REGULAR INCOME TAX INCLUSION IN GROSS INCOME

WHAT IS GROSS INCOME?

• It refers to the total income earned by an individual on a paycheck before taxes and other
deductions. It comprises all incomes received by an individual from all sources – including
wages, rental income, interest income, and dividends.

ITEMS OF GROSS INCOME

• The term items of gross income or inclusions in gross income is a broad category pertaining to
all items of income subject to taxation, namely;

ITEMS OF GROSS INCOME

- GROSS INCOME SUBJECT TO TAX

- TO CAPITAL GAINS TAX
- TO REGULAR TAX
-
ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX
Gross income includes, but is not limited to, the following items;
- Compensation for services in whatever form paid
- Gross income from the conduct of trade, business, or exercise of a profession.
- Gains derived from dealings in properties.
- Interest
- Rents
- Royalties
ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX
• DividendsAnnuities
• Prizes and winnings
• Pensions
• Partner’s distributive share from the net income of general professional partnership
OTHER SOURCES OF GROSS INCOME SUBJECT TO REGULAR INCOME TAX
1. Income distributions from taxable estate or trusts.
2. Share from the net income of other pass-through entities:
Exempt joint venture
Exempt co-ownership
Farming income
Recovery of past deductions
Reimbursement of expenses
Cancellation of indebtedness for a consideration
COMPENSATION FOR SERVICES IN WHATEVER FORM PAID
• Under current tax rules, the term “Compensation Income” technically pertains to the types of
employee benefits that are subject to regular tax.The fringe benefits of managerial or
supervisory employees are not considered compensation income but are subject to final tax.
 TYPES OF EMPLOYEE’S BENEFITS
1. Health Benefits
2. Retirement Benefits
3. Workplace Flexibility
4. Wellness Program
5. Tuition Reimbursement

GROSS INCOME FROM THE CONDUCT OF TRADE, BUSINESS OR EXERCISE OF A PROFESSION

• This includes income from any trade or business, legal or illegal, and whether registered or
unregistered.
Sales/Revenues/Receipts/Fees
Less: Cost of sales or services
Gross income from operations

INCOME SHALL NOT BE INCLUDED IN GROSS INCOME SUBJECT TO REGULAR INCOME TAX:

1. Business income exempt from income tax such as:

a. Gross income from a Barangay Micro-Business Enterprise (BMBE) under RA 9178
b. Gross income from enterprises enjoying tax holiday incentives under the CREAT Law which
have not yet graduated to their income tax holiday incentives
2. Business income subject to special tax such as:
a. Philippine Economic Zone Authority (PEZA)-registered enterprises subject to 5% gross income
tax
b. Tourism infrastructure and Enterprise Zone Authority (TIEZA)-registered enterprises subject to
5% gross income tax
c. Income of self-employed and or individuals (SE/P) who opted to be taxed under the 8%
income tax
3. Business income subject to final tax when not subjected to final tax by the payor
1. Subcontractors of petroleum service contractors subject to 8% final tax
2. Business income of foreign currency deposit units (FCDUs) and expanded FCDUs
(eFCDUs) from Philippine residents subject to 10% final tax
GAINS FROM DEALINGS IN PROPERTIES
The gains or losses in dealing on ordinary assets are subject to regular income tax.
Dealings in capital assets other than domestic stocks and real properties are also
subject to regular income tax.
• Ordinary gains are included as items of gross income.
• Ordinary losses are items of deductions against gross income.
• The net capital gains from capital assets after deducting capital losses is also included as an item
of gross income.
• A net capital loss is not an item of deduction against gross income.

INTEREST INCOME
• This particularly refers to interest income other than passive interest income subject to final tax.
A taxable income must have been actually paid out of an agreement to pay interest. It cannot be
imputed. (CIR vs. Filinvest Development Corporation, GR 163653 and 167689)

RENTS
Rent income arises from leasing properties of any kind. It is a passive income but is not subject
to final tax under the NIRC; hence it is subject to regular income tax.

Special considerations on rent

1. Obligations of the lessor that are assumed by the lessee are additional rental income to the
lesson.
2. Advance rentals are:
a. Item of gross income upon receipt if:
Unrestricted; or restricted to the applied in future years or upon the termination of the lease.
B. Not a.n item of gross income if: It constitutes a loan.
It is a security deposit to guarantee payment or rent subject to contingency which may or may
not happen.
3. Leasehold improvements made by the lessee on the leased property are recognized by the
lessor as income using the spread-out method or outright method.

ROYALTIES
• Royalties earned from sources within in the Philippines are generally subject to final income tax
except when they are active by nature.
• Active royalty income and royalties earned from sources outside the Philippines are subject to
regular income.

DIVIDENDS
• Dividends (cash, property, script) declared by foreign corporations.
• Stock dividend –exempt from income tax but when the declaration confers to the recipient a
different interest or right after the stock dividend declaration.
• Liquidating dividend – is not income. Liquidating dividend are considered an amount in
exchange for the investment of the investor.

ANNUITIES
• The excess of annuity payments received by the recipient over premium paid is taxable income
in the year of receipt.

PRIZES AND WINNINGS

• Prices and winnings that are exempted from final taxes are not items of gross income subject
to regular income tax.
Exempt prices and winnings
• Prices received without effort to join a contest
• Prices in athletic competition sanctioned by their respective national sports association.
• Winnings from PCSO games, not
• exceeding in P10, 000 in amountare

PENSIONS
• This pertains to pensions and retirement benefits that fail to meet the exclusion criteria and
hence subject to regular tax.

PARTNER’S DISTRIBUTION SHARE FROM THE NET INCOME OF THE GENERAL PROFESSIONAL
PARTNERSHIP
• It should be recalled that general professional partnership are not subject to income tax (i.e.,
final tax, capital gains or regular income tax) because they are merely viewed as pass
through entities.

BUSINESS PARTNERSHIP AND TAXABLE JOINT VENTURE OR CO- OWNERSHIP

• This entities are subject to corporate income tax.The distributive share of a partner, venture,
or co-owner from the net income of these entities, if organized within the Philippines, is
subject to 10% final withholding tax.

GENERAL CRITERIA FOR ITEMS OF GROSS INCOME

Items of gross income subject to regular income tax are not limited to the aforementioned
NIRC list.

OTHER SOURCES OF GROSS INCOME SUBJECT TO REGULAR INCOME TAX

1. Income distribution from taxable estates or trust
2. Share from the net income of other pass-through entities
a. Exempt joint venture
b. Exempt co-ownership
3. Farming income
4. Recovery of past deductions
5. Reimbursement of expenses
6. Cancellation of indebtedness for a consideration
- Income distribution from taxable estate or trust
- Any income distribution received by an heir or beneficiary from a taxable estate or trust
shall be included in his gross income subject to regular tax, provided that such income
must not have been subjected to final tax or capital gains tax.
- Share from the net income of exempt joint ventures and co-ownership
- The same tax treatment on recognition of share in the income of a general professional
partnership applies to the share from the net income of exempt joint ventures and co-
ownership.

FARMING INCOME
Farming operations can be classified as:
1. Raise and sell operation
- Proceeds on the sales of livestock or farm products is included in gross income.
- Animal raising expenses are presented as items of deductions against gross income.
 2. Purchase and sell operation
- Gross profit from the sale (sales less cost of purchase) is included in gross income.

RECOVERIES OF PAST DEDUCTIONS

Examples of recoveries of past deductions
1. Recovery of previously claimed bad debt expense
2. Refund local tax expense
3. Refund of foreign tax previously
4. Re-commissioning of abandoned petroleum service
contracts or mining properties
5. Release of reserve funds or insurance companies
6. Interest expense which were subsequently condoned by the lender

REIMBURSEMENT OF EXPENSES
• Expenses of the taxpayer that are reimbursed or paid by the customer or client constitute
additional income to the taxpayer

CANCELLATION OF INDEBTEDNESS
• This may amount to gratuity or payment of income

TREATMENT OF CANCELLATION
1. In consideration of service or goods – treated as income.
2. As an act of gratuity- treated as gift; not as income.
3. As capital transaction such as forfeiting the right to receive dividends in exchange of the debt-
treated as dividend income.

CHAPTER 11 FRINGE BENEFIT TAX

*Chapter Overview and Objectives

This chapter discusses fringe benefits of managerial and supervisory employees subject to final fringe
benefit tax and the procedural computations of the fringe benefit tax.

