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Cynamid vs CA

Facts:
Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of American
Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and
chemicals, a wholesaler of imported finished goods and an imported/indentor. In 1985 the CIR assessed
on petitioner a deficiency income tax of P119,817) for the year 1981. Cyanamid protested the
assessments particularly the 25% surtax for undue accumulation of earnings. It claimed that said profits
were retained to increase petitioners working capital and it would be used for reasonable business needs
of the company. The CIR refused to allow the cancellation of the assessments, petitioner appealed to the
CTA. It claimed that there was not legal basis for the assessment because 1) it accumulated its earnings
and profits for reasonable business requirements to meet working capital needs and retirement of
indebtedness 2) it is a wholly owned subsidiary of American Cyanamid Company, a foreign corporation,
and its shares are listed and traded in the NY Stock Exchange. The CTA denied the petition stating that
the law permits corporations to set aside a portion of its retained earnings for specified purposes under
Sec. 43 of the Corporation Code but that petitioners purpose did not fall within such purposes. It found
that there was no need to set aside such retained earnings as working capital as it had considerable liquid
funds. Those corporations exempted from the accumulated earnings tax are found under Sec. 25 of the
NIRC, and that the petitioner is not among those exempted. The CA affirmed the CTAs decision.

Issue: Whether or not the accumulation of income was justified.


Held:
In order to determine whether profits are accumulated for the reasonable needs of the business to avoid
the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is
manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts.
The accumulated profits must be used within reasonable time after the close of the taxable year. In the
instant case, petitioner did not establish by clear and convincing evidence that such accumulated was for
the immediate needs of the business.
To determine the reasonable needs of the business, the United States Courts have invented the
Immediacy Test which construed the words reasonable needs of the business to mean the immediate
needs of the business, and it is held that if the corporation did not prove an immediate need for the
accumulation of earnings and profits such was not for reasonable needs of the business and the penalty
tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs of a business depend
on the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the
amount of accounts receivable, the collection rate, the availability of credit and other similar factors. The
Tax Court opted to determine the working capital sufficiency by using the ration between the current
assets to current liabilities. Unless, rebutted, the presumption is that the assessment is correct. With the
petitioners failure to prove the CIR incorrect, clearly and conclusively, the Tax Courts ruling is upheld.

CIR vs General Foods

Facts:
Respondent corporation General Foods (Phils), which is engaged in the manufacture of Tang,
Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 1985 and
claimed as deduction, among other business expenses, P9,461,246 for media advertising for Tang.
The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of
P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied.
General Foods later on filed a petition for review at CA, which reversed and set aside an earlier
decision by CTA dismissing the companys appeal.

Issue:
W/N the subject media advertising expense for Tang was ordinary and necessary expense fully
deductible under the NIRC

Held:
No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor
of the taxing authority, and he who claims an exemption must be able to justify his claim by the
clearest grant of organic or statute law. Deductions for income taxes partake of the nature of tax
exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly
construed.
To be deductible from gross income, the subject advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of
the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.
While the subject advertising expense was paid or incurred within the corresponding taxable year
and was incurred in carrying on a trade or business, hence necessary, the parties views conflict as to

whether or not it was ordinary. To be deductible, an advertising expense should not only be
necessary but also ordinary.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground
that it failed the two conditions set by U.S. jurisprudence: first, reasonableness of the amount
incurred and second, the amount incurred must not be a capital outlay to create goodwill for the
product and/or private respondents business. Otherwise, the expense must be considered a capital
expenditure to be spread out over a reasonable time.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an
advertising expense. There being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the type and size of business in which the
taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure itself;
the intention of the taxpayer and the general economic conditions. It is the interplay of these, among
other factors and properly weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement of a single product to be inordinately
large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under
then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or
use of services and (2) advertising designed to stimulate the future sale of merchandise or use of
services. The second type involves expenditures incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayers trade or business or for the industry or profession of which
the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as
to the question of the reasonableness of amount, there is no doubt such expenditures are deductible
as business expenses. If, however, the expenditures are for advertising of the second kind, then
normally they should be spread out over a reasonable period of time.
The companys media advertising expense for the promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half of the companys entire claim for marketing
expenses for that year under review.Petition granted, judgment reversed and set aside.

