Title
Fringe Benefits Tax Implementing Rules
Law
Bir Regulations No. 3-98
Decision Date
May 21, 1998
BIR Regulations No. 3-98 establishes a final withholding tax on fringe benefits provided to managerial and supervisory employees, detailing tax rates and valuation methods while excluding rank-and-file employees and certain employer-required benefits from taxation.
fringe benefits
tax regulations
internal revenue

Who is covered; who is excluded

  • Fringe benefits tax applies to fringe benefits given or furnished by an employer to managerial or supervisory employees and not to rank and file employees, as defined in these regulations.
  • “Rank and file employees” are all employees who hold neither managerial nor supervisory positions.
  • Managerial employees are those vested with 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 managerial actions using independent judgment (and not merely routinary or clerical in nature).
  • These regulations do not cover fringe benefits properly forming part of compensation income subject to withholding tax on compensation under Revenue Regulations No. 2-98.
  • Fringe benefits paid prior to January 1, 1998 are not covered by these regulations.

Fringe benefits tax: imposition and rates

  • A final withholding tax is imposed on the grossed-up monetary value of fringe benefits furnished, granted, or paid by the employer to the employee.
  • The withholding is imposed except rank and file employees, and applies regardless of whether the employer is an individual, professional partnership, corporation, or government and its instrumentalities—except where the fringe benefit is (1) required by the nature of or necessary to the employer’s trade, business, or profession, or (2) for the convenience or advantage of the employer.
  • The fringe benefit tax is imposed at the following rates (general rates):
    • Effective January 1, 1998 – 34%
    • Effective January 1, 1999 – 33%
    • Effective January 1, 2000 – 32%
  • The tax under Section 33 of the Code is treated as a final income tax on the employee, withheld and paid by the employer on a calendar quarterly basis as provided under Section 57(A) and Section 58(A) of the Code.
  • The grossed-up monetary value is determined by dividing the monetary value of the fringe benefit using the following gross-up factors:
    • Effective January 1, 1998 – 66%
    • Effective January 1, 1999 – 67%
    • Effective January 1, 2000 – 68%
  • The grossed-up monetary value represents the whole amount of income realized by the employee, consisting of the net amount received or net monetary value of property plus the fringe benefit tax paid by the employer for and on behalf of the employee.

Coverage rules for special groups

  • A 25% fringe benefit tax is imposed on the grossed-up monetary value for fringe benefits received by a non-resident alien individual who is not engaged in trade or business in the Philippines.
  • The 25% tax base for non-resident alien individuals is computed by dividing the monetary value of the fringe benefit by 75%.
  • A 15% fringe benefit tax is imposed on the grossed-up monetary value for fringe benefits received by:
    • (1) an alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company;
    • (2) an alien individual employed by an offshore banking unit of a foreign bank established in the Philippines;
    • (3) an alien individual employed by a foreign service contractor or foreign service subcontractor engaged in petroleum operations in the Philippines; and
    • (4) any Filipino individual employee who is employed and occupying the same position as those occupied or held by the alien employees.
  • The 15% tax base for the above group is computed by dividing the monetary value of the fringe benefit by 85%.
  • Fringe benefits received by employees in special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are covered and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15%.

Definition of “fringe benefit”

  • A “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.
  • Fringe benefits include—by way of illustration—(1) housing; (2) expense account; (3) vehicle of any kind; (4) household personnel; (5) interest on loan at less than market rate to the extent of the difference; (6) membership fees and dues (social and athletic clubs or similar organizations); (7) expenses for foreign travel; (8) holiday and vacation expenses; (9) educational assistance to the employee or dependents; and (10) life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
  • The taxable value of a fringe benefit is the grossed-up monetary value of the fringe benefit.