After this chapter, readers are expected to demonstrate:

1. Understanding of the nature of fringe benefits

2. Appreciation of the convenience of the employer rule and hybrid expense

3. Ability to distinguish exempt benefit, partially exempt, and fully-taxable fringe benefits

4. Understanding of the scope of the final fringe benefit tax

5. Knowledge of the characteristics of fringe benefits tax

6. Understanding of the procedures of fringe benefit tax computation

7. Comprehension of the general rules on monetary value

8. Comprehension on monetary value rules as applied to actual scenarios

9. Mastery of the procedures for the computation of the fringe benefit tax

10. Knowledge of the list of exempt fringe benefits

FRINGE BENEFITS

Under labor laws, fringe benefits pertain to all other benefits or incentives of employees other
than the basic pay. The basic pay is the fixed regular salary or wages of employees every payroll
period. Under the NIRC, the term "fringe benefit" was defined to pertain to goods, services or other
benefits furnished by the employer to the employees. Tax classification of fringe benefits Under
current tax rules, however, items of fringe benefits in the strict sense are scattered among the three
classes of gross taxable compensation income while some are exempt from income tax:

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 exempt from income tax.

Other fringe benefits

As mentioned in the previous chapter, other fringe benefits not included or classifiable as items of
compensation income and which are not exempted under the law are treated as follows:

1. For rank and file employees - included as "other benefits" under "13th month pay and other
benefits"

2. For managerial and supervisory employees- excluded in compensation income and are subjected to
final fringe benefit tax.

SCOPE OF THE FRINGE BENEFIT TAX

 The fringe benefit tax covers only the taxable fringe benefits of managerial and supervisory
employees.

For purposes of the fringe benefit tax, RR3-98 clarifies that taxable fringe benefits exclude
those items considered as compensation income. Hence, an excellent understanding of the items of
compensation income is extremely important in highlighting the bounds between compensation
income and the fringe benefits subject to fringe benefit tax.

*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

Management perquisite benefits

Perquisite benefits, also called "management perks" are highly privileged incentives given only to a
special group of employees.

These benefits are non-performance based and are given as incentives to management employees.
Perquisites benefits are not considered as compensation income, but as fringe benefits subject to fringe benefits
tax.

In practice, the boundary between fringe benefits subject to final tax and compensation income subject to
regular tax sometimes overlaps. Based on pas Rulings, however, the BIR seemed to maintain the view that
performance-based benefits are compensation income while benefits in the nature of incentives or perks are
fringe benefits.

As a safety net, it is therefore best recommended for taxpayers to secure BIR rulings on the proper
treatment of income in their compensation plans to avoid inconvenience.

Employee personal expenses

When an expense takes the nature of an employee personal expense or expenditure and is paid or assumed
by the employer in default of a proximate business necessity, it is deemed a fringe benefit in its entirety even if
the expense is receipted in the name of the employer.

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.

2. Allowing an employee free use of business property.

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

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

6. De minimis benefits within their legal limits

Necessity or convenience of the employer" rule

If an expense is necessitated by the nature of the trade, business, or profession of the employer, or is
furnished principally for the employer's convenience or advantage, it is an ordinary business expense. The
personal advantage of the employee is merely incidental to the expense. These fringe benefits are not viewed
as taxable fringe benefits under the NIRC.

Examples of exempt benefits under this rule:

1. Scholarship program for an employee to study and acquire competence for future use of the business

2. Car incentives to medical doctors so they will be available for duty anytime

3. Free transportation services to employees working at distant facilities

4. 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

6. Helicopters assigned to fishing employees for locating schools of fish offshore or to mining engineers for
mineral exploration purposes

7. Personal aircraft to a chief executive officer managing business affiliates and

subsidiaries spread across different countries

8. Car incentive to a travelling company salesman

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.

*FRINGE BENEFIT TAX

 Final tax imposed on the Fringe Benefit furnished, granted or paid by the employer to the
employees, whether such employee, except rank and file employees, whether such employer is
an individual, a professional partnership or a corporation regardless of whether the corporation
or taxable or not, or the government and its instrumentalities.

FRINGE BENEFIT
 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.
7. Expense for foreign travel
8. 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

 FINAL TAX
Withheld by the employer at source
The employee need not report the fringe benefit in his income tax return.

 TAX UPON MANAGERIAL OR SUPERVISORY EMPLOYEES

Tax upon the fringe benefit realized by the managerial or supervisory employee.
Applies even if the employer is a sole proprietor, partnership, corporation whether
taxable or exempt, or the government.
  PAID BY THE EMPLOYER
Tax is withheld at source and remitted by the employer to the government.

 GROSSED-UP TAX
The monetary value is first grossed-up by the complement percentage of the applicable
fringe benefit tax before the fringe benefit tax rate is applied.

