TAX IMPOSED TO CORPORATION

4. FRINGE BENEFITS TAX

Fringe Benefits – it pertain to all other benefits or incentives of employees other than
the basic pay. It was also defined to pertain goods , services or other benefits
furnished by the employer to the employees.

Classification of Fringe Benefit

a. Taxable Fringe Benefit – Fringe benefit under the following category.

1. Given to the managerial employee or Management Perquisite Benefits

2. Employee personal expenses shouldered by the employer.

3. Taxable de minimis benefit

3.1 Excess de minimis benefit over their limits

3.2 Benefits not included in the de minimis benefit

b. Non Taxable Fringe benefit – Fringe benefit given to the rank and file employee
and those form part of the Di minimis benefit .

Difference between a Managerial Employee over a rank and file employee

Managerial Employees are those individual who holds the key position of certain
organizations and at the same time , they fire, hire employees and made a important
decision in the organization .They also given powers or prerogatives to lay down and
execute managerial policies and /or to hire , transfer, suspend , layoff, recall , assign
or discipline employees

Example of Managerial Employee:

College Dean, Campus Administrator, President , Vice President for Academic Affairs,
Chief Executive Officer, Chief Financial officer, CHED Dircetor, Secretary of Health

Rank and File Employees are those individuals who performed routinary duties in a
certain organization.

Example of Rank and File Employee:

Instructor, Security Guard, Police, Factory Worker , Private Secretary, Health workers.
DI MINIMIS BENEFIT

Are facilities or privileges that are relatively small value and are furnished by the
employer merely as a means of promoting the health , goodwill , contentment or
efficiency of his employees.

1. Monetized unused vacation leave credits of private employees – not exceeding 10

days during the year .

2. Monetized unused vacation and sick leave credits paid to government officials and
employees.

3. Medical cash allowances to dependents of employees – not exceeding P750 per

employee per semester , or P125 per month.

4. Rice subsidy – 1 sack per month or not more than P 1,500

5. Uniform and clothing allowances – not exceeding P 6,000.00

6. Actual Medical Assistance - not exceeding P 10,000 per annum.

7. Laundry allowance – not exceeding P300/month.

8. Employee achievement award- not more than P 10,000.00

9. Cash gifts – not more than P 5,000 per annum.

10. Daily meal allowances for overtime – not exceeding the 25% of the basic minimum
wage.

11. Benefits received by an employee by virtue of collective bargaining agreement.

Example :

1. Danny Boy , a private employee who is paid a P 800 daily rate, receives the
following benefits during the year 2019

Monetized unused vacation leave credits 9 days

Monetized unused sick leave credits 9 days
Medical assistance 12,000
Rice Subsidy ( 2,000 per month) 24,000
Clothing Allowance 10,000
Laundry Allowance 6,000

Required : Determine the taxable amount of de-minimis benefits.

Solution :
Actual Limit Excess
Monetized unused VL 7,200.00 8,000. 0.00
Monetized unused SL 7,200.00 0.00 7,200.00
Medical Assistance 12,000.00 10,000.00 2,000.00
Rice Subsidy 24,000.00 18,000.00 6,000.00
Clothing Allowance 10,000.00 6,000.00 4,000.00
Laundry Allowance 6,000.00 3,60000 2,400.00
Taxable De minimis benefit 21,600.00

2. Giovanni, a government rank and file employee , received the following benefits:

Monetized unused vacation leave credits ( 10 days ) P 8,000.00

Monetized unused sick leave credits ( 15 days ) 12,000.00
Uniform Allowance 15,000.00
Laundry Allowance 4,800.00

Required : Determine the amount to be included in other benefits .

Solution :
Actual Limit Excess
Monetized unused VL 8,000.00 exempt 0.00
Monetized unused SL 12,000.00 exempt 0.00
Uniform allowance 15,000.00 6,000.00 9,000.00
Laundry Allowance 4,800.00 3,600.00 1,200.00
Taxable De-minimis benefit 10,200.00

EXAMPLE OF TAXABLE FRINGE BENEFIT TAX

1. HOUSING BENEFITS
2. EXPENSE ACCOUNT
3. VEHICLE OF ANY KIND
4. HOUSEHOLD PERSONNEL
5. INTEREST , FOR THE DIFFERENCE BETWEEN THE MARKET RATE AND THE
ACTUAL INTEREST GRANTED
6. MEMBERSHIP FEES
7. EXPENSES FOR FOREIGN TRAVEL
8. HOLIDAY AND VACATION EXPENSES
9. EDUCATIONAL ASSISTANCE
10. LIFE OR HEALTH INSURANCE