Valuation rules by fringe benefit type

  • Housing privilege (employer-lease or employer-owned properties):
    • If the employer leases a residential property for the employee’s usual place of residence, the value is the amount of rental paid, evidenced by the lease contract, and the monetary value is 50% of the benefit value.
    • If the employer owns a residential property assigned for the employee’s usual place of residence, the annual value is 5% of the market value of the land and improvement as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner under Section 6(E) of the Code—whichever is higher—and the monetary value is 50% of the benefit value.
    • If the employer purchases a residential property on installment basis and allows the employee to use it as usual residence, the annual value is 5% of the acquisition cost, exclusive of interest, and the monetary value is 50% of the value of the benefit.
    • If the employer purchases a residential property and transfers ownership to the employee for residential use, the value is the employer’s acquisition cost or zonal value under Section 6(E)—whichever is higher—and the monetary value is the entire value of the benefit.
    • If ownership is transferred to the employee at a price less than acquisition cost, the value is the difference between the higher of (a) fair market value as declared or (b) zonal value under Section 6(E), and the employee’s cost; the monetary value is the entire value of the benefit.
  • Housing privilege of AFP military officials:
    • Housing for military officials of the Armed Forces of the Philippines (AFP) consisting of officials of the Philippine Army, Philippine Navy and Philippine Air Force is not treated as taxable fringe benefit under the existing doctrine that the State provides necessary quarters within or accessible to the military camp.
  • Business/factory-adjacent housing:
    • A housing unit situated inside or adjacent to the premises of a business or factory is not treated as a taxable fringe benefit if it is located within the maximum of 50 meters from the perimeter of the business premises.
  • Temporary housing:
    • Temporary housing for an employee who stays in a housing unit for three (3) months or less is not treated as taxable fringe benefit.
  • Expense account:
    • Expenses incurred by the employee but paid by the employer are taxable fringe benefits unless duly receipted for and in the name of the employer and not of a personal nature attributable to the employee.
    • Expenses paid by the employee but reimbursed by the employer are taxable fringe benefits unless duly receipted for and in the name of the employer and not of a personal nature attributable to the employee.
    • Personal expenses of the employee (e.g., groceries for personal consumption) paid for or reimbursed by the employer are taxable fringe benefits whether or not duly receipted in the name of the employer.
    • Representation and transportation allowances fixed in amounts and regularly received as part of monthly compensation are not taxable fringe benefits; they are taxable compensation income subject to Section 24 of the Code.
  • Motor vehicle:
    • If the employer purchases a motor vehicle in the employee’s name, the value is the acquisition cost and the monetary value is the entire value of the benefit.
    • If the employer provides cash for purchase of a motor vehicle placed in the employee’s name, the value is the cash received and the monetary value is the entire value of the benefit, unless the cash was subjected to withholding tax as compensation income under Revenue Regulations No. 2-98.
    • If purchased on installment basis in the employee’s name, the value is the acquisition cost exclusive of interest divided by five (5) years, and the monetary value is the entire value of the benefit.
    • If the employer shoulders part of the purchase price for a vehicle in the employee’s name, the value is the amount shouldered by the employer.
    • If the employer owns and maintains a fleet for business and employees, the value is the acquisition cost of all vehicles not normally used for sales, freight, delivery, service, and other non-personal use divided by five (5) years; the monetary value is 50% of the value.
    • If the employer leases and maintains a fleet, the value is rental payments for vehicles not normally used for sales, freight, delivery, service, and other non-personal use; the monetary value is 50% of the value.
    • Use of aircraft (including helicopters) owned and maintained by the employer is business use and not subject to fringe benefits tax.
    • Use of a yacht (owned and maintained or leased) is taxable fringe benefit; the value is measured based on depreciation at an estimated useful life of 20 years.
  • Household expenses:
    • Household personnel expenses borne by the employer (e.g., salaries of household help, personal driver) and similar personal expenses (e.g., homeowners association dues, garbage dues) are taxable fringe benefits.
  • Interest on loans at less than market rate:
    • If the employer lends money at zero interest or at less than 12%, the foregone interest or the difference between the assumed interest and 12% is a taxable fringe benefit.
    • The benchmark rate of 12% remains effective until revised by subsequent regulation.
    • This rule applies to installment payments or loans at less than 12% starting January 1, 1998.
  • Social and athletic club membership fees:
    • Employer expenditures for the employee’s membership fees, dues, and similar club or organization expenses are taxable fringe benefits in full.
  • Foreign travel:
    • Reasonable business expenses paid for foreign travel for business meetings or conventions are not taxable fringe benefits, except inland travel expenses (food, beverages, local transportation) other than hotel lodging costs, which are not subject to fringe benefit tax only when hotel lodging and similar inland items amount to an average of US$300.00 or less per day.
    • The cost of economy and business class airplane tickets is not subject to fringe benefit tax.
    • 30% of the cost of first class airplane tickets is subject to fringe benefit tax.
    • Documentary evidence must prove actual occurrence of the meetings or conventions.
    • Without documentary evidence of business meetings or conventions, the entire ticket cost (including hotel accommodations and other incident expenses paid by the employer) is treated as taxable fringe benefits.
    • Business meetings must be evidenced by official communications from business associates abroad indicating purpose.
    • Business conventions must be evidenced by official invitations/communications from the host organization or entity abroad.
    • Travel expenses paid for family members of the employee are taxable fringe benefits.
  • Holiday and vacation expenses:
    • Holiday and vacation expenses borne by the employer are taxable fringe benefits.
  • Educational assistance:
    • Educational assistance costs borne by the employer for the employee are taxable fringe benefits.
    • A scholarship grant to the employee is not taxable if the education or study is directly connected with the employer’s trade, business, or profession and there is a written contract obligating the employee to remain employed for a period mutually agreed upon; in this case, the expenditure is treated as incurred for the employer’s convenience and furtherance of trade or business.
  • Life or health and other insurance premiums:
    • Employer-paid life or health insurance and other non-life insurance premiums are taxable fringe benefits, except:
      • employer contributions pursuant to law such as under SSS (R.A. No. 8282, as amended) or GSIS (R.A. No. 8291) or similar legally mandated contributions; and
      • premiums for group insurance of employees.

