March 17, 2003

BIR RULING [DA-081-03]

33

023-2002

Lacson & Lacson Insurance Brokers, Inc.

15th Floor Burgundy Corporate Tower

252 Sen. Gil Puyat Avenue

Makati City

Attention: Mr. Salvador L. Lacson

Managing Director

Gentlemen :

This refers to your letter dated December 27, 2002 requesting clarification on the following: CHTcSE

"(1) If non-insured in medical benefits provided by an employer to its employees and their dependents
are subject to tax; and

"(2) If an employer decides to buy medical insurance for its employees and their dependents, are the
insurance premiums subject to tax."

In reply thereto, please be informed that Section 33 of the Tax Code of 1997 provides that a final tax of
32% beginning January 1, 2000 shall be imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (except rank and file employees) by the employer, whether an
individual or a corporation (unless the fringe benefit is 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).

The term "fringe benefit" means any good, service or other benefit furnished or granted in cash or in kind
by an employer to an individual employee (except rank and file employees) such as life or health
insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
TcAECH

On the other hand, 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 actual yearly medical benefits not
exceeding P10,000.00 per annum. (Revenue Regulations No. 10-2000)
It is clear from the above-cited provisions that fringe benefit taxes are imposed on the benefits provided
by an employer to its managerial and supervisory employees. Thus, benefits granted to rank and file
employees are not subject to fringe benefit tax, but may form part of the compensation of the said (rank
and file) employees subject to withholding tax on compensation, except when they are specifically
exempt or considered as de minimis benefits. However, the excess of the de minimis value shall be
subject to tax on compensation if granted to rank and file employees and to fringe benefit tax if granted to
managerial and supervisory employees. ADcHES

Accordingly, in applying the said provisions to the above issues raised, this Office holds that —

1. If the medical benefits granted do not exceed P10,000.00 per annum, the same shall be considered
as de minimis benefits that are not subject to income tax as well as to withholding tax on compensation
income of both managerial and rank and file employees. However, if the employer pays more than the
ceiling of other benefits provided in Section 32(B)(7)(e) of the Tax Code of 1997, the excess shall be
taxable to the employee receiving the benefits only if such excess is beyond the P30,000.00 ceiling, i.e., if
pertaining to supervisory or managerial employees, the excess shall be subject to fringe benefit tax while
those pertaining to rank and file employees, the excess shall be subject to withholding tax on
compensation. Hence, the medical benefits provided by the employer to its employees in excess of the
amount considered as de minimis is subject to either fringe benefit tax or income tax on compensation.
SEcTHA

2. Life or health insurance and other non-life insurance premiums or similar amounts in excess of
what the law allows shall be subject to fringe benefit tax (Sec. 2.33(B)(10), Revenue Regulations No. 3-
98), except (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) or Government Service Insurance System
(GSIS) 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. Corollarily, Section
32(B)(7)(f) of the Tax Code of 1997 provides that GSIS, SSS, Medicare and Pag-Ibig Contributions, and
union dues of individuals shall be excluded from gross income. Accordingly, where the employer decides
to buy medical insurance for its employees, whether rank and file or supervisory, and their dependents,
the insurance premiums paid by the employer shall be excluded from gross income and therefore not
subject to withholding tax. On the other hand, the premiums paid by the employer shall be deductible
from its gross income as business expense under Section 34 of the Tax Code of 1997. Moreover, the same
rule as stated in Number (1) above will apply, when an employer granting insurance benefits to its
employees, whether supervisory or rank and file, will buy insurance directly from an insurance company.
IEaATD

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG

Deputy Commissioner

Legal & Inspection Group

Bureau of Internal Revenue