INCOME TAXATION

BACC 301 FIRST SEMESTER

GENERAL CATEGORIES OF FRINGE BENEFITS

SUBJECT TO FINAL TAX
CH 11: Fringe Benefit Tax
1. Management perquisite benefits
Fringe benefits - Highly privileged
- All other benefits or incentives of non-performance based
employees other than their basic pay. incentives given to management
- NIRC also pertains to “fringe benefits” as employee
goods, services, or other benefits *performance-based benefits
furnished by employer to employees are compensation income
*benefits in nature of incentives
or perks are fringe benefits
*basic pay = fixed regular salary or wages of 2. Employee personal expenses
employees every payroll period. shouldered by the employer
- When an expense takes the
Tax Treatments of Fringe Benefits nature of an employee's personal
Items of Fringe Benefits are treated differently expense and is paid or assumed
depending on their nature: by the employer in default or
proximate business necessity, it is
a. Fixed Fringe Benefits are considered as deemed as fringe benefit in its
REGULAR COMPENSATION entirety.
b. Variable Performance-based Fringe
Benefits are SUPPLEMENTAL Hybrid Expenses
COMPENSATION - When the employer incurs
c. Incentive Fringe Benefits are 13TH expenses which are partly
MONTH PAY AND OTHER BENEFIT for the business and partly
d. Fringe Benefits furnished for the as an incentive of the
convenience or necessity of employer are employee. Only the 50% of
EXEMPT FROM INCOME TAX the expense that
represents the employee
Other Fringe Benefits Not Included or incentive is subject to
Classifiable as Items of Compensation Income fringe benefit tax.
and which are Not Exempted by Law
3. Taxable de minimis benefits
If employee is a: a. Excess de minimis over their
a. Rank and File Employees - included as limits
“other benefits” under 13th month and b. Benefits not included in the de
other benefits minimis list
b. Managerial and Supervisory Employees
- excluded in compensation income and EXEMPT FRINGE BENEFITS
are subject to final fringe benefit tax. The following fringe benefits are exempt from
the fringe benefit tax:
*FRINGE BENEFIT TAX COVERS ONLY THE 1. Fringe benefits which are authorized and
TAXABLE FRINGE BENEFITS OF MANAGERIAL exempted from tax under special laws
AND SUPERVISORY EMPLOYEES
Examples: Employer's contribution to
*TAXABLE FRINGE BENEFITS EXCLUDES ITEMS SSS, PhilHealth, HDMF or group
THAT ARE CONSIDERED AS COMPENSATION insurance, except excess over the
INCOME mandatory amounts set by law

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BACC 301 FIRST SEMESTER

2. Benefits required by the nature of, or 2. Tax upon the fringe benefits of
necessary to the trade, business or managerial or supervisory employees
profession of the employer - FBT applies regardless of the
identity of the employer for the
3. Benefit given for the convenience or reason that the FBT is not a tax to
advantage of the employer the employer but to their
employee. It is a tax upon the
4. Contributions of the employer for the fringe benefits realized by the
benefit of the employee to retirement, managerial or supervisory
insurance and hospitalization benefit employee.
plans 3. Paid by the employer
- Since FBT is a final tax, it is
5. Benefit given to rank and file employees withheld at source and remitted
whether or not granted under a by the employer to the
collective bargaining agreement government.
4. Grossed-up Tax
The taxable fringe benefits of rank and - The monetary value or amount of
file employees are exempt from fringe the fringe benefit realized by the
benefit tax, but are subject to regular employee is net of final tax.
income tax as part of compensation - That monetary value is first
income. grossed-up by the complement
percentage of the applicable FBT
6. De minimis benefits within their legal rate before the FBT rate is applied
limits *the grossed up rate is 100% less
the given fringe benefit tax rate
“Necessity or Convenience of the Employer” 5. Due Quarterly
Rule - FBT is due for remittance
quarterly based on the
- If an expense is furnished principally for accounting period selected by the
the convenience or advantage of the employer.
employer the expense is deemed - The quarterly FBT is due ON or
“ordinary business expense”. BEFORE THE LAST DAY OF THE
- These fringe benefits are not viewed as MONTH FOLLOWING THE
taxable fringe benefits. QUARTER IN WHICH THE
WITHHOLDING WAS MADE.

THE FRINGE BENEFIT TAX Procedures in Computing the Fringe Benefit

- Is a FINAL TAX imposed on the fringe Tax
benefit furnished, granted or paid by the 1. Determine the monetary value.
employer to the employee, except rank Monetary value refers to the taxable
and file employees. amount of benefits taken home or
realized by the managerial or supervisory
Characteristics of Fringe Benefit Tax employee. The monetary value is
1. Final Tax presumed net of the final tax.
- FBT is a final tax that is withheld
by the employer at source, which 2. Determine the gross-up rate and fringe
means the employee does not benefit tax rate applicable for the
need to report fringe benefits in taxpayer.
his ITR.

