Taxwise Or Otherwise
By Theresa Redencion S. San Diego
A part from the health crisis, the other grim impact of the coronavirus pandemic is the disruption of business and workers’ livelihoods. To sustain operations, some companies have re-engineered their operations or adopted flexible work arrangements. Since staying at home has become a civic duty, the once home-work-home routine has been replaced by work-from-home arrangements for the more fortunate ones.
The less fortunate workers who are unable to carry out their normal work functions, however, are hard-pressed to make ends meet during the shutdown. Some employers who had reserves provided employee assistance in monetary form, including allowances, advance 13th– month pay, frontline bonuses, benefits, and hazard pay.
Are these payments, intended as employee financial aid during a crisis, tax-exempt?
CASH ALLOWANCE
As a general rule, any cash payment received by employees on account of their employment is considered compensation subject to income tax. Regardless of how companies call them — utilities allowance, grocery allowance, COVID-19 allowance, etc. — these payments represent additional disposable income to the employees. Thus, these payments are still taxable.
This is highlighted under Section 2.78.1(A)(6)(a) of Revenue Regulations (RR) No. 2-98, which provides that “fixed or variable transportation, representation and other allowances received by a public officer or employee or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding.”
However, allowances that fall within the threshold amounts for de minimis benefits under RR No. 11-2018, such as medical cash allowances to dependents, rice subsidies, uniform/clothing, laundry, and meal allowances, are exempted from tax.
13TH-MONTH PAY, BONUSES, AND OTHER BENEFITS
After Luzon was placed under quarantine in mid-March, the government encouraged employers in the private sector to pay the 13th-month pay in advance to their employees as a show of solidarity. Since the 13th-month pay is in the nature of a bonus, our tax rules provide that the first P90,000 received by an employee during the calendar year is exempt from income tax. Any amount paid in excess of the threshold is considered taxable income.
The same rule applies to other bonuses and “other benefits/incentives” received by an employee, which are considered compensation or disposable income under Section 2.78.1(A) of RR No. 2-98. They are generally treated as non-taxable subject to the P90,000 limit. While the cash allowance can also be considered “other benefits” given to the employees, the exemption would apply to payments that are in the nature of a bonus (to reward services) or similar payments that would incentivize employees due to the achievement of specific objectives that have been predetermined or that would motivate employees to work more.
HAZARD PAY
Our Labor Code does not provide for hazard pay. Only workers in the public sector are entitled to the benefit under Administrative Order No. 26 series 2020. Hence, any hazard pay in the private sector is discretionary, borne out of the generosity of the employer, unless granted in a collective bargaining agreement, company policy, or company practice.
Regardless of its source, Section 2.78.1(B)(13) of RR No. 2-98, as amended by RR No. 11–18 clearly provides that hazard pay is only exempt from income tax if given to Minimum Wage Earners (MWEs) who “were actually assigned to danger or strife-torn areas, disease-infected places, or in distressed or isolated camps, which expose them to great danger or contagion or peril to life.” If the precondition is not satisfied, the hazard pay is deemed taxable.
Thus, if the employee is not an MWE, any hazard pay given is taxable even if the employee works in areas which pose health risks due to unavoidable exposure to infectious diseases and the dangers of COVID-19, like hospitals, or other frontline work.
Let’s assume that this month, a frontline worker receives a special COVID–19 bonus of P35,000, a monthly hazard pay of P6,000, monthly grocery allowance of P2,000, and an advance on 13th-month pay of P60,000, for a total of P103,000. His total bonus payment for the month amounting to P95,000 will be exempt up to P90,000. Thus, the taxable amount would be P13,000, consisting of the P6,000 hazard pay, P2,000 grocery allowance, and the P5,000 bonus in excess of the P90,000 threshold.
To summarize, any payment made by employers to their employees to financially aid them during this pandemic is generally taxable, unless the law or regulations clearly provide otherwise. The rationale behind the stringent rule on tax exemptions is that taxes are the source of funds to support government expenditures.
Although there is a prevailing sentiment to exempt employee financial assistance from tax, tilting the balance against tax collection would only exacerbate an economy that experts say could be heading for a downturn. With the delayed tax collections due to the quarantine, the government is already scrambling for funds to support expenditures for social relief and medical provisions.
Nonetheless, in the absence of additional tax exemptions during this period, employers can still assist their employees by maximizing the exemptions that are already available, such as giving medical benefits to employees and dependents, group health insurance, hazard pay for MWEs, and benefits/incentives that could fall within the P90,000 tax-exempt threshold. The employer could also reimburse employees for expenses that are necessary to the business of the employer which the employees may be incurring while working from home (e.g., Internet data usage).
While employers are busy finding ways to stay afloat during the pandemic, undoubtedly, there is also an element of generosity and sincere concern for the welfare of people when employers dole out financial assistance. If total strangers can compel you to reach for your wallets, what wouldn’t you give for the people who work with you and help you with your business? Overall, the negative impact of this pandemic has been balanced by the generosity of these employers. Quoting Winston Churchill, “We make a living by what we get. We make a life by what we give.”
The views or opinions 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 the article.
Theresa Redencion S. San Diego is a Director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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