DELOITTE. ON THE DOT

CHRISTMAS is the most awaited season of giving and sharing. For employees, the 13th month pay and other bonuses are highly anticipated “blessings.” Let us be reminded, though, that it is not all about receiving but conforming to tax requirements as well.

Under the 13th Month Pay Law [ Presidential Decree ( PD) No. 851], the “13th month pay” shall be equivalent to one- twelfth of the basic salary of an employee for the calendar year. The basic salary shall include all remunerations or earnings paid by the employer to the employee for services rendered but may not include cost- of- living allowances, profit- sharing payments, cash equivalent of unused vacation and sick leave credits, overtime pay, premium pay, night shift differential, holiday pay, all allowances and monetary benefits that are not part of the regular or basic salary of the employee.

The law provides that all rank- and- file employees in the private sector shall be entitled to the 13th month pay regardless of their position, designation, or employment status, and irrespective of the method by which their wages are paid, as long as they have worked for at least one month during the calendar year. While the 13th month pay is mandatory for rank- and- file employees, it is the option of the employer to furnish the same to its managerial employees.

In view of the foregoing provision, an employee who has resigned or whose services were terminated at any time before the payment of the 13th month pay is still entitled to the 13th month pay in proportion to the length of time he worked during the year.

Note that under PD 851, not all employers are obliged to give 13th month pay to their employees. Here are the exceptions:

a. Government and any of its political subdivisions, including government-owned and - controlled corporations

b. Employers already paying their employees 13th month pay or more in a calendar year or its equivalent ( such as Christmas bonus and other cash bonuses amounting to not less than one- twelfth of the basic salary) at the time of the issuance of PD 851

c. Employers of household helpers and persons in the personal service of another in relation to such workers

d. Employers who are paid on purely commission, boundary, or task basis, and those who are paid a fixed amount for performing a specific work, except where the workers are paid on piecerate basis, in which case the employer shall be covered insofar as such workers are concerned

For employers who are obligated to release a 13th month pay, note that it should be paid not later than December 24. Also, the covered employer has an option to pay half of the required 13th month pay before the opening of the regular school year and the other half on or before the 24th of December of every year. With this requirement, employers must submit a report of compliance to the nearest Department of Labor and Employment ( DOLE) regional office not later than January 15 of each year. Fail- ure to pay the 13th month pay will render the employer liable to administrative cases, which may be filed by the aggrieved employees at any DOLE regional office.

Generally, the 13th month pay and other bonuses are exempt from tax, but subject to limitations. Under Section 32 ( B)( 7)( e) of the Tax Code, as amended, the threshold is P82,000; anything in excess of this amount will be subject to income tax.

Aside from the 13th month pay, employees may also get the so- called “Christmas bonus.” Note, though, that this is not mandated by law, and is left entirely to the employer’s discretion.

On top of these bonuses, some employers may opt to provide productivity incentives, which incentivize the performance of the employee, such as increase in productivity, within the establishment.

In the Bureau of Internal Revenue's Ruling No. 293- 2015, it clarified that any collective bargaining agreement or productivity incentive scheme benefit is considered “de minimis” benefit if the total amount does not exceed P10,000 per taxable year. Thus, it is exempt from withholding tax on compensation and fringe benefit tax.

However, in case the total amount exceeds P10,000, the bonus shall no longer be considered “de minimis” benefit but shall instead be treated as “other benefits,” which shall be exempt if, when combined with the 13th month pay and other benefits, it will not exceed P82,000. Otherwise, the productivity incentive shall be subject to the normal income tax rate.

For accrued bonuses, such are subject to withholding tax on compensation in the year of accrual. This is pursuant to the case of ING Bank vs Commissioner of Internal Revenue, promulgated on July 22, 2015, in which the Supreme Court 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. According to the rules, the employer has to deduct and pay the tax on compensation actually or constructively paid to its employees.

Thus, accrued bonuses that are not subject to applicable withholding tax and claimed as an expense in the year of accrual shall be disallowed as deductible expense of the taxpayer.

Now that the holiday season is upon us, you are likely to hear that age-old saying, “It is better to give than to receive.” Just don’t forget that tax compliance is essential, too, during this season of sharing.