CHARACTERISTICS OF THE FRINGE BENEFIT TAX

1. Final Tax - FBT is withheld by the employer at source.
2. Tax upon managerial or supervisory employee- The FBT is not tax to the employer.
It is a tax upon the fringe benefit .
3. Paid by the employer.
4. Grossed up Tax – The monetary value or the amount of FB realized or taken home
by the employee is effectively net of the final tax which is to be withheld at source.
5. Due quarterly . The FBT will due for remittance quarterly and reported through BIR
Form 1603 . Deadline of filing will be on or before the 10 th day of the month following
the quarter in which withholding was made.
PROCEDURES IN COMPUTING THE FRINGE BENEFIT TAX
1. Determine the monetary value
Monetary value refers to the taxable amount of benefits taken home or realized
by the managerial or supervisory employee.
2. Determine the gross up rate and FBT rate applicable for the taxpayer.
The gross up arte is the complement of the FBT rate. IF FBT rate is 32%, the
gross up rate is 68 % ( 100% less 32%).
3. Determine the gross up monetary value by dividing the monetary value by the gross
up rate.
4. Determine the fringe benefit tax by multiplying the fringe benefit tax rate to the
GMV( gross up monetary value)

RULES ON VALUATION OF FRINGE BENEFITS

1. When benefit is given in cash or paid in cash , the MV (monetary value) is the
amount paid for in cash with the exception when the employer pays for the rent of the
residence of the employee, the MV is 50% of the rental payment.
2. When benefit is given in kind , the monetary value is the fair value of the thing
given unless its book value is higher.
3. When a benefit is given in the form of free use the employer’s property , the MV is
50% of the rental value of the property. If the property has no rental value, the
depreciation value is used. The presumptive lives of the property are:
3.1 20 years for real properties
3.2 5 years for movable properties.

SPECIAL GUIDELINES ON MONETARY VALUE DETERMINATION

1. TAXABLE HOUSING BENEFITS
1.1 Employer leases a residential property for the use of his employee and the
said property is the usual residence of the employee
MV = 50 % of the benefit
Illustration :
A sole proprietorship business leases a residential house and lot for the use of
his business manager for P 20,000/month

The MV shall be
Quarterly value = ( 20,000 x 3 months ) P 60,000
Quarterly MV = P 60,000 x 50 % P 30,000

1. 2 Employer owns a residential property and assigns the same for the use of
his employee as his usual place of residence , the annual value of benefit is 5 % of
whichever is higher of the zonal or assessed value of the land and improvement
MV = 50 % of the annual value of the benefit
Illustration :
Danny Boy Inc., allowed one of its unused realty investment costing P 3.5
million with zonal value of P 4M and assessed value of 3M to be used by its Vice
President

MV shall be :
Annual Depreciation value = P 4M x 5 % P 200,000
 Quarterly value = P 200k / 4 quarters 50,000
Quarterly MV = ( 50K x 50%) 25,000

1.3 The employer purchases a residential property on instalment basis and

allows his employee to use the same as his usual place of residence, the annual value
is 5 % or 1/20 of the acquisition cost , exclusive of interest

MV = 50% of the annual value of the benefit. This is the same with 1.2 except
the basis is the purchase price of the property.
Illustration :
Danny Corporation purchased a residential property for the use of its
production manager . The property is payable over 11 annual instalment of P200,000
including interests but have a cash price of P 2M . For accounting purposes , Danny
Corporation opted to capitalize the interest and recorded the P 2.2 M contract price as
the acquisition cost of the property .

