ISSUANCES/MEMORANDUMS NOTES 2

REVENU FRINGE BENEFITS A final withholding tax called the Fringe Benefits Tax (FBT) is imposed on the
E TAX grossed-up monetary value
REGULA of fringe benefit furnished, granted or paid by an employer to an employee who
TIONS is holding a managerial or supervisory position.
NO. 3-98 (personal expenses)

The FBT will be imposed regardless of whether such employer is an individual,

professional partnership or a corporation, or that the corporation is taxable or
not, or the employer is the Philippine government or one of its instrumentalities.

COVERAGE:
Only fringe benefits given or furnished to managerial or supervisory employees a
re subject to FBT.
-refers to those who are vested with powers or prerogatives to lay down and
execute management policies

Gen Tax rate under TRAIN: 35%

Exception: those given preferential tax rate:

Taxpayer Tax rate

Alien individual who is not 25%
engaged in trade or
business in the Philippines Grossed up: 75%
-Alien employed by 15%
. regional or area headquarters
. representative office Grossed up: 85%
. regional operating headquarters
. foreign service
contractor/subcontractor
. engaged in petroleum
Operation

-Filipino individual employees who

are employed
and occupying the same position
as those
occupied or held by the alien
employees in the
entities listed above
Fringe benefits received by 15%
employees in special economic
zones Grossed up: 85%
the following 1. Fringe benefits which are authorized and exempted from income tax under the
benefits are NOT Code or under special
COVERED by the law.
FBT.
Separation benefits which are given to employees who are
INVOLUNTARILY separated from work are NOT subject to FBT.

2. Contributions of the employer for the benefit of the employee to retirement,

insurance and hospitalization benefit plans;
3. Benefits given to the rank and file, whether granted under a collective
bargaining agreement or not;
4. De minimis benefits
5. Benefits granted to employee as required by the nature of, or necessary to the
trade, business or
profession of the employer
6. Benefits granted for the convenience of the employer

NOTE: Although the benefit may be exempt from FBT, it may, however, still form
part of the employee’s gross
compensation income which is subject to income tax, which is required to be
covered by the withholding tax on wages.
De minimis� refer to facilities or privileges furnished or offered by an employer to his
benefits employees that are of relatively small value and are offered or furnished by the
employer merely as a means of promoting the health, goodwill, contentment or
efficiency of his employees,
the following fringe  Housing privilege of military officials of the AFP located inside or near
benefits are also not the military camps.
subject to FBT  A housing unit which is situated inside or at most 50 meters from the
because t perimeter of the business premises.
hey are necessary to  Temporary housing for an employee for 3 months or less.
the  Expenses of the employee which are reimbursed by the employer if
business of the they are supported by receipts in the name of the employer and do not
employer, or granted partake the nature of a personal expense of the employee.
for the convenience  Motor vehicles used for sales, freight, delivery service and other non-
of the employer: personal uses
 The use of aircraft (including helicopters) owned and maintained by the
employer
 Business expenses which are paid for by the employer for the foreign
travel of his employees in
 connection with business meetings or conventions. The expenses
should be supported by documents proving the actual occurrences of
the meetings/conventions, or official communications from business
associates
Valuation of Benefits 1. If benefit is granted in money or is paid directly paid for by employer, then the
value is the amount
granted or paid for.

2. If the employer gave the employee a property and the title to the property is
placed under his name, the fair market value of the property will be considered
as the monetary value of the fringe benefit.

3. However, if the employee is only allowed to use the property, and the title to
the property remains with the employer, the monetary value of the benefit is
equal to the depreciation value of the property.
guidelines are set for 2. housing
the valuation and Situation Valuation of the benefit
determination of the If employer leases a amount of rental paid by the
monetary value of residential property for the employer, as evidenced by the
specific types of use of his employee lease contract.
benefits. The monetary value shall be
equal to fifty percent (50%) of
1. HOUSING the value of the benefit.

