(a) Compensation Income

i. Compensation income

In general, the term “compensation” means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the NIRC¹.

Compensation Income Earners - individuals whose source of income is purely derived from an employer-employee relationship. (Rev. Regs. 08-18, Sec.2(a))²

Q: Bank A is a foreign banking corporation incorporated in the Netherlands duly authorized by the Bangko Sentral ng Pilipinas to operate as a branch with full banking in the Philippines. On January 3, 2000, the bank received a Final Assessment Notice containing the Details of Assessment and 13 Assessment Notices issued by the Enforcement Service of the Bureau of Internal revenue through its Assistant Commissioner Percival T. Salazar. The notice covered the deficiency tax assessments for taxable years 1996 and 1997. Bank A paid the assessments except 10 deficiency tax assessments in the total amount of P672,576,939.18. While the case was pending before the court, Bank A filed a Manifestation and Motion stating that it availed itself of the government’s tax amnesty under republic Act No. 9480³ with respect to its deficiency documentary stamp tax and deficiency onshore tax liabilities. Commissioner of Internal revenue countered that BIR Revenue Memorandum Circular No. 19-2008⁴ specifically excludes cases which were ruled by any court in favor of the BIR prior to amnesty availment of the taxpayer from the coverage of the tax amnesty under Republic Act No. 9480. Furthermore, Bank A claims that it is not liable for withholding taxes on bonuses accruing to its officers and employees during taxable years 1996 and 1997 maintaining the position that the liability of the employer to withhold the tax does not arise until such bonus is actually distributed.

1) May the Bank validly avail itself of the tax amnesty granted by Republic No. 9480?

2) If the supposed bonuses were not distributed to the officers and employees in 1996 and 1997 but were distributed in the succeeding year when the amounts of the bonuses were finally determined, is the Bank liable for deficiency withholding tax on accrued bonuses for the taxable years?

Definition

Any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees) 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
• Membership fees, dues and other expenses borne by the employer for the employee in social & athletic clubs or other similar organizations
• Expenses for foreign travel
• Holiday and vacation expenses
• Educational assistance to the employee or his dependents
• Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows

Special treatment of fringe benefits

Effective January 1, 2018 and onwards, a final tax of thirty-five percent (35%) is hereby imposed on the grossed-up monetary value of fringe benefit furnished/granted to the employee by the employer, whether an individual or corporation.

Fringe benefit is an income of the employee subject to Fringe Benefit Tax (FBT) but is payable by the employer. Employer can deduct FBT from its taxable income.

Taxable fringe benefits furnished by an employer, whether an individual or a corporation, to managerial or supervisory employees are subject to FBT; benefits furnished to rank-and-file employees are not subject to FBT. The income-tax treatment of benefits furnished to rank-and-file employees depends on the nature of the benefit and any applicable exclusion. (NIRC, Secs. 32 and 33.)

Fringe benefits not subject to FBT:

• Fringe benefit authorized and exempted from tax under special laws;
• Contributions of employer for the benefit of the employee to retirement, insurance and hospitalizations benefit plan;
• Benefits given to the rank and file employees, whether granted under a CBA or not;
• Benefits received by virtue of a CBA and productivity incentive schemes provided that the total annual monetary value received from both combined do not exceed P10,000 per employee per taxable year; (Rev. Regs. 01-15)⁶
• De minimis benefits;
• If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or profession of the employer; or
• If the grant of the fringe benefit is for the convenience or advantage of the employer.

De Minimis Benefits:

• Monetized unused vacation leave credits of private employees not exceeding 10 days during the year;
• Monetized value of vacation and sick leave credits paid to government officials and employees;
• Medical cash allowance to dependents of employees not exceeding P1,500 per employee per semester or P 250 per month; (Rev. Regs. 11-18⁷)
• Rice subsidy of P 2,000 or 1 sack of 50 kg rice amounting to not more than P 2,000 per month; (Rev. Regs. 11-18)
• Uniform and clothing allowance not exceeding P6,000 per year; (Rev. Regs. 11-18)
• Actual yearly medical benefits not exceeding P10,000;
• Laundry allowance of P300 per month;
• Employee achievement awards, for length of service or safety achievement in the form of tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;
• Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;
• Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis; and
• Benefits received by virtue of a CBA and productivity incentive schemes provided that the total annual monetary value received from both combined do not exceed P10,000 per employee per taxable year; (Rev. Regs. 01-15⁸)

Convenience of the Employer Rule

When a fringe benefit is given solely for the convenience of the employer, the fringe benefit is exempt from FBT because the employee does not recognize income from the benefit.

Example: Expenditure on housing of engineer within factory premises is not subject to FBT

General Rule: If housing is located outside, it is subject to FBT.

Exception: If the nature of the employer’s business is hazardous to health of employee, housing can be located outside the factory without being subject to FBT.

Example: If employee is given housing allowance in cash, this will constitute compensation of the employee (income from whatever source). However, if it qualifies as a fringe benefit, then it will be subject to FBT and the burden is shifted to employer.

ix. Pension, retirement benefit, or separation pay

Lump sum payment or on a staggered basis in consideration of services rendered given after an individual reaches the age of retirement

Amounts excluded from gross income:

• Retirement benefits received under RA 7641⁹ (Labor Code of the Philippines)
• Retirement benefits received under a reasonable private benefit plan if the employee has served the same employer for at least 10 years, is at least 50 years old at retirement, and has not previously availed of this exclusion
• Amounts received by an employee or the employee's heirs from the employer because of separation due to death, sickness, or other physical disability, or for any other cause beyond the employee's control
• Benefits received from a foreign government by resident or nonresident citizens or aliens who reside permanently in the Philippines
• Veterans benefits
• Benefits under SSS
• Benefits received from GSIS

ii. Taxation on compensation income

Compensation Income Earner- individuals whose source of income is purely derived from an employer-employee relationship.

Individuals earning purely compensation income shall be taxed based on the graduated tax rates. Taxable income is the gross compensation income less non-taxable income/benefits such as but not limited to the 13th month pay and other benefits (subject to limitations), de minimis benefits, and employee’s share in the SSS, GSIS, PHIC, Pag-IBIG, and union dues (Rev. Regs. 08-18 Sec. 3)¹⁰.

Inclusion and Exclusion

In general, the term “compensation” means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the NIRC.

Types of Employees as to Taxability

• Minimum wage earners- exempt from income tax on compensation
• Regular employees- subject to regular progressive income tax
• Mixed earners

(a) Inclusions – monetary and non-monetary compensation

Monetary benefits

• Salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like);
• Fees including director's fees, if the director is, at the same time, an employee of the employer/corporation;
• Taxable pensions and retirement pay; and
• Taxable bonuses paid in cash; and
• Other income of a similar nature

Non-monetary benefits

• Taxable non-monetary benefits, except fringe benefits subject to the Fringe Benefit Tax (FBT) under Sec. 33 of the NIRC¹¹

(b) Exclusions/ Non-taxable Compensation

• Mandatory deductions include employees’ mandatory contribution to GSIS, SSS, PhilHealth, HDMF, union dues
• Exempt benefits
• Exempt retirement benefits under RA 7641¹²
• Exempt termination benefits
• Benefits from United States Veterans Administration
• Social Security, retirement gratuities, pensions, similar benefits from foreign government agencies
• Benefits from SSS
• Benefits from GSIS
• De minimis benefits
• 13th month pay and other benefits not exceeding P90,000
• For qualified minimum wage earners, the statutory minimum wage and their holiday pay, overtime pay, night-shift differential pay, and hazard pay are exempt from income tax under NIRC, Sec. 24(A)(2), as amended by RA 9504