The MV shall be
Annual depreciation value = P 2M x 5% P 100,000
Quarterly Value = P100k/4 quarters 25,000
Quarterly MV = 25K x 50% 12,500
1.4 Purchase by the employer of residential property and transfer of ownership
in the name of the employee, the value of the benefit is whichever is higher of the
acquisition cost or zonal value.
MV = 100 % of the value of the benefit
Illustration
Baby boy corp bought a residential dwelling for P 5M and transferred to its
president. The property has 3M zonal value
MV = P 5M

1.5 Purchase by the employer of residential property and transfer of title to

employee for less than adequate consideration , the value is Market value or zonal
value which ever is higher less the consideration paid by the employee
MV = 100% of the value of the benefit
Illustration
Thrisha Mae , a professional practitioner , transferred his residential property
in the name of his president for P 2M. The propert has fair value of P3.5 M per tax
declaration and P 5m zonal value

MV = P 5M – P 2M = P 3M

EXEMPT HOUSING PRIVILEGES

1. Housing for the AFP , PAF , PA and Philippine Navy
2. Housing unit situated to the premises of a business( within a maximum of 50
meters)
3. Temporary housing for an employee in a housing unit for 3 months or less.
2. EXPENSE ACCOUNT

The expense incurred by an employee but which are paid by his employer or
incurred and paid by employee but reimbursed or advanced by the employer are
taxable fringe benefits. The monetary value is the amount paid by the employer.

3. MOTOR VEHICLES OF ANY KIND

3.1 Purchase by employer of motor vehicle in the name of employee regardless
of whether the same is used partially in the business of the employer
MV = 100% cost of the motor vehicle

3.2 Cash benefit to employee for the purchase of vehicle , even if the vehicle is
partly used in the business of employer
MV = 100 % of the cash benefit , except when the amount is subjected to
withholding tax on compensation
3.3 Purchase of car on instalment basis by the employer with ownership placed
in the name of the employee even if the car is used partly for the employer’s business,
the benefit is the acquisition cost divided by 5 years
MV = (1/5) or 20% of the acquisition cost
Illustration :
An employer purchased a car for P 1M payable in four instalment plus
10 % interest on the outstanding unpaid balance of the car.

The entire acquisition cost shall be recognized as monetary value since there is
transfer of ownership but the regulation requires amortization of 5 years. Hence the
employer shall recognize 1M /5 or P200K MV annually until years.

3.4 Employers shoulders a portion and is placed in the name of the employee ,
even if partially used in business.
MV = the portion shouldered by the employee

Illustration :
An employer assisted its managerial employee to purchase a brand new
car for P 4M . 60 % of the value is deductible against future salaries of the managerial
employee.

MV = P 4M x40% = P 1.6 M

3.5 Fleet of motor vehicles owned for the use of the business and the employees
, the value of benefit is the cost of all motor vehicles not used for sales , freight ,
delivery service and other non-personal uses divided by 5 years
MV = 50 % of the value of benefit

4. HOUSEHOLD EXPENSES
Employee expenses borne by the employer for household personnel , salaries of
household help, personal driver of employee and other personal expenses are taxable
fringe benefit. THE MV is the amount paid by the employer.
5. INTEREST ON LOAN AT LESS THAN MARKET RATE

The interest forgone by the employer representing the difference between 12 %

and the actual interest charged is TFBT.

Illustration :
Danny Corporation lent is Chief Financial Officer P1M at a minimal 3% annual
interest rate.

The MV shall be
Annual MV = 1M x ( 12%-3%) P 90,000
Quarterly MV = P90K/4 P 22,500

6. EXPENSES FOR FOREIGN TRAVEL

Any foreign travel that is for the luxury of the employee is TFB (Taxable Fringe
Benefit ) but reasonable business expense for foreign travel for attending business
meetings and conventions are exempt.

7. HOLIDAY and VACATION EXPENSE

Holiday and vacation expense are TFB if shouldered by the employer. The MV is
the amount paid or shouldered by the employer.

8. Educational assistance to the employee or his dependents

Educational assistance to the employee is generally taxable except when it is
incurred for the convenience or furtherance of the employer’s business such as
8.1 The education or study is directly connected with the employer’s trade ,
business or profession
8.2 There is a written contract that the employee is under obligation to remain
at the employ of the employer for the period of time they mutually agreed.

Educational assistance granted to dependents of the employee is generally

taxable except when the assistance was provided through a competitive scheme under
a scholarship program of the company.

Illustration
Trisha Corporation , a distributor of cosmetics , provides educational assistance
to the following employee under an employment bond.

