Grupos abelianos finitos

Income arising from an employer-employee (ER-EE) relationship. It means all remuneration for services performed by an EE for his ER, including the cash value of all remuneration paid in any medium other than cash [Sec. 78(A)],unless specifically excluded by the Tax Code.

It includes, but is not limited to, salaries and wages, honoraria and emoluments, allowances (e.g., transportation, representation, entertainment), commissions, fees (including directors’ fees, if the director is, at the same time, an employee of the payor-corporation), tips, taxable bonuses, fringe benefits except those subject to Fringe Benefit Tax (FBT) under Section 33 of the Tax Code, and taxable pensions and retirement pay (e.g. retirement benefits earned without meeting the conditions for exemption thereof – e.g. retirement of less than 50 years of age.

General Rule: every form of compensation income is taxable regardless of how it is earned, by whom it is paid, the label by which it is designated, the basis upon which it is determined, or the form in which it is received. The basis upon which remuneration is paid is immaterial. It may be paid on the basis of piece of

work, percentage of profits, hourly, weekly, monthly, or annually.

Exception: The term wages does NOT include remuneration paid:

(a) For agricultural labor paid entirely in products of the farm where the labor is performed, or

(b) For domestic service in a private home, or

(c) For casual labor not in the course of the employer's trade or business, or

(d) For services by a citizen or resident of the Philippines for a foreign government or an int’l organization. [Sec. 78(A)]

Note: The term “agricultural labor” does not include services performed in connection with forestry, lumbering or landscaping.

The term “remuneration for domestic services” refers to remuneration paid for services of a household nature performed by an employee in or about the private home of the person whom he is employed.The services of household personnel furnished to an employee (except rank and file employees) by an employer shall be subject to the fringe benefits tax pursuant to Sec. 33 of the Tax Code. A private home is the fixed place of abode of an individual or family. If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise, it ceases to be a private home and remuneration paid for services performed therein is not exempted. Services of the household nature in or about a private home include services rendered by cooks, maids, butlers, valets, laundresses, gardeners, chauffeurs of automobiles for family use. The remuneration paid for the services which are performed in or about rooming or lodging houses, boarding houses, clubs, hotels, hospitals or commercial officer or establishments is considered as compensation. Remuneration paid for services performed as a private secretary, even if they are performed in the employer’s home is considered as compensation.

The term “casual labor” includes labor which is occasional, incidental or regular. “Not in the course of the employer’s trade or business” includes labor that does not promote or advance the trade or business of the employer.

The term “remuneration paid for services performed as an employee of a foreign government or an international organization” includes not only remuneration paid for services performed by ambassadors, ministers and other diplomatic officers and employees but also remuneration paid for

services performed as consular or other officer or employee of a foreign government or as a non- diplomatic representative of such government. Compensation income including overtime pay, holiday pay, night shift differential pay, and hazard pay, earned by MINIMUM WAGE EARNERS (MWE) who has no other returnable income are NOT taxable and not subject to withholding tax on wages [RA 9504]Provided, however, that an employee shall not enjoy the privilege of being a MWE and, therefore, his/her entire earning are not exempt from income tax and, consequently, from withholding tax if he receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000, taxable allowance, and other taxable income other than the statutory minimum wage (SMW), holiday pay, overtime pay, hazard pay and night shift differential pay.

MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their income earned during the taxable year.

This rule, notwithstanding, the SMW, Holiday Pay, overtime pay, night differential pay and hazard pay shall still exempt from withholding tax.

Forms of compensation and how they are assessed (a) Cash – If compensation is paid in cash, the full

amount received is the measure of the income subject to tax.

(b) Medium other than money – If services are paid for in a medium other than money (e.g. shares of stock, bonds, and other forms of property), the fair market value (FMV) of the thing taken in payment is the amount to be included as compensation subject to tax. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the FMV of the remuneration received.

(c) Living quarters or meals - General Rule: The value to the employee of the living quarters and meals given by the employer shall be added to his compensation subject to withholding. Exception: If living quarters/meals are furnished to an employee for the convenience of the employer the value needed NOT be included as part of compensation income.

