Chapter 6 Taxation of Fringe Benefits

 Fringe Benefit
Fringe benefit means any good, service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee (except rank and file employees) such as,
but not limited to, the following:

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 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. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents and
10. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.

Managerial employee is one who is vested with the powers or prerogatives to lay down and
execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge,
assign or discipline employees;

Supervisory employees are those who, in the interest of the employer, effectively
recommend such managerial actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of independent judgment;

All employees not falling within any of the above definitions are considered rank and file
employees. (Art 212, Labor Code)

 Fringe Benefit Tax

Fringe benefit tax is a final withholding tax on the grossed-up monetary value of the fringe
benefit granted by the employer to an employee who holds a managerial or supervisory
position (i.e., except rank and file employees). Fringe benefit tax is treated as a final
income tax on the employee which shall be withheld and paid by the employer on a
calendar quarterly basis (BIR Form 1603).
 
 Benefits Not Covered by Fringe Benefit Tax
The following employee benefits are not covered by fringe benefits tax:

1. Fringe benefits which are authorized and exempted from income tax under
the Code or under special law
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 (See discussion on de minimis benefits chapter 3)

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5. Benefits granted to employee as required by the nature of, or necessary to the

trade, business or profession of the employer and
6. Benefits granted for the convenience of the employer.
Ex. Expenditure on housing of engineer within factory premises is not subject to FBT. Exception: If the nature of the employer’s business is
hazardous to health of employee, housing can be located outside the factory without being subject to FBT.
Although the benefit may be exempt from fringe benefits tax, 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.

 Computation of Fringe Benefit Tax

Monetary Fringe
Recipient value of Tax base Rate benefit
fringe benefit tax
In general, for citizen,
resident alien, and non- Divided by = Grossed-up X 35% =
resident alien engaged in 65% monetary
trade or business in the value
Philippines

For non-resident alien not

engaged in trade or business Divided by = Grossed-up X 25% =
in the Philippines 75% monetary
value

Illustration 1
Belle Corporation a domestic employer granted Mr. Flores a Filipino branch manager
employee, in addition to his basic salaries, P5,000 cash per quarter for his personal
membership fees at Gold’s Gym a fitness and athletic club. The fringe benefit tax that Belle
Corporation should withhold and remit to the BIR per quarter is computed as follows:

Monetary value of fringe benefit…………………. P 5,000

Divide by: ……....................………………………. 65%
Grossed-up monetary value……………………… 7,692.31
X Tax rate…………………………………………… 35%
Fringe benefit tax…………………………………. 2,692.31

 Housing Privilege

Case Annual monetary value

1. Employer leases the residential property Rental paid X 50%
2. Employer owns the residential property [ 5% (FMV* or Zonal Value whichever
is higher) ] X 50%
3. Employer purchases the residential property in [ 5% (acquisition cost, exclusive of
installment interest) ] X 50%
4. Employer purchases the residential property Acquisition Cost or
and transfers ownership thereof in the name of Zonal Value whichever is higher
the employee

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5. Employer purchases a residential property and (FMV or Zonal Value whichever is

transfers ownership thereof to his employee higher) - Cost to the employee
for the latter's residential use, at a price less
than the employer's acquisition cost
6. Housing privilege of military officials of the Not a taxable fringe benefit
Armed Forces of the Philippines (AFP)
consisting of officials of the Philippine Army,
Philippine Navy and Philippine Air Force
7. A housing unit which is situated inside or Not a taxable fringe benefit
adjacent (within the maximum of 50 meters
from the perimeter) to the premises of a
business or factory
8. Temporary housing for an employee who Not a taxable fringe benefit
stays in a housing unit for three (3) months or
less
*Fair Market Value in the Real Property Declaration

Illustration 2
Manila Electric Company gave Mr. Uy one of its supervisors the following during a month:

Salaries……………………………………………….… P36,000
Laundry allowance………………………………….… 450
Rice allowance………………………………………… 1,500
Rent of apartment paid by the company..…………… 2,000
The fringe benefit tax per month is computed as follows:

Monetary value of fringe benefit (P2,000 x 50%)….. P 1,000

Divide by: ……....................………………………… 65%
Grossed-up monetary value……………………….. 1,538.46
X Tax rate……………………………………………. 35%
Fringe benefit tax………………………………….. 538.46

 Expense Account
The following expenses by the employee shall be treated as taxable fringe benefits:
1. Expenses paid for by the employee but reimbursed by his employer shall be treated
as taxable benefits.
2. Personal expenses of the employee (like purchases of groceries for the personal
consumption of the employee and his family members) paid for or reimbursed by the
employer to the employee shall be treated as taxable fringe benefits of the
employee whether or not the same are duly receipted for in the name of the
employer.

The following expenses are not treated as fringe benefits:

1. Expenditures are duly receipted for and in the name of the employer and the
expenditures do not partake the nature of a personal expense attributable to the
employee.
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2. Representation and transportation allowances which are fixed in amounts and are
regular 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 regular tax rates.

