Value of Foregone Interest on Salary Loans Forms Part of Compensation Subject to Income Tax

July 28, 2005 BIR RULING NO. 005-05 RR's 2-98; 8-2000 10-2000 ; 3-98 000-00 Philippine Transport & General Workers Organization Rm. 304, 3rd Floor, Cecileville Building 1203-1211 Quezon Avenue, Quezon City Attention: Mr. Freddie A. Agravio Union President Gentlemen : This refers to your letter dated April 2001 requesting for a ruling on whether or not the foregone interest on an employee's salary loan is subject to fringe benefit tax. It is represented that as part of the negotiations between the management of the Manila Jockey Club and the members of the Manila Jockey Club Employees' Labor Union (MJCELU) the management is insisting on charging interest because of their belief that the salary loan is subject to tax; that the union members are rank and file employees; and that the benefit of salary loan is currently enjoyed by the employees pursuant to the Collective Bargaining Agreement (CBA), viz. : Article X Special Provisions "xxx xxx xxx "Sec. 2. The COMPANY further agrees to extend a salary loan equivalent to an employee's three months salary without interest provided that an employee can borrow only at one time during a given year said three months salary and the same is payable within one (1) year at the rate of 8.33% of the principal. xxx xxx xxx." In reply, please be informed that Section 33 (C) of the Tax Code of 1997 as implemented by Section 2.33 (C) of Revenue Regulations No. 3-98, enumerates the fringe benefits not subject to tax, to wit: IECcAT "Sec. 2.33 SPECIAL TREATMENT OF FRINGE BENEFITS (A) . . . . (B) . . . . (C) Fringe Benefit Not Subject To Fringe Benefits Tax In general, the fringe benefits tax shall not be imposed on the following fringe benefits: (1) Fringe Benefits which are authorized and exempted from income tax under the Code or under any 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 as defined in these Regulations; (5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or profession of the employer; or (6) If the grant of the benefit is for the convenience of the employer." (Underscoring supplied) Thus, the grant to the rank and file employees of a once a year three-months-salary-loan without interest pursuant to the CBA are fringe benefits not subject to fringe benefit tax. (BIR Ruling No. 24-95 dated February 14, 1995) However, the value of the foregone interest on the three months salary loan granted to the rank and file employees pursuant to their CBA shall form part of their compensation subject to income tax and consequently, to the withholding tax prescribed under Section 79, Chapter III, Title II of the Tax Code of 1997. Applying by analogy Section 2.33 (B) (5) (a) of Revenue Regulations No. 3-98, as amended, the value of such foregone interest is 12% per annum less the stated interest in the CBA of 8.33%, if the latter is actually imposed. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. CHaDIT Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue