5 views5 pages

    Chapter 11 - Income Tax

    Uploaded by

    estamorabin
    income tax

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    CHAPTER 11

    FRINGE BENEFIT TAX

    FRINGE BENEFITS
    Under labor laws, fringe benefits refer to all incentives or benefits provided to employees apart from
    their basic pay. The basic pay denotes the fixed regular salary or wages paid to employees each
    payroll period. According to the National Internal Revenue Code (NIRC), fringe benefits encompass
    goods, services, or other benefits furnished by employers to employees.

    Tax treatments of fringe benefits


    Under current tax rules, however, items of fringe benefits in the strict sense are
    treated differently depending on their nature:
    For example:
    a. Fringe benefits that are fixed every payroll period are considered regular
    compensation.
    For example: Fixed transportation allowance
    b. Fringe benefits that are variable and performance-based are considered
    supplemental compensation.
    For example: commission, profit sharing and overtime pay
    c. Fringe benefits in the form of incentives are considered 13th month pay and
    other benefits.
    d. Fringe benefits furnished for the employer's convenience or necessity are
    exempt from income tax.

    SCOPE OF THE FRINGE BENEFIT TAX


    The fringe benefit tax applies only to taxable fringe benefits of managerial or supervisory employees.
    Items considered as compensation income are excluded from taxable fringe benefits.

    GENERAL CATEGORIES OF FRINGE BENEFITS SUBJECT TO FINAL TAX


    1. Management perquisite benefits
    2. Employee personal expenses shouldered by the employer
    3. Taxable de minimis benefits
    a. Excess de minimis over their limits
    b. Benefits not included in the de minimis list

    Employee personal expenses


    Expenses incurred by employees but paid by the employer or reimbursed by the employer are
    considered taxable fringe benefits. Proper documentation is necessary to distinguish between
    business expenses and personal expenses.

    Illustration
    Mr. Lakewood, a managerial expatriate employee, was granted by his employer a
    P30,000 monthly housing allowance in addition to his regular salary. The actual
    monthly rent of Mr. Lakewood's residence is P25,000.
    The P25,000 personal expense assumed by the employer constitutes a taxable fringe
    benefit subject to fringe benefit tax. The monthly fixed P5,000 excess is a taxable
    additional compensation. (BIR Ruling No. 512-2011)

    Hybrid expenses
    When the employer incurs expenses which is purported partly for business and
    partly for employee's incentive, only 50% of the expense representing the
    employee incentive is subject to the fringe benefit tax.

    The following are hybrid expenses under RR3-1998:


    1. Housing benefits in the form of rental accommodation
    When an employer leases a residential unit for the use of the employee and the
    business, the rental expense is deemed half business expense and half fringe
    benefit to the employee.
    2. Allowing an employee free use of business property
    When the employer allows its employee to use business properties, the rental
    value or depreciation value of the business property over the period of usage is
    deemed half business expense and half fringe benefit to the employee.

    Exempt fringe benefits


    The following fringe benefits are exempt from the fringe benefit tax:
    1. Fringe benefits which are authorized and exempted from tax under special
    laws
    Examples: Employer's contribution to SSS, PhilHealth, HDMF or group insurance,
    except excess over the mandatory amounts set by law
    2. Benefits required by the nature of, or necessary to the trade, business or
    profession of the employer
    3. Benefit given for the convenience or advantage of the employer
    4. Contributions of the employer for the benefit of the employee to retirement,
    insurance and hospitalization benefit plans
    5. Benefit given to rank and file employees whether or not granted under a
    collective bargaining agreement
    The taxable fringe benefits of rank and file employees are exempt from fringe
    benefit tax, but are subject to regular income tax as part of compensation income.
    6. De minimis benefits within their legal limits

    "Necessity or convenience of the employer" rule


    Examples of exempt benefits under this rule:
    1. Scholarship program for an employee to study and acquire competence for future
    use of the business
    Car incentives to medical doctors so they will be available for duty anytime
    Free transportation services to employees working at distant facilities
    Mobile phone allowance to corporate secretaries who are required to handle off
    duty client inquiries
    5. Sleeping quarters to field engineers and staffs working on remote facilities
    9. Sleeping quarters near the camp furnished to military personnel so they will be
    available for duty at any time of insurgency
    10. Housing units for an employee and his family near the employer's place of
    business to ensure the employee's availability anytime when the employer needs
    him

    THE FRINGE BENEFIT TAX


    The fringe benefit tax is a final tax imposed on fringe benefits furnished or granted by employers to
    employees, excluding rank and file employees. It is paid by the employer and applies regardless of the
    employer's identity or nature of business.

    For the purposes of the fringe benefit tax, fringe benefit means any good, service,
    or other benefits furnished or granted in cash or in kind by the employer to
    individual employees (except rank and file employees) such as, but not limited to,
    the following:

    1. Housing benefits
    2. Expense account
    3. Vehicles of any kind
    4. Household personnel, such as maid, driver or others
    5. Interest, for the difference between the market rate (12%) and the actual
    interest granted
    6. 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
    9. Educational assistance to the employee or his dependents
    10. Life or health and other non-life insurance premiums or similar accounts
    in excess of what the law allows

    CHARACTERISTICS OF THE FRINGE BENEFIT TAX


    1) Final Tax: The fringe benefit tax is a final tax withheld by the employer at the source.
    Consequently, employees need not report fringe benefits on their income tax returns.

    2) Tax on Managerial or Supervisory Employees' Fringe Benefits: Fringe benefit tax is levied on the
    fringe benefits received by managerial or supervisory employees. It's an employee tax,
    irrespective of the employer's identity, whether a sole proprietor, partnership, corporation, or
    government entity.

    3) Employer Payment: This tax is presumed withheld by the employer at the source and remitted to
    the government.

    4) Grossed-up Tax: Fringe benefits received by employees are effectively net of the final tax.
    Initially, the monetary value is grossed up by the complement percentage of the applicable
    fringe benefit tax rate before applying the tax rate.

    5) Quarterly Payment: Fringe benefit tax is due quarterly, based on the employer's chosen
    accounting period. The value of each taxable fringe benefit is determined and reported quarterly

    PROCEDURES IN COMPUTING THE FRINGE BENEFIT TAX


    1. Determine the monetary value.
    Monetary value refers to the taxable amount of benefits taken home or realized by
    the managerial or supervisory employee. The monetary value is presumed net of
    the final tax.
    2. Determine the gross-up rate and fringe benefit tax rate applicable for the
    taxpayer.
    The gross up rate is the complement of the fringe benefit tax rate. If the fringe benefit
    tax rate is 35%, the gross-up rate is (100% less 35%) or 65%. If the fringe benefit tax
    rate is 25%, the gross-up rate is 75%.
    3. Determine the grossed-up monetary value by dividing the monetary value by
    the gross-up rate.
    4. Determine the fringe benefit tax by multiplying the fringe benefit tax rate to
    the grossed-up monetary value.

    RULES ON VALUATION OF FRINGE BENEFITS


    1. Benefits Paid in Cash: When benefits are provided in cash, the monetary value is simply the
    amount paid. An exception exists when the employer pays for the employee's residence rent,
    where the monetary value is 50% of the rental payment.

    2. Benefits Paid in Kind: For benefits provided in kind, the monetary value is either the fair value or
    the book value, whichever is higher. Book value refers to the cost less any depreciation provision
    for depreciable properties. If ownership of the property is transferred to the employee, the
    entire fair value is considered, regardless of partial business use.

    3. Furnished Benefits: When benefits come in the form of free use of employer property, the
    monetary value is 50% of the rental value. If there's no rental value available, depreciation value
    is used. For real properties with a presumptive useful life of 20 years, depreciation is computed
    as 1/20 or 5% of the property value. For movable properties with a 5-year presumptive useful
    life, depreciation is 1/5 or 20% of the property value.
    Since the fringe benefit tax is paid quarterly, the valuation and reporting of
    monetary value is also done quarterly. In case of use of employer properties, the
    reporting of monetary value ceases from the month the free use is discontinued.

