Tax Treatment of Housing Allowance Philippines

Introduction

In the Philippine tax system, housing allowances provided by employers to employees are a common component of compensation packages, particularly in industries where relocation or high living costs are factors. However, their tax treatment is governed by the National Internal Revenue Code (NIRC) of 1997, as amended by laws such as Republic Act No. 10963 (TRAIN Law), Republic Act No. 11534 (CREATE Law), and various revenue regulations issued by the Bureau of Internal Revenue (BIR). This article provides a comprehensive overview of the tax implications of housing allowances, including their classification, taxability, exemptions, computation methods, reporting requirements, and related penalties. Understanding these rules is essential for employers to ensure compliance and for employees to accurately report income.

The primary principle under Philippine tax law is that all forms of compensation for services rendered are included in gross income and subject to income tax, unless expressly excluded. Housing allowances fall under this broad category but may be treated differently depending on whether they qualify as fringe benefits, de minimis benefits, or ordinary compensation.

Definition and Classification of Housing Allowance

A housing allowance refers to any payment or benefit provided by an employer to an employee to cover or subsidize housing-related expenses, such as rent, mortgage payments, utilities, or maintenance. It can be provided in various forms:

• Cash Allowance: A fixed or variable amount paid directly to the employee.
• In-Kind Provision: The employer provides actual housing, such as a company-owned residence or leased property.
• Reimbursement: The employer reimburses the employee for documented housing expenses.

Under Revenue Regulations (RR) No. 2-98, as amended, housing allowances are classified based on the employee's rank:

• For Rank-and-File Employees: Treated as part of compensation income, subject to regular withholding tax on compensation.
• For Supervisory or Managerial Employees: Generally considered a fringe benefit, subject to fringe benefit tax (FBT).

This distinction is crucial because FBT is borne by the employer, while compensation income tax is withheld from the employee's salary.

Taxability of Housing Allowance

General Rule: Inclusion in Gross Income

Section 32(A) of the NIRC defines gross income to include compensation for services in whatever form paid, including allowances. Thus, housing allowances are presumptively taxable unless they fall under specific exclusions or exemptions.

• As Compensation Income: For rank-and-file employees, the allowance is added to their taxable salary and subject to graduated income tax rates (ranging from 0% to 35% under the TRAIN Law for annual taxable income exceeding P250,000). Employers must withhold tax at source under RR No. 2-98.
• As Fringe Benefit: For managerial or supervisory employees, housing benefits are subject to FBT under Section 33 of the NIRC. The FBT rate is:
  • 35% for Philippine citizens, resident aliens, and non-resident aliens engaged in trade or business (on the grossed-up monetary value).
  • 25% for non-resident aliens not engaged in trade or business.
  • 15% for special aliens (e.g., employees of regional headquarters) under certain conditions.

The grossed-up monetary value (GMV) is computed by dividing the actual monetary value of the benefit by the gross-up factor (65% for the 35% rate, meaning GMV = Actual Value / 0.65).

Specific Scenarios and Computations

1. Cash Housing Allowance:

   • Fully taxable as compensation for rank-and-file.
   • For managers/supervisors: Taxable as fringe benefit if not for the employer's convenience (e.g., not required for business operations).
   • Example: An employee receives P10,000 monthly housing allowance. For a rank-and-file employee, this is added to salary and taxed accordingly. For a manager, GMV = P10,000 / 0.65 ≈ P15,384.62; FBT = 35% × P15,384.62 ≈ P5,384.62 (employer pays).

2. Employer-Provided Housing:

   • If the employer owns the property: The monetary value is 50% of the fair market value (FMV) or zonal value (whichever is higher) of the property, prorated monthly, but not exceeding 5% of FMV.
   • If leased by employer: The monetary value is the actual rental paid, prorated based on usage.
   • Exemption applies if housing is provided for the employer's convenience, such as on business premises where the employee must reside for security or operational reasons (e.g., factory guards or remote site workers). This is outlined in RR No. 3-98.