If the property provided for the annual value of the

the use of the employee
belongs to his employer
benefit shall be equal to 5% of
the market value of the land and
improvement as
declared in the Real
Property Tax Declaration Form
or zonal value thereof as
determined by the BIR,
whichever is higher.

The monetary value of the fringe

If the employer purchases
property on installment basis
and allows it to be used by its
employee,
benefit shall be fifty percent
(50%) of the value of the benefit.
annual value of the benefit shall
be five percent (5%) of the
acquisition cost o
f the property, exclusive of
interest. The monetary value of
fringe benefit shall be fifty
percent (50%) of t
he value of the benefit.

If the employer purchases a its monetary value is equal to

residential property and the full amount of the acquisition
transfers ownership thereof cost
in the name of the or zonal value as
employee determined by the BIR,
whichever is higher. In case the
property is sold to the employee
at a price less
than the acquisition cost, the
difference between the fair
market value or zonal
value, whichever is
higher, and the cost of the
property to the employee will be
the basis for FBT.
2. Motor Vehicle Situation Valuation amount
If the employer purchases the the acquisition price will be the
motor vehicle in the name of value of the benefit.
the employee
The monetary value of the fringe
benefit shall be the entire value
of the benefit, regardless of

If the employer pays for the
car on installment basis and
ownership of the car is placed
in the name of the employee
If instead of buying the car
directly, the employer gave
the employee money to
purchase the car, whether the
full amount or just a portion
of the price
If the employer owns and
maintains, or leases a fleet of
motor vehicles for the
use of the business and
employees,
The use by the employee of
the yacht owned or being
leased by his employer
whether the motor vehicle is
used by the employee partly for
his personal purpose and
partly for the benefit of the
employer.
the value of the benefit shall be
the acquisition cost exclusive o
f interest, divided by five
(5) years. The monetary value
shall be the entire value of the
benefit.
the cash received by the
employee will be used as basis
for FBT.
However, the subsidy given by
the employer is not subject to
FBT if it was declared as part
of the employee’s taxable
compensation income subject to
withholding tax.
the value of the benefit is equal
to the acquisition cost of all
motor vehicles not normally
used for sales, freight, delivery
service and other non-personal
use divided by five (5) years.
The monetary value shall be fifty
percent (50%) of the value of
the benefit.
is subject to FBT and the value
of the benefit is measures based
on the depreciation of the yacht
at an estimated useful life of 20
years.

3. Foreign business If employee is given a first class airplane ticket the monetary value of
travel the benefit is equal to 30% of the
cost of the first class airplane ticket.

The full amount of the travelling expenses of the family members of

the employee which are paid for by the employer is subject to FBT.
4. Expense account In general, expenses incurred by the employee which are paid by his
employer, and expenses paid for by the employee but reimbursed by
his employer shall be treated as taxable benefits

However, expenditures which are not in the nature of a personal

expense of the employee are not subject to FBT provided that
these are supported by receipts in the name of the employer.

Personal expenses of the employee paid for or reimbursed by the

employer are subject to FBT, even if the same are duly receipted in
the name of the employer.

REPRESENTATIONS AND TRANSPORTATION (gi ask ni ni sir)

allowances which are fixed in amounts and regularly received by the
employee as part of their monthly compensation income will be
considered as taxable compensation income.
5. Loans Extended by If the employer lends money to his employee free of interest, the
Employers interest waived which will be
computed at the rate of 12% is considered as a benefit to the
employee.

If the loan was given with interest but at a rate lower than 12%, the
difference of the interest assumed by the employee and the rate of
12% shall be treated as taxable fringe benefit.

This rule will apply to installment payments or loans with interest rate
lower than 12% starting Jan 1,1998.

6. Educational The cost of the educational assistance to the employee which are
support borne by the employer shall be
treated as taxable fringe benefit.
 However, if the employer granted a scholarship to the employee for an
education or study which is
directly connected with the employer’s business, it is not subject to
FBT if there
is a written contract between them that the employee is under
obligation to remain in the employ of the employer for a period of time
that they have mutually agreed upon.