PHILIPPINE REFINING COMPANY V. JARQUE


FACTS:

Plaintiff Philippine Refining Co. and defendant Jarque executed three mortgages on the motor vessels
Pandan and Zargazo. The documents were recorded as transfer and encumbrances of the vessels for the
port of Cebu and each was denominated a chattel mortgage.

The first two mortgages did not have an affidavit of good faith. A fourth mortgage was executed by Jarque
and Ramon Aboitiz over motorship Zaragoza and was entered in the Chattel Mortgage Registry on May
12, 1932, within the period of 30 days prior to the foreclosure/institution of the insolvency proceedings.

Jose Curaminas filed with the CFI of Cebu a petition praying that Francisco Jarque be declared an
insolvent debtor. This was granted and Jarques properties were then assigned to Curaminas.

A problem arose when Judge Jose Hontiveros declined to order the foreclosure of the mortgages, and
instead, ruled that they were defective because they did not have affidavits of good faith.

ISSUE:
1.

Whether or not the mortgages of the vessels are governed by the Chattel Mortgage Law

2.

Whether or not an affidavit of good faith is needed to enforce achattel mortgage on a vessel

RULING:
Yes. Personal property includes vessels. They are subject to the provisions of the Chattel Mortgage Law.
The Chattel Mortgage Law says that a good chattel mortgage includes an affidavit of good faith. The
absence of such affidavit makes mortgage unenforceable against creditors and subsequent
encumbrances. The judge was correct.

Note: A mortgage on a vessel is generally like other chattel mortgages. The only difference between a
chattel mortgage of a vessel and a chattel mortgage of other personalty is that the first must be noted in
the registry of the register of deeds.

Commissioner vs Procter and Gamble

Facts:
Procter and Gamble Philippines declared dividends payable to its parent company
and sole stockholder, P&G USA,and deducted 35% withholding tax at source. It then
filed a claim with the Commissioner of Internal Revenue for arefund or tax credit,
claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as
amended by Presidential Decree No. 369, the applicable rate of withholding tax on
the dividends remitted was only 15%.
Issues and Ruling:
1. W/N P&G Philippines is entitled to the refund or tax credit.
YES. The ordinary 35% tax rate applicable to dividend remittances to nonresident corporate stockholders of aPhilippine corporation goes down to 15% if
the country of domicile of the foreign stockholder corporation shallallow such
foreign corporation a tax credit for taxes deemed paid in the Philippines,
applicable against the taxpayable to the domiciliary country by the foreign
stockholder corporation. Such tax credit for taxes deemed paid inthe Philippines
must, as a minimum, reach an amount equivalent to 20 percentage points
which represents thedifference between the regular 35% dividend tax rate and
the preferred 15% tax rate. Since the US Congress desires toavoid or reduce
double taxation of the same income stream, it allows a tax credit of both (i) the
Philippine dividendtax actually withheld, and (ii) the tax credit for the Philippine
corporate income tax actually paid by P&G Philippines but deemed paid by
P&G USA. Moreover, under the Philippines-United States Convention
W ith Respect to Taxeson Income, the Philippines, by treaty commitment, reduced
the regular rate of dividend tax to a maximum of 20% of the gross amount of
dividends paid to US parent corporations, and established a treaty obligation on the
part of theUnited States that it shall allow to a US parent corporation receiving
dividends from its Philippine subsidiary a[tax] credit for the appropriate amount of
taxes paid or accrued to the Philippines by the Philippine [subsidiary].
Notes:
The law sets no condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to withhold the tax under all
circumstances. In effect, the responsibility for the collection of the taxas well as the
payment thereof is concentrated upon the person over whom the Government has
jurisdiction.The withholding agent is the agent of both the Government and the
taxpayer.