Fringe benefits excluded from tax

  • The fringe benefits tax shall not be imposed on:
    • fringe benefits authorized and exempted from income tax under the Code or under any special law;
    • employer contributions for retirement, insurance, and hospitalization benefit plans;
    • benefits given to rank and file employees (whether granted under a collective bargaining agreement or not);
    • de minimis benefits as defined in these regulations;
    • fringe benefits required by the nature of or necessary to the employer’s trade, business, or profession; and
    • fringe benefits granted for the convenience of the employer.
  • Exemption from fringe benefits tax does not eliminate other income taxes; a fringe benefit may still form part of gross compensation subject to income tax and corresponding withholding tax on compensation.
  • De minimis benefits exempt from fringe benefits tax are facilities or privileges of relatively small value offered merely to promote employees’ health, goodwill, contentment, or efficiency, including:
    • monetized unused vacation leave credits not exceeding ten (10) days during the year;
    • medical cash allowance to dependents not exceeding PHP 750 per semester or PHP 125 per month;
    • rice subsidy of PHP 350 per month;
    • uniforms given to employees;
    • medical benefits given to employees;
    • laundry allowance of PHP 150 per month;
    • employee achievement awards in tangible personal property other than cash or gift certificates with an annual monetary value not exceeding one-half (1/2) month of the basic salary under an established written plan that does not discriminate in favor of highly paid employees;
    • Christmas and major anniversary celebrations for employees and their guests;
    • company picnics and sports tournaments in the Philippines participated exclusively by employees; and
    • flowers, fruits, books, or similar items given on special circumstances such as illness, marriage, or birth of a baby.

Tax accounting and employer deductions

  • The taxable fringe benefit amount and the fringe benefit tax due constitute allowable deductions from the employer’s gross income as a general rule.
  • If the fringe benefit tax computation is based on depreciation value, the zonal value under Section 6(E), or the fair market value in the current real property tax declaration, only the actual fringe benefit tax paid is deductible as an expense.
  • The value of the fringe benefit is not deductible and is presumed to have been tacked on or claimed as depreciation expense.
  • If the zonal value or fair market value used is greater than its depreciable cost, the excess amount is allowed as a deduction from the employer’s gross income as fringe benefit expense.

Deadline and transitory relief

  • No penalty is imposed for late payment of the fringe benefit tax for the first quarter ending March 1998, provided that:
    • the withholding tax return for the first quarter is filed, and
    • the tax is paid not later than July 25, 1998.

Repeal and effectivity

  • Inconsistent rules and regulations or parts thereof are revoked.
  • The regulation’s effectivity applies to fringe benefits furnished, granted, or paid beginning January 1, 1998.

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