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BACC 301 FIRST SEMESTER

The gross up rate is the complement of

the fringe benefit tax rate. If the fringe Hence, the depreciation
benefit tax rate is 35%, the gross-up rate value is computed as 1/20
is (100% less 35%) or 65%. If the fringe or 5% of the value of the
benefit tax rate is 25%, the gross-up rate property.
is 75%.
b. 5 years for movable
3. Determine the grossed-up monetary properties.
value by dividing the monetary value
by the gross-up rate. Hence, the depreciation
value is computed as 1/5 or
4. Determine the fringe benefit tax by 20% of the value of
multiplying the fringe benefit tax rate *the valuation and reporting of the monetary
to the grossed-up monetary value. value is done quarterly
*in case of use of employer properties the
reporting of monetary value ceases from the
RULES ON VALUATION OF FRINGE BENEFITS month of free use is discontinued.
1. Benefits Paid in Cash
- The monetary value is the amount
paid for in cash SPECIAL GUIDELINES ON MONETARY VALUE
- When the employer pays for the DETERMINATION
rent of the residence of the
employee then the monetary Housing Privilege
value is 50% of the rental 1. ER leased property for the use of EE
payment. Value = Rental
2. Benefits Paid in Kinds
- The monetary value is the fair Monetary Value = 50% of Value
value or the book value of the
thing given, whichever is higher 2. ER owns property for the use of EE
- When ownership of the property Value = 5% of Assessed or Zonal Value,
is given to the employee, the Whichever is higher
monetary value is the entire fair
value of the property even if the Monetary Value = 50% of Value
property is partially used for the
business. 3. ER purchased property on installment for
3. Benefits that are furnished the use of EE
- When benefits are given in the Value = 5% or 1/20 of the acquisition
form of free use of the employer’s cost, exclusive of interest.
property. The monetary value is
50% of the rental value of the Monetary Value = 50% of the value
property, however, if there is no
rental value, depreciation value is 4. ER transfers ownership of the property to
used. EE
Value = whichever is higher of
For depreciation value, the acquisition cost or zonal value
presumptive useful lives of the
property are: Monetary Value = 100% of the value of
the benefit.
a. 20 years for real
properties.

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5. ER transfers title of the property to EE for

less than the adequate consideration 2. ER provides cash to EE for the purchase
Value = [(fair market value or zonal of the vehicle Monetary value = 100% of
value whichever is higher) less the cash benefit (except when the
consideration amount is subjected to withholding tax
on compensation)
Monetary Value = 100% of the value of *car benefits that are paid in cash and are
the benefit. subject to withholding tax on
compensation are subject to regular tax
not in fbt, that’s why they are exempt.
Exempt housing privileges: *but if the benefit is subject to fbt, then
1. Military officials of the Armed Forces of it's monetary value shall be reported in
the Philippines (AFP), Philippine Air the quarter of payment.
Force (PAP), Philippine Army, and
Philippine Navy on their quarters which 3. ER purchased the vehicle on installment
is within or accessible from the military basis and the ownership is placed in the
camp so they can be readily available on name of EE.
call to meet the exigencies of their Benefit = acquisition cost divided by 5
military service. years
Monetary value = (1/5) or 20% of the
2. Housing unit situated or adjacent to the acquisition cost
premises of a business or factory (within
a maximum of 50 meters) from the 4. ER shoulders a portion and is placed in
perimeter of the business premises. the name of EE
Monetary value = the portion
The 50-meter rule may be relaxed when shouldered by the employer
upon the basis of health or safety
requirements such as in the case of 5. Vehicles owned for the use of business
chemical manufacturing, the housing be and EEs
located at a farther location. Value = cost of all vehicles not used for
sales, freight, delivery, service, and
3. Temporary housing for an employee in a other non-personal uses divided by 5
housing unit for 3 month or less, (i.e. not years
exceeding one quarter) Monetary Value = 50% of the value

Expense Account *cost of motor vehicles not used in

- Expenses incurred by employee but paid business is amortized over 5 years.
by their employer/expenses incurred and *there being no transfer of title, monetary
paid by employee but reimbursed or value is 50% of the benefit
advanced by employer are TAXABLE *quarterly recognition of monetary value
FRINGE BENEFITS continues until free usage is terminated

Motor Vehicles of Any Kind 6. Vehicles leased for the use of the
business and EEs
1. ER purchases vehicle in the name of EE Value = rental payment of the vehicles
Monetary value = 100% of the cost of not used for sales, freight, delivery,
the motor vehicle service, and other non-personal uses
Monetary Value = 50% of the value
*Note that the monetary value shall be
reported in the quarter of purchase.

