With the current state of competition, companies are competing not only on marketing their products and services, but also to attract recruits. And so, they often offered attractive compensation packages. This includes interest in and awareness of the correct tax treatment that accompanies employee benefits.

Here in the country, compensation and benefits received by employees are generally subject to withholding tax on compensation. But other benefits are subject to another form of tax, the employee benefits tax (FBT). There are still cases, however, where the tax treatment is confusing, where even our tax authority keeps changing the rules more often.

Remuneration income paid to employees, regardless of their rank or position in the company, is subject to withholding tax. Remuneration would take all forms, whether paid in cash or in other forms like stocks, bonds or other forms of property, as long as it is given as compensation for services rendered by the employee. It includes accommodation or meals provided for the benefit of the employee, as well as fixed and variable allowances. The withholding tax varies from 0% to 35% of income, depending on the amount.

The benefits subject to the FBT are only those granted to employees who hold a management or supervisory position. Benefits refer to goods, services or other benefits provided in addition to base salaries. Among these social advantages subjected to the FBT, let us quote for example certain privileges which are granted to them for the housing, the use of the transport vehicles of the employer or the reimbursement of personal expenses. The FBT rate is 35%. The monetary value of the benefits, calculated according to certain guidelines provided by law (for example., 50% of the value), is increased and subject to the FBT rate. Indeed, the FBT is borne by the employer, and is not deducted from the amount of social benefits.

Like remuneration subject to withholding tax, benefits in kind can also be paid in cash or in kind. The fine line between benefits subject to withholding tax and those subject to FBT is often confusing.

For example, housing allowances are subject to the FBT. But there are decisions that housing allowances, given to managerial and supervisory employees in the form of allowances, are subject to FBT to the extent of the actual rent, and any excess of the fixed housing allowance over the amount of the actual rent is taxable. as remuneration income subject to withholding tax.

With respect to stock awards, our tax authority has not been consistent in its reporting. But recently, the Department of Finance (DOF) issued RR 13-2022, providing that equity awards (in the form of stock options, stock appreciation rights and other option plans ) granted to employees are considered remuneration subject to withholding tax. This rule will apply regardless of the employment status of the scholarship employee, who may be a simple executive, manager or supervisor. Equity grants, once exercised or used, would be subject to withholding tax at the graduated tax rate of 0% to 35%.

RR 13-2022 was issued following a DOF Notice in Notice No. 016-2022 on the same matter. The DOF took into account that equity grants are not provided as a benefit which is the conventional description of benefits subject to FBT, but rather as payment for services rendered by employees. As a result, share-based compensation is systematically treated by granting companies as compensatory due to the vesting period during which employees are required to be employed or render services to the employer. Thus, the DOF ruled that stock grants are taxable as compensation subject to withholding and not FBT.

Prior to RR 13-2022, RMC 79-2014 imposed a different rule. In RMC No. 79-2014, income from share allocations was taxable depending on the employee’s professional situation. If he is a basic employee, the income has been subject to withholding tax on remuneration; otherwise, the FBT applied. This distinction is no longer present in RR 13-2022.

It is important for taxpayers to know the appropriate taxes that are taxable on their employee benefits to actually serve the purpose of giving them, i.e. to receive and retain them, while also complying with the law. This is particularly relevant in cases where the applicable withholding tax rate is lower than the FBT rate. The same applies when the benefits are paid in goods. The employee may not appreciate receiving non-monetary benefits when withholding taxes on them are withheld and deducted from their wages paid in cash, whereas, if subject to FBT, they may obtain the value of benefits in full.

Why the DOF issued the notice provided us with a helpful guide. On this basis, we can say that, if the benefits are granted primarily in consideration for the services of the employees, and not just “as a benefit”, then these must be treated as remuneration subject to withholding tax and not at the FBT.

But even with the guidelines provided by the tax administration, applications are still susceptible to conflicting interpretations. Refer to your advisors if in doubt!

The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a member firm of WTS Global.

The article is provided for general information only and is not intended, nor should it be construed, as a substitute for tax, legal or financial advice on any specific subject. The applicability of this article to any actual or particular tax or legal matter should therefore be supported by professional study or advice. If you have any comments or questions regarding the article, you can email the author at [email protected] or call 8403-2001 local 160.