Having returned from the Christmas holidays just a bit poorer (but happier, I hasten to add lest you think me an old humbug) I found on my desk the newly-minted Revenue Regulations (RR) no. 1-2015 (the “1” denoting that this is the first regulation for 2015). Surprisingly, instead of clamping down on tax exemptions 1-2015 actually granted an additional amount of income tax relief for salaried employees. Apparently, it wasn’t just Santa’s helpers that were busy over the holidays as the Department of Finance and BIR toiled to welcome the New Year with a gift to us working folks.
RR 1-2015 amends certain provisions of RR No. 2-1998, which governs the grant of exemptions from income tax and fringe benefit tax. On its face, RR 1-2015 places a P10,000 limit on the income tax and fringe benefit tax exemption that an employee may enjoy on productivity incentive schemes combined with other benefits received by the employee arising from a collective bargaining agreement (CBA). Clearly, the significance of RR 1-2015 is that it addresses the question of whether, and to what extent, productivity incentives and other benefits are income or fringe benefit tax-exempt. More importantly, the intent of RR 1-2015 is to grant P10,000 worth of exemption from income tax and fringe benefit tax to employees, in addition to other exemptions from income or fringe benefits tax already existing. This, I gathered from my DOF and BIR sources, was the result of consultations held with the Department of Labor and Employment and labor groups.
These types of exemptions have fallen under the general rubric of de minimis benefits. To understand the concept of de minimis benefits, let’s accept the general proposition stated in the Tax Code that income on which a tax is levied (that is, gross income less allowable deductions) includes “compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items.” (Section 32(A)(1)). Commenting on its equivalent provision in the US Federal Tax Code the US Supreme Court said that this section is “broad enough to include in taxable income any economic or financial benefit conferred on the employee, as compensation, whatever the form or mode by which it is effected.” (Old Colony Trust Co. vs. Commissioner, 279 US 716, 49 S.Ct. 499 (1929)).
Technically, then, whether an employee is paid in cash, property, the enjoyment of a right, or the cancellation of an obligation, is of no moment when determining whether it is compensation. The example can be made of an employee’s use of the company vacation house: this is income to the employee because the use of the house arose out of the employer-employee relationship and, more importantly, benefitted the employee to the extent that he did not have to pay for lodging. However, depending on the circumstances, the benefit granted to an employee may be of such a trivial amount (hence, de minimis) that its reporting would be, for practical purposes, impossible: in other words, valuing the vacation house stay would be a useless economic exercise.
Conversely, more substantial benefits are subject to a fringe benefit tax of 32 percent on the grossed up value of fringe benefit enjoyed by the employee. The Tax Code enumerates some examples of taxable fringe benefits. In the case of supervisory and managerial employees these include housing, expense accounts, vehicles, and the like. (This rule, however, exempts these items from taxation when they are given clearly for the benefit of the employer; e.g., employee housing located proximately to the work place.
The de minimis benefits enumerated by RR 2-98 may arise out of practical considerations in the mode of the vacation house example I mentioned earlier. Other examples given by RR 2-98 include: “flowers, fruits, books or similar items given to employees under special circumstances, e.g., on account of illness, birth of a baby, etc.” or “laundry allowance not exceeding P300 per month”.
Certain de minimis benefits are actually given for the employer’s convenience, such as uniform allowance not exceeding P5,000.
The Tax Code and regulations also recognize de minimis benefits as a tool of social welfare. Thus, Section 2.78.1 (3) of RR 2-98 states that these are provided for the “health, goodwill, contentment…of his employees”. Examples of what I consider as RR 2-1998’s social welfare provisions are:
1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the year and the monetized value of leave credits paid to government officials and employees.
2. Medical cash allowance to employee dependents not exceeding (P750 per employee per semester or P125 per month).
3. Rice subsidy of P1,500 or one sack of 50 kg. rice.
4. Actual yearly medical benefits not exceeding P10,000 per month.
5. Daily meal allowance for overtime work not exceeding 25 percent of the basic minimum wage.
Clearly, the P10,000 de minimis benefit granted by RR 1-2015 falls within this latter category. With the addition of this benefit, total de minimis benefits that an employee may enjoy are at least worth P63,100 (this does not count the effects of additional variable de minimis benefits, such as the unutilized vacation leave credits). If one were to add another type of benefit, viz., the exemption from income tax on the first P30,000 of 13th month pay and “other benefits” granted by Tax Code Section (B)(7)(e), then the total benefits tax exemption is P93,100 (again, not counting variable de minimis benefits). From my conversations with DoF officials this seems to be the proper interpretation of RR 1-2015.
On the whole – and taking into consideration the nature of de minimis benefits – I would say that this is a good faith effort on government’s part to expand de minimis coverage. Others might grouse and say it’s not enough (it never is!), but this is one gift horse I won’t look in the mouth – I’ll take it. Happy New Year!
Emmanuel P. Bonoan is the vice chairman, chief operating officer and head of tax of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email ph-kpmgmla@kpmg.com or rgmanabat@kpmg.com.
For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.
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