Tax rules on employee compensation and benefits change dramatically with the TRAIN law.

On December 19, 2017 Congress enacted R.A. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) which changed substantially the taxation rules on employee salaries and benefits.

TRAIN law took effect on January 1, 2018.

The most notable change is the Tax Schedule where employees earning not over P250,000.00 are exempted from tax. They are not also required to file the income tax returns.

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An individual whose taxable income does not exceed P250,000 shall not be required to file an income tax return (Sec. 13, RA 10963).

Minimum wage earners (MWE) as defined in Section 22 (HH) of the NIRC are exempt from the payment of income tax on their taxable income. Also exempted is the holiday pay received by such minimum wage earners.

Notably, the MWE’s earnings from overtime, night shift differential, and hazard pay are not anymore exempt. Under R.A. 9504 overtime pay, night shift differential pay and hazard pay received by such minimum wage earners are exempt from income tax (Section 2, R.A. 9504).

The personal and additional exemptions of employees previously available under R.A. 9504 were also removed. To recall, under R.A. 9504, basic personal exemption amounting to P50,000 for each individual taxpayer was allowed. Employees are allowed additional exemption in the amount of P25,000 for each dependent not exceeding four (4).

The TRAIN law removed all these exemptions under Sec. 8 in amending the definition of the term “taxable income” found in Section 31, of the NIRC. To recall, Section 31 of the NIRC states that the term “taxable income” means the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws.

In relation to Section 31, Section 12 of the TRAIN law repealed Section 35 of the NIRC which allowed basic personal exemption and additional exemption for dependents. Thus, finally sealing the fate of any allowable exemptions for employees.

Consequently, the TRAIN law repealed Section 33 (A) of RA 7277 as amended by R.A. 10754 or the Magna Carta for Persons with Disability. Before the repeal, PWDs, who are within the fourth civil degree of consanguinity or affinity to the taxpayer, regardless of age, who are not gainfully employed and chiefly dependent upon the taxpayer, were treated as dependents under Section 35(b) of the NIRC of 1997, as amended. As such, individual taxpayers caring for them were accorded the privileges granted by the NIRC insofar as having dependents under the same section are concerned.

Meaning, if an employee has a brother or cousin who is a PWD he could obtain an additional exemption by including him as his dependent. That was removed by the TRAIN law.

Further, the ceiling for the 13th month pay and other benefits was raised to P90,000.00 from the former P82,000.00 under R.A. 10653. Interestingly, the power of the Secretary of Finance to increase the ceiling through rules and regulations, upon recommendation of the BIR Commissioner, after considering among others, was also removed. The obvious implication is that any future change in the ceiling shall be made through congressional enactment and not by mere executive issuance.

The fringe benefit (FB) tax was increased from 32% to 35%. This is bad news for employers who reward their supervisors and managers with benefits in recognition of good performance. This means that the divisor in deriving the grossed up monetary value (GMV) of FB is now 65% instead of 68%.

For example, X company gives P100,000.00 to manager Y for his exemplary performance. This means that the GMV is:

P100,000.00 / 65% = P153,846.15

The FB tax is P153,846.15 x .35 = P53,846.15

Under the old rate, the GMV is:

P100,000.00 / 68% = P147,058.82

The FB tax in such old rate is just P47,058.82

Hence, under the TRAIN law, the employer will now have to pay more than P6,000.00 for every P100,000 worth of fringe benefit given in cash.

The TRAIN law did not amend Section 33, (C) (4) of the NIRC pertaining to De Minimis benefits. Hence, the existing rules shall still apply which will be good news for employers.

Related: De Minimis Benefits (Certain Items) Increased under RR 11-2018

In sum, the impact of TRAIN law on employee compensation and benefits is a mix of good and bad news. The Minimum Wage Earners (MWEs) bear the brunt of the law considering that the changes in the tax table did not affect them as they were exempted from tax even before the TRAIN law arrived.

What made life difficult for the MWEs under the TRAIN law is that their overtime pay, night differential pay, and hazard pay are now taxable. The overtime pay used to be a big boost in MWEs net take home pay but may now be diminished with the new tax law. The question probably is whether the grant of overtime pay will render the MWE to lose his MWE status. This is where the 2017 Supreme Court decision in Soriano vs. Secretary of Finance may come in.

With the increases in fuel and other items usually consumed by employees, it is doubtful if any bump in their net take home will beat the consequent inflation. It remains to be seen if the additional P8,000 in the ceiling of 13th month pay and other benefits will save employees from inflationary effects of the increase in fuel and other items.

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