05 March 2015

Mr Raul VillanuevaVice President for OperationsPhilippine Global Systems, Inc.PO Box 25Cebu City 6000

Dear Mr Villanueva,

Application of Income tax on de minimis benefits and fringe benefitsThank you for your letter on 25 February 2015, addressed to Atty. Nereus Jr S. Caeda, in which you requested advice on the application of income tax on de minimis benefits and fringe benefits.

Your questions, our answers to those questions, and the reasons for our answers are set out bellow.

QUESTIONS AND ANSWERS

Q1Rice allowance of Php1, 300 per monthQ2 Uniform allowance of Php6, 000 per monthQ3Laundry allowance of Php300 per monthQ4Meal allowance of Php100 per day (non-overtime work)Q6Service award ( A regular employee who has rendered 5, 10, 15, 20 and 25 years of continuous service with the company receives a plaque of recognition denoting the years of service, with a value of not exceeding Php1, 500)

ARevenue Regulations No. 8-2012 (as amended) provides that the following de minimis benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank-and-file employee:1. Rice subsidy of P1, 500 or one (1) sack of 50-kg. rice per month amounting to not more than P1, 500;2. Uniform and clothing allowance not exceeding P5, 000 per annum;3. Laundry allowance not exceeding P300 per month;4. Employees achievement awards, e. for length of service or safety achievement. There must be in the form of a tangible personal property other than cash of gift certificate, with an annual monetary value of not exceeding P10, 000 received by the employee under an established written plan which does not discriminate in favour of highly paid employees.5. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage per region

The following rule shall be observed in determining the taxability of the de minimis and the P82, 000 other benefits ceiling under Section 32(b)(7)(e) of the Tax Code:

The excess of the de minimis benefits over their respective ceilings prescribes by these regulations shall be considered as part of the other benefits and the employee receiving it shall be subjected to tax only on the excess over the P82, 000 ceiling.

Illustration

De MinimisTaxableNontaxable

Rice allowance (P1,300 x 12)P15600

Uniform allowance (P6,000 x 12) P67, 0005,000

Laundry Allowance (P300 x 12)3,600

Service Award1,500

TOTALSP68,500P24, 200

It is notable that the uniform allowance and the service award are taxable in the illustration above. It would be highly recommended if the uniform allowance would not exceed P5, 000 per annum, and also such service award should be tangible to be exempt from tax. Also, the meal allowance of P100 per day for non-overtime work should take part of the compensation income of the employee, it should not be considered part of the de minimis benefits for such allowance is not for overtime work.

Q5Transportation allowance of Php1,000 per monthQ7 Medical Benefits (The employees are entitled to reimburse an annual medicine allowance of Php2, 000 to cover their medical needs. The employees are required to submit official receipts covering the purchase of prescribed medicines to support their claim for reimbursement. In addition, the employees are also entitled to free medical check-up and hospitalization benefits [i.e., X-ray, ECG, blood tests, etc. which should not exceed Php 10,000 per year);Q8Company outing (To foster goodwill and camaraderie, the company sponsors an annual company outing to be attended by all its employees. The total amount spent on the company outing varies annually);Q9Christmas party (To celebrate the Christmas season and to foster goodwill among all employees, the company usually sponsors an annual Cristmas party where the expenses vary from year to year)

AFor taxation purposes, fringe benefits may be classified as follows:

1. Fringe benefit to rank and file employees are taxable as compensation income subject to normal tax rate2. Fringe benefit to managerial employees are taxable with final fringe benefit tax of 32%3. Allowances which are fixed in amounts and are regularly received by the employee as part of his monthly compensation income shall not be treated as taxable fringe benefit but as compensation income.

The transportation allowance of P1, 000 per month shall not be treated as taxable fringe benefit but as compensation income for such allowance is fixed in amount and is regularly received by the employee.

Section 33 (B) of the NIRC defines Finge Benefits and provided a list of benefits that are considered fringe benefits, but not limited to the following:1. Holliday and vacation expenses2. Expense accountUnder expense account the following are treated as taxable fringe benefits:1. Expensed incurred by the employee but paid by his employer2. Expenses paid by the employee but reimbursed by his employer.3. In Q7 the medical benefits of the employees other than a rank and file employee are subject to fringe benefit tax, since such expenses of the employee are reimbursed by his employer evidenced by valid receipts. Also the free medical check-up and hospitalizations are incurred by the employee but paid by his employer.

Illustration

Reimbursable expenses:Medicine 2,000

Expenses paid by the employer

Hospitalization10,000

Total Fringe Benefits12,000Divide by Grossed-up monetary value factor 68%Grossed-up Monetary value17,647Multiply by tax rate 32%Fringe Benefit tax due P5, 647

In Q8 and Q9 this can be considered as vacation and holiday expenses respectively, such expenses of the employee borne by his employer shall be treated as taxable fringe benefits.

Illustration

Total Expenses incurred:Christmas PartyP2, 000,000OutingP1, 000,000Assuming that 80% are rank-and-file

Christmas PartyFringe benefit of supervisory/ managerial employee (P2, 000,000 x 20%)P400, 000Divide by grossed-up monetary value factor 68%Grossed-up monetary valueP588, 235Multiply by tax rate 32%Fringe Benefit tax dueP188, 235

OutingFringe benefit of supervisory/ managerial employee (P1, 000,000 x 20%)P200, 000Divide by grossed-up monetary value factor 68%Grossed-up monetary valueP294, 117Multiply by tax rate 32%Fringe Benefit tax due P94,117

In our view, therefore, such rates are applicable to de minimis benefits and fringe benefits and some recommendation are provided with respect to such.

This advice was read by Atty. Stephen L. Yu, Senior Associate, and he agrees with its contents. Please contact me if you have any questions in relation to this advice.

Yours sincerely

Atty. Nereus Jr S. CaedaJunior AssociateM5 Law FirmUC Banilad- College of Law+63-9164717789jhuncanz@gmail.com