W ith respect to the collection and/or withholding of tax, he is the Governments


agent.
With regard to the filing of the necessary income tax return and thepayment of the
tax to the Government, he is the agent of the taxpayer.The NIRC does not require
that the US tax law deem the parent corporation to have paid the 20 percentage
points of dividend tax waived by the Philippines. It only requires that the US shall
allow P&G-USA a deemed paid tax creditin an amount equivalent to the 20
percentage points waived by the Philippines. Section 24(b)(1) does not create a
taxexemption nor does it provide a tax credit; it is a provision which specifies when
a particular (reduced) tax rate islegally applicable. An interpretation of a tax statute
that produces a revenue flow for the government is not, for that reason
alone,necessarily the correct reading of the statute.Section 24(b)(1) of the NIRC
seeks to promote the in-flow of foreign equity investment in the Philippines by
reducingthe tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreigninvestor, however, would not
benefit from the reduction of the Philippine dividend tax rate unless its home
country gives it some relief from double taxation by allowing the investor additional
tax credits which would be applicableagainst the tax payable to such home country.
Accordingly Section 24(b)(1) of the NIRC requires the home ordomiciliary country to
give the investor corporation a deemed paid tax credit at least equal in amount to
the 20percentage points of dividend tax foregone by the Philippines, in the
assumption that a positive incentive effect wouldthereby be felt by the investor.
Revenue Regulations No. 3-98 - Fringe Benefit Tax

May 21, 1998 January 1, 1998


REVENUE REGULATIONS NO. 03-98
SUBJECT
:
Implementing Section 33 of the National Internal Revenue
Code, as Amended by Republic Act No. 8424 Relative to the Special Treatment of
Fringe Benefits
TO

All Internal Revenue Officers and Others Concerned

Pursuant to Section 244, in relation to Section 33 of the National Internal Revenue


Code of 1997, these Regulations are hereby promulgated to govern the collection at
source of the tax on fringe benefits which have been furnished, granted or paid by
the employer beginning January 1, 1998.

SEC. 2.33.

SPECIAL TREATMENT OF FRINGE BENEFITS

(A)
Imposition of Fringe Benefits Tax A final withholding tax is hereby imposed
on the grossed-up monetary value of fringe benefit furnished, granted or paid by
the employer to the employee, except rank and file employees as defined in these
Regulations, whether such employer is an individual, professional partnership or a
corporation, regardless of whether the corporation is taxable or not, or the
government and its instrumentalities except when: (1) the fringe benefit is required
by the nature of or necessary to the trade, business or profession of the employer;
or (2) when the fringe benefit is for the convenience or advantage of the employer.
The fringe benefit tax shall be imposed at the following rates:
Effective January 1, 1998

34%

Effective January 1, 1999

33%

Effective January 1, 2000

32%

The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on
the employee which shall be withheld and paid by the employer on a calendar
quarterly basis as provided under Sec. 57 (A) (Withholding of Final Tax on certain
Incomes) and Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the
Code.
The grossed-up monetary value of the fringe benefit shall be determined by dividing
the monetary value of the fringe benefit by the following percentages and in
accordance with the following schedule:
Effective January 1, 1998

66%

Effective January 1, 1999

67%

Effective January 1, 2000

68%

The grossed-up monetary value of the fringe benefit represents the whole amount
of income realized by the employee which includes the net amount of money or net
monetary value of property which has been received plus the amount of fringe
benefit tax thereon otherwise due from the employee but paid by the employer for
and in behalf of his employee, pursuant to the provisions of this Section.
Coverage These Regulations shall cover only those fringe benefits given or
furnished to managerial or supervisory employees and not to the rank and file.
The term, "RANK AND FILE EMPLOYEES" means all employees who are holding
neither managerial nor supervisory position. The Labor Code of the Philippines, as
amended, defines "managerial employee" as one who is vested with powers or
prerogatives to lay down and execute management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or discipline employees. "Supervisory
employees" are those who, in the interest of the employer, effectively recommend