Requisites to be not taxable under FBT:

1. employer granted a scholarship program for employee’s
education
2. directly connected with employer’s business
3. there is a WRITTEN contract between them that the
employee is under obligation to remail in the employ of the
employer for a period of time

EDUC Assistance to dependents:

The cost of educational assistance extended to the employee’s
dependents is not taxable if such
assistance was provided through a competitive scheme under the
scholarship program of the company.
7. Insurance The cost of life or health insurance and other non-life insurance
premiums borne by the employer for his
employee shall be treated as taxable fringe benefits.

However, the cost of life or health insurance borne by the employer if

made under the SSS or GSIS or
similar contributions arising from the provisions of any other existing
law is not taxable. Likewise, the
cost of premiums borne by the employer for the group insurance of his
employees is not subject to FBT.
Payment of FBT The FBT is treated as a final income tax on the employee which is
required to be withheld and paid by the employer on a calendar
quarterly basis. The FBT return is required to be filed and the FBT
withheld paid within 25 days from the close of the quarter when
withholding was made.
RR No.10-2002 AUTHORIZES THE Coverage:
IMPOSITION OF A
CEILING ON 1. individuals engaged in business, including taxable estates
ENTERTAINMENT, and trusts
AMUSEMENT AND 2. individuals engaged in the practice of profession
RECREATIONAL 3. domestic corporations
EXPENSES 4. resident foreign corporations
(EAR) 5. general professional partnerships, including its members

EXCLUSIONS: NOT 1. expenses which are treated as compensation or fringe

CONSIDERED AS benefits for services rendered under an employer-
EAR employee relationship, pursuant to RR- 2-98; 3-98 and
amendments thereto;
2. Expenses for charitable or fund-raising events;
3. Expenses for bonafide business meeting of stockholders,
partners, directors;
4. Expenses for attending or sponsoring employee to a
business league or professional organization meeting
5. Expenses for events organized for promotion, marketing
and advertising including concerts, conferences,
seminars, workshops, and similar events
6. Other expenses of similar nature

Notwithstanding, such items of exclusions may, nonetheless

qualify as items of deduction under Sec 34 of the Tax code of
1997 subject to conditions of deductibility.

Requisites of 1. It must be paid or incurred during the taxable year

deductibility of EAR 2. It must be
subject to the ceiling - Directly connected to the development,
provided management and operation of the trade, business or
profession of the taxpayer; or
- Directly related to or in furtherance of the conduct of
his or its trade, business or exercise of profession\
3. It must not be contrary to law, morals, good customs, public policy
or public order
4. It must not have been paid, directly or indirectly, to an official or
employee of the NGO or any local government unit of any
GOCC, or of GPP or a similar entity, if it constitutes bribe,
kickback or other similar payment
 5. It must be duly substantiated by adequate proof. The official
receipts or invoices, or bills or statements of accounts should be
in the name of the taxpayer claiming the deduction; and
6. The appropriate amount of withholding tax, if applicable, should
have been withheld therefrom and paid to BIR.
CEILING There shall be allowed a deduction from gross income for EAR in
an amount equivalent to the actual entertainment, amusement and
recreation (EAR) expenses paid or incurred with the taxable year by
the taxpayer,

BUT

in no case shall such deduction exceed 1/2 of 1% or .50% of net sales

(i.e., gross sales less sales returns/allowances and sales discounts)
for taxpayers engaged in sale of goods or properties; or 1% of net
revenue (i. e., gross revenue less discounts) for taxpayers engaged in
sale of services, including exercise of profession and use or lease of
properties.

Note: However, if after verification a taxpayer is found to have shifted

the amount of the entertainment of the entertainment, amusement and
recreation expense to any other expense in order to avoid being
subjected to the ceiling herein prescribed, the amount shifted shall be
disallowed in its totality.

Appointment Formula:

Net sales/net revenue x actual expense

Total Net sales and net revenue

Illustration:
ERA Corp is engaged in the sale of goods and services with he net
sales / net revenue of 200,000 and 100,000 respectively. The actual
EAR expense for the taxable quarter totaled to 3,000.

