Train Law and its Impact on Employee Compensation and Benefits

TRAIN Law or R.A. 10963 was passed which changed the landscape of taxation of employee compensation. At least for those whose monthly basic income ranges from the minimum up to PhP20,833.00.

There are other significant impact of the TRAIN Law like the increase in the ceiling of 13^th month pay and other benefits. However, it is the change introduced in the monthly withholding and new tax rate that is more considerable since the working man feels it every pay day.

Employees used to be classified into employed by a single employer, by multiple employers, employed but engaged in business, alien practicing profession in the country, employees of multinational, among others. This classification was removed under the TRAIN law.

The exemptions on the PhP50,000.00 worth of basic personal exemption, PhP25,000.00 worth of additional exemption per qualified dependent not exceeding four, and personal exemption allowable to nonresident alien individual were repealed. Further, the provisions stating that husband is deemed head of the family and proper claimant of the additional exemption and that taxes to be withheld from the wages of the wife must be in accordance with the table for zero exemption of the withholding tax table have been repealed as well.

RMC 50-2018 states that personal and additional exemptions previously provided under Section 35 of the 1997 Tax Code, as amended, have been removed under the TRAIN Law. Starting January 1, 2018, said exemptions of individual taxpayers were replaced with the first PhP250,000 of taxable income which is now subject to zero percent (0%) rate of income tax, practically exempting such income from income tax. (See discussion on Tax Solutions on Employee Compensation and Benefits, Second Edition 2019 by Atty. Villanueva citing A1, RMC 50-2018)

Also, what used to be an allowed deduction of PhP2,400.00 per year or PhP200.00 per month worth of premium payments on health and/or hospitalization insurance of an individual provided that the family has a gross income not exceeding PhP250,000.00 for the taxable year is not anymore available.

At any rate, revenue memorandum circular related to the TRAIN law provides that employees are not required to update their tax status and submit documents thereon to the BIR. (See Q15, A15, RMC 50-2018 also discussed in the book)

Section 5 of R.A. 10963 (TRAIN law) further amended Section 24 of the Tax Reform Act of 1997 imposing an income tax on individual citizen and resident alien of the Philippines on their taxable income from all sources within and without the Philippines.

Under RMC 50-2018, the MWE is exempt from income tax on his minimum wage, overtime (OT) pay, holiday pay, night shift differential pay and hazard pay. However, incomes other than those mentioned are subject to income tax.

For those whose basic pay is more than the minimum wage but does not exceed PhP250,000.00, they are no longer considered an MWE since their basic pay is more than the minimum wage. Thus, the amount of basic pay, OT pay, holiday pay, night shift differential pay and hazard pay shall be subject to income tax, and consequently, to the withholding tax on compensation.

Thus, the rates in Section 24 shall be applicable on all purely compensation earnings of the employee such as overtime, holiday pay, night shift differential, among others.

Other income related to employment which may also be subjected to the same rate of tax are regular allowances, 13^th month pay, Christmas bonus and other monetary benefits even the de minimis items when they exceed the limits provided by the regulation. The rule is subject to certain exceptions though considering that certain benefits are exempted as long as they do not exceed certain ceiling.

The employer is under obligation to withhold the tax due for the employee’s purely compensation income.

LVS is now accepting advanced orders for the book Tax Solutions on Employee Compensation and Benefits, Second Edition 2019 at a special introductory price of PhP850.00 until April 24, 2019. Shipping fee shall be on the buyer. Shipping of orders shall start May 1, 2019. After launch date regular price is PhP998.00. To place advanced order please call 579-9170 or text Lea at 0917-6256598.