 DUE QUARTERLY
The monetary value of each taxable fringe benefit is determined and reported quarterly
through BIR form 1603.
The quarterly fringe benefit tax is due as follows:

Manual filing EFPS filing

On or before the 10th day of the month On or before the 15th day of the month
following the quarter in which following the quarter in which
withholding was made. withholding was made.

PROCEDURES IN COMPUTING THE FRINGE BENEFIT TAX

1. Determine the monetary value
Monetary Value is the taxable amount of the benefits taken home or realized by the
managerial or supervisory employee.
Monetary Value is presumed net of the final tax.

2. Determine the gross- up rate and fringe benefit tax rate applicable for the taxpayer.
 Gross up rate is the complement of the fringe benefit tax rate.

3. Determine the grossed-up monetary value by dividing the monetary value by the gross-up rate.
monetary value
Grossed−up monetary value=
gross−up rate

4. Determine the fringe benefit tax by multiplying the fringe benefit tax rate to the grossed-up
monetary value.
Fringe Benefit tax=Fringe benefit tax rate ×Grossed−up monetary value

RULES ON VALUATION OF FRINGE BENEFITS

1. When benefit is given in cash or paid for in cash, the monetary value is the amount paid for in
cash.
2. When benefit is given in kind, the monetary value is the fair value of the thing given unless its
book value is higher.
3. When the benefit is given in the form of free use of the employer’s property, the monetary
value is 50% of the rental value of the property. If the property has no rental value, the
depreciation value is used.
 For purposes of the depreciation value, the presumption useful lives of the property are:
a. 20 years for real properties.
 The depreciation value is computed as 1/20 or 5% of the value of the property.

b. 5 years for movable properties.

 The depreciation value is computed as 1/5 or 20% of the value of the property.

Illustration: Determination of depreciation value

A partnership transferred the use of a property with a fair value of ₱ 2,000,000.00 to its
supervisor. The annual depreciation value shall be:

If the property is an immovable such as residential unit, the annual depreciation value shall be ₱
100,000.00 computed as:
₱ 2,000,000.00 × 5% = ₱ 100,000.00

If the property is movable such as car or other motor vehicles, the annual depreciation value
shall be ₱ 400,000.00 computed as:
₱ 2,000,000.00 × 20% = ₱ 400,000.00

*SPECIAL GUIDELINES ON MONETARY VALUE DETERMINATION

Taxable Housing Benefits

1. Employer leases a residential property for the use of his employee and the said property is the usual
residence of the employee.

Monetary value = 50% of the benefit

Illustration

A sole proprietorship business leases a residential house and lot for the use of his business manager for
P20,000/month.

The monetary value shall be:

Quarterly value = (P20,000 x 3 months) ₱ 60,000.-

Quarterly monetary value = P 60,000 x 50% ₱ 30,000.-

2. Employer owns a residential property and assigns the same for the use of his employee as his usual place of
residence; the annual value of the benefit is 5% of whichever is higher of the zonal or assessed value of the
land and improvement.
 Monetary value = 50% of the annual value of the benefit

Illustration:

Chamberly, Inc. allowed one of its unused realty investment costing P3,500,000 with zonal value of
P4,000,000 and assessed value of P3,000,000 to be used by its vice president.

The monetary value shall be determined as follows:

Annual depreciation value = P4,000,000.- x 5% ₱ 200,000.-

Quarterly value = P200,000.-/4 quarters ₱ 50,000.-

Quarterly monetary value = P50,000.- x 50% ₱ 25,000.-

3. The employer purchases a residential property on installment basis and allows a his employee to use the
same as his usual place of residence; the annual value is 5% or 1/20 of the acquisition cost, exclusive of
interest.

Monetary value = 50% of the annual value of the benefit

This is the same with No. 2 except that the basis is the purchase price of the property.

Illustration

Cotabato Corporation purchased a residential property for the use of its production manager. The property is
payable over 11 annual installments of P200,000 including interests but have a cash price of P2,000,000. For
accounting purposes, Cotabato Corporation opted to capitalize the interest and recorded the P2,200,000
contract price as acquisition cost of the property.

The monetary value shall be determined as follows:

Annual depreciation value = P2,000,000 x 5% ₱100,000.-

Quarterly value = P100,000/4 quarters ₱25,000.-

Quarterly monetary value = P25,000 x 50% ₱12,500.-

Note: The purchase price is the cost net of interest.

