Some business owners believe that their employees are the backbone of their company. Creating a solid employee program that helps to promote job satisfaction and morale, increase motivation, and efficiencies in processes, may result in financial gain. Salary increase and job promotions are the most common examples of such. Aside from that, they tend to give special benefits or what they call “Fringe Benefit”.
The term fringe benefit, as provided in the amended National Internal Revenue Code (NIRC) Section 33(B), means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee 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 loan 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;
- 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.
These benefits are subject to final withholding taxes on the grossed-up monetary value (tax base) of the benefit furnished, granted or paid by the employer to the employee, whether such employer is an individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities. However, the fringe benefit is exempt from final withholding tax if it’s required by the nature of or necessary to the trade, business or profession of the employer; or when the fringe benefit is for the convenience or advantage of the employer.
The following benefits are also not subject to final withholding tax as per amended NIRC Sec. 33 (C):
- 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 benefit plans;
- Benefits given to rank and file employees which is subject to the rule under amended NIRC Sec. 32 and;
- De minimis benefits as defined and enumerated in amended RR 3-1998.
Revenue Regulation (RR) 11-2018 imposed new tax rates for the taxable fringe benefits. Below is as follow:
| Employee is a citizen/resident alien/non-resident alien engaged in trade or business within the Philippines | Thirty-five percent (35%) |
| Employee is a non-resident alien not engaged in trade or business within the Philippines | Thirty-five percent (25%) |
To determine the grossed-up value/tax base of the fringe benefit, the actual monetary value or the actual amount of benefit furnished, granted or paid shall be divided by sixty-five percent (65%) subject to 35% Fringe Benefit Tax (FBT) or the divisor shall be seventy-five percent (75%) subject to 25% FBT.
To illustrate, supposed that Company A granted Employee B, resident citizen, a total fringe benefit of Php325,000 in cash and Employee C, non-resident alien not engage in business in the Philippines, a total fringe benefit of Php 600,000 in cash. In this case, the grossed-up value/tax base and FBT is computed as follow:
| Employee B (35%) | Employee C (25%) | |
| Grossed-up value/Tax base: | ||
| Employee B (325,000/65%) | Php 500,000 | |
| Employee C (600,000/75%) | Php 800,000 | |
| Fringe Benefit Tax: | ||
| Employee B (500,000 * 35%) | Php 175,000 | |
| Employee C (800,000 * 25%) | Php 200,000 |
To record the fringe benefit transactions in the book by using the same illustration provided above, below is as follow:
| Fringe benefit expense | Php | 925,000 | ||
| Fringe benefit tax expense | Php | 375,000 | ||
| Cash | Php | 925,000 | ||
| Fringe benefit tax payable | Php | 375,000 |
The BIR Form to be used is 1603Q and the filing/payment date is not later than the last day of the month following the close of the taxable quarter during which withholding was made.
The above rules shall cover only those fringe benefits given or furnished to managerial or supervisory employees and not to the rank and file. Moreover, these fringe benefits shall not be forming part of the gross compensation income subject to withholding tax on compensation of the managerial or supervisory employees.
Giving benefits to our employees are good but the employer shall have to pay the FBT for the taxable fringe benefits (as required by NIRC), in order to claim the paid fringe benefit and its related tax as a deduction to the company’s taxable income. Otherwise, an assessment may arise for non-payment of FBT and income tax deficiencies as this paid fringe benefit will be disallowed as a deduction to the company’s taxable income.