Below are the items/topics discussed in this new book:

BASIC TAXATION PRINCIPLES

1. The power to tax

A.1      Limitations on the power to tax

CHAPTER II

INCOME TAX

1. Definition of Income
2. Taxability of Income

B.1       Requisites for taxability

1. Individual as taxpayer

C.1       Tax on an employee under the TRAIN Law

C.1.1 Tax rules governing employees

C.1.2    Employee as resident citizen

C.2       Tax rates

C.2.1    Basis of computation of wages

C.3       Withholding of tax on compensation income

C.3.1    Not qualified for substituted filing

C.3.2    Frequency of payment of wages

C.3.4    Suggested formula in obtaining equivalent monthly rate

C.4       Basic rules on withholding

C.4.1    Exemption from withholding tax on compensation

C.4.2    Withholding tax table under TRAIN law

C.5       How to determine the amount to be withheld using the withholding tax table

C.6       Illustration

CHAPTER III

MAXIMIZING TAX SAVINGS UNDER THE TRAIN LAW

1. NON-TAXABLE LIMIT UNDER THE TRAIN LAW
2. GRANTING AN ALLOWANCE

CHAPTER IV

13TH MONTH PAY AND OTHER BENEFITS

1. REVISED CEILING OF 13TH MONTH PAY AND OTHER BENEFITS

A.1            Coverage of 13th month pay

A.2            Exclusion from the benefit

A.2.1   Meaning of “its equivalent”

A.3 Illustration

CHAPTER V

DE MINIMIS BENEFITS

1. MEANING OF DE MINIMIS BENEFITS (DMB)

A.1            Amended list

A.2 Sample annual values of DMB

A.3 Illustrating the effect of DMB beyond the non-taxable range of WT table

CHAPTER VI

TAX TREATMENT

ON NEWLY HIRED EMPLOYEES WITH PREVIOUS EMPLOYER

1. Cumulative average method

A.1            Use of cumulative average method

1. Applying average cumulative method to newly hired employee with previous employer within the calendar year

CHAPTER VII

TAX TREATMENT

ON EMPLOYEE TERMINATED BEFORE THE END OF CALENDAR YEAR

1. Annualized Withholding Tax Method

A.1            Treatment of deficiency or excess

A.2            Illustration of annualized computation

A.3 Illustration of Year-End Adjustments

A.4 Withholding tax on compensation of employees other than rank-and-file

CHAPTER VIII

FRINGE BENEFITS

1. NEW RATES ON FRINGE BENEFITS

A.1            Fringe benefit tax is payable by employer

A.2            Fringe benefits rates for local and alien employees

A.3            Grossed-up monetary value (GMV) of benefit

A.4 Certain fringe benefits

A.4.1 Non-taxable fringe benefits

A.5 Illustration of grant of fringe benefits

1. DETERMINATION OF THE AMOUNT SUBJECT TO THE FRINGE BENEFIT TAX

B.1 Value of fringe benefits

B.2 Housing privilege to company directors who received fixed salaries as company officers taken from retained earnings

B.3 Ruling on housing allowance

B.4 Treatment of car plan for managers and executives

B.5 Leased car used for official and personal purposes

B.6 Case of car maintenance allowance

B.7 Fringe benefit ruled as for convenience of employer

B.8 Tax accounting for the fringe benefit furnished to the employee and the fringe benefit tax due thereon

B.9 Tax credit (TCC) cannot be used against the FBT liability of employer

B.10 Tax accounting of fringe benefits

CHAPTER IX

RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE

1. MANNER, VENUE AND TIME OF FILING OF WITHHOLDING TAX RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE
2. WITHHOLDING TAX STATEMENT FOR TAXES WITHHELD
3. ANNUAL INFORMATION RETURN AND ANNUAL ALPHABETICAL LIST OF PAYEES FOR INCOME TAX WITHHELD AT SOURCE

CHAPTER X

REGISTRATION AND OTHER RULES ON WITHHOLDING

1. APPLICATION FOR REGISTRATION FOR INDIVIDUALS EARNING COMPENSATION INCOME (BIR FORM NO. 1902)
2. CURRENT MULTIPLE EMPLOYMENTS
3. SUCCESSIVE MULTIPLE EMPLOYMENT
4. PROCEDURES FOR THE FILING OF THE APPLICATION FOR REGISTRATION (BIR FORM NO. 1902) AND/OR APPLICATION FOR REGISTRATION INFORMATION UPDATE (BIR FORM NO. 1905)
5. EMPLOYEES WITHHOLDING STATEMENTS (BIR FORM 2316)
6. SUBSTITUTED FILING OF INCOME TAX RETURNS BY EMPLOYEES RECEIVING PURELY COMPENSATION INCOME

F.1 Return for Individuals Earning Purely Compensation Income (BIR Form No. 1700)