4. Purchase by the employer of residential property and transfer of ownership in the name of the employee, the
value of the benefit is whichever is higher of the acquisition cost or zonal value.

Monetary value = 100% of the value of the benefit

Illustration

A non-profit corporation bought a residential dwelling for P5,000,000 and transferred ownership to its
president. The property has P3,000,000 zonal value.

Since there is transfer of ownership, the monetary value is the entire P5,000,000, the higher of book value(i.e.
cost in this case) and zonal value.

5. Purchase by employer of property and transfer of title to employee for less than adequate consideration, the
value is [(fair market value or zonal value, whichever is higher) less consideration paid by employee

Monetary value = 100% of the value of the benefit

Illustration

Denzy, a professional practitioner, transferred his residential property in the name of his managerial employee
for P2,000,000. The property has fair value per tax declaration of P3,400,000 and P5,000,000 zonal value.

Since there is a transfer of ownership (i.e. title), the monetary value is P3,000,000 computed as P5,000,000 fair
value less the P2,000,000 consideration paid.

Exempt housing privileges:

1. Military officials of the Armed Forces of the Philippines (AFP), Philippine Force (PAF), Philippine Army,
and Philippine Navy on their quarters which are within or accessible from the military camp so they can be
readily available off to meet the exigencies of their military service.

2. Housing unit situated or adjacent to the premises of a business or factory (within a maximum of 50 meters)
from the perimeter of the business premises.

The 50-meter rule may be relaxed when upon the basis of health or safety requirements such as in the case of
chemical manufacturing, the housing needs to be located at a farther location.

3. Temporary housing for an employee in a housing unit for 3 months or less (i.e., not exceeding one quarter)

Expense Account

Expenses incurred by an employee but which are paid by his employer or incurred and paid by employee
but reimbursed or advanced by the employer are taxable fringe benefits. The monetary value is the amount
paid by the employer.

Properly documented employer expense

 When the expense is receipted for and in the name of the employer and the expenditure does not partake
of the nature of a personal expense attributable to the employee, it is not a taxable fringe benefit because it is a
business expense.

Personal expenses of the employee such as groceries for the personal consumption of the employee and/or
his family, if paid or reimbursed by the employer, are taxable fringe benefits whether or not receipted in the
name of the employer.

Fixed and regular RATA are treated as part of regular compensation income and are subject to creditable
withholding taxes, not to fringe benefit tax.

Illustration

Denver Corporation paid for the following expenses which were liquidated by its managerial employee:

Water and electricity bill at manager's home

₱15,000.-

Meals and groceries at manager's home

18,000.-

Bill on business telephone

2,000.-

Bill on personal phone

1,000.-

Transportation from office to and from clients

12,000.-

Transportation from office to and from manager's home

10,000.-

Foods and beverages for visiting business clients

8,000.-

The monetary value of fringe benefits shall be computed as follows:

Water and electricity bill at director's home ₱ 15,000.-

Meals and groceries at director's home 18,000.-

Bill on personal phone 1,000.-

Transportation from office to and from home 10,000.-

Total monetary value ₱ 44,000.-

Note: Business telephone bills, office to client transportation and food and beverages for client visitors are
business expenses, not fringe benefits to the manager.

*MOTOR VEHICLES OF ANY KIND

1. Purchased by employer of motor vehicle in the name of the employee regardless of whether the same
is used partially in the business of the employer.* Note that the monetary value shall be reported in the
quarter of purchase.
Monetary value= 100% of the cost of the motor vehicle

2. Cash benefit to employee for the purchase of a vehicle, even if the vehicle is partly used in the
business of the employer
Monetary value= 100% of the cash benefit, except when the amount is subjected to withholding
tax on compensation

3. Purchase of car on installment basis by the employer with ownership placed in the name of the
employee even if the car is used partly for the employer's business, the benefit is the acquisition cost
divided by 5 years
Monetary value= (1/5) or 20% of the acquisition cost

4. Employer shoulders a portion and is placed in the name of the employee, even if partially used in
business
Monetary value= the portion shouldered by the employee

5. Fleet of motor vehicles owned for the use of the business and the employees, the value of benefit is
the cost of all motor vehicles not used for sales, freight, delivery service, and other non-personal uses
divided by 5 years. *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 rankand file alike), the regulations simply
subjected it to the final fringe benefit tax.
Monetary value= 50% of the value of benefit
6. Fleet of motor vehicles leased for the use of the business and the employee, the value of the benefits
is the rental payments of 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; hense, they are not subject to
fringe benefit tax.