such managerial actions if the exercise of such authority is not merely routinary or
clerical in nature but requires the use of independent judgment. cdtai
Moreover, these regulations do not cover those benefits properly forming part of
compensation income subject to withholding tax on compensation in accordance
with Revenue Regulations No. 2-98.
Fringe benefits which have been paid prior to January 1, 1998 shall not be covered
by these Regulations.
Determination of the Amount Subject to the Fringe Benefit Tax In general, the
computation of the fringe benefits tax would entail (a) valuation of the benefit
granted and (b) determination of the proportion or percentage of the benefit which
is subject to the fringe benefit tax. That the Tax Code allows for the cases where
only a portion (i.e. less than 100 per cent) of the fringe benefit is subject to the
fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which stipulates
that fringe benefits which are "required by the nature of, or necessary to the trade,
business or profession of the employer, or when the fringe benefit is for the
convenience or advantage of the employer" are not subject to the fringe benefit tax.
Thus, in cases where the fringe benefits entail joint benefits to the employer and
employee, the portion which shall be subject to the fringe benefits tax and the
guidelines for the valuation of fringe benefits are defined under these rules and
regulations.
Unless otherwise provided in these regulations, the valuation of fringe benefits shall
be as follows:
(1)
If the fringe benefit is granted in money, or is directly paid for by the
employer, then the value is the amount granted or paid for.
(2)
If the fringe benefit is granted or furnished by the employer in property
other than money and ownership is transferred to the employee, then the value of
the fringe benefit shall be equal to the fair market value of the property as
determined in accordance with Sec. 6 (E) of the Code (Authority of the
Commissioner to Prescribe Real Property Values).
(3)
If the fringe benefit is granted or furnished by the employer in property
other than money but ownership is not transferred to the employee, the value of the
fringe benefit is equal to the depreciation value of the property.
Taxation of fringe benefit received by a non-resident alien individual who is not
engaged in trade or business in the Philippines A fringe benefit tax of twenty-five
percent (25%) shall be imposed on the grossed-up monetary value of the fringe
benefit. The said tax base shall be computed by dividing the monetary value of the
fringe benefit by seventy-five per cent (75%).

Taxation of fringe benefit received by (1) an alien individual employed by regional or


area headquarters of a multinational company or by regional operating
headquarters of a multinational company; (2) an alien individual employed by an
offshore banking unit of a foreign bank established in the Philippines; (3) an alien
individual employed by a foreign service contractor or by a foreign service
subcontractor engaged in petroleum operations in the Philippines; and (4) any of
their Filipino individual employees who are employed and occupying the same
position as those occupied or held by the alien employees. A fringe benefit tax of
fifteen per cent (15%) shall be imposed on the grossed-up monetary value of the
fringe benefit. The said tax base shall be computed by dividing the monetary value
of the fringe benefit by eighty-five per cent (85%).
Taxation of fringe benefit received by employees in special economic zones
Fringe benefits received by employees in special economic zones, including Clark
Special Economic Zone and Subic Special Economic and Free Trade Zone, are also
covered by these regulations and subject to the normal rate of fringe benefit tax or
the special rates of 25% or 15% as provided above.
(B)
Definition of Fringe Benefit In general, except as otherwise provided under
these regulations, for purposes of this Section, the term "FRINGE BENEFIT" means
any good, service, or other benefit furnished or granted by an employer in cash or
in kind, in addition to basic salaries, to an individual employee (except rank and file
employee as defined in these regulations) such as, but not limited to the following:
(1)

Housing;

(2)

Expense account;

(3)

Vehicle of any kind;

(4)

Household personnel, such as maid, driver and others;

(5)
Interest on loan at less than market rate to the extent of the difference
between the market rate and actual rate granted;
(6)
Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
(7)

Expenses for foreign travel;

(8)

Holiday and vacation expenses;

(9)

Educational assistance to the employee or his dependents; and

(10)
Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.

For this purpose, the guidelines for valuation of specific types of fringe benefits and
the determination of the monetary value of the fringe benefits are give below. The
taxable value shall be the grossed-up monetary value of the fringe benefit.
(1)

Housing privilege

(a)
If the employer leases a residential property for the use of his employee and
the said property is the usual place of residence of the employee, the value of the
benefit shall be the amount of rental paid thereon by the employer, as evidenced by
the lease contract. The monetary value of the fringe benefit shall be fifty per cent
(50%) of the value of the benefit.
(b)
If the employer owns a residential property and the same is assigned for the
use of his employee as his usual place of residence, the annual value of the benefit
shall be five per cent (5%) of the market value of the land and improvement, as
declared in the Real Property Tax Declaration Form, or zonal value as determined by
the Commissioner pursuant to Section 6(E) of the Code (Authority of the
Commissioner to Prescribe Real Property Values), whichever is higher. The monetary
value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.
cda
The monetary value of the housing fringe benefit is equivalent to the following:
MV = [5%(FMV or ZONAL VALUE] X 50%
WHERE:
MV = MONETARY VALUE
FMV = FAIR MARKET VALUE
(c)
If the employer purchases a residential property on installment basis and
allows his employee to use the same as his usual place of residence, the annual
value of the benefit shall be five per cent (5%) of the acquisition cost, exclusive of
interest. The monetary value of fringe benefit shall be fifty per cent (50%) of the
value of the benefit.
(d)
If the employer purchases a residential property and transfers ownership
thereof in the name of the employee, the value of the benefit shall be the
employer's acquisition cost or zonal value as determined by the Commissioner
pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe
Real Property Values), whichever is higher. The monetary value of the fringe benefit
shall be the entire value of the benefit.
(e)
If the employer purchases a residential property and transfers ownership
thereof to his employee for the latter's residential use, at a price less than the
employer's acquisition cost, the value of the benefit shall be the difference between

