Imposition of Final Tax on Fringe Benefit or Withholding Tax on Compensation Depends on Employees' Classification

November 14, 2002 BIR RULING NO. 041-02 EMPLOYMENT BENEFITS LDC: SEC. 33 (B); 33 (C) REV. REGS. 3-98, 8-2000 027-2001 Samahang Manggagawa ng University of Santo Tomas Main Building, UST Espaa, Manila Attention: Mr. Edward O. Santos President Gentlemen : This refers to your letter dated September 19, 2000 requesting for a ruling on the following: 1. Whether the cost of educational benefits to employee and dependents of the employees and the hospitalization benefit given to employees is a fringe benefit tax or a withholding tax on compensation? 2. Who will determine whether or not your educational fringe benefit shall form part of the employee's gross compensation income?;and 3. What will qualify a rank and file to this taxation scheme? In reply, please be informed that Section 2.78.1 of Revenue Regulations No. 2-98, as amended by RR 8-2000 and RR 10-2000 provides, viz. : "Sec. 2.78.1. Withholding of Income Tax on Compensation Income . xxx xxx xxx (3) Facilities and privileges of relatively small value. Ordinarily, facilities and privileges (such as entertainment, medical services, or so-called "courtesy discounts" on purchases),otherwise known as " de minimis benefits" furnished or offered by an employer to his employees, are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities are offered or furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his employees. The following shall be considered as "De Minimis" benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees: (b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month." Therefore, the medical cash allowance to the extent of P750.00 per employee per semester or P125 per month given as a de minimis benefit is not subject to income tax and consequently, to withholding tax of both managerial and rank and file employees. RR 8-2000 provides that if the employer pays more than the ceiling prescribed, the excess shall be taxable to the employee, if such excess is beyond the P30,000.00 ceiling provided for 13th month pay and other benefits, otherwise, it is not. On educational benefits, Section 2.33(B) of Revenue Regulations No. 3-98 defined fringe benefits as follows: "Sec. 2.33. Special Treatment of Fringe Benefit xxx xxx xxx (B) Definition of Fringe Benefit In general, except as otherwise provided under these regulations, for purposes of this Section, 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 as defined in these regulations ) such as, but not limited to the following: xxx xxx xxx (9) Educational assistance to the employee or his dependents" (emphasis supplied) Pursuant to the said Revenue Regulations, the cost of the educational assistance to the employee which is 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 a 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. Furthermore, 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. To determine whether or not the educational fringe benefit shall form part of the employees' gross compensation income, it is necessary to determine whether or not said employee is a managerial or supervisory employee or a rank and file employee. Under Sec. 2.33(A) of Revenue Regulations No. 3-98, the term "rank and file employees" means all employees who are holding neither managerial nor supervisory position. The Labor Code of the Philippines, as amended, defines "Managerial employee" as one who is vested with powers or prerogatives to lay down and execute management policies and/or 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 judgement. Section 2.78.1(A) of Revenue Regulations No. 2-98, as amended, includes fringe benefits as part of compensation income, "except those which are subject to fringe benefit tax under Section 33 of the Code," which means that if the recipient is a managerial or supervisory employee, then the provisions of Section 33 shall apply with respect to the imposition of a final tax on fringe benefits. But if the recipient is a rank and file employee, the fringe benefit will still be subject to withholding tax on compensation and consequently, to income tax, but not to final tax on fringe benefits. The benefits apply to both managerial/supervisory and rank and file employee but will be subject to different tax treatment (e.g. final FBT or income tax). Nonetheless, both types of employees shall be subject to the P30,000.00 threshold test pursuant to Section 32(B)(7)(e) of the Tax Code of 1997. Therefore, the imposition of either a final tax on fringe benefit or withholding tax on compensation will depend on the employees' classification. Educational benefits received by managerial/supervisory employees shall be subject to the final tax on fringe benefits, while educational benefits of rank and file employees shall be subject to withholding tax on compensation, which shall be creditable to the taxpayers' income tax that shall become due and payable at the end of their taxable year. Please be guided accordingly. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group