1. TAXES UNDER THE NIRC Estelita C. Aguirre, CPA, MM Fringe Benefit Tax Lecture No. 10

2. The following slides apply to an employer who may either be a self-employed or a corporation/partnership with respect to fringe benefits paid to managerial and supervisory employees, but the FRINGE BENEFIT TAX Is shouldered by the employer.

3. Chapter V: Computation of Taxable Income Special Treatment of Fringe Benefit (Sec 33) Revenue Regulations on Fringe Benefit Tax (RR 3-98)

4. Definitions 1. Fringe Benefit (FB) is any good, service or other benefit furnished or granted in cash or in kind by an employer to an employee (except rank and file). 2. Fringe Benefit Tax (FBT) is a final withholding income tax imposed on the grossed-up monetary value of fringe benefit granted or paid by an employer to a managerial or supervisory employee. 3. FBT is deemed a final income tax due from the employee who earned the income but is mandated by law to be paid by the employer.

5. Definitions 4. Rank and File employee – one who is holding neither a supervisory or managerial position 5. Managerial employee is one who is vested with powers to lay down and execute management policies and/or hire, transfer, suspend, recall, discharge, assign or discipline employees 6. Supervisory employees – one who in the interest of the employer, effectively recommend such managerial actions, exercising authority which is not merely routinary or clerical in nature but requires the use of independent judgment.

6. Taxable Fringe Benefits (FB) 1. Housing 2. Expense account 3. Vehicle of any kind 4. Household personnel 5. Interest on loans at less than market rate 6. Fees and dues of social organizations 7. Foreign travel expenses 8. Holiday and vacation expenses 9. Educational assistance 10. Life, non-life and health insurance

7. Non-Taxable Fringe Benefits (FB) 1. FBs that are exempt under special laws 2. Contributions of employers for the benefit of the employee to retirement, insurance and hospitalization plan 3. Benefits to rank and file 4. De minimis benefits 5. FBs to employees which is required of the nature of, or necessary to trade/profession of employer 6. FB for the convenience of the employer 7. Housing benefits of military officers of AFP 8. Housing benefits if dwelling is situated adjacent to or within business premises

8. De minimis Benefits The full Legal phrase is “de minimis non curat lex” which means the law does not take account of trifles.

9. Rates of Taxes on Fringe Benefits 32%, on FB, in general 25% on FB of non-resident aliens not engaged in trade or business in the Philippines 15% on FB of alien individuals ( and Filipino counterparts) employed by regional or area headquarters, OBUs, or foreign petroleum service contractors or sub-contractors..

10. STEPS IN Computing FBT 1.Consider the applicable rates Tax Rate Grossed up Rate FB, in general 32% 68% FB of NRAETB in the Philippines 25% 75% FB of special aliens and Filipinos15% 85%

11. STEPS IN Computing Taxable FBT 2. Determine the Actual Value (AV) of taxable FB 3. Determine the Monetary Value (MV) of taxable FB (Refer to valuation guidelines #s 1 to 27) 4. Determine the Grossed Up MV of taxable FB GMV = MV divided by Grossed up MV Rate 5. Compute the FBT FBT = GMV x FBT rate

12. Determination of basis of FBT Computation of FBT entails: 1. Valuation of the benefit granted (Actual Value) 2. Determination of the proportion or percentage of the benefit which is subject to FBT (Monetary Value)

13. Guidelines in determining MV 1. If the FB is granted in money, or is directly paid by the employer: MV = Amount granted x 100% 2. If the FB is granted by the employer in property and ownership is transferred to the employee: MV = FMV x 100%

14. Guidelines in determining MV 3. If the FB is granted by the employer in property but ownership is not transferred to the employee: MV = Depreciation Value x 100% 4. If the employer leases a residential property for the use of his employee and the said property is the usual place of residence of the employee: MV = Rental x 50%

15. Guidelines in determining MV 5. If the employer owns a residential property and the same is assigned for the use of his employee as his usual place of business: MV = (Higher of FMV in Tax declaration or Zonal Value x 5%) x 50% 6. If the employer purchase a residential property and transfers the ownership to the employee: MV= (Higher of acquisition cost or Zonal Value) x 100%

16. Guidelines in determining MV 7. If the employer purchases a residential property and transfers the ownership to the employee, at a price less than the acquisition cost: MV= (Excess of the FMV or Zonal Value whichever is higher over the cost price of the employee) x 100% 8. If the housing privilege is for the military officials of the Armed Forces of the Philippines - Exempt

17. Guidelines in determining MV 9. If the housing unit is situated inside or adjacent to the premises of the business or factory (located within the maximum of 50 meters from the perimeter of the business premises – Exempt 10. Expenses incurred by the employee but which are paid by his employer, except when paid for and in the name of the employer and do not partake the nature of personal expenses attributable to the employee: MV = Expense payment x100%

18. Guidelines in determining MV 11. Expenses paid for by the employee but reimbursed by his employer, except when paid for in the name of the employer and do not partake the nature of personal expenses of employee MV = Expense payment x 100% 12. Personal expenses of the employee paid for and reimbursed by the employer (like groceries for his personal consumption) whether or not the receipt is in the name of the employer: MV = Expense payment x 100%

19. Guidelines in determining MV 13. Representation and transportation allowances which are fixed in amounts and are regularly received by the employee as part of his monthly compensation income – not treated as fringe benefit but subject to schedular income tax 14. If the employer purchases a motor vehicle in the name of the employee, regardless of whether the it is used by the employee partly for personal purposes or for the benefit of the employer: MV = Acquisition Cost x 100%

20. Guidelines in determining MV 15. If the employer provides the employee with cash for the purchase of a vehicle in the name of the employee, regardless of whether it is used by the employee partly for personal purpose or for the benefit of the employer, unless the same was subjected to withholding tax on compensation: MV = Cash grants x 100% 16. If the employer purchases the car on installment basis in the name of the employee (same conditions as #15): MV = (Acquisition cost except interest divided by 5 years) x 100%

21. Guidelines in determining MV 17. If the employer shoulders portion of the purchase price of a vehicle, the ownership of which is in the name of the employee, whether used by the employee partly for personal purposes or for the benefit of the employer: MV=Amount shouldered by employer x 100% 18. If the employer owns a fleet of motor vehicles for the use of the business and the employee: MV= (Acquisition cost of all motor vehicles not normally used for sales, freight, delivery service and other non-personal use divided by 5 years) x 50%

22. Guidelines in determining MV 19. If the employer leases and maintains a fleet of motor vehicles for the use of the business and employees: MV= (Rental or Lease payment for motor vehicles not normally used for sales, freight, delivery service and other non- personal) x 50% 20. If the employer owns and maintains an aircraft (including helicopters) for business use: Exempt from FBT

23. Guidelines in determining MV 21. If the employer owns and maintains a yacht or leases the same: MV = (Acquisition Cost divided by 20 years) x 100% 22. If the employer pays for the household personnel (like household help, driver, gardener) or other personal expenses (like homeowners association dues, garbage dues, etc.) MV = Household expenses Value/payments x 100%

24. Guidelines in determining MV 23. If the employer lends money to his employee free of interest or at any rate lower than 12%*: MV = (Interest foregone) x 100% or (Excess of the 12% interest over the interest actually charged) x 100% *the benchmark interest remains in effect until revised by a subsequent regulation. 24. Membership fees, dues and other expenses borne by the employer for the employee in social, athletic clubs and similar organizations: MV = Fees/Dues Payments x 100%

25. Guidelines in determining MV 25. On foreign travels 25.1 Reasonable business meetings and conventions abroad expenses – exempt 25.2 Inland travel expenses for food, beverages and local transportation shall be subject to FBT, except lodging cost in a hotel or similar establishments amounting to an average of US $300.00 or less per day 25.3 Cost of economy or business class airplane ticket is not subject to FBT. However: MV = first class airplane ticket x 30%

26. Guidelines in determining MV 25. On foreign travels: (cont’d) 25.4 The business meeting should be evidenced by official communication from business associates abroad including the purpose of the meetings and for business conventions, by official invitations from host organizations abroad. 25.5 In the absence of documentary evidences showing travel was in connection with business meeting/convention abroad: MV = cost of ticket, hotel, others x100%