the fair market value, as declared in the Real Property Tax Declaration Form, or
zonal value as determined by the Commissioner pursuant to Sec. 6(E) of the Code
(Authority of the Commissioner to Prescribe Real Property Values), whichever is
higher, and the cost to the employee. The monetary value of the fringe benefit shall
be the entire value of the benefit.
(f)
Housing privilege of military officials of the Armed Forces of the Philippines
(AFP) consisting of officials of the Philippine Army, Philippine Navy and Philippine Air
Force shall not be treated as taxable fringe benefit in accordance with the existing
doctrine that the State shall provide its soldiers with necessary quarters which are
within or accessible from the military camp so that they can be readily on call to
meet the exigencies of their military service.
(g)
A housing unit which is situated inside or adjacent to the premises of a
business or factory shall not be considered as a taxable fringe benefit. A housing
unit is considered adjacent to the premises of the business if it is located within the
maximum of fifty (50) meters from the perimeter of the business premises.
(h)
Temporary housing for an employee who stays in a housing unit for three (3)
months or less shall not be considered a taxable fringe benefit.
(2)

Expense account

(a)
In general, expenses incurred by the employee but which are paid by his
employer shall be treated as taxable fringe benefits, except when the expenditures
are duly receipted for and in the name of the employer and the expenditures do not
partake the nature of a personal expense attributable to the employee.
(b)
Expenses paid for by the employee but reimbursed by his employer shall be
treated as taxable benefits except only when the expenditures are duly receipted
for and in the name of the employer and the expenditures do not partake the nature
of a personal expense attributable to the said employee.
(c)
Personal expenses of the employee (like purchases of groceries for the
personal consumption of the employee and his family members) paid for or
reimbursed by the employer to the employee shall be treated as taxable fringe
benefits of the employee whether or not the same are duly receipted for in the
name of the employer.
(d)
Representation and transportation allowances which are fixed in amounts
and are regular received by the employees as part of their monthly compensation
income shall not be treated as taxable fringe benefits but the same shall be
considered as taxable compensation income subject to the tax imposed under Sec.
24 of the Code.
(3)

Motor vehicle of any kind

(a)
If the employer purchases the motor vehicle in the name of the employee,
the value of the benefit is the acquisition cost thereof. The monetary value of the
fringe benefit shall be the entire value of the benefit, regardless of whether the
motor vehicle is used by the employee partly for his personal purpose and partly for
the benefit of his employer.
(b)
If the employer provides the employee with cash for the purchase of a motor
vehicle, the ownership of which is placed in the name of the employee, the value of
the benefits shall be the amount of cash received by the employee. The monetary
value of the fringe benefit shall be the entire value of the benefit regardless of
whether the motor vehicle is used by the employee partly for his personal purpose
and partly for the benefit of his employer, unless the same was subjected to a
withholding tax as compensation income under Revenue Regulations No. 2-98.
(c)
If the employer purchases the car on installment basis, the ownership of
which is placed in the name of the employee, the value of the benefit shall be the
acquisition cost exclusive of interest, divided by five (5) years. The monetary value
of the fringe benefit shall be the entire value of the benefit regardless of whether
the motor vehicle is used by the employee partly for his personal purpose and
partly for the benefit of his employer.
(d)
If the employer shoulders a portion of the amount of the purchase price of a
motor vehicle the ownership of which is placed in the name of the employee, the
value of the benefit shall be the amount shouldered by the employer. The monetary
value of the fringe benefit shall be the entire value of the benefit regardless of
whether the motor vehicle is used by the employee partly for his personal purpose
and partly for the benefit of his employer.
(e)
If the employer owns and maintains a fleet of motor vehicles for the use of
the business and the employees, the value of the benefit shall be the acquisition
cost of all the motor vehicles not normally used for sales, freight, delivery service
and other non-personal used divided by five (5) years. The monetary value of the
fringe benefit shall be fifty per cent (50%) of the value of the benefit.
The monetary value of the motor vehicle fringe benefit is equivalent to the
following:
MV = [(A)/5] X 50%
where:
MV = Monetary value
A = acquisition cost
(f)
If the employer leases and maintains a fleet of motor vehicles for the use of
the business and the employees, the value of the benefit shall be the amount of

rental payments for motor vehicles not normally used for sales, freight, delivery,
service and other non-personal use. The monetary value of the fringe benefit shall
be fifty per cent (50%) of the value of the benefit.
(g)
The use of aircraft (including helicopters) owned and maintained by the
employer shall be treated as business use and not be subject to the fringe benefits
tax.
(h)
The use of yacht whether owned and maintained or leased by the employer
shall be treated as taxable fringe benefit. The value of the benefit shall be
measured based on the depreciation of a yacht at an estimated useful life of 20
years.
(4)
Household expenses Expenses of the employee which are borne by the
employer for household personnel, such as salaries of household help, personal
driver of the employee, or other similar personal expenses (like payment for
homeowners association dues, garbage dues, etc.) shall be treated as taxable fringe
benefits.
(5)

Interest on loan at less than market rate

(a)
If the employer lends money to his employee free of interest or at a rate
lower than twelve per cent (12%), such interest foregone by the employer or the
difference of the interest assumed by the employee and the rate of twelve per cent
(12%) shall be treated as a taxable fringe benefit.
(b)
The benchmark interest rate of twelve per cent (12%) shall remain in effect
until revised by a subsequent regulation.
(c)
This regulation shall apply to installment payments or loans with interest
rate lower than twelve per cent (12%) starting January 1, 1998.
(6)
Membership fees, dues, and other expenses borne by the employer for his
employee, in social and athletic clubs or other similar organizations. These
expenditures shall be treated as taxable fringe benefits of the employee in full.
(7)

Expenses for foreign travel

(a)
Reasonable business expenses which are paid for by the employer for the
foreign travel of his employee for the purpose of attending business meetings or
conventions shall not be treated as taxable fringe benefits. In this instance, inland
travel expenses (such as expenses for food, beverages and local transportation)
except lodging cost in a hotel (or similar establishments) amounting to an average
of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The
expenses should be supported by documents proving the actual occurrences of the
meetings or conventions.

The cost of economy and business class airplane ticket shall not be subject to a
fringe benefit tax. However, 30 percent of the cost of first class airplane ticket shall
be subject to a fringe benefit tax.
(b)
In the absence of documentary evidence showing that the employee's travel
abroad was in connection with business meetings or conventions, the entire cost of
the ticket, including cost of hotel accommodations and other expenses incident
thereto shouldered by the employer, shall be treated as taxable fringe benefits. The
business meetings shall be evidenced by official communications from business
associates abroad indicating the purpose of the meetings. Business conventions
shall be evidenced by official invitations/communications from the host organization
or entity abroad. Otherwise, the entire cost thereof shouldered by the employer
shall be treated as taxable fringe benefits of the employee.
(c)
Travelling expenses which are paid by the employer for the travel of the
family members of the employee shall be treated as taxable fringe benefits of the
employee.
(8)
Holiday and vacation expenses Holiday and vacation expenses of the
employee borne by his employer shall be treated as taxable fringe benefits.
(9)

Educational assistance to the employee or his dependents

(a)
The cost of the educational assistance to the employee which are borne by
the employer shall, in general, be treated as taxable fringe benefit. However, a
scholarship grant to the employee by the employer shall not be treated as taxable
fringe benefit if the education or study involved is directly connected with the
employer's trade, business or profession, and there is a written contract between
them that the employee is under obligation to remain in the employ of the employer
for period of time that they have mutually agreed upon. In this case, the
expenditure shall be treated as incurred for the convenience and furtherance of the
employer's trade or business.
(b)
The cost of educational assistance extended by an employer to the
dependents of an employee shall be treated as taxable fringe benefits of the
employee unless the assistance was provided through a competitive scheme under
the scholarship program of the company.
(10)
Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows The cost of life or health insurance and
other non-life insurance premiums borne by the employer for his employee shall be
treated as taxable fringe benefit, except the following: (a) contributions of the
employer for the benefit of the employee, pursuant to the provisions of existing law,
such as under the Social Security System (SSS), (R.A. No. 8282, as amended) or
under the Government Service Insurance System (GSIS) (R.A. No. 8291), or similar

contributions arising from the provisions of any other existing law; and (b) the cost
of premiums borne by the employer for the group insurance of his employees.
(C)
Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe
benefits tax shall not be imposed on the following fringe benefits:
(1)
Fringe benefits which are authorized and exempted from income tax under
the Code or under any special law;
(2)
Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3)
Benefits given to the rank and file, whether granted under a collective
bargaining agreement or not;
(4)

De minimis benefits as defined in these Regulations;

(5)
If the grant of fringe benefits to the employee is required by the nature of,
or necessary to the trade, business or profession of the employer; or
(6)

If the grant of the fringe benefit is for the convenience of the employer.

The exemption of any fringe benefit from the fringe benefit tax imposed under this
Section shall not be interpreted to mean exemption from any other income tax
imposed under the Code except if the same is likewise expressly exempt from any
other income tax imposed under the Code or under any other existing law. Thus, if
the fringe benefit is exempted from the fringe benefits tax, the same may, however,
still form part of the employee's gross compensation income which is subject to
income tax, hence, likewise subject to a withholding tax on compensation income
payment.
The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall,
in general, be limited to facilities or privileges furnished or offered by an employer
to his employees that are 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 his employees such as the following:
(1)
Monetized unused vacation leave credits of employees not exceeding ten
(10) days during the year;
(2)
Medical cash allowance to dependents of employees not exceeding P750
per semester or P125 per month;
(3)

Rice subsidy of P350 per month granted by an employer to his employees;

(4)

Uniforms given to employees by the employer;

(5)

Medical benefits given to the employees by the employer;

(6)

Laundry allowance of P150 per month;

(7)
Employee achievement awards, e.g. for length of service or safety
achievement, which must be in the form of a tangible personal property other than
cash or gift certificate, with an annual monetary value not exceeding one-half ()
month of the basic salary of the employee receiving the award under an established
written plan which does not discriminate in favor of highly paid employees; dctai
(8)
Christmas and major anniversary celebrations for employees and their
guests;
(9)
Company picnics and sports tournaments in the Philippines and are
participated exclusively by employees; and
(10)
Flowers, fruits, books or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc
(D)
Tax Accounting for the Fringe Benefit Furnished to the Employee and the
Fringe Benefit Tax Due Thereon. As a general rule, the amount of taxable fringe
benefit and the fringe benefits tax shall constitute allowable deductions from gross
income of the employer. However, if the basis for computation of the fringe benefits
tax is the depreciation value, the zonal value as determined by the Commissioner
pursuant to Section 6(E) of the Code or the fair market value as determined in the
current real property tax declaration of a certain property, only the actual fringe
benefits tax paid shall constitute a deductible expense for the employer. The value
of the fringe benefit shall not be deductible and shall be presumed to have been
tacked on or actually claimed as depreciation expense by the employer.
Provided, however, that if the aforesaid zonal value or fair market value of the said
property is greater than its cost subject to depreciation, the excess amount shall be
allowed as a deduction from the employer's gross income as fringe benefit expense.
Illustrations on fringe benefit furnished or granted by the employer to an employee
(other than a rank-and-file employee)
(1)
During the year 1998, ABC Corporation paid for the monthly rental of a
residential house of its branch manager (Mr. Dela Cruz) amounting to P66,000.00.
In this case, the monthly taxable grossed-up monetary value of the said fringe
benefit furnished or granted to its branch manager (Mr. Dela Cruz) shall be
P50,000.00, computed as follows:
Monthly rental for the residential house
Grossed-up monetary benefit granted
(P66,000.00 divided by 66% factor for

P66,000.00

calendar year 1998 times 50% taxable portion)