Net EAR expense Max Allowable

sales/Net base on Percentage Amtclaimed
revenue apportionment Ceiling of as EAR
Formula EAR Expense
expense (whichever
is lower of
col 2 and 3)

(1) (2) (3) (4)

Sale of 200k 2k 1k 1k
Goods
Sale of 100k 1k 1k 1k
services
total

Apportionment Formula:
Sales of Goods (P200,000 / P300,000 x P3,000) = P2,000
Sale of Services (P100,000 / P300,000 x P3,000) = P1,000

Maximum Percentage Ceilings:

Sales of Goods (P200,000 x .50%) = P1,000
Sales of Services (P100,000 x 1%) = P1,000

In this case, ERA Corp can only claim a total of 2k as EAR expense,
amusement and recreation expense.(mao ra ni ma ask niya as
deductions).

Note: Notwithstanding the ceiling imposed, the claimed expense shall

be subject to verification and audit. if after verification a taxpayer is
found to have shifted the amount of the entertainment of the
entertainment, amusement and recreation expense to any other
expense in order to avoid being subjected to the ceiling herein
prescribed, the amount shifted shall be disallowed in its totality.
RR No. 13-2000 Implements the Notes:
provisions of Section you cannot just deduct from your gross taxable income all the
34(B) of the Tax expenses you incur within the taxable year. The following are tips and
Code of 1997 relative things you should consider when claiming expenses as deductions
 to the requirements against your taxable income.
for the 1. Personal, living or family expenses. As a general rule, expenses
DEDUCTABILITY OF can only be claimed if they are paid or incurred as part of the
INTEREST profession, trade or business operations of the taxpayer. Hence,
EXPENSE FROM personal expenses, living or family expenses are not deductible.
THE GROSS
INCOME OF 2. Substantiation Requirements. No expenses shall be allowed
-A CORPORATION unless the taxpayer shall substantiate with sufficient evidence, such as
OR official receipts or other adequate records:
-AN INDIVIDUAL (a) the amount of the expense being deducted, and
ENGAGED IN
TRADE, BUSINESS (b) the direct connection or relation of the expense being
OR deducted to the development, management, operation and/or
- IN THE PRACTICE conduct of the trade, business or profession of the taxpayer.
OF PROFESSION
4. Bribes, Kickbacks and Other Similar Payments. No deduction
from gross income shall be allowed for any payment made to an
official or employee of the national, local or foreign government or
similar entities if the payment constitutes a bribe or kickback. In other
words, expenses done illegally are not allowed as deductions to your
taxable income.
5. Losses and interest incurred/paid to related parties
6. Interest expense (tax arbitrage). There are exception and
limitations on the amount of interest expense that can be deducted
from income.

The taxpayer’s allowable deduction for interest expense shall be

reduced (meaning minusan)by an amount equal to the 33% of the
interest income subjected to final tax.

Moreover, all interest incurred or paid to related parties cannot be

claimed as deductions to income

Illustration:
Interest expense during the period – P20,000,
Interest income, net of 20% final tax – P8,000.
(bali ang 8k is 20% lang na sa interest income with final tax) so you
have to get the 100% of it to determine your base in calculating the
allowable interest expense deduction.)

Formula:
1. 8k ÷ 80% (why? Because 20% raman ang given sa fact) =
P3300
2. (Interest expense) 20k
-(33% of the interest income subjected to final tax) P3300
= (deductible interest income expense) P16700

Under this, deductible interest expense reduction will be reduced by

33% of the amount of gross income or P3,300 (33% multiplied by the
quotient of P8,000 divided by 80% (100% less 20% FWT). Deductible
interest expense would only be P16,700 (P20,000 less P3,300).

WHEN MAN NI MO APPLY?

7. Bad debts expense.

8. Taxes
9. Entertainment, amusement and recreation expenses.
RR No. 14-2012 Prescribes the proper
tax treatment of interest
income earnings on
financial instruments
and other related
transactions