8. 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.

NOTE ON AIRCRAFTS AND YACHTS

The high cost of ownership of aircraft makes it inherently prohibited or impractical to be for
personal use does aircraft sardam by the regulations as solely for business use; hence, they are exempt
from fringe benefit tax. Yachts, though pricey on the other hand, generally lack any sensible business
purpose aside from being for personal pleasure; hence, its depreciation value is subject to fringe benefit
tax in full.

Household Expenses
Employee expenses borne by the employer for household personnel,l salaries of household help,
personal driver of the employee, and other personal expenses such as homeowners association dues,
garbage dues, electricity, and water are taxable fringe benefits. The monetary value is the amount paid.

Illustration:
Henesy Corporation granted the following benefits to a managerial employee:
Salary of household personnel P12,000/month
Salary of personal driver 10,000/month
Home owner's association dues 4,000/year

The quarterly monetary value of the benefit shall be determined as follows:

Salary of household personnel ₱12,000x3 ₱36,000
Salary of personal driver 10,000x3 30,000
Home owner's association dues* 4,000/4 1,000
₱67,000

INTEREST ON LOAN AT LESS THAN MARKET RATE

The interest forgone by the employer representing the difference between 12% and the actual interest
charged is a taxable fringe benefit.

Illustration:
Europa Cooperative lent its chief executive officer P1,000,000 at a minimal 3% annual interest rate. The
monetary value shall be computed as follows:

Annual monetary value= (12% - 3%)x₱1,000,000 ₱90,000

Quarterly monetary values= ₱9,000/4 ₱22,500

EXPENSES FOR FOREIGN TRAVEL

Reasonable business expenses for foreign travel for attending business meetings and conventions are
exempt.
- In land travel expenses: Food, beverage and local transportation except lodging cost amounting to an
average of $300 or less per day are exempt.
- Lodging costs are exempt.
- Economy and business class airplane tickets are exempt.
- For first class ticket, 30% of ticket cost is presumed a fringe benefit.

* SUBSTANTIAL REQUIREMENT

The said rules apply it the expenses were supported by documentations proving the actual occurrences
of the meeting or convention; otherwise, they shall be subject to fringe benefit tax.

 Business meetings must be supported by an official communication from business associates

 abroad indicating the purpose of the meeting.
 Business conventions must be supported by an official invitation or communication from the
host organization or entity abroad.

Expense for the family members of the employee shouldered by the employer are taxable fringe
benefits in full.

Illustration

MIG, Inc. allowed its VP Finance, Mr. Lasuna, to attend a convention abroad with the privilege to bring
his wife.

The expenses of the foreign travel were:

Mr. Lasuna Mrs. Lasuna Total

First class plane ticket ₱ 70,000.00 ₱70,000.00 ₱140,000.00
Lodging cost 60,000.00 60,000.00 120,000.00
Foods & Local transportation 50,000.00 50,000.00 100,000.00
₱ 180,000.00 ₱ 180,000.00 ₱ 360,000.00
The applicable exchange rate is ₱40:$1 - ₱40 × $250 × 5 days each to Mr. and Mrs. Lasuna.

The monetary value shall be determined as follows:

ITEMS REMARKS AMOUNT

First class plane ticket:
Mr. Lasuna ₱ 70,000.00 × 30% ₱ 21,000.00
Mrs. Lasuna ₱ 70,000.00 × 100% 70,000.00
Lodging cost
Mr. Lasuna Exempt 0
Mrs. Lasuna Fully taxable 60,000.00
Foods and local transportation
Mr. Lasuna Exempt – below limit 0
Mrs. Lasuna Fully taxable 50,000.00
₱ 201,000.00

Holiday and Vacation Expenses

 Holiday and vacation expenses are taxable fringe benefits if shouldered by the employer. The
monetary value is the amount paid or shouldered by the employer.

Education Assistance to the Employee or his Dependents

Educational assistance to the employee is generally taxable except when it is incurred for the
convenience or furtherance of the employer’s business, such as:

1. the education or the study is directly connected with the employer’s trade, business or profession;
and

2. there is a written contract (i.e., employee bond) that the employee is under obligation to remain at
the employ of the employer for a period of time they mutually agreed upon.

Educational assistance granted to dependents of the employee is generally taxable except when the
assistance was provides through a competitive scheme under a scholarship program of the company.