Position Field of Study Amount per semester

VP for Management DBA P 50,000
VP for Marketing Master in Marketing Mgmt 35,000
Operations Manager BS Cosmetology 25,000
Accounting Supervisor BS Criminology 24,000
Accounting Staff BS Accountancy 20,000

MV = P 24,000
The fringe benefit of all the other employees except the accounting supervisor will
neither be subject to TFB nor the regular income tax under the “ convenience of the
employer rule “.

TAX TREATMENT of the TOTAL FRINGE BENEFIT EXPENSE

The total fringe benefit expense including the FBT( Fringe Benefit Tax) is a
deductible expense to the employer against his gross income in the computation of his
taxable income.

5. IMPROPERLY ACCUMULATED EARNINGS TAX

IAET is a 10% penalty tax imposed on the improper accumulation of corporate
earnings beyond the needs of business. It is intended as a deterrent for corporations
intending to defeat the 10% dividend tax by mere non-declaration of dividends . The
imposition of the 10 % IAET is not automatic. It is due only upon formal assessment
by the BIR .

SCOPE OF IAET
The IAET covers the improperly accumulated earnings of domestic corporations
only.

EXEMPT APPROPRIATIONS EARNINGS

1. MANDATORY APPROPRIATIONS – appropriations required by law such as
appropriation to cover the cost of treasury stock acquisitions
2. CONTRACTUAL APPROPRIATION S – appropriations required by contract
such as appropriation for bond sinking fund required by creditors
3. REASONABLE APPROPRIATIONS – appropriations for reasonable needs of
business

INSTANCES OF REASONABLE ACCUMULATION OF ERANINGS

A. Allowance for the increase of earnings up to 100 % of the paid up capital of

the corporation as of balance sheet date , inclusive of accumulations taken from other
years.
B. Earnings reserved for definite corporate expansion projects or programs
requiring considerable capital expenditure as approved by the Board of Directors or
equivalent body.
C. Earnings reserved for building, plants or equipment acquisition as approved
by the Board of Directors or equivalent body.
D. Earnings reserved for compliance with any loan covenant or pre-existing
obligation established under a legitimate business agreement;
E. Earnings required by law or applicable regulations to be retained by the
corporation or in respect of which there is legal prohibition against its distribution.
F. In the case of subsidiaries of foreign corporations in the Philippines , all
undistributed earnings intended or reserved for investments within the Phils. As cab
be proven by corporate records and/or relevant documentary evidence.

PRIMA FACIE INSTANCES of IMPROPERLY ACCUMULATION EARNINGS

1. Investment of substantial profit in unrelated business or stocks or securities

of unrelated business.
 2. Investment in bonds and other long –term securities
3. Accumulation of eranings in excess of 100 % of the paid up capital

ENTITIES PRESUMED IMPROPERLY ACCUMULATION EARNINGS

1. Investment Companies
2. Holding Companies
3. Closely Held Corporations

PRO FORMA for the computation of IAET

Taxable income XXX

Add : NOLCO XXX
Passive Income XXX
Capital Gains XXX
Exempt or Excluded Income XXX XXX
TOTAL Earnings XXX
Less :
Income Tax Due XXX
Final Tax XXX
Capital gains Tax XXX
Dividends Declared XXX
Reasonable appropriations XXX XXX
Improperly Accumulated Earnings XXX
Multiply by IAET rate 10 %
Improperly Accumulated Earnings Tax P XXX

Illustration :

Trisha Corp. was assessed by the BIR for improperly accumulating profits . Trisha
reported the following in 2019

Gross Income P 2M
Business Expenses 1.4 M
NOLCO Prior years 500 K
Dividend income – Domestic 30k
Gross interest income – bank 50K
Gain on sale of domestic stock 200K
Gain on sale on land , classified as capital asset
( SP = 2M ; MV 2.5 M) 500K
Dividends Declared 100K
Appropriations for treasury stocks 50K
Appropriation for plant expansion 150K
Compute the IAET :

Taxable Income 100K

Add : NOLCO 500K
Dividend Income 30K
Interest Income 40K
Gain on Sale of Domestic Stocks 200K
Gain on Land 500K 1,270K
Total 1,370K
Less :
INCOME TAX 40K
Final tax 10K
CGT 165K
Dividends Declared 100K
Appropriations 200K 515K
Improperly Accumulated Earnings 865K
Multiply by rate 10 %
IAET P 86500

6. CAPITAL GAINS TAX

Capital gains subject to Capital Gains Tax

1. Capital gains on the sale domestic stocks sold directly to buyer
2. Capital gains on the sale of properties not used in business

TAX on Sale, exchange and other disposition of domestic stock directly to buyer

Net gain up to P 100K 5%

Excess net gain above P 100K 10 %

Tax on Sale of properties not used in business

6 % whichever is higher between the selling price or market value .

