Let’s Talk Tax -- By Oliver Gil M. Beltran

De minimis redefined

Posted on March 22, 2011

In its continuing effort to boost the collection of taxes, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 5-2011 last March 16, amending the provisions of RR Nos. 2-98 and 3-98 pertaining to the exemption from income tax from compensation and from fringe benefits tax of de minimis benefits.

As defined under Section 2.79(D)(3)(d) RR 2-98, de minimis benefits are facilities or privileges given or offered by an employer to his employees, provided such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees.

This definition is of utmost importance because, with the issuance of RR 5-2011, de minimis benefits have been actually redefined.

In RR 2-98 and RR 3-98, the BIR enumerated certain benefits that it considered de minimis. This list has been revised under RR 5-2011 to the following:

  • monetized unused vacation leave credits of private employees not exceeding 10 days during the year;

  • monetized value of vacation and sick leave credits paid to government officials and employees;

  • medical cash allowance to dependents of employees not exceeding P750 per employee per semester or P125 per month;

  • rice subsidy of P1,500 or one 50-kilogram sack of rice per month worth no more than P1,500;

  • uniforms and clothing allowance not exceeding P4,000 per annum;

  • actual medical assistance, e.g. medical allowance to cover medical and health care needs, annual medical/executive checkup, maternity assistance, and routine consultations, not exceeding P10,000 per annum;

  • laundry allowance not exceeding P300 per month;

  • employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;

  • gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; and

  • daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage.

One of the significant amendments is the omission from the list of flowers, fruits, books and similar items of small value given to employees during special circumstances such as on account of illness, the celebration of marriage, and the birth of a baby, among others.

With the amendment, these will now be considered as compensation income subject to income tax and consequently to withholding tax on compensation.

In the case of the daily meal allowance, RR 5-2011 had the effect of both limiting and relaxing the rules at the same time.

Daily meal allowance of up to 25% of the minimum wage will now be considered de minimis benefits under two conditions: on account of overtime work and if given to employees on night/graveyard shift.

It should be noted that, prior to RR 5-2011, the BIR (e.g. BIR Ruling No. DA-250-02) considered meal allowance not exceeding the 25% threshold as de minimis even if such were not granted in relation to overtime work. Under RR 5-2011, the grant of meal allowance, if not for overtime work, shall cease to be considered as de minimis benefit, therefore, subject to income tax.

However, if it is any consolation, meal allowance of employees who work at night/graveyard shift is now considered de minimis benefit, even without confirmation through a BIR ruling. This is a dose of good news to those who work in call centers, hospitals, security agencies, among others.

The most compelling development in RR 5-2011 is the introduction of a phrase which limits the scope of de minimis benefits exclusively to those benefits which are included in the enumeration. Thus, benefits granted to employees which are not on the list, although of relatively of small value, cannot qualify as de minimis benefits, hence, shall be subject to income tax and, consequently, to withholding tax on compensation income.

The above provision is a departure from the previous position taken by the BIR that the enumeration of de minimis benefits under RR Nos. 2-98 and 3-98 is only illustrative and non-exclusive (BIR Ruling Nos. DA-003-02, Jan. 2, 2002, and DA-335-03, Oct. 7, 2003). Hence, other benefits not on the list may still be added or considered de minimis benefits and exempt from income tax and fringe benefit tax (FBT) for so long as they qualify under the definition. For example, the BIR declared in BIR Ruling No. DA-336-06 that performance incentive award given to employees is also considered as de minimis benefit even if it is not included in the enumeration in the old regulations.

Taxpayers, however, need not despair. Other than the de minimis criteria, it is worth mentioning that there are other conditions in the regulations which will allow an allowance or fringe benefit to be exempt from fringe benefit tax or tax on compensation.

Certain employee benefits may also be exempt on the ground that the fringe benefits are required by the nature of, or necessary to, the trade, business or profession of the employer and/or if the grant of fringe benefit is for the convenience of the employer, as provided under Section 2.33(C) of RR 3-98.

In BIR Ruling No. DA-233-07, the bureau exempted mobile phone allowance granted to employees from fringe benefit tax and tax on compensation on the basis that the mobile allowance is deemed required by the nature of the job of the employees and deemed necessary to business. The ruling recognized that there are now many businesses, especially those on 24-hour operations, that require employees to be available for consultation or assignment round the clock.

It may also be noted that reasonable amounts of reimbursements or advances for traveling and representation which are pre-computed on a daily basis and which are paid to any employee while on assignment or duty are not considered compensation subject to withholding tax. This serves as legal basis for the exemption granted to employees in the various rulings issued by the BIR (e.g., BIR Ruling No. DA-350-04) on transportation allowance.

Finally, the new regulation has likewise clarified the tax treatment of benefits in excess of the de minimis thresholds. Any amount of de minimis benefit in excess of the threshold can still be exempt as "other benefits" but not exceeding P30,000. Previously, amounts exceeding the P30,000 tax-exempt "other benefits" were either taxed as compensation or FBT.

The new regulations have confirmed that the excess shall be considered as compensation income and, therefore, subject to income tax on compensation.

The author is a tax manager with Punongbayan & Araullo’s Tax Advisory & Compliance Division.