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BACC 301 FIRST SEMESTER

7. Aircrafts which includes helicopters are employees in social and athletic clubs or
deemed solely for business use, hence, other similar organizations
they are NOT SUBJECT TO FBT 5. Undocumented travel expenses
6. Expenses for the family of EE shouldered
8. Yachts owned, maintained, or lease by ER by ER (in full)
are presumed not for business use, 7. Holiday and Vacation Expenses
hence, TAXABLE AS FRINGE BENEFIT shouldered ER
*if owned or maintained, value of benefit 8. Education Assistance (except when
is measured as depreciation value over beneficial for ER or is a scholarship
20 years program of the business)
9. Life or health insurance and other
*Yacht's depreciation value is subject to fbt in full non-life insurance premiums or similar
*If a yacht is used for the entertainment of amounts in excess of what the law
guests or clients, it is then not subject to fbt. It's allows (except mandatory contributions
depreciation is qualified as “entertainment, and cost of premium for group insurance
amusement, and recreation expense” of EEs)
10. Personal Expenses
Expenses for Foreign Travel 11. Fringe benefit imposed upon the
Business expenses for foreign travel for employee
attending business meetings and conventions 12. Excess De Minimis & Other Fringe
are exempt, such as: Benefits

1. Inland travel expenses (i.e., food, MONETARY VALUES

beverages, transport cost) - monetary value shall be reported in the
2. Lodging costs in hotels or similar quarter of purchase.
establishments amounting to $300/day
or less. 1. Benefits paid in Cash
3. Economy and Business class plane tix Monetary Value = amount paid in cash
4. 70% of the cost of first class tix (*the Monetary Value if ER pays for the rent of
remaining 30% is deductible if domestic the residence = 50% of rental payment
travel but considered as fringe benefit if
foreign travel) 2. Benefits paid in Kind
Monetary Value = fair value or book
*these rules apply if the expenses were value of the thing given, whichever is
supported by documentation proving the actual higher
occurrences of meeting or convention.
*if there are no documentation then they are 3. Benefits that are Furnished (free use of
FBT ERs property)
Monetary Value (if there is rent) = 50% of
TAXABLE FRINGE BENEFITS the rent value
1. Expenses incurred by an employee which
are paid by his employer or incurred and Monetary Value (no rent) = we use
paid by the employee but reimbursed or depreciation
advanced by the employer. a. Depreciation for Real Properties
2. Household Expenses - 20 years (1/20 or 5% of the
3. Difference between 12% and the actual value of the property)
interest charged b. Depreciation for Movable
4. Membership fees, dues, and other Properties
expenses borne by the employer for his - 5 years (⅕ or 20% of the
value of the property)

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BACC 301 FIRST SEMESTER

14. Holiday and Vacation Expenses

4. ER purchases vehicle in the name of EE Monetary Value = amount paid or
Monetary value = 100% of the cost of the shouldered by ER
motor vehicle

5. ER provides cash to EE for the FRINGE BENEFIT TAX RATES

purchase of the vehicle Monetary value
= 100% of the cash benefit (except when
RESIDENT NON-RESIDE
the amount is subjected to withholding
OR CITIZENS NT ALIENS
tax on compensation)
Fringe 35% 25%
6. ER purchased the vehicle on
Benefit Tax
installment basis and the ownership is
Rates
placed in the name of EE.
Monetary value = (1/5) or 20% of the Grossed-up 65% 75%
acquisition cost Rates

7. ER shoulders a portion and is placed in

the name of EE *grossed-up monetary value is the monetary
Monetary value = the portion shouldered value of benefits divided by the appropriate
by the employer grossed-up rate for the employee. It is inclusive
of FBT
8. Vehicles owned for the use of business *personal expenses are TAXABLE FRINGE
and EEs BENEFITS even if received in full or in part in the
Monetary Value = 50% of the value of the name of ER
vehicle

9. Vehicles leased for the use of the ACCOUNTING ENTRIES

business and EEs Accounting entries shall be classified as follows:
Monetary Value = 50% of the value of the 1. Taxable benefits paid for in cash or in
vehicle kind
2. Taxable benefits which do not involve
10. Yachts owned, maintained, or lease by payment of cash or transfer of property
ER 3. Exempt benefits paid for in cash or in
Monetary Value = annual depreciation kind
value / 4 4. Exempt benefits which do not involve
payment of cash or transfer of property
11. Household Expenses
Monetary Value = amount paid for the Benefits paid for in cash or in kind
household expenses Taxpayers shall record fringe benefits paid for in
cash or in kind in their books as follows:
12. Membership fees, dues, and other
expenses borne by the employer for his Fringe benefit expense (monetary value)
employees in social and athletic clubs xxx
or other similar organizations Fringe benefit tax expense
Monetary Value = amount paid xxx
Cash/Tax basis of property given
13. Lodging Cost xxx
Monetary Value = $300/day or less Fringe benefit tax payable
xxx

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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

Exempt benefits paid in cash or in kind

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

Fringe benefit expense (monetary value)

xxx
Cash/Property given
xxx

Treatment of the Total Fringe Benefit Expense

- 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.
- a deductible fringe benefit expense
exists only when the benefit is paid in
cash or in kind.
- expense is measured at the actual cost
or tax basis of consideration given as
fringe benefits.

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