(d) Facilities and privileges of a relatively small value - Facilities and privileges (such an 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 generally, are NOT considered as compensation subject to income tax and therefore 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. (See RR 5-2011, as amended by RR 8-2012 for ceilings of de minimis benefits.) The amount of “de minimis” benefits confirming to the ceiling prescribed shall not be considered in determining the P30,000 ceiling of “other benefits” excluded from gross income under Section 32 (b)(7)(e) of the Tax Code, Provided, that the excess of the ‘de minimis’ benefits over their respective ceilings prescribed by these regulations shall be considered as part of “other benefits” and the employee receiving it will be subject to tax only on the excess over the P30,000 ceiling, Provided, further, that MWEs receiving, ‘other benefits’ exceeding the P30,000 limit shall be taxable on the excess benefits, as well as on his salaries, wages, and allowances, just like an employee receiving compensation income beyond the SMW. Any amount given by the employer as benefits to its employees, whether classified as “de minimis” benefits of fringe benefits, shall constitute as deductible expense upon such employer. Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the BIR.

Classification of Gross Compensation Income Basic salary or wage

(a) Salary – earnings received periodically for a regular work other than manual labor. Example: monthly salary of an employee

(b) Wages – earnings received usually according to specified intervals of work, as by the hour, day, or week. Example: a carpenter’s wage.

Honoraria – payments given in recognition for services performed for which the established practice discourages charging a fixed fee. Example: honorarium of a guest lecturer

Fixed or variable allowances i.e. Transportation, Representation, and other allowances such as Cost of Living Allowances (COLA)

General Rule: Fixed or variable transportation, representation or other allowances that are received by a public officer or employee of a private entity, in addition to the regular compensation fixed for his

position or office is a COMPENSATION subject to withholding tax. (Rev. Regs. 2-98)

Exception: Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are NOT COMPENSATION subject to withholding tax, provided the following conditions are satisfied:

(a) It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the employer’s trade, business or profession; and (b) The employee is required to account or liquidate

for the foregoing expenses.

(c) The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. The employee is required to account/liquidate for the expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Section 34 of the Tax Code.

Note: Reasonable amounts of

reimbursements/advances for traveling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty. – NOT subject to withholding tax on wages and substantiation requirements.

Commission – usually a percentage of total sales or on certain quota of sales volume attained as part of incentive such as sales commission.

Fees – received by an employee for the services rendered to the employer including a director’s fee of the company, fees paid to the public officials such as clerks of court or sheriffs for services rendered in the performance of their official duty over and above their regular salaries.

Tips and Gratuities – those paid directly to the employee (usually by a customer of the employer) which are not accounted for by the employee to the employer. (taxable income but not subject to withholding tax) [RR NO. 2-98, Sec. 2.78.1]

Hazard or Emergency Pay – additional payment received due to the workers’ exposure to danger or harm while working. It is normally added to the basic salary together with the overtime pay and night differential to arrive at gross salary.

Retirement Pay – a lump sum payment received by an employee who has served a company for a considerable period of time and has decided to withdraw from work into privacy. [RR 6-82, Sec. 2b] In general, retirement pay is taxable except in the following instances:

(1) SSS or GSIS retirement pays.

(2) Retirement pay (R.A. 7641) due to old age provided the following requirements are met: (a) The retirement program is approved by the

BIR Commissioner;

(b) It must be a reasonable benefit plan. (Its implementation must be fair and equitable for the benefit of all employees)

(c) The retiree should have been employed for 10 years in the said company;

(d) The retiree should have been 50 years old or above at the time of retirement; and

(e) It should have been availed of for the first time.

Separation pay – taxable if VOLUNTARILY availed of. It shall not be taxable if involuntary i.e. death, sickness, disability, reorganization/merger of company and company at the brink of bankruptcy or for any cause beyond the control of the said official or employee.

“For any cause beyond the control.” –

(a) Connotes involuntariness on the part of the official or employee

(b) The separation from the service of the official or employee must not be asked for or initiated by him.

(c) The separation was not of his own making. (d) Such fact shall be duly established by the

employer by competent evidence which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made.

(e) Amounts received by reason of involuntary separation remain EXEMPT from income tax even if the official or the employee, at the time of separation, had rendered less than ten (10) years of service and/or is below fifty (50) years of age. (f) Any payment made by an employer to an

employer to an employee on account of dismissal, constitutes compensation regardless of whether theemployer is legally bound by contract, statute, or otherwise, to make such payment.

Pension – a stated allowance paid regularly to a person on his retirement or to his dependents on his death, in consideration of past services, meritorious

work, age, loss, or injury. Pension is taxable unless the law states otherwise, or unless the BIR approves the pension plan of a private company.