Illustration

Cleopatra Marketing, a distributor of cosmetics products, provides educational assistance to the

following employees under an employment bond:

POSITION FIELD OF STUDY AMOUNT PER SEMESTER

VP for Management Doctor in Business Administration ₱ 50,000.00
VP for Marketing Master in Marketing Management 35,000.00
Operations manager BS Cosmetology 25,000.00
Accounting supervisor BS Criminology 24,000.00
Accounting staff BS Accountancy 20,000.00

Life or health insurance and other non-life insurance premiums or similar amounts in excess of what
the law allows

These are taxable fringe benefits except the following insurance or premium contributions allowed or
required by law:

1. Contributions of the employer for the benefit of the employee pursuant to the provisions of existing
law such as contributions to SSS, GSIS, PhilHealth, and HDMF.

2. Cost of premium for group insurance of employees.

Illustration

Queensdale Company made the following insurance premium payments during a calendar quarter:
  P 30,000 premium for the life insurance of the Chief Executive Officer (CEO) with Queensdale
company as the beneficiary of the policy
 P 20,000 premium for the life insurance of the Company Chief Operating Officer (COO) with his
wife as the beneficiary
 P 15,000 insurance premium of the personal car of the company manager
 P 40,000 premium for group insurance of employee
 P 80,000 premium share in SSS, PhilHeath and Pag-ibig dues of employees
 P 10,000 fire insurance premium for the company building

The quarterly monetary value of fringe benefits shall be computed as follows:

Life insurance premium of COO where his wife is the beneficiary ₱ 20,000.00

Car insurance of company manager 15,000.00

Quarterly monetary value ₱ 35,000.00

Note:

1. The insurance premium on the life of the CEO where the company itself is the beneficiary is not a
fringe benefit to the executive employee but a business expense.

2. Group insurance premiums and those required by special laws are not taxable.

3. The premium for fire insurance on company building is a business expense.

FRINGE BENEFIT TAX RATES

The fringe benefit tax rates are as follows:

TYPE OF EMPLOYEE
YEAR
Residents or citizens Special Aliens Non-resident aliens
1998 34%
1999 33% 15% 25%
2000 and thereafter 32%
*Includes resident citizens, non-residents, and residents aliens.

*GROSSED-UP MONETARY VALUE

－Is the basis of fringe benefit tax.

－is inclusive of the fringe benefit tax

Grossed-up monetary value = monetary value of benefits ÷ appropriate grossed-up rate for the
employee.

The following are the grossed-up rate:

TYPE OF EMPLOYEE
Calendar Year Resident or Citizen Special Alien Non-resident Alien
1998 66%
1999 67% 85% 75%
2000 and thereafter 68%

Illustration:

Assume an employer grants fringe benefits with monetary value of ₱54,400.- to a resident citizen
managerial employee.

Computation:

Resident/citizen if it is
special alien, then:

Monetary value ₱54,400.-

₱54,000.-

Divided by: Grossed-up rate 68%

85%

Grossed-up monetary value ₱80,000.-

₱64,000.-

Illustrations: FRINGE BENEFIT TAX COMPUTATIONS

Illustration 1: Citizens or Residents

In the last quarter of 2014, Juan, a Filipino supervisory employee, was given ₱13,600.- worth of
groceries for personal use.

Computation:

Monetary Value
₱13,600.-

Grossed-up monetary value ₱13,600.- ÷ 68% ₱20,000.-

 Fringe benefit tax ₱20,000.- x 32% ₱6,400.-

Or, it can be computed directly as ₱13,600.- x 32% ÷ 68%

Illustration 2: Special Alien

An offshore banking unit (OBU) reimbursed the following personal expenses of its managerial
employee during a calendar quarter:

Golf club membership dues - 100% in the name of the employer ₱10,000.-

Groceries - 50% in the name of the employer

36,000.-

Home owners’ association dues

5,000.-

Total
₱51,000.-

Computation:

Monetary value
₱51,000.-

Grossed-up monetary value ₱51,000.- ÷ 85%

₱60,000.-

Fringe benefit tax ₱60,000.- x 15%

9,000.-

Or it can be computed directly as ₱51,000.- x 15% ÷ 85%

Note:

1. The fringe benefit tax can be computed directly.

2. Personal expenses are taxable fringe benefits in full even if they are receipted in full or in part in
the name of the employer.