P50,000.00

Fringe benefit tax due thereon (34%)

P17,000.00

=========
ABC Corporation shall take up in its books of accounts the P66,000.00 fringe benefit
furnished to Mr. Dela Cruz, under account title "Fringe Benefit Expense" and the
amount of 17,000.00 under the account title "Fringe Benefit Tax Expense". The
aforesaid amounts shall be fully allowed as deductions from the gross income of
ABC Corporation and shall be taken up in the said employer's books of accounts as
follows:
Debit: Fringe Benefit Expense

P66,000

Debit: Fringe Benefit Tax Expense

P17,000

Credit: Cash

P83,000

To record fringe benefit expense and fringe benefit tax paid on rental of the
residential property furnished to Mr. Dela Cruz for his residential use. (Note: If the
fringe benefit expense of P66,000.00 has already accrued but not yet paid, use the
account title "fringe benefit payable". If the fringe benefit tax has already accrued
but not yet paid, use the account title "fringe benefit tax payable").
(2)
XYZ Corporation owns a condominium unit. During the year 1998, the said
corporation furnished and granted the said property for the residential use of its
Assistant Vice-President. The fair market value of the said property as determined
by the Commissioner pursuant to Section 6(E) of the Code amounts P10,000,000.00
while its fair market value as shown in its current Real Property Tax Declaration
amounts to P8,000,000.00. In this case, the higher fair market value of
P10,000,000.00 as determined by the Commissioner shall be used in computing the
monetary of the fringe benefit so furnished or granted to said employee and the
fringe benefit tax due thereon shall be computed as follows:
Monthly rental value of the property
(P10,000,000 times 5% thereof times 50%
divided by 12 months)

P20,833.33

Grossed-up monetary value thereof as fringe


benefit (P20,833.33 divided by 66% factor for
calendar year 1998) P31,565.66

Fringe Benefit tax due thereon (34%)

P10,732.32

=========
In general, under this illustration, the XYZ Corporation shall not further claim
deduction for allowing its Assistant Vice-President the use of its residential property
since the cost for the use thereof has already been recovered as deduction from its
gross income under "Depreciation Expense". However, since the fringe benefit tax
in the amount of P10,732.32, assumed and paid by XYZ corporation has not as yet
been recovered by way of deduction from gross income, the same shall be allowed
as a deduction from its gross income. XYZ Corporation shall take up the foregoing in
its books of accounts, as follows:
Debit: Fringe Benefit Tax Expense

P10,732.32

Credit: Cash/Fringe Benefit Tax Payable

P10,732.32

To record fringe benefit tax expense for the


residential property furnished to employees.
However, if the cost of the aforesaid condominium unit subject to depreciation
allowance (example: its acquisition cost is only P7,000,000.00) is lesser that its fair
market value as determined by the Commissioner (i.e. P10,000,000.00), the excess
amount (i.e. P3,000,000.00) shall be amortized throughout the remaining estimated
useful life of the residential property used in computing the said employer's
depreciation expense and allowed as a deduction from the said employer's gross
income as fringe benefit expense. Thus, if the remaining estimated useful life
thereof during the year 1998 is fifteen (15) years, its monthly amortization shall be
computed as follows:
Monthly amortization (P3,000,000.00 divided by
15 years divided by 12 months)

P16,666.67

In this case, XYZ Corporation shall take up the foregoing in its books of accounts as
follows:
Debit: Fringe benefit expense
Debit: Fringe benefit tax

P16,666.67

P10,732.32

Credit: Income constructively realized

P16,666.67

Credit: Cash/Fringe benefit tax payable

P10,732.32

To record fringe benefit and fringe benefit tax expenses and income constructively
realized from the use of company-owned residential property furnished to
employees.

REPEALING CLAUSE All existing rules and regulations or parts thereof which are
inconsistent with the provisions of these regulations are hereby revoked. LibLex
EFFECTIVITY These regulations shall take effect on fringe benefits furnished,
granted or paid beginning January 1, 1998.
TRANSITORY PROVISIONS No penalty shall be imposed for late payment of the
fringe benefit tax for the first quarter ending March 1998: Provided, however, that
the withholding tax return for the first quarter shall be filed and the tax is paid not
later than July 25, 1998.
SALVADOR M. ENRIQUEZ, JR.