 Motor Vehicle of Any Kind

Case Monetary value

1. Employer purchases the motor vehicle in the
name of the employee
2. Employer provides the employee with cash for
the purchase of a motor vehicle, the
ownership of which is placed in the name of
the employee
3. Employer purchases the car on installment
basis, the ownership of which is placed in the
name of the employee
4. Employer shoulders a portion of the amount of
the purchase price of a motor vehicle the
ownership of which is placed in the name of
the employee
5. Employer owns and maintains a fleet of motor
vehicles for the use of the business and the
employees
6. Employer leases and maintains a fleet of
motor vehicles for the use of the business and
the employees
7. The use of yacht whether owned and
maintained or leased by the employer
8. The use of aircraft (including helicopters)
owned and maintained by the employer
Acquisition cost
Cash received by the employee
Acquisition cost exclusive of interest,
divided by five (5) years
Amount shouldered by the employer
Acquisition cost of all the motor vehicles not
normally used for sales, freight, delivery
service and other non-personal used
divided by 5 years and multiplied by 50%
Amount of rental payments for motor
vehicles not normally used for sales, freight,
delivery, service and other non-personal
use multiplied by 50%
Depreciation of a yacht at an estimated
useful life of 20 years
Not a taxable fringe benefit

Illustration 3
Monde Nissin Corporation purchased a brand new car for use by its marketing manager.
The car costing P765,000 was registered in the name of the manager. The company paid
40% of the value of the car, while the balance was paid by the manager.

The fringe benefit tax is computed as follows:

Monetary value of fringe benefit (P765,000 x 40%)…. P 306,000

Divide by: ……....................…………………………… 65%
Grossed-up monetary value…………………………. 470,769.23
X Tax rate………………………………………………. 35%
Fringe benefit tax…………………………………….. 164,769.23

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Chapter 6 Taxation of Fringe Benefits

 Household Expenses
The following expenses of the employee which are borne by the employer for household
personnel shall be treated as taxable fringe benefits:
1. Salaries of household help, personal driver of the employee.
2. Other similar personal expenses (like payment for homeowners’ association dues,
garbage dues, etc.).

 Interest on Loan at Less than Market Rate

If the employer lends money to his employee free of interest or at a rate lower than twelve
per cent (12%), such interest foregone by the employer or the difference of the interest
assumed by the employee and the rate of twelve per cent (12%) shall be treated as a
taxable fringe benefit.

The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by
a subsequent regulation. This regulation shall apply to installment payments or loans with
interest rate lower than twelve per cent (12%) starting January 1, 1998.

Illustration 4
Stradcom Corporation approved a loan of P150,000 to its manager at 8% interest rate. The
loan is payable in 6 months.

The fringe benefit tax is computed as follows:

Interest at benchmark rate (P150,000 x 12% x 6/12)……. P 9,000

Less: Interest at special rate (P150,000 x 8% x 6/12)…… 6,000
Monetary value of fringe benefit………………………… 3,000
Divide by: ……....................……………………………… 65%
Grossed-up monetary value…………………………….. 4,615.38
X Tax rate…………………………………………………. 35%
Fringe benefit tax……………………………………….. 1,615.38

 Membership Fees, Dues, etc.

Membership fees, dues, and other expenses borne by the employer for his employee, in
social and athletic clubs or other similar organizations shall be treated as taxable fringe
benefits of the employee in full.

 Expenses for Foreign Travel

The following expenses are not taxable fringe benefits if properly substantiated by proof:

1. Reasonable business expenses which are paid for by the employer for the foreign
travel of his employee for the purpose of attending business meetings or
conventions.
2. Inland travel expenses (such as expenses for food, beverages and local
transportation) except lodging cost in a hotel (or similar establishments) amounting
to an average of US$300 or less per day.
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3. The cost of economy and business class airplane ticket. However, 30% of the cost
of first class airplane ticket shall be subject to a fringe benefit tax.

Travelling expenses which are paid by the employer for the travel of the family members of
the employee shall be treated as taxable fringe benefits of the employee.

 Holiday and Vacation Expenses

Holiday and vacation expenses of the employee borne by his employer shall be treated as
taxable fringe benefits.

 Educational Assistance to the Employee or his Dependents

The following are treated as taxable fringe benefits:

1. The cost of the educational assistance to the employee which are borne by the
employer shall, in general, be treated as taxable fringe benefit.

However, a scholarship grant to the employee by the employer shall not be treated
as taxable fringe benefit if the education or study involved is directly connected with
the employer's trade, business or profession, and there is a written contract between
them that the employee is under obligation to remain in the employ of the employer
for period of time that they have mutually agreed upon. In this case, the expenditure
shall be treated as incurred for the convenience and furtherance of the employer's
trade or business.

2. The cost of educational assistance extended by an employer to the dependents of

an employee shall be treated as taxable fringe benefits of the employee unless the
assistance was provided through a competitive scheme under the scholarship
program of the company.

 Life or Health Insurance and Other Non-life Insurance Premiums or Similar Amounts
in Excess of What the Law Allows
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 benefit, except the following:

1. Contributions of the employer for the benefit of the employee, pursuant to the
provisions of existing law, such as under the Social Security System (SSS),
Government Service Insurance System (GSIS), or similar contributions arising from
the provisions of any other existing law; and
2. The cost of premiums borne by the employer for the group insurance of his
employees.

 Accounting for the Fringe Benefit and the Fringe Benefit Tax

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Illustration 5
RFM Corporation paid for the monthly rental of a residential house of its branch manger
Mr. Lopez amounting to P51,000.

The fringe benefit tax per month is computed as follows:

Monetary value of fringe benefit (P51000 x 50%)….. P 25,500

Divide by: ……....................………………………… 65%
Grossed-up monetary value……………………….. 39,230.77
X Tax rate……………………………………………. 35%
Fringe benefit tax………………………………….. 13,730.77

Journal entries:
Date Account titles and explanation Debit Credit

Fringe Benefit Expense 51,000.00

Fringe Benefit Tax Expense 13,730.77
Cash 51,000.00
Fringe Benefit Tax Payable 13,730.77
To record fringe benefit expense and accrued fringe benefit tax

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