Illustration 3: Nonresident alien

On January 2014, Cyberspace Company purchased a ₱3,000,000.- car and designated it for the
personal use of its non-resident alien executive.
Computation:

Monetary value (₱3,000,000.- / 5) x 50%

₱300,000.-

Quarterly value (₱300,000.- / 4)

₱75,000.-

Quarterly grossed-up monetary value (₱75,000.- / 75%) ₱100,000.-

Quarterly fringe benefit tax (₱100,000.- x 25%)

₱25,000.-

Note:

1. The fringe benefit tax continues to be payable for as long as the employee uses the property for
the personal use and/or business use.

2. The quarterly fringe benefit tax can be directly computed as ₱75,000.- x 25% / 75%.

ACCOUNTING ENTRIES

Accounting entries shall be classified as follows:

1. Taxable benefits paid for in cash or in kind.

2. Taxable benefits which do not involve payment of cash or transfer of property.

3. Exempt benefits paid for in cash or in kind.

4. Exempt benefits which do not involve payment of cash or transfer of property.

BENEFITS PAID FOR IN CASH OR IN KIND

Taxpayers shall record fringe benefits paid for in cash or in kind in their books as follows:

Fringe benefit expense (monetary value) xxx

Fringe benefit tax expense xxx

Cash/Tax basis of property given

xxx
 Fringe benefit tax payable
xxx

Illustration 1: Rental Accommodation

Hometown CCC Corporation paid ₱54,400.- for the rental of a housing unit for the use of its president.

Fringe benefit expense (monetary value)

₱54,400.-

Fringe benefit tax expense

12,800.-

Cash
₱54,400.-

Fringe benefit tax payable

12,800.-

Fringe benefit tax = [(₱54,400.- x 50%) / 68%] x 32%

Illustration 2: transfer of ownership over properties

Groov1n Company transferred ownership over a newly acquired investment property costing
₱1,428,000.- as residence of its supervisory employee. The property has a zonal value of ₱1,700,000.-

Fringe benefit expense

₱1,428,000.-

Fringe benefit tax expense (₱1.7M x 32% / 68%) 800,000.-

Investment property
₱1,428,000.-

Fringe benefit tax payable

800,000.-

BENEFITS WHICH DO NOT INVOLVE PAYMENT OF CASH OR PROPERTIES

Taxpayers shall record fringe benefits without outflow of cash or properties in their books as follows:

Fringe benefit expense (monetary value) xxx

 Fringe benefit tax payable
xxx

Illustration 1: Free Usage of Assets

Ravi Realty Inc. designated a unit of its condominium property for the use of its vice president for
finance as his family residence. The rental value of the unit for the past calendar quarter would have
been ₱340,000.-.

Fringe benefit tax expense

₱80,000.-

Investment property
₱80,000.-

Fringe benefit tax = [(₱340,000.- x 50%) / 68%) x 32%

Note:

 The employer is not allowed to claim fringe benefit expense.

 A deductible expense needs to be an actual outflow or depletion of resources.

 The employer can claim depreciation expense if the property is an ordinary asset.

 In case of capital asset where no depreciation is allowable, fringe benefit tax rules shall not
inappropriately allow the claim of deduction.

Illustration 2: Interest free loans

Petrodrill, an oil exploration company, granted a ₱1,000.000.- interest free loan to its managerial
employee considered a special alien.

Fringe benefit tax expense

₱21,176.-

Investment property
₱21,176.-

Fringe benefit tax = [(₱1,000,000.- x 12%) / 85%) x 15%]

Note:
The interest expense is not recognized as a fringe benefit expense because it is not an expense involving
actual payment or transfer of properties.

EXEMPT BENEFITS PAID FOR IN CASH OR IN KIND

The taxpayer shall record exempt fringe benefits paid in cash or in kind as follows:

Fringe benefits expense (monetary value)

xxx

Cash/Property given
xxx

Illustration: Exempt transfer

An employer paid ₱120,000.- for the tuition fee of his supervisor who is taking an advancement course
in furtherance of the employer’s business.

Fringe benefit expense

₱120,000.-

Cash
₱120,000.-

EXEMPT BENEFITS WHICH DO NOT INVOLVED PAYMENT OF CASH OR TRANSFER OF PROPERTY

NO ENTRY IS REQUIRED.

TAX TREATMENT OF THE TOTAL FRINGE BENEFIT EXPENSE

The total fringe benefit expense including the fringe benefit tax expense is a deductible expense of
the employer against his gross income in the computation of his taxable income. It must be noted that a
deductible fringe benefit expense exist only when the benefit is paid in cash or in kind.