According to recent news reports, the inflation rate for May 2022 is at 5.4%, the highest recorded inflation rate since December 2018. To boot, last month, there were also talks about the possibility of postponing the individual income tax cuts supposedly scheduled starting 2023 as provided under the Tax Reform for Acceleration and Inclusion (TRAIN) Act. These scenarios would certainly trigger taxpayers into thinking about these events’ consequent impact to them. Definitely, these taxpayers include the millions of employees in the Philippines who may be worried about their take home pay vis-à-vis the rising prices of goods and services.
Hence, perhaps, companies-employers may want to consider certain action points on how to possibly lessen the impact of taxes on their employees and increase the latter’s take-home pay.
One of these action points is to revisit the non-taxable “de minimis benefits” that could be granted to the employees. When considering giving an increase in employee benefits, companies may take a look at the said “de minimis benefits” and may grant these first, before increasing the basic salary rate.
De minimis benefits are non-taxable fringe benefits granted by an employer to its employees, a list of which is provided under existing regulations. To name a few are the following fixed and monetary de minimis benefits: P250 monthly medical cash allowance, P2,000 monthly rice subsidy, P300 monthly laundry allowance, and P6,000 annual uniform and clothing allowance. The said benefits alone would amount to P36,600 every year, with annual tax benefits ranging from P7,320 to P12,810 (based on the current 20% minimum and 35% maximum income tax rate).
Other de minimis benefits also include the annual monetized unused vacation leave credits not exceeding 10 days (for private employees), actual medical assistance not exceeding P10,000 per year, employee achievement awards in tangible personal property other than cash or gift certificate amounting to P10,000 per year, gifts made during Christmas and major anniversary amounting to P5,000 per year, daily meal allowance not exceeding 25% of the basic minimum wage per region, and benefits received by an employee by virtue of a collective bargaining agreement and productivity incentive schemes with values not exceeding P10,000 per employee per year. The list of de minimis benefits could be found in Revenue Regulations (RR) No. 02-98, as amended by RR Nos. 05-11, 01-15, and 11-18.
Thus, if a company is considering giving salary increases, it may want to check first on the aforementioned de minimis benefits. The said benefits might seem meager to some, but the consequent reduction of total compensation tax would undeniably increase the employee’s take home pay and purchasing power to cope with the increasing prices.
Another action point to look into is transportation expense. Here in Metro Manila, some commuters may still feel that certain modes of transportation utilized before the pandemic are still not available today. Instead of giving taxable fixed transportation allowances, companies may contemplate offering free shuttles to their employees who are required to return to office.
To illustrate, suppose that an employee normally spends around P2,000 every month in transportation expenses. Thus, if a company gives a fixed transportation allowance to its employee in the same amount of P2,000, while the fixed transportation allowance less withholding tax on compensation amounts to P1,600 (assuming 20% withholding tax rate), then the employee will have to cover for the P400 deficiency which represents the amount of tax withheld on the employee’s transportation allowance.
On the other hand, let’s assume that a company provides free shuttle services to its 10 employees per shuttle and incurs a monthly shuttle rental expense amounting to P20,000 per shuttle. In this case, the rental of shuttle may be subjected to expanded withholding tax, but the employee will not be at the risk of covering for the deficiency brought about by the compensation tax imposition as in the example above.
Needless to say, companies should consider several things in evaluating the above transportation arrangement, like the location of its employees, point-to-point travel arrangement, and costs, among others.
On the other hand, companies may also want to assess whether there are work-from-home (WFH) expenses solely related to the furtherance of the company-employer’s business that can be practically shouldered by the latter. Instead of giving fixed allowances to the employees to answer for such WFH expenses which could be taxable, the company may consider directly coordinating, to the extent possible, with the suppliers to pay for the said WFH expenses, and thus, the corresponding documents will be issued in the name of the company. However, the problem on shouldering WFH expenses is on how determine in particular the portions for personal use versus for business use, like in the case of internet usage. Perhaps, the BIR can issue a guidance on the determination of personal use vs. business use or of a pre-determined fixed percentage for segregation (e.g. 50% for personal use and 50% for business use), so that companies may also include this in their evaluation whether to shoulder some of the employee’s WFH expenses versus giving fixed taxable allowances to the employees.
While the foregoing suggested action points may be worth a thought, some companies might still opt to just give additional taxable fixed allowances as this could be easier put into practice, and there are other factors to consider in pursuing alternative benefits like the administrative functions/monitoring of supporting documents that certain benefits indeed qualify as non-taxable.
The rising prices of commodities is certainly a concern to Filipino employees, and the possible postponement of income tax cuts may not come as a good development unless there are other countermeasures that the government will implement. Nonetheless, with careful planning or consultations, employers may help diminish the tax burden on employees and increase their take-home pay to cope with the rising prices of goods and services.
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 14 June 2022