Vacation and sick leave- rules in determining whether money received for vacation and sick leave is taxable or not:

(a) If paid or availed of as salary of an employee who is on vacation or on sick leave notwithstanding his absence from work, it constitutes TAXABLE compensation income. [RR 6-82, 2d]

(b) Monetized value of unutilized vacation leave credits of ten (10) days or less which were paid to private employees during the year and the monetized value of leave credits paid to government officials and employees are not subject to income tax and to the withholding tax. [RR no. 2-98, Sec 2.78.1(A)(7)] Note: monetization of sick leave credits of private employees even if not exceeding 10 days is not exempt from income tax and withholding tax on wages.

(c) Terminal leave or money value of accumulated vacation and sick leave benefits received by heir upon death of employee is not taxable.

Thirteenth month pay and other benefits - Not taxable if the total amount received is P30,000 or less. Any amount exceeding P30,000 is taxable. [Sec. 32 (7)e, NIRC]

Overtime Pay – premium payment received for working beyond regular hours of work which is included in the computation of gross salary of employee. It constitutes compensation.

Profit Sharing – the proportionate share in the profits of the business received by the employee in addition to his wages.

Awards for special services – awards for past services or suggestions to employers resulting in the prevention of theft or robbery, etc. are also compensations.

Beneficial Payments – such as where employer pays the income tax owed by an employee are additional compensation income.

Other forms of compensation – other forms received due to services rendered are compensation paid in kind, e.g., insurance premium paid by the employer for insurance coverage where the heirs of the employee are the beneficiaries is the employee’s income.

Note: Any amount which is required by law to be deducted by the employer from the compensation of an employee including the withheld tax is considered as part of the employee’s compensation and is deemed to be paid to the employee as compensation at the time the deduction is made. (This also applies to deductions not required by law.)

Withholding Tax on Compensation Income

The income recipient (i.e., EE) is the person liable to pay the tax on income, yet to improve the collection of compensation income of EEs, the State requires the ER to withhold the tax upon payment of the compensation income.

Fringe Benefits

Special treatment of fringe benefits

Persons liable: The Employer (as a withholding agent), whether individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities, is liable to remit the fringe benefit tax to the BIR once fringe benefit is given to a managerial or supervisory employee.

The fringe benefit tax (FBT) is a final tax on the employee’s income to be withheld by the employer. The withholding and remittance of FBT shall be made on a calendar quarterly basis.

Managerial employee: 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: 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. Basic Rule: Convenience of the Employer Rule

(a) If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requirement of the employee’s work or position, the value of that privilege need not be included as compensation (Henderson v. Collector)

(b) Fringe benefit tax is imposed on fringe benefits received by supervisory and managerial employees. The fringe benefits of rank and file employees are treated as part of compensation

income subject to income tax and withholding tax on compensation.

Definition

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 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 and 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 on excess of what the law allows.[Sec. 33(B)]

Tax Rate and Tax Base

(a) Tax base is based on the grossed-up monetary value (GMV) of fringe benefits.

(b) Rate is generally 32%

(c) GMV represents: (a) the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property that has been received; and (b) the amount of fringe benefit tax due from the employee which has been withheld and paid by the employer for and in behalf of his employee.. How GMV is determined

GMV is determined by dividing the actual monetary value of the fringe benefit by 68% [100% - tax rate of 32%]. For example, the actual monetary value of the fringe benefit is P1,000. The GMV is equal to P1,470.59 [P1,000 / 0.68]. The fringe benefit tax, therefore, is P470.59 [P1470.59 x 32%].

Special Cases:

(a) For fringe benefits received by non-resident alien not engaged in trade of business in the Philippines (NRANETB), the tax rate is 25% of the GMV. The GMV is determined by dividing the actual monetary value of the fringe benefit by 75% [100% - 25%].

(b) For fringe benefits received by alien individuals and Filipino citizens employed by regional or area headquarters, regional operating headquarters, offshore banking units (OBUs), or foreign service contractor or by a foreign subcontractor engaged in petroleum operations in the Philippines, or by any of their Filipino individual employees who are employed and occupying the same positions as those occupied by the alien employees, the tax rate is 15% of the GMV. The GMV is determined by dividing the actual monetary value of the fringe benefit by 85% [100% - 15%].

(c) What is the tax implication if the employer gives ‘fringe benefits’ to rank-and-file employees? Fringe benefits given to a rank-and-file employee are treated as part of his compensation income subject to normal tax rate and withholding tax on