The company may formulate policies for the provision of fringe benefits to its employees. Or the fringe benefits may have been provided in the contract of employment. Either way, the employer is obliged to provide fringe benefits.
Section 33.B of the NIRC defines Fringe Benefits as "any good, service, or other benefit furnished or granted by an employer, in cash or in kind, in addition to basic salaries, to an individual employee such as, but are not limited to the following:
- 1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel
5. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;
6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows."
One reason why fringe benefits are granted by the employer to the employee is to provide incentive to encourage employee's productivity and loyalty to the employer. It could be in form of vehicle to be used for business meetings and personal travels, or personal benefits like providing for house maids and family drivers.
Under the Tax Code, fringe benefits are taxable. You have to withhold tax for the fringe benefit in order for it to become deductible from business income in computing income tax
* Fringe benefit to rank-and-file employees are taxable as compensation income subject to normal tax rate in Section 24.A of the NIRC, except for De minimis benefits and benefits provided for the convenience of the employer. A rank-and-file employee is an employee not holding a managerial or a supervisory position.
*. Fringe benefit to managerial employees are taxable with the 32% fringe benefit tax which is a final tax, except for De minimis benefits and benefits provided for the convenience of the employer. A managerial employee is an employee vested with powers or prerogatives to lay down and execute management systems, procedures and policies, as well as to hire and fire employees, transfer, suspend or recall employees.
The fringe benefit tax is computed only to those granted with managerial positions. Other than that, the income is subject to normal income tax rate.
Those allowances that are received by an employee in fixed amounts and regularly received by the employee as part of his salaries shall not form part of the taxable fringe benefit but shall be treated as compensation income.
There are fringe benefits under Section 33.C, however, that are not taxable as the following:
- 1. Fringe benefits which are authorized and exempted from tax under special laws;
2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;
3. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and
4. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
How does the fringe benefits tax computed?
Fringe benefits provided to managerial and supervisory employees are subject to the 32% fringe benefit tax. According to Section 33.A of the NIRC, fringe benefit is a final tax on employee's income to be withheld by the employer. It is the company that is liable for the fringe benefit tax and not the employee. As an employer, you are required to file fringe benefit tax remittances using BIR Form 1603 on a quarterly basis.
The tax base of fringe benefits is based on the grossed-up monetary value
For a non-resident individual
The fringe benefit tax of 15% shall be imposed on the grossed-up monetary value of the fringe benefit and a tax base of 85% for the following individuals:
1. An alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company. 2. An alien individual employed by an offshore banking unit of a foreign bank established in the Philippines.
3. An alien individual employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines.
4. Any of their Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees.
Illustration: The employer granted P85,000 cash benefit representing reimbursement of the personal expenses of his employee that is the manager of the subsidiary
The taxable amount of the fringe benefit is computed as follows. This amount will be used as our tax base when computing the fringe benefit tax.
Monetary value of the fringe benefit (cash payment) | 85,000 | |
Divided by the Grossed-Up Monetary Value | 68% | |
Taxable Amount of the Fringe Benefit | 125,000 |
The taxable amount of the fringe benefit tax multiplied by the applicable tax rate will be our fringe benefit tax.
Taxable Amount of the Fringe Benefit | 125,000 | |
Multiplied by the Fringe Benefit Tax Rate | 32% | |
Fringe Benefit Tax | 40,000 |
The deductible fringe benefit expense for income tax purposes is the sum of the cash payment and the fringe benefit tax. For income tax purposes, the total amount of the deductible fringe benefit expense is a deductible expense from business income.
Cash Payment of the Personal Expenses | 85,000 | |
Plus The Fringe Benefit Tax | 40,000 | |
Deductible Fringe Benefit Expense | 125,000 |
In the books of the company upon payment of the fringe benefit to the employee, the total deductible fringe benefit is debited to fringe benefit expense and cash is credited to the amount of payment to the employee and the withholding tax
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