The Rule on ‘The Fringe Benefit Tax’ and the Grossed-up Monetary Value
| SUBJECT: The Rule on ‘The Fringe Benefit Tax’ and the Grossed-up Monetary Value |
I. Introduction
This memorandum provides an exhaustive analysis of the fringe benefit tax (FBT) under Philippine taxation law, with particular focus on the critical concept of the grossed-up monetary value. The FBT is a final tax imposed on the grossed-up monetary value of fringe benefits granted or furnished by an employer to its employees, except rank and file. The rule operates on the principle that the benefit received by the employee is net of the tax, which is borne by the employer. Consequently, determining the grossed-up monetary value is the essential first step in computing the correct FBT liability. This memo will delineate the statutory framework, define key terms, outline the computation mechanics, enumerate reportorial requirements, and discuss pertinent jurisprudence.
II. Statutory Framework and Governing Laws
The primary statutory basis for the fringe benefit tax is found in Section 33 of the National Internal Revenue Code of 1997 (NIRC), as amended. The implementing rules and regulations are detailed in Revenue Regulations No. 3-98, as subsequently amended by Revenue Regulations No. 5-2011, Revenue Regulations No. 8-2012, and other relevant issuances. Furthermore, Revenue Memorandum Circulars (e.g., RMC No. 79-2014) and Bureau of Internal Revenue (BIR) rulings provide administrative interpretations and clarifications on specific fringe benefit scenarios.
III. Definition of Key Terms
Fringe Benefit: Any good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee, except rank and file employees. It includes, but is not limited to, housing, expense accounts, vehicles of any kind, household personnel, interest on loans at below market rate, membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs, foreign travel, holiday and vacation expenses, educational assistance, insurance, and other similar benefits.
Rank and File Employee: An employee who holds neither a managerial nor supervisory position as defined under the Labor Code of the Philippines. The grant of fringe benefits to rank and file employees is not subject to FBT but is generally treated as additional compensation subject to regular income tax and withholding tax on compensation.
Grossed-Up Monetary Value: The whole amount of income realized by the employee which includes the net amount of money or the net monetary value of the property received plus the amount of fringe benefit tax paid thereon by the employer. It represents the total taxable value of the benefit before the tax is applied.
Employer: Includes an individual, professional partnership, or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities.
IV. Determination of Fringe Benefits Subject to FBT
A fringe benefit is subject to the FBT if it is: (1) granted by an employer; (2) furnished or granted to an employee, except a rank and file employee; (3) not exempt under the NIRC or other special laws; and (4) not considered as compensation income subject to regular income tax. The BIR provides a non-exhaustive list of de minimis benefits which are exempt from both income tax and FBT under Revenue Regulations No. 5-2011. Benefits exceeding the de minimis thresholds are subject to the appropriate tax.
V. The Grossed-Up Monetary Value: Concept and Computation
The core mechanism of the FBT is the gross-up procedure. Since the employer is the withholding agent liable to pay the tax, the actual benefit enjoyed by the employee is considered net of the tax. To compute the tax due, one must first ascertain the total taxable value (grossed-up monetary value) that corresponds to the net benefit received.
The formula for the grossed-up monetary value depends on whether the employer is a domestic or foreign corporation.
For a domestic corporation or a resident foreign corporation:
Grossed-Up Monetary Value = (Monetary Value of the Benefit) / (1 – 0.35)
Where 0.35 represents the FBT rate of 35%.
For a non-resident foreign corporation (not engaged in trade or business in the Philippines):
Grossed-Up Monetary Value = (Monetary Value of the Benefit) / (1 – 0.25)
Where 0.25 represents the FBT rate of 25%.
The fringe benefit tax due is then computed as:
FBT Due = Grossed-Up Monetary Value x Applicable Tax Rate (35% or 25%)
VI. Illustrative Computation
Assume a domestic corporation grants a non-supervisory manager a car with a monetary value of PHP 700,000 as a fringe benefit.
= PHP 700,000 / (1 – 0.35)
= PHP 700,000 / 0.65
= PHP 1,076,923.08
= PHP 1,076,923.08 x 35%
= PHP 376,923.08
Thus, the employer pays PHP 376,923.08 to the BIR as final tax. The employee is deemed to have received a taxable benefit of PHP 1,076,923.08 but is not required to report it in their personal income tax return as it is a final tax.
VII. Comparative Table: FBT on Domestic vs. Foreign Corporations
| Aspect | Domestic Corporation / Resident Foreign Corporation | Non-Resident Foreign Corporation (Not Engaged in Trade/Business) |
|---|---|---|
| Applicable FBT Rate | 35% | 25% |
| Gross-Up Divisor | (1 – 0.35) = 0.65 | (1 – 0.25) = 0.75 |
| Tax Base | Grossed-up monetary value of the fringe benefit | Grossed-up monetary value of the fringe benefit |
| Withholding Agent | The employer-corporation | The employer-corporation or the resident employee who is considered a withholding agent in certain cases (e.g., under RR 8-2012) |
| Common Reporting Form | BIR Form 1603 (Monthly Remittance Return of Final Income Taxes Withheld) | BIR Form 1603 |
VIII. Reporting and Remittance Requirements
The fringe benefit tax is deemed withheld at the end of the calendar quarter in which the fringe benefit was granted or paid. The employer must file the Quarterly Remittance Return of Final Income Taxes Withheld (BIR Form 1603-Q) and pay the tax within twenty-five (25) days following the close of each taxable quarter. An Annual Information Return of Creditable Income Taxes Withheld (Expanded) (BIR Form 1604-E) must also be filed on or before January 31 of the following year. Failure to withhold and remit the FBT results in penalties, including deficiency tax assessment, surcharge, interest, and compromise penalty.
IX. Jurisprudential Highlights and BIR Interpretations
The Supreme Court, in Commissioner of Internal Revenue vs. Court of Appeals and Ateneo de Manila University (G.R. No. 115349, April 18, 1997), clarified that the FBT is imposed on the employer, not the employee. The tax liability arises from the act of the employer in providing the fringe benefit. Furthermore, the Court of Tax Appeals and BIR rulings have addressed specific applications, such as: the treatment of housing benefits (whether within or outside the business premises); the valuation of interest on loans; and the taxability of benefits granted to employees who are simultaneously stockholders. A consistent principle is that the substance of the transaction, not merely its form, governs its tax treatment.
X. Conclusion
The fringe benefit tax regime is a distinct system designed to tax the indirect compensation provided to managerial and supervisory employees. Its unique computational feature—the derivation of the grossed-up monetary value—ensures that the employer bears the economic burden of the final tax. Compliance requires a meticulous understanding of what constitutes a taxable fringe benefit, the correct application of the gross-up formula based on the employer’s tax residency, and strict adherence to the quarterly remittance and annual reporting deadlines. Given the complexity and evolving interpretations, consulting the latest BIR issuances and seeking professional advice for specific transactions is imperative.