College of Accounting Education

PreRev and Correlation Course

3rd Floor, Business & Engineering Building, Matina, Davao City
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Phone No.: (082) Local 137

TAXATION
Session 2: Compensation Income and Fringe Benefits Taxation

CONCEPT OF COMPENSATION INCOME

A. EMPLOYER-EMPLOYEE RELATIONSHIP
• Employer – any person for whom an individual performs any service of whatever nature as employee of
such person.
• Employee – any individual who is a recipient of wages and includes officer, employee or elected official of
the Government of the Philippines or any political subdivisions, agency or instrumentality thereof.
B. TYPES OF EMPLOYEES AS TO FUNCTION
a. Managerial employees
b. Supervisory employees
c. Rank and file employees
C. TYPES OF EMPLOYEES AS TO TAXABILITY
a. Minimum Wage Earners – recipients of minimum wage who are exempt from income tax on their
compensation.
b. Regular employees – subject to the regular progressive income tax

COMPENSATION INCOME

Gross compensation income P XXX

Less: Non-taxable compensation XXX
Taxable compensation income P XXX

A. Gross Compensation Income – all remunerations received under an employer-employee relationship

B. Non-Taxable Compensation
A. Mandatory Deductions
B. Exempt Benefits
a. Benefits excluded and/or exempted under the NIRC and special laws
1. Remunerations received as incidents of employment
a. Exempt retirement benefits under RA 7641, including exempt retirement gratuities to
government officials and employees
b. Exempt termination benefits
c. Benefits from the United States Veterans Administration
d. Social security, retirement gratuities, pensions and similar benefits from foreign government
agencies and other institutions, private or public
e. Benefits from SSS, under the SSS Act of 1954, as amended
f. Benefits from GSIS under the GSIS Act of 1937, as amended
2. De minimis benefits (in excess over the limits, TAXABLE)
a. Monetized unused vacation leave credits to private employees not exceeding ten (10) days
during the year.
b. Monetized unused vacation and sick leave credits paid to government officials and employees
c. Medical cash allowance to dependents of employees not exceeding one thousand five
hundred pesos (P1,500) per employee per semester, or two hundred fifty pesos (P250) per
month;
d. Rice subsidy of two thousand pesos (P2,000) or one (1) sack of 50-kg. rice per month
amounting to not more than two thousand pesos (P2,000);
e. Uniforms and clothing allowance not exceeding six thousand pesos (P6,000) per annum; (RR
1-2015)
f. Actual medical benefits not exceeding ten thousand pesos (P10,000) per annum;
g. Laundry allowance not exceeding three hundred pesos (P300) per month;
h. Employee achievement awards, e.g., for length of service, or safety achievement, which must
be in the form of a tangible personal property other than cash or gift certificate, with an
annual monetary value not exceeding ten thousand pesos (P10,000) received by the employee
under an established written plan which does not discriminate in favor of highly paid
employees;
i. Gifts given during Christmas and major anniversary celebrations not exceeding five thousand
pesos (P5,000) per employee per annum;

Session 2: Compensation Income and Fringe Benefits Taxation September 11, 2020 Page 1
 j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic
minimum wage.
k. Benefits received by an employee by virtue of a collective bargaining agreement and
productivity incentive schemes provide that the total annual monetary value received from
both CBA and productivity incentive schemes combined do not exceed P10,000 per employee
per taxable year.

Treatment of taxable de minimis benefits

a. Rank and file employees – other compensation income
b. Managerial and supervisory employees – fringe benefit subject to final fringe benefit tax

Illustration: Praybeyt Benjamin, a private employee who is paid a P600 daily rate, receives the following
benefits during the year 2018:

Monetized unused vacation leave credits 9 days

Monetized unused sick leave credits 9 days
Medical assistance P 7,000
Rice subsidy (P2,500 per month) 30,000
Clothing allowance 8,000
Laundry allowance 6,000

Determine the taxable amount of de minimis benefits.

3. 13th month pay and other benefits not exceeding P90,000

4. Certain benefits of minimum wage earners
a. a worker in the private sector who is paid the minimum wage or an employee in the public
sector with compensation income of not more than the statutory minimum wage
b. the employee must not have other income aside from minimum wage and exempt benefits
i. Basic minimum wage
ii. Holiday pay
iii. Overtime pay
iv. Night shift differential pay
v. Hazard pay

b. Benefits exempt under treaty or international agreements

Foreign embassy, missions or Philippine embassy or

organization consulate office
In the Philippines
• Filipino citizens Taxable N/A
• Aliens Exempt N/A
Abroad
• Filipino citizens Exempt Taxable
• Aliens Exempt Exempt

c. Benefits necessary to the trade, business or conduct of profession of the employer – necessity of the
employer rule.
d. Benefits for the convenience or advantage of the employer – convenience of the employer rule

C. Taxable Compensation Income

A. Regular Compensation
Exception of taxability of allowances:
a. If it is an ordinary and necessary travelling, representation or entertainment expense of employee
in the pursuit of his trade, business or profession
b. The expense is subject to accounting or liquidation
c. Any excess advances are returned to the employer

Compensation in kind – taxable at fair value of the consideration received

B. Supplementary Compensation
a. Overtime pay
b. Hazard pay
c. Night shift differential pay
d. Holiday pay
e. Commissions
f. Fees, including director’s fees (if director is an employee)

Session 2: Compensation Income and Fringe Benefits Taxation September 11, 2020 Page 2
 g. Emoluments and honoraria
h. Taxable retirement and separation pay
i. Value of living quarters or meals
j. Gains on exercise of stock options
k. Profit sharing and taxable bonuses

C. 13th month pay and other benefits

a. 13 month pay
b. Other benefits
i. Christmas bonus
ii. Cash gifts
iii. Additional compensation allowance
iv. 14th month, 15th month, etc.
v. Other fringe benefits of rank and files

Christmas bonus vs. Christmas gift

Government employees Private employees

Christmas bonus 13th month pay and other benefits 13th month pay and other benefits

Christmas gift 13th month pay and other benefits De minimis

INTEGRATIVE ILLUSTRATIONS: COMPENSATION INCOME

For each of the examples given below, compute for the taxable compensation income.
A. Mayora, a government rank and file employee, had the following summary of his compensation and benefits in
2018:
Gross compensation income P 1,060,000
Less: Employee payroll deductions
Employee contribution to GSIS, PHIC, HDMF P 82,000
Employee deduction for withholding tax _ 70,000 __ 152,000
Net regular payroll P 908,000
Representation and Transportation Allowance 30,000
Personnel Economic Relief Allowance 45,000
Christmas bonus 70,000
Uniform allowance 10,000
Christmas gift 5,000
Honoraria 15,000
Total compensation P 1,083,000

B. Mayordoma, a private employee, derived the following remunerations and benefits in 2018:
Basic compensation, net of P30,000 SSS, PHIC, PhilHealth, HDMF,
Union dues and P35,000 withholding tax P 595,000
Overtime pay 30,000
Vacation expenses of the employee paid by employer 25,000
Cost of living allowance (COLA) 20,000
Pre-computed daily transportation allowance 15,000
Rice subsidy (12 cavans worth P2,700 each) 32,400
th
13 month pay 55,000
Monetized unused leave credit (10 VL and 8 SL) 18,000
Uniform allowance __ 10,000
Total compensation income P 800,400

MINIMUM WAGE EARNERS

Minimum Wage Earners (MWEs) are exempt from income tax on:
a. Minimum wage
b. Holiday pay
c. Overtime pay
d. Night shift differential
e. Hazard pay
• Under RR 10-2008, MWE receiving additional “compensation” such as commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory amount of P90,000, taxable allowances and other taxable income other
than the statutory minimum wage, overtime pay, holiday pay, hazard pay, night shift differential pay shall not enjoy
the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax. However, in
the case of Soriano vs. Secretary of Finance with GR No. 184450 promulgated by the Supreme Court on January 24,
2017, it was held that nothing to this effect can be read from RA 9504. Hence, such MWE shall still enjoy the benefit
of being exempt from tax on compensation income.
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 • MWE with additional “business” income:
a. Compensation income as MWE = EXEMPT
b. Business income = TAXABLE

Rules of change in status as a Minimum Wage Earner during a year

1. When an employee becomes a minimum wage earner during the year, he shall be subject to income tax only on
compensation earned before becoming a minimum wage earner.
2. When an employee ceases to be a minimum wage earner during the year due to increase in salary, only the income
for the rest of the year is taxable.
3. When an employee ceases to be a minimum wage earner during the year by disqualification.

