A tax shield is the reduction in income taxes that resulted from taking an allowable deduction from taxable income. In business, it is used as a strategy to reduce income tax liabilities by an individual or corporation, which is achieved by claiming allowable deductions such as interest expenses, charitable donations, amortization and depreciation. In the BPO employees, tax shielding is employed by lowering the basic salary of the employee and increasing the fringe benefits and allowances. This way, the tax base becomes lower. In particular, the company provides what is called “de minimis” benefits which are compensation that are not subject to tax or privileges of relatively small values and furnished by the employer as means of promoting the health, goodwill, contentment, or efficiency of his employees.
Per BIR Revenue Regulations No. 5-2011, “de minimis” benefits exempted from withholding tax on compensation (WTC) or to Fringe Benefits Tax (FBT) are as follows:
- Monetized unused vacation leave credits of private employees not exceeding ten days
- Monetized value of vacation and sick leave credits paid to government employees
- Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester of P125 per month
- Rice Subsidy of P1,500 or one(1) sack of 50kg of rice per month amounting to not more than P1,500
- Uniform and clothing allowance not exceeding P4,000 per annum
- Actual medical expenses not exceeding P10,000 per annum
- Laundry allowance not exceeding P300 per month
- Annual achievement awards with an annual monetary value not exceeding P10,000
- Gifts during Christmas and major anniversaries not exceeding P5,000 per annum
- Daily meal allowance for overtime work and night shift not exceeding 25% of the basic minimum wage
Companies are allowed to add or create their own benefits as long as they are of relatively small value such as monthly cellphone allowance or transportation allowance or other items that can be categorized under any of the above items. For instance, optical allowance can be placed under medical cash allowance and vacation trip can be placed under annual achievement awards.
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