 TRANSFER TAXES

MODES OF ACQUIRING OWNERSHIP

1. Occupation- the property seized is without a known owner.
2. Intellectual creation- the composer owns his musical compositions while the
author owns his literary work.
3. Donation – it is an act of liberality whereby a person disposes gratuitously of a
thing or right in favour of another , who accepts it.
4. Succession – is a mode of acquisition by virtue of which property and obligations
to the extent of value of inheritance
5. Prescription – One acquires ownership and other real rights through the lapse of
time in the manner and under the conditions laid down by law

SUCCESSION – Is a mode of acquisition by virtue of which the property , rights and

obligations to the extent of the value of the inheritance , of a person are transmitted
through his death to another or others either by his will or by operation of law .

Kinds of Succession
a. Testamentary or testate – results from the designation of an heir, made in a will
executed in the form prescribed by law.
b. Legal or intestate – effected by operation of alw since the dependent did not
execute a will.
c. Mixed – effected partly by will and partly by operation of law .

ELEMENTS OF SUCCESSION
1. Death of the decedent
Decedent – the person whose property is transmitted through succession,
whether or not he left a will. If he left a will, he is also called the testator.
2. Inheritance – It includes all the property , rights and obligations of a person which
are not extinguished by his death. Devise is a testamentary disposition of real estate
while legacy is a gidt or bequest by will of personal property.
3. Successors – Heirs , devisees and legatees are all successors . An heir is a person
called to the succession either by provision of a will or by operation of law . Devisees
are persons to whom gifts of real property are given by virtue of will . Legatees are
persons whom gifts of personal property are given by virtue of will.
4. Acceptance

EXECUTORS and ADMINISTRATORS

Executor is a person appointed by a testator to carry out the directions and requests
in his will and to dispose of the property according to his testamentary provisions after
his death .

Administrator is a person appointed by the court to administer the assets and

liabilities of a decedent.
Will is an act whereby a person is permitted , with the formalities prescribed by the
law, to control to a certain degree the disposition of his estate to take effect after his
death.

Codicil is an instrument that amends the provisions of will.

Probate of will is the court procedure by which a will is proved to be valid or invalid

Holographic will is a will written entirely by the testator with his own hand and not
witnessed or attested.

Institution of Heir is an act by virtue of which testator designates in his will the
person or persons who are to succeed him in his property and transmissible right and
obligations

LEGITIME

Legitime is that part of the testators property which he cannot dispose of because of
the law has reserved it for certain heirs who are therefore called compulsory heirs.

COMPULSORY HEIRS
1. Legitimate children and descendants, with respects to their legitimate parents and
ascendants
2. Legitimate parents and ascendants with respects to their legitimate children and
ascendants
3. The widow or widower
4. Acknowledge natural children and natural children by legal fiction
5. Illegitimate children

Legitime of Compulsory heirs

1. legitimate children - ½
2. Surviving spouse – same as the 1 share of legitimate children, 1/3 if only
illegitimate children is surviving
3. Illegitimate children – ½ of the share of 1 legitimate children, 1/3 if olnly surviving
spouse is avialable
4. legitimate parents – ½ if no surviving legitimate children, illegitimate children and
surviving spouse.
 BUSINESS TAXES

Three Major Business internal revenue taxes

1. Value added tax ( VAT- 12 %)

2. Percentage Taxes ( 3 %)
3. Excise Taxes

Business Taxes are imposed upon onerous transfers such as sale , barter or exchange
.

Value Added Tax is a tax on consumption levied on the sale, barter, exchange or lease
of goods or properties and services in the Philippines and on the importation of goods
into the Philippines .

Value added tax and excise tax may be imposed simultaneously on the manufacture
and importation of products.

Value added tax and percentage tax cannot be imposed at the same time. It is either
that sale is subject to tax or subject to percentage tax.

Prepared by :

FELIX M. DEL ROSARIO, CPA, MBA

Instructor