Withholding Tax on Compensation – a method of collecting the income tax at source upon receipt of the income. This
applies to all employed individuals whether citizens or aliens. The employer is constituted as the withholding agent.

Deadline of filing and remittance of Withholding Tax on Compensation

• BIR Form 1601-C (Monthly Remittance Return of Income Taxes Withheld on Compensation)
o On or before the 10th day of the following month
o For December – on or before January 15 of the succeeding year.
• BIR Form 1604-CF (Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding
Taxes)
o on or before January 31 of the following calendar year
• BIR Form 2316 (Certificate of Compensation Payment or Income Tax Withheld)
o On or before January 31 of the succeeding year
o This shall be given by the employer to the employee

FRINGE BENEFITS

Fringe Benefit Tax (FBT) – is a final withholding tax imposed on the grossed-up monetary value of the fringe benefit
furnished, granted or paid by the employer to managerial or supervisory employees, whether such employer is an individual,
professional partnership or corporation, regardless of whether the corporation is taxable or not, or the government and its
instrumentalities. (Section 33, RA 8424, RR No. 3-98)

The term “FRINGE BENEFIT” means any good, service, or other benefit furnished or granted by an employer in cash or in kind,
in addition to basic salaries, to an individual employee (except rank and file employee) such as but not limited to the
following:
HEV – HIM – HELF
1) Housing
2) Expense Account;
3) Vehicle of any kind;
4) Household personnel, such as maid, driver and others;
5) Interest on loan at less than market rate to the extent of the difference between the market rate and the actual rate
granted;
6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or
other similar organizations;
7) Holiday and vacation expenses;
8) Educational assistance to the employee or his dependents; and
9) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
10) Expenses for foreign travel;

The following fringe benefits are NOT subject to FBT:

1. Housing privilege of military officials of the Armed Forces of the Philippines (AFP);
2. A housing unit which is situated inside or adjacent (within 50 meters from the perimeter of the business premises) to
the premises of a business or factory.
3. Temporary housing for an employee who stays in a housing unit for three (3) months or less;
4. Expenses incurred by the employee which are paid by the employer and expenses paid for by the employee but
reimbursed by his employer, provided;
a) The expenditures are duly receipted for and in the name of the employer; and
b) It does not partake the nature of a personal expense attributable to the employee;
5. Representation and transportation allowances which are fix in amounts and are regularly received by the employees
as part of their monthly compensation (subject to basic tax);
6. Inland travel expenses (such as expenses for food, beverages and local transportation) during foreign travel;
7. Lodging cost in a hotel (or similar establishments) amounting to an average of US$300.00 or less per day during
foreign travel;
8. Cost of economy and business class airplane ticket for foreign travel;
9. 70% of the cost of first class airplane ticket for foreign travel;
10. Educational assistance to the employee, provided:

Session 2: Compensation Income and Fringe Benefits Taxation September 11, 2020 Page 4
 a) The education or study is directly connected with the employer’s trade, business or profession; and
b) There is written contract between them that the employee is under obligation to remain in the employ of
the employer for a period of time they have mutually agreed upon;
11. Educational assistance to the dependents of the employee, provided that the assistance was provided through a
competitive scheme under the scholarship program of the company;
12. Contributions of the employer for the benefit of the employee;
a) Pursuant to the provisions of existing law, such as under SSS and GSIS; or
b) Similar contributions arising from provisions of any other existing law;
13. The cost of premiums borne by the employer for the group insurance of his employees;
14. Fringe benefits which are authorized and exempted from income tax under the Tax Code o under any special law;
15. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit
plans;
16. Benefits given to the rank and file;
17. The fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or
18. When the fringe benefit is for the convenience or advantage of the employer;
19. De minimis benefits (refer to list under exempt compensation income)

FORMULA:
Grossed-up Monetary Value xxx GROSSED-UP MONETARY VALUE
Rate x% 1) GMV = Monetary Value (MV/ GMV Factor
FBT Pxxx GMV Factor = 100% - FBT Rate
2) GMV = MV + FBT

In GENERAL, the valuation of fringe benefits shall be as follows:

KIND OF FRINGE BENEFIT VALUATION KIND OF FRINGE BENEFIT VALUATION
1) Money Amount of money
2) Non-cash property and Fair Market Value vs. Zonal 3.) Non-cash property and Depreciation value of the
ownership is transferred Value (whichever is higher), ownership is not transferred property
if applicable

EXCEPTIONS:
KIND OF FRINGE BENEFIT VALUATION KIND OF FRINGE BENEFIT VALUATION
HOUSING
▪ Employer leases a MV = Rental Paid x 50% ▪ Employer purchases a MV = AC vs ZV, whichever is
residential property for residential property higher
the use of his employee and transfers
ownership in the name
of employee
▪ Employer owns a MV = FMV vs ZV, whichever ▪ Employer purchases a MV = (FMV vs. ZV,
residential property is higher) x 2.5% residential property whichever is higher) – Cost
and the same is and transfer ownership to the employee
assigned for the use of to his employee, at a
his employee price less than the
acquisition cost
▪ Employer purchases a MV = AC x 2.5%
residential property on
installment basis and
allows the employee to AC should be net of interest
use the same
MOTOR VEHICLE
▪ Employer purchases MV = AC ▪ Employer shoulders a MV = amount shouldered by
motor vehicle in the portion of the amount the employer
name of the employee of the purchase price
of a motor vehicle the
ownership of which is
placed in the name of
the employee
▪ Employer provides MV = Cash given ▪ Employer owns and MV = AC of al motor
cash for the purchase maintains a fleet of vehicles for personal use/ 5
of a motor vehicle motor vehicles for the years
use of the business and
the employees
▪ Employer purchases MV = AC / 5 years ▪ Employer leases and MV = Rental payments of all
the car on installment maintains a fleet of motor vehicles for personal
basis, the ownership of motor vehicles for the use x 50%
which is placed in the use of the business and

Session 2: Compensation Income and Fringe Benefits Taxation September 11, 2020 Page 5
 name of the employee the employees
INTEREST
▪ Employer lends money MV = Principal x 12% ▪ Employer lends money MV = Principal x (12% -
to his employee free of to his employee at a Actual Rate)
interest rate lower than 12%

TAX RATES

Taxpayer 2018 Prior

2018
RC, NRC, OCW, RA and NRA-ETB 35% 32%
NRA-NETB 25% 25%
SFE 15%
SAE 15%

SAMPLE PROBLEMS

PROBLEM 1
Mr. Peter, a self-employed individual, had provided the following fringe benefits during the 2018 taxable year:
a. Housing units provided to the plant supervisor necessary to the business operation of the employer:
Fair Market value P 900,000
Zonal value 1,000,000
b. Cash payment for the purchase of grocery items 382,500
c. Car benefit in the name of the finance officer acquired on installment basis:
Cash price 750,000
Installment price:
Down payment 400,000
Annual installment for four years at the amount of 400,000

Compute for the total fringe benefits expense and fringe benefits tax.

PROBLEM 2
Star Company provided the following fringe benefits to its employees during the 2018 taxable year:
Fringe benefits provided to supervisory and managerial employees P 956,250
Fringe benefits furnished to rank and file employees 430,750
Fringe benefits granted to non-resident aliens not engaged in business in the Phils. 750,000

Compute the total value of fringe benefits and the total fringe benefits tax.

PROBLEM 3
Mr. Brown, a self-employed individual, provided the following data during the 2018 taxable year:
Gross sales from business P 3,200,000
Rental income on machinery 280,000
Interest income on bank deposit in the Philippines 60,000
Local travel expenses paid by the company for the travel of the managers and
members of their families 420,750
De minimis benefits to all employees 80,000
Company contributions to the employees’ retirement, insurance, and
hospitalization benefit plans 120,000

Compute the total value of fringe benefits, the grossed-up monetary value of fringe benefits and the fringe benefits tax.

PROBLEM 4
The manager of Cream Company received the following during 2018:
Annual salary P 6,000,000
Toyota Sedan purchased by Cream Company in the name of the manager 1,020,000
Rice allowance 147,200
Medical allowance 101,800

Determine the total fringe benefits expense and fringe benefits tax.

References:
*Banggawan, Rex (2019). Income Taxation: Laws, Principles and Application. Real Excellence Publishing

*Tabag, Enrico (2019). Income Taxation with Special Topics in Taxation. EDT Book Shop. Manila

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