Are productivity incentive schemes benefits considered De minimis or other benefits?

As we approach the end of the calendar year, employees’ excitement builds as bonuses and incentives such as collective bargaining agreement (CBA) and productivity incentives are expected to be paid out. But for most companies providing these bonuses and incentives, tax questions arise, like what are the applicable tax rules if the CBA and productivity incentive schemes exceed the de minimis ceiling?

The Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 5-2011, as amended, providing a specific list of de minimis benefits, e.g. rice subsidy, uniform and clothing allowance, laundry allowance, medical cash allowance to dependents, actual medical assistance, etc. each with specific tax exemption ceilings. De minimis benefits are facilities and privileges 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 its employees. It also indicates that if the employer pays more than the ceiling amount for de minimis benefits, the excess shall be considered taxable income. This excess, however, is still taken into account in an individual’s personal tax exclusion threshold as indicated below.

In January 2015, the BIR issued RR No. 1-15, which provided additional tax-exempt de minimis benefits to employees by virtue of a CBA and productivity incentive schemes. These are exempt from withholding tax on wages (WTW) or fringe benefits tax (FBT), provided that the combined annual monetary value received from both the CBA and productivity incentive schemes does not exceed P10,000 per employee per taxable year.

Regarding personal tax exclusions, Section 2.78.1 (B) (11) of RR No. 2-98, as amended by RR No. 3-15, provides that the 13^th month pay of private and government employees (including government-owned or -controlled corporations), and any other benefits, such as Christmas bonuses, productivity incentive bonuses, loyalty awards, gifts in cash or in kind and other benefits of similar nature paid or accrued during the year, are considered income payments exempt from income tax, and consequently, withholding tax, provided that the total amount shall not exceed Php 82,000 pursuant to Republic Act (RA) No. 10653. Hence, any amount in excess of P82,000 shall be subject to income tax, and consequently, to WTW/FBT. Any excess de minimis payments beyond the ceilings specified in RR No. 5-2011, as amended would be considered here, and if still below the P82,000 threshold, remain tax exempt pursuant to the rules laid out in RR No. 8-2000.

These BIR issuances were later followed by BIR Ruling No. 293-2015 dated Aug. 27, 2015, which defined the productivity incentive scheme as benefits given by management to labor that incentivize performance of an employee for certain economic factors, i.e., increase in productivity, etc. with the establishment.

Based on the foregoing, the following rules on benefits arising from CBA and productivity incentive schemes may apply:

• The benefits are exempt from WTW to the extent of P10,000.

• The excess of the benefit over P10,000 is exempt from WTW to the extent of Php 82,000 when considered together with other benefits.

• The benefit in excess of the P10,000 and the Php 82,000 when considered together with other benefits is subject to WTW (for rank-and-file employees) or to FBT (for non-rank-and-file employees).

While it is clear that CBA and productivity incentives are now among those considered de minimis benefits if these fall under the ambit of the definition under RR No. 1-15 and BIR Ruling No. 293-2015 and the amount is within the ceiling of P10,000, an important question to address is whether the CBA and productivity incentive schemes that exceed the de minimis ceiling will still qualify as de minimis or considered as “other benefits”?

In BIR Ruling No. 293-2015 (August 2015), the BIR was requested to clarify the treatment of amounts over the income tax exempt de minimis Collective Negotiation Agreement (CNA) benefits received by employees in the public sector, in relation to the increase in the exempt 13^th Month Pay and other benefits brought about by RA No. 10653.  The BIR ruled that any CBA or productivity incentives scheme benefits shall only be exempt as “de minimis” benefits if the total amount thereof does not exceed P10,000 per taxable year. Otherwise, it shall be treated as “other benefits,” the gross of which, not exceeding P82,000, shall be excluded from gross compensation income of the employee receiving the same. Otherwise, it shall be subject to normal income tax rates.

What this means is that if CBA/CNA benefits under a productivity incentive scheme is below the P10,000 ceiling, it is considered a tax-exempt de minimis benefit. However, if the incentive exceeds the ceiling, the ENTIRE amount does not qualify as a de minimis benefit and is then treated as “other benefits” and is then tested to the P82,000 threshold to determine its taxability

Given the above, it would seem that the application of the rules on the taxability of CNA/CBA benefits and productivity incentive scheme benefits under BIR Ruling No. 293-2015 appear to deviate from the earlier rules presented under RR No. 8-2000, as amended.

Considering that BIR Ruling No. 293-2015 is the current interpretation of the BIR with regard the tax treatment on the excess of the CNA/CBA benefits and productivity incentive scheme benefits over the de minimis ceiling, this prompts the question on whether such an interpretation would prevail in determining the tax treatment for all other de minimis benefits exceeding their respective tax exempt ceilings.

For example, if an employee’s rice subsidy were to exceed the ceiling of P1,500 or one (1) sack of 50 kg. of rice per month amounting to not more than P1,500, would it disqualify this from being considered a de minimis benefit and thus have to fall under the “other benefits” category? Or only the excess beyond the de minimis ceiling of P1,500?

In this regard, since the clarification in BIR Ruling No. 293-2015 was specific to CNA/CBA benefits and productivity incentive schemes, it can be argued that such a rule is to be applied only to CNA/CBA benefits and productivity incentive scheme benefits and should not be made as a basis for the tax treatment for the rest of de minimis benefits.

Towards the year end, employees’ performance results (on which most productivity incentive schemes are based) are expected to be reported and the year-end annualization of compensation benefits will most likely take place. When that happens, we hope that the above clarification on the limited impact of BIR Ruling No. 293-2015 would be taken in consideration.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Hentje Leo L. Leaño is a Tax Partner of SGV & Co.