3. Reimbursement of Housing Expenses:

   • Taxable unless substantiated as necessary business expenses of the employee (rare for housing). Receipts must be in the employer's name for FBT treatment; otherwise, it's compensation income.

4. Housing Loans or Mortgage Assistance:

   • Interest subsidies on housing loans are fringe benefits if below market rates.
   • Under RR No. 8-2000, if the loan is for acquiring a residential property and interest is at least the benchmark rate (based on 91-day Treasury Bill rate), it may be exempt from FBT.

Exemptions and Exclusions

While housing allowances are generally taxable, certain exemptions apply:

1. De Minimis Benefits:

   • Housing allowances do not qualify as de minimis benefits under RR No. 5-2011 (as amended). De minimis benefits are limited to items like rice subsidies (up to P2,000/month post-2023 updates), uniforms (P6,000/year), and medical allowances (P10,000/year). Excess over de minimis thresholds becomes taxable fringe benefits.

2. Convenience of the Employer Rule:

   • Under Section 32(B)(7)(d) of the NIRC, housing provided on business premises where the employee is required to reside as a condition of employment is excluded from gross income. This includes utilities if part of the housing.
   • Criteria (from BIR rulings): The housing must be integral to business operations, and the employee must accept it as a job condition. Examples: Military barracks, mining camp dormitories, or hospital on-call residences.

3. Temporary Housing for OFWs and Seafarers:

   • Overseas Filipino Workers (OFWs) and seafarers may have housing allowances exempt if part of their overseas contract, as their income from abroad is exempt under Section 23 of the NIRC. However, local housing allowances remain taxable.

4. Government Employees:

   • Certain public sector employees, such as those under the Salary Standardization Law (RA 6758), receive housing privileges that may be non-taxable if classified as allowances for public service (e.g., quarters allowance for military/police). However, excess or private sector equivalents are taxable.

5. Disaster-Related Housing:

   • Temporary housing aid during calamities may be exempt as donations or relief under RR No. 14-2013, if provided through qualified donee institutions.

6. Retirement Benefits:

   • Housing as part of retirement packages under a BIR-approved plan may be exempt up to certain limits under Section 32(B)(6).

Reporting and Compliance Requirements

• Employers:

  • Withhold and remit FBT quarterly via BIR Form 1603.
  • Report fringe benefits in the Annual Information Return (BIR Form 1604-CF).
  • Include housing allowances in the employee's BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld).
  • Maintain records of valuations, such as lease contracts or property appraisals.

• Employees:

  • Report taxable housing allowances in their Income Tax Return (BIR Form 1700 or 1701).
  • If self-employed, housing reimbursements may be deductible as business expenses if proven ordinary and necessary.

• Audits and Assessments:

  • The BIR may reclassify allowances during audits. Failure to report can lead to deficiency assessments.

Penalties for Non-Compliance

• Civil Penalties: 25% surcharge for late filing/remittance, plus 12% interest per annum.
• Criminal Penalties: Under Section 255 of the NIRC, willful failure to withhold or report can result in fines (P5,000 to P50,000) and imprisonment (1-10 years).
• Compromise Settlements: Available for minor violations under RR No. 7-2018.

Recent Developments and Case Law

Amendments under the TRAIN Law (2018) increased personal exemptions but did not alter housing treatment fundamentally. The CREATE Law (2021) reduced corporate income tax but maintained FBT rates. BIR rulings, such as Ruling No. 025-02, clarify that housing for expatriates is taxable unless for employer convenience.

In jurisprudence, cases like Commissioner of Internal Revenue v. Henderson (G.R. No. L-12954) emphasize that benefits must be compensatory to be taxable, supporting exclusions for convenience-based housing.

Conclusion

The tax treatment of housing allowances in the Philippines balances the need to tax compensation fairly while recognizing business necessities. Employers should carefully document and classify these benefits to avoid penalties, and employees should consult tax professionals for personalized advice. Compliance not only ensures legal adherence but also optimizes tax positions through available exemptions. For updates, refer to the latest BIR issuances, as tax laws evolve with economic conditions.