27. Guidelines in determining MV 25. On foreign travels: (contd ) 25.6 Travelling expenses paid for by the employer for the family members of the employee is subject to FBT MV = Travelling expensess x 100% 25.7 Holiday and vacation expenses borne by the employer for the employee: MV = Holiday/vacation expenses x 100%

28. Guidelines in determining MV 26. Cost of educational assistance to employee or his dependents: MV = Educational Assistance Expense x 100% Exempted for FBT: Scholarship grants to 26.1 employee, if study is directly connected with employer’s trade/profession with a written contract that employee is to serve employer for a period of time 26.2 employee’s dependents was provided through a competitive scheme under the scholarship program of the company

29. Guidelines in determining MV 27. Life or Health Insurance and other non-life insurance premiums or similar amounts in excess of what the law allows: MV = Insurance Premium payments x 100% However, cost of premiums paid by employer - for the benefit of the employee pursuant to RA 8282 (SSS) or RA 8291 (GSIS) or similar contributions from the provisions of any existing laws – exempt from FBT - for the group insurance of employees - exempt

30. Tax Accounting for FB and FBT 1. General rule: the taxable FB and the FBT shall be considered as allowable deduction for employers 2. If the basis for FB is the depreciation value or FMV per Tax Declaration or zonal value of a certain property: 2.1 Only the actual FBT shall constitute deductible expense for the employer 2.2 The value of the FB shall not be deductible and shall be presumed to have been tacked on or actually claimed as depreciation expense by the employer

31. Tax Accounting for FB and FBT 2. If the basis for FB is the depreciation value or FMV per Tax Declaration or zonal value of a certain property: 2.3 However, if the aforesaid ZV or FMV is greater than the cost subject to depreciation, the excess amount shall be allowed as a deduction from employer’s gross income as fringe benefit expense.

32. Illustrations 1 and 2 No.1 No. 2 Actual Value of FB P 100,000 P 80,000 MV (Assume: 50% or 100% 50,000 80,000 GMV (Divide by 68%) 73,529 117,647 FBT (Multiply by 32%) 23,529 37,647 Journal entry for No. 1 Debit FB Expense 100,000 Debit FB Tax Expense 23,529 Credit FB Exp Payable or cash 100,000 Credit FB Tax ExpPayable 23,529

33. Illustration No. 3 Assume: XYZ Corp owns a condo unit. In 2006, the said corp furnished and granted the said property for the residential use of its President. FMV as determined by the CIR P10,000,000 FMV per Tax Declaration 8,000,000 Monthly rental value of the property (P10,000,000 x 5% x 50% divided by 12 months) 20,833.33 Grossed up MV= 20,833.33 / 68% 30,637.25 FBT = 30,637.25 x 32% 9,803.92

34. Illustration No. 3 In general, under this illustration, XYZ Corp shall not further claim deduction for allowing its President to use the condo as the cost for the use thereof has already been recovered as deduction from its gross income under “Depreciation expense”. However, since the FB Tax has not been recovered by way of deduction from gross income, entry will be Debit Fringe Benefit Tax Expense9,803.92 Credit FB Tax Payable 9,803.92 Assumption is FMV is = or lower than acquisition cost If FMV is higher than acquisition cost, see next page:

35. Illustration No. 3 Assume: the cost of the Condo is less than FMV 1. Acquisition cost of condominium P7,000,000 2. FMV 10,000,000 3. Excess amount to be amortized during the remaining useful life 3,000,00 4. Estimated remaining useful life in 1998 is 15 years P3,000,000 divided by 15 years = P16,666.67 Entry: FB expense 16,666.67 FB Tax expense 9,803.92 Income constructively realized 16,666.67 FB Tax Payable 9,803.92

36. When to File and Pay FBT: When: On or before the 25 th day of the month ff the end of the calendar quarter “Remit as you file” Who: The employer (could be an individual, corp, partnership, association or govt offices required to withhold tax from FBs) Where: With the authorized agent bank located within the District Office having jurisdiction over the principal place of business of the employer-withholding agent.

37. Income Taxation End of presentation... estelitaaguirre@yahoo.com