Minimizing de minimis benefits

By Myrna M. Fernando (Reposted from Business World’s Taxwise or Otherwise, March 31, 2011)

In the midst of increases in fuel prices and related transport fares since the start of the year, the release of Revenue Regulations (RR) 5-2011 certainly aggravates the financial difficulty of employee taxpayers.

The RR amends the fringe benefits tax regulations (RR 3-98) and now treats as taxable all other fringe benefits of small value that are not among the 10 items listed in the old RR.

For clarity and easy reference, a comparison of the list of benefits under the old and the new revenue regulations, with the changes highlighted, is presented in the table below.

Previously, as confirmed by the Bureau of Internal Revenue (BIR) through various rulings, the listing of de minimis benefits in the fringe benefits tax regulations is considered illustrative and non-exclusive in the enumeration of what constitutes de minimis fringe benefits.

The list is not an exclusive enumeration by the use of the phrase “such as the following:” to introduce the listing.

Accordingly, other benefits of small value and of similar nature may still be added to the enumeration.

This treatment was applied by the BIR to various other items of benefits that were also treated as exempt de minimis benefits, as embodied in several rulings, among which are:

meal and food allowance not for overtime work but within 25% of basic minimum wage;
taxi or transportation allowance for employees rendering overtime work; and
death assistance for loss of immediate family memberIn the above rulings, the basis for the exemption was the fact that the benefits were of relatively small value and are given by employers to their employees merely as a means of promoting the health, goodwill, contentment or efficiency of the employees.

The fact that these items were not listed in the previous RR was not important.

RR 5-2011 changes all these with this provision: “All other benefits given by employers which are not included in the above enumeration shall not be considered as de minimis benefits, and hence, shall be subject to income tax as well as withholding tax on compensation income.”

With this specific and restrictive statement in the new RR, all the above benefits would be deemed as outside of the coverage of de minimis benefits and are now taxable either as compensation or as fringe benefits.

The new revenue regulations also effectively repeals, revokes and modifies the tax rulings that were issued for the tax exemption of these benefits.

Personally, I feel strongly against the deletion of the item “flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a baby, etc.” from the list.

I think that if there is one clear example of a gesture of goodwill that an employee can receive from his employer which will be greatly enjoyed by the former it would be such simple items as flowers or books given on a special occasion.

The gift could be relatively inexpensive, but it expresses appreciation for his valuable contributions in the company.

For this gift to now be considered subject to withholding tax or FBT demeans the gesture and impairs the goodwill that the employer is seeking to build with his employee.

On the practical side, the revenue regulations state that the benefits provided shall apply to all income earned starting the year 2011 and takes effect on April 2 (15 days after its publication on March 18).

With these provisions, employers would now be hard-pressed to review the de minimis employee benefits already given out since January of this year that are not included in the exclusive list and evaluate if they would have any tax exposure arising from it. I believe the above summary and discussions would be useful to them in the process.

The author is a Partner at the Tax Services Department of Isla Lipana & Co., a member firm of the worldwide PricewaterhouseCoopers organization. Please call 845-2728 or e-mail to myrna.fernando@ph.pwc.com for feedback.

The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co.. The firm will not accept any liability arising from such article.

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