“Managers’ benefits: compensation or perks?” by Jo-Anne T. Matas (June 18, 2012)
By Jo-Anne T. Matas
Employers ought to revisit the benefits given to their employees in light of some BIR issuances that affect the taxation of compensation benefits.
Revenue Regulations (RR) No. 5-2011 dated March 16, 2011 generated some buzz in that it effectively limited the types of employee benefits that may be considered as “de minimis” or of relatively small value which would previously be exempted from withholding tax. RR 5-2011 states that all other benefits given by employers, which are not enumerated under the regulations, will not be considered as ”de minimis” benefits, and hence, subject to income tax as well as withholding tax on compensation income (WTC).
The main issue then was whether this effectively overturned rulings previously issued by the BIR, which exempted from tax benefits which, although excluded in the enumeration of de minimis benefits, are relatively of small value or otherwise required by or necessary to the nature of the business of the employer.
The BIR subsequently issued Revenue Memorandum Circular (RMC) No. 20-2011 which provided that the income tax and WTC referred to in RR 5-2011 pertains to the fringe benefits tax (FBT) for non-rank and file employees (i.e., employees occupying managerial/supervisory positions). Under the RMC, the BIR seems to take the position that benefits granted to managerial employees, in addition to basic salaries and in excess of the de minimis benefits as enumerated, are considered fringe benefits subject to FBT.
Under Section 33 of the Tax Code, the FBT does not apply when: (1) the fringe benefit is required by the nature of, or is necessary to, the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or to the advantage of the employer.
Furthermore, under RR No. 3-98, representation and transportation allowances which are fixed in amounts and are regularly received by the employees as part of their monthly compensation are not treated as taxable fringe benefits, but are considered taxable compensation income subject to WTC.
The question now arises: Are other benefits outside and/or in excess of the enumeration of de minimis benefits subject to WTC or FBT?
The term “compensation,” as defined in RR No. 2-98, means all remuneration for services performed by an employee for his or her employer under an employee-employer relationship, unless specifically excluded under Section 32 of the Tax Code. “Fringe benefits,” as defined under Section 33(B) of the Tax Code, means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee, with the exception of rank-and-file employees.
Based on the above, there seems to be no clear-cut distinction between compensation and fringe benefits.
When FBT was first implemented, some took the view that only the following fringe benefits specifically enumerated under the Tax Code are subject to FBT:
• Expense account;
• Vehicle of any kind;
• Household personnel (e.g., maid, driver, etc.);
• Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;
• Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;
• Expenses for foreign travel;
• Holiday and vacation expenses;
• Educational assistance to the employee or his dependents; and
• Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
This view may find support in Section 2.33(C) of RR No. 3-98, which states that if the fringe benefit is exempt from FBT, the same may still form part of the employee’s gross compensation income which is subject to regular income tax (i.e., WTC). However, it is also possible that this provision is intended to merely clarify that fringe benefits granted to rank-and-file employees are subject to WTC, although specifically exempt from FBT. Particularly since the enumeration is preceded by the phrase “but not limited to,” it may be construed to be a listing of examples and not an exclusive or exhaustive enumeration of fringe benefits subject to FBT. However, when viewed in light of recent BIR issuances, it appears that this perspective is no longer shared by the BIR.
The alternative view is that benefits may be considered as “perk benefits” and would qualify as fringe benefits rather than compensation. “Perk” or “perquisite” is defined as “any extra or non-standard benefit given to a limited number of employees.” This supports the position that fringe benefits are only those given to supervisors and other company officers, and which may not be considered as necessary but merely accessory to their employment. In this view, amounts given to managerial employees in excess of de minimis benefits may be subject to WTC if these benefits are also provided to rank and file employees. If only the managerial employees enjoy these “perks”, the same should be subject to FBT.
WTC, on the one hand, is tax withheld on the amount granted as benefit and is borne by the recipient employee. On the other hand, FBT is effectively borne by the employer, becoming not just a question of the appropriate tax rate to apply, but perhaps also the more important question of who will shoulder the tax on benefits granted to managerial employees. Certainly, a clear guidance on this matter from the BIR would be most welcome to companies and employees alike.
Jo-Anne T. Matas is a Tax Senior Director of SGV &Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.