Legal basis and regulatory amendments
- These Regulations are promulgated pursuant to Section 244 of the 1997 Tax Code, in relation to Section 78 on withholding of income tax on compensation income.
- They amend Sections 2.78.1(A)(1), (A)(3), (A)(6), (A)(7), (B)(11)(b), and (B)(13) of Revenue Regulations No. 2-98, as amended.
- They also amend the enumeration of de-minimis benefits exempt from fringe benefits tax under Section 2.33(C) of Revenue Regulations No. 3-98.
- The Regulations are implemented through modification, revocation, and amendment of the cited provisions of the prior regulations.
Policy: taxability and withholding clarification
- De minimis benefits furnished by an employer to employees are treated as not considered compensation subject to income tax and, consequently, not subject to withholding tax, when provided merely to promote health, goodwill, contentment, or efficiency.
- Representation and transportation allowances, and reimbursement-type payments, are clarified by distinguishing taxable compensation from non-taxable bona fide expenses under required accounting and substantiation rules.
- Additional compensation allowance (ACA) for government personnel receives a specific temporary treatment tied to its formal integration into basic pay.
Definitions and rules on de minimis benefits
- Facilities and privileges of relatively small value, including “de minimis benefits,” are not considered compensation subject to income tax and withholding tax when furnished or offered as means of promoting employees’ health, goodwill, contentment, or efficiency.
- Monetized unused vacation leave credits are treated as de minimis benefits only up to the stated ceiling.
- Medical cash allowance to dependents, rice subsidy, uniforms and clothing allowance, actual yearly medical benefits, and laundry allowance are treated as de minimis benefits only up to the stated ceilings and conditions.
- Employees’ achievement awards must be tangible personal property other than cash or gift certificate, must follow an established written plan that does not discriminate in favor of highly paid employees, and must stay within the stated annual monetary limit.
- Gifts, flowers/fruits/books/similar items for special circumstances, and overtime daily meal allowance are treated as de minimis benefits only within the stated ceilings and qualifying situations.
Withholding of compensation: property payments
- Where compensation is paid in property other than money, the employer must make necessary arrangements to ensure that the amount of tax required to be withheld is available for payment to the Commissioner.
Withholding of compensation: allowances and reimbursements
- Fixed or variable transportation, representation and other allowances received by a public officer or employee of a private entity, in addition to regular compensation, are compensation subject to withholding.
- Representation and transportation allowance (RATA) granted to public officers and employees under the General Appropriations Act is not subject to income tax and consequently not subject to withholding tax when it is tied to official duties.
- Personal economic relief allowance (PERA) is likewise treated as not subject to income tax and consequently not subject to withholding tax when it essentially constitutes reimbursement for expenses incurred in official government duties.
- Additional compensation allowance (ACA) given to government personnel is not subject to withholding tax pending its formal integration into the basic pay.
- For the taxable year 2000, ACA is classified as part of “other benefits” under Section 32(B)(7)(e) of the Code and excluded from gross compensation income only if the total amount does not exceed P30,000.00.
Expense reimbursements and substantiation conditions
- Amounts paid specifically as advances or reimbursements for traveling, representation, and other bona fide ordinary and necessary expenses are not compensation subject to withholding if:
- (i) they are for ordinary and necessary traveling, representation, or entertainment expenses incurred in pursuit of the trade, business, or profession; and
- (ii) the employee must account/liquidate the expenses under substantiation requirements for each category of expenses pursuant to Section 34 of the Code.
- The excess of actual expenses over advances is treated as taxable income if the excess is not returned to the employer.
- Reasonable amounts of reimbursements/advances for traveling and entertainment expenses that are pre-computed on a daily basis and paid to an employee while on assignment or duty need not be subject to the requirements of substantiation and withholding.
Enumerated de minimis benefits ceilings
- De minimis benefits that are not subject to withholding tax on compensation income of both managerial and rank and file employees include the following items within these ceilings:
- (a) Monetized unused vacation leave credits not exceeding ten (10) days during the year.
- (b) Medical cash allowance to dependents not exceeding P750.00 per employee per semester or P125 per month.
- (c) Rice subsidy of P1,000.00 or one (1) sack of 50-KG. rice per month, amounting to not more than P1,000.00.
- (d) Uniforms and clothing allowance not exceeding P3,000 per annum.
- (e) Actual yearly medical benefits not exceeding P10,000 per annum.
- (f) Laundry allowance not exceeding P300 per month.
- (g) Employees achievement awards (e.g., for length of service or safety achievement) given as tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00, received under an established written plan that does not discriminate in favor of highly paid employees.
- (h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum.
- (i) Flowers, fruits, books, or similar items given under special circumstances such as illness, marriage, birth of a baby, etc.
- (j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage.
Interaction with the P30,000 “other benefits” limit
- Amounts of de minimis benefits conforming to the prescribed ceilings are not considered in determining the P30,000 ceiling of “other benefits” under Section 32(B)(7)(e) of the Code.
- If the employer pays more than the ceiling prescribed by these Regulations, the excess becomes taxable to the employee only if such excess is beyond the P30,000.00 ceiling.
- Any amount given by the employer as benefits to employees—whether classified as de minimis benefits or fringe benefits—constitutes a deductible expense upon the employer.
Exemptions from withholding: 13th month pay and related benefits
- Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift in cash or in kind, and other benefits of similar nature actually received by officials and employees of both government and private offices are exempt from withholding tax if included within the rule for 13th month pay and other benefits.
- The exemption expressly includes the additional compensation allowance (ACA) granted and paid to officials and employees of:
- national government agencies (NGAs) including state universities and colleges (SUCs),
- government-owned and/or controlled corporations (GOCCs),
- government financial institutions (GFIs), and
- local government units (LGUs).
- The total amount of the benefits covered by the exclusion must not exceed P30,000.00.
- The Secretary of Finance, upon recommendation of the Commissioner, may increase the P30,000.00 total amount through rules and regulations after considering, among others, the effect of inflation at the end of the taxable year.
Repealing and modifying effect
- Sections 2.78.1(A)(1), (A)(3), (A)(6), (A)(7), and (B)(11)(b) of Revenue Regulations No. 2-98, including the enumeration of de-minimis benefits exempt from fringe benefits tax under Section 2.33(C) of Revenue Regulations No. 3-98, are modified by these Regulations.
- These Regulations are effective to modify and include Section 2.78.1(B)(13) in accordance with the amendments made by these Regulations.
- All provisions of these Regulations are revoked, modified, or amended accordingly for the covered portions.