Now that we are almost ready to close the year and everyone is looking forward to their 13th month pay and bonuses, let us not forget that amid all the excitement for this most wonderful time of the year, we still have tax obligations to fulfill.
13th month pay and Christmas bonus
The 13th month pay should not be confused with the Christmas bonus. As defined under the 13th Month Pay Law, an employee’s “13th month pay is equivalent to one-twelfth (1/12) of the basic salary of an employee within a calendar year.”
The basic salary includes all remunerations or earnings paid by an employer to an employee for services rendered, but may not include profit-sharing payments and all allowances and monetary benefits that are not considered or integrated as part of the regular or basic salary of the employee.
Employers are mandated by law to grant 13th month pay to employees regardless of status, provided that the employee has worked for at least one month in the company. It should be released not later than December 24 of each year.
Christmas bonus, on the other hand, is left to the employer’s discretion and is not mandated by law. It is commonly released during the holiday season, thus the term.
Generally, 13th month pay and Christmas bonus are exempt from tax. However, there is a limit to that exemption. Under Section 32 (B)(7)(e) of the Philippine Tax Code, as amended by Republic Act (RA) No. 10653 and implemented by Revenue Regulations (RR) No. 3-2015, 13th month pay and other benefits shall not be subject to tax up to a maximum of P82,000. Any amount in excess thereof must be included in the computation of the employee’s gross income for the applicable taxable year. Normally, the tax due should be withheld by the employer and remitted to the Bureau of Internal Revenue.
In addition to the 13th month pay and Christmas bonus, some employers have incentive programs designed to reward employees who meet certain performance goals. These productivity incentives can be given in cash or in kind. As with every income or remuneration received by employees, now comes the interesting question: Are productivity incentives subject to tax or not?
Under RR 1-2015, “benefits received by an employee by virtue of a Collective Bargaining Agreement (CBA) and productivity incentive schemes, provided that the total annual monetary value received from both CBA and productivity incentive schemes do not exceed P10,000 per employee per taxable year,” shall be considered de minimis benefits not subject to income tax and withholding tax on compensation income of both managerial and rank and file employees.
RR 1-2015 referred only to benefits received by virtue of a CBA and productivity incentive schemes. For this reason, some employers are confused as to whether a performance-based bonus (PBB) can be considered benefits provided under a productivity incentive scheme. It should be noted that in BIR Ruling No. 293-2015, PBB was defined within the purview of a productivity incentive scheme, since the purpose of a PBB is to encourage higher performance and greater accountability, and to ensure the accomplishment of commitments and targets.
Going back to the taxability of productivity incentives, the aforementioned ruling clarified that, “any CBA or productivity incentive scheme benefit, the amount of which exceeds P10,000, is no longer within the purview of a de minimis benefit. However, the same en toto may be considered part of the term ’Other Benefits’ in Section 32(B)(7)(e) of the Philippine Tax Code, as amended, which is excludible from the employee’s gross income so long as the same, in addition to the 13th month pay and other benefits received, does not exceed P82,000. Otherwise, it shall be subject to normal income tax rates.”
To summarize the taxability of productivity incentive in the foregoing ruling:
If the amount of productivity incentive granted to employees does not exceed P10,000, the total amount shall be treated as de minimis benefits exempt from withholding tax on compensation and fringe benefit tax.
If the amount of productivity incentive exceeds P10,000, the total amount (i.e., P10,000 plus the excess) shall be treated as “Other Benefits,” which is exempt if, combined with the 13th month pay and other benefits, it will not exceed P82,000.
If the amount of productivity incentive exceeds P10,000, and the 13th month pay and other benefits already exceed P82,000, the productivity incentive shall be subject to normal income tax.
As for the time of withholding on accrued year-end bonus, the Supreme Court (SC), in the case of ING Bank versus Commissioner of Internal Revenue, ruled that the obligation of the employer to deduct and withhold the related withholding tax arises at the time the income is paid, accrued, or recorded as an expense in the employer’s books, whichever comes first. The SC further stated that absolute accuracy in the determination of the amount of compensation income is not a prerequisite for the employer’s withholding obligation to arise. The rules require that the employer deduct and pay the tax on compensation paid to its employees, either actually or constructively.
Another important issue to consider is the proposed tax reform package submitted by the Department of Finance that seeks to repeal the income tax exemption of the 13th month pay, Christmas bonus, productivity incentives, and other benefits up to a maximum amount of P82,000 a year. If the said proposed tax reform package is approved by the House of Representatives and the Senate, employees will be taxed on the full amount of their 13th month pay, Christmas bonus, productivity incentives, and other benefits.
Painful as it may seem, even the holiday season is not spared from taxes. With the possibility of the revocation of the tax exemption of 13th month pay and other benefits, now more than ever, employers are encouraged to extend a generous hand to their employees while the tax exemption is still available.
The author is a manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd., a member firm of Deloitte Touche Tohmatsu Limited—comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.