March 9, 2016

MR. MICHAEL T. ROSARIO

Vice President- Operations
Philippine Global Systems, Inc.

Re: Legal Opinion on the tax treatment of employee benefits provided for by
Philippine Global Systems, Inc. to its managerial, supervisory, and rank-and-file
employees.

Dear Mr. Rosario:

Here is the opinion you requested. The facts gathered from you and your
documents, are as follows:
Philippine Global Systems, Inc. has various employees owing different
positions from managerial, supervisory and rank-and-file employees. Aside from
their compensations, your employees also received other benefits. The following are
the benefits the company gives to all its employees regardless of position:
BENEFITS
Rice allowance
Uniform allowance
Laundry allowance
Meal allowance (non-overtime work)
Transportation allowance
Service Award

AMOUNT/ PURPOSE/ PARTICULARS

Php 1,300 per month
Php 6,000 per month
Php 300 per month
Php 100 per day
Php 1,000 per month
Awarded to an employee who has
rendered 5,10,15,20 and 25 years of
continuous service with the company. A
plaque of recognition worth Php 1,500

Medical benefits

is given to the employee.

MEDICINE ALLOWANCE: Php 2,000 per
year
(supported by official receipts)
FREE

MEDICAL

CHECK

UP:

not

to

Company outing

exceed Php 10,000 per year

Amount varies annually;

Christmas Party

goodwill and camaraderie.

Amount varies annually; to celebrate
Christmas

season

and

to

to

foster

foster

goodwill.
From these list, you are seeking opinion on the tax treatment on these
benefits particularly on de minimis benefits and fringe benefits. I believe based on

the facts you have given is that you are asking me to identify if any of these
benefits can be considered as de minimis, or fringe benefits in general, and if
otherwise, how should it be treated for income tax purposes. But before anything
else, I would like to briefly discuss the two, and its nature.
De Minimis Benefits
De minimis benefits are those facilities furnished to employees that are
relatively of small value and are offered or furnished merely as a means of
promoting health, goodwill, contentment or efficiency of employees. 1 De minims
benefits are not expressly provided for by the 1997 Tax Code, but it is regulated by
BIR Revenue Regulations particularly BIR Revenue Regulation No. 5-2011, as further
amended by RR No. 8-2012, and as last amended by RR No. 1-2015. These benefits
are exempt from income tax and withholding tax, even if received by rank-and-file
employees and supervisory or managerial employees. 2(For a list of enumeration,
please see RR No. 8-2012).

Fringe Benefits
Fringe benefits on the other hand means any good, service, or other benefit
furnished or granted in cash or in kind by any employer to an individual employee
except rank-and-file employees.

The same section enumerates some of the fringe

benefits considered by law, which is not exclusive. This provision in the Tax Code is
however further supplemented by RR No. 3-98. The said revenue regulation
provides that a final witholding tax called the Fringe Benefits Tax (FBT) is imposed
on the grossed-up monetary value of fringe benefit furnished, granted or paid by an
employer to an employee who is holding a managerial or supervisory position. The
said tax is imposed on any employer regardless of its nature, except when: (1) the
fringe benefit is required by the nature of or necessary to the trade, business or
profession of the employer; or (2) when the fringe benefit is for the convenience or
advantage of the employer. Effective January 1, 2000 up to present, it has the rate
of 32%.
To compute the payable tax, a final withholding tax of 32% shall be imposed
in the gross- up monetary value of the benefit received. The grossed-up monetary
value of the fringe benefit shall be determined by dividing the monetary value of
the fringe benefit by 68%. 4The grossed-up monetary value of the fringe benefit
represents the whole amount of income realized by the employee which includes
the net amount of money or net monetary value of property which has been
received plus the amount of fringe benefit tax thereon otherwise due from the
employee but paid by the employer for and in behalf of his employee.

1 RR No. 8-2012
2 Id.
3 Sec. 33 (B) 1997 National Internal Revenue Code of the Philippines NIRC.
4 BIR Revenue Regulation No. 3-98.

With respect to ordinary expenses incurred by the employer, they could be

properly deducted from the computation of his gross income. 6

We come now to the tax treatment for the different benefits you give to your
employees.

As to the Rice Allowance:

The rice allowance of Php1, 300 given by your company to your employees
may it be rank-and-file, supervisory or managerial is considered as de minimis
benefit, as the law allows a maximum of Php1, 500 monthly rice allowance.

As

what you are providing for is below the threshold, then it still is considered as de
minimis, and hence exempt from both income and withholding tax.

As to the Uniform Allowance:

The law considers Php5, 000 per annum uniform allowance as de minimis
benefits.8 Any amount which exceeds Php5, 000 is already subject to income tax as
well as withholding tax on compensation income by the employee, that is if it is in
excess of Php82,000 exclusions allowed by law under Sec. 32 (B)(7)(e). Per
computations, as you are giving Php6, 000 per month as uniform allowance to your
employees, it would amount to Php72, 000 per year. Php5, 000 of that is de
minimis, hence exempt from tax which would leave you Php67, 000 more. This Php
67, 000 can be considered as other benefits entitled to Php 82,000 exclusion.
Whatever excess of the Php 82, 000 threshold would be subject to income taxation:
for rank and file a compensation withholding tax, for managerial and supervisory, a
fringe benefit tax rate as provided above.

As to the Laundry Allowance:

The law allows Php300 per month as laundry allowance as de minimis

benefit.9 As the laundry allowance you provide is not in excess of the said threshold,
it is considered as de minimis, hence exempt from income tax.

As to the Meal Allowance:

5 Id.
6 Sec. 34 of the NIRC par. A (1) (iv)
7 Revenue Regulation No. 05-2011 par. (d)
8 Revenue Regulation No. 08-2012 par. (e)
9 Supra note 7, par. (g).

For Meal allowance, it can only be considered as de minimis in two instances,

that is: (1) for overtime work, and (2) for graveyard shift. 10 Outside of these
instances, no meal allowance can be considered as de minimis benefits, and is
therefore subject to compensation income tax. The allowance you are providing is
for non-overtime work, hence it is subject to compensation income tax, but the
employee can claim it as an exclusion under Sec. 32 (B)(7)(e) as other benefits. If
the allowance cannot be covered, the excess would form part of the compensation
income subject to withholding tax of a rank and file employee. If the recipient is a
manager or supervisor, an FBT as discussed above shall be imposed.

As to the Transportation Allowance:

Transportation allowance is not one of the de minimis benefits enumerated
under RR. No. 5-2011, and so cannot be considered as de minimis, as the regulation
expressly provides that all other benefits given by employers which are not
enumerated under the regulation shall not be considered as de minimis benefits,
and hence shall be subject to income tax as well as withholding tax on
compensation income.

11

This is further supplemented by RR No. 03-98 which states

that: transportation allowances which are fixed in amounts and are regularly
received by the employees as part of their monthly compensation income shall not
be treated as taxable fringe benefits but the same shall be considered as taxable
compensation income subject to the tax imposed under Sec. 24 of the Tax Code.

12

Thus, the Php 1, 000.00 transportation allowance per month is a taxable income
subject to the schedular tax system.

As to the Service Awards:

The service awards your company is providing for your employees is a de
minimis benefits, hence exempt from income tax.

Revenue regulation 05-2012

considers as de minimis Employees achievement awards, e.g. for length of service

or safety achievement, provided that it is in the form of a tangible personal property
which is not money or gift certificate, whose monetary value does not exceed
Php10, 000 annually received by the employee under an established written plan
which does not discriminate in favor or highly paid employees.

13

As your awards is

for the purposes of length of service, and comes in a tangible personal property,
which is neither money nor gift certificate as it comes in the form a plaque which
amount is only Php1, 500 and is below the threshold, it is de minimis, and exempt
from income tax.
10 Id, at par. (j).
11 BIR RR No. 05-2011.
12 BIR RR No. 03-98 Sec. 2.33 (B) (2) (d).
13 Supra note 11, par. (h).

As to the Medical Benefits:

The Medical benefits you are providing to your employees is classified into two, that
is: (1) Medicine allowance amounting to Php2, 000 and (2) Medical Check-up
amounting to Php10, 000. per year. These allowances to be considered as de
minimis benefits, should be actual expenses as the regulation provides that these
should be actual medical assistance,14 meaning; the amount must have been
actually spent for medical purposes. Thus, to be exempt from income tax, the said
expenses must be supported by official receipts for the purchase of medicine or
check-ups. However, under the regulations only a maximum amount of Php10, 000
can be considered as de minimis. Any excess would then be subject to
compensation income tax for rank-and- file employees and FBT if supervisor or
managerial employee if it cannot be claimed as other benefits under Sec. 32 (B)
(7)(e) of the Tax Code. Thus, for the medical benefits to be exempt from income tax,
it must be actual and not over Php10, 000 annually. If you could comply with such,
then the medical allowance you are providing would be exempt from income tax.
As to the Company Outing and Christmas Party Expenses:
Neither can the Company Outing nor the Christmas party expenses be claimed as
de minimis benefits or fringe benefits as it is not one of the enumerations under the
law. The de minimis benefits enumeration under RR 5-2011 is exclusive. However,
the same can be claimed as allowable deductions from the companys gross income
under the Tax Code. Under the said code, a reasonable

allowance for

entertainment, amusement and recreation expenses during the taxable year, that
are directly connected to the development, management, and operation of the
trade, business or profession of the taxpayer.

15

For your company to be able to

claim these expenses as deductions from your gross income, you must be able to
substantiate with sufficient evidence, such as official receipts or other adequate
records: (a) the amount of the expense being deducted, and (b) the direct
connection or relation of the expense being deducted to the development,
management, operation and/or conduct of the trade, business or profession of your
company.16
Seeing that the purposes of the company outing and Christmas party is for the
development of your company as it involves fostering the goodwill and camaraderie
among your employees, which is essential for all business organizations to grow,
you can validly claim such expenses as allowable deductions from your taxable
gross income, by properly supporting it with sufficient documents.

Please note that this opinion is solely based on the facts you have disclosed
to me, and is rendered based on applicable tax laws and BIR Revenue Regulations.
14 Supra note 11, par. (f).
15 NIRC, Sec. 34 (A)(1)(a)(iv).
16 NIRC, Sec .34 (A)(1)(b).

Should you have further questions and queries, please do not hesitate to consult me
again. If there be any misapprehension of the facts herein, it is important that you
inform me as soon as possible.

Thank you!

Sincerely,

JOY IVEE O. ONG

Attorney-at- Law