    Illustration: Determination of Depreciation Value

    Illustration: Determination of Depreciation Value

    . A property with a fair value of P2,000,000 was transferred to a supervisor.

    · Annual depreciation value:

    . If the property is immovable (e.g., residential unit), annual depreciation is P100,000


    (P2,000,000 x 5%).

    Special Guidelines on Monetary Value Determination

    1. Taxable Housing Benefits

    . If an employer leases a residential property to an employee for their usual residence, the
    monetary value is 50% of the benefit.

    . For instance, if a business leases a house for its manager at P20,000/month:

    . Quarterly value: P20,000 x 3 months = P60,000

    · Quarterly monetary value: P60,000 x 50% = P30,000

    2. Employer-owned Residential Property

    . If an employer assigns their property for an employee's residence, the annual value is 5% of the
    higher value between the zonal or assessed value of the property.

    . Example: Chamberly, Inc. allows its vice president to use an unused realty investment.

    · Annual depreciation value: P4,000,000 x 5%

    . Quarterly monetary value: P50,000 x 50%

    3. Purchase of Residential Property

    . If an employer buys a property on installment for an employee's residence, the annual value is
    5% of the acquisition cost.

    . Example: Cotabato Corporation purchased a property for its manager.

    . Quarterly monetary value: P100,000 / 4 = P25,000

    Motor Vehicles:

    Employer Purchases Vehicle for Employee:


    Monetary value: 100% of vehicle cost.
    Report in the quarter of purchase.

    Cash Benefit for Vehicle Purchase:


    Monetary value: 100% of cash benefit, unless subject to withholding tax on compensation.
    If subject to withholding tax on compensation, regular tax applies, not fringe benefit tax. Report in the
    quarter of payment.

    Employer Buys Car on Installment for Employee:


    Monetary value: Acquisition cost divided by 5 years.
    Illustration: If a car is bought for P1,000,000, report P200,000 annually for 5 years, or P50,000
    quarterly.

    Employer Assists Employee in Purchasing Car:


    Monetary value: Employer's share.
    Illustration: If employer pays 60% of a P4,000,000 car, report P1,600,000 (40%) when paid.

    Fleet of Motor Vehicles for Business and Employees:


    Monetary value: 50% of the cost of vehicles not used for business purposes.
    Report quarterly until usage ends.
    Chapter 11 - Fringe Benefit Tax
    It must be noted that because of the inherent difficulty of tracing the realization of
    the fringe benefits to a particular employee considering the collective enjoyment
    of the benefit by the employees (managerial, supervisory, or possibly including
    rank and file alike), the regulations simply subjected it to the final fringe benefit
    tax.

    6. Fleet of motor vehicles leased for the use of the business and the employee, the
    value of the benefits is the rental payments for motor vehicles not normally used
    for sales, freight, delivery, service, and other non-personal use
    Monetary value = 50% of the value of the benefit
    7. Aircrafts including helicopters are deemed solely for business use; hence, they are
    not subject to fringe benefit tax.
    Yachts whether owned and maintained or leased by the employer are presumed
    not for business use; hence, taxable as fringe benefits. If owned or maintained, the
    value of the benefit is measured as the depreciation value over 20 years.

    Illustration:

    A corporation buys a P10,000,000 yacht for executives' use.

    Monetary value:

    . Annual depreciation: P500,000.

    . Quarterly: P125,000.

    Yachts are considered immovable, with a 20-year useful life. If leased, the entire rental is the value.

    If transferred to an executive, the value is the full P10,000,000.

    Note on Aircraft and Yachts:

    . Aircraft: Exempt from fringe benefit tax due to business use.

    . Yachts: Subject to fringe benefit tax except if solely for entertaining guests or clients, then treated as
    an entertainment expense.

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