Tax Law Notes
Tax Law Note:
How Should Fringe Benefits be Valued?
Last Updated: December 02, 2004
This note considers the valuation of fringe benefits, on the assumption that they are taxable to the employee. A separate Note talks about the mechanics of withholding on fringe benefits. Alternative methods of taxing fringe benefits (including the option of exempting certain benefits) are beyond the scope of this Note.1
Valuing fringe benefits for tax purposes at fair market value generally achieves the most equitable and efficient result. Any lower valuation encourages paying a portion of salaries in kind rather than in cash. The actual subjective value of the benefit for the taxpayer may be higher or lower than its market value, but subjective values are impossible to use in a law-based system like income taxation. While market value (i.e. the price that would have to be paid for the benefit in an arms-length situation) makes sense from a tax policy point of view, establishing market value may be difficult or even impossible in some cases. Therefore tax legislation commonly provides for surrogate values, such as:
Countries tend to establish standard valuation methods for the most commonly used taxable fringe benefits. These may include: company cars, free or low rent housing, low or zero rate loans, debt waiver programs and the provision of free or discounted price consumer products.2
1. Statutory Formulas
With respect to company cars, many countries consider a fixed percentage of the catalogue price to be income of the employee.3 Other countries use the motor size as a reference for calculating the market value in absence of a catalogue price or take a percentage of book value of the car per month.4
Similarly to the treatment of company cars, formulas are also used for establishing the value of other benefits where the employee uses property owned by the employer, such as furniture.5
Formulas are also used in the case of benefits such as free or discounted goods or services where a certain percentage of the market price of the product is taken into account based on the fact that the price of the product for the employer is lower than the arm's-length price.6
Some fringe benefits are valued at the employer's cost of providing the benefit.
For example, cost to the employer may be used for products provided to the employee free or at discount. This rule may be restricted to products that are not sold externally by the employer. 7
For certain benefits the exact cost of the benefit for the year is not known until later. Examples are subsidized meals or the direct coverage by the employer of expenses of medical services (e.g. screening or dental care). Several countries use rules of thumb in these situations such as assigning presumptive values (see below).
3. Presumptive values
Sometimes predetermined values are used as a surrogate where calculation of the fair market value (or assigning it to the individual employees) would be too complicated or where actual cost could not be determined until after the tax period.8
The use of presumptive values in the form of tables setting out how a certain benefit is taxed at a fixed amount is also common, especially in cases where using the market value as the base for taxation would be unfair to the employee as the assets are used at least in part in relation to the employer's business.9
4. Special valuation rules
Other valuation rules are used in special situations.
For example in the case of housing that is not owned by the employer, rental value is the closest to the actual benefit the employee receives. If the housing is owned by the employer, an estimated rental value is often provided for based on comparables.10 In the case of remote housing it may be considered unfair to use the market rate rental (e.g. in a remote jungle location) if this is higher than rental in the employee's place of usual residence. Some countries use the rent that the employee saves by not renting in an ordinary location.11 Other countries exempt this kind of benefit (housing provided for the employer's convenience).
Debt waiver fringe benefits can be valued on the basis of the amount of interest which is waived. In the case of low interest or interest-free loans (where there is no explicit waiver of interest) many countries regard as the respective income of the employee the difference between the interest actually paid and the market rate interest on a comparable loan.12
Fashioning a Solution
Even though valuing fringe benefits at market value is conceptually attractive, it is often administratively impracticable. In order to avoid discussions with taxpayers, countries should consider using rules of thumb that provide formulas or specific values for the most common kinds of benefits while applying residual rules (fair market value or cost to the employer) for other benefits.
Providing presumptive values in tables (e.g. in the case of cars based on different ranges of horsepower) is the simplest way of taxing benefits, and is also the easiest to monitor for the tax administration. In cases where the calculation of the value can be based on the cost of the service or product to the employer, the legislation needs to specify rules for determining cost (i.e. direct cost only or also indirect cost, or a fixed markup on direct cost).
For Further Reference
Tax Law Design and Drafting, Chapter 14, pp. 515-563, (IMF 1998)
The series of Tax Law Notes has been prepared by the IMF staff as a resource for use by government officials and members of the public. The notes have not been considered by the IMF Executive Board and, hence, should not be reported or described as representing the views of the IMF or IMF policy.
1See generally Lee Burns and Richard Krever, Individual Income Tax, in 2 Tax Law Design and Drafting 495, 515-24 (1998).
2The most popular fringe benefits may vary in different countries.
3Germany: 1 percent of the catalogue price has to be included monthly in taxable income. The Netherlands: 20 or 25 percent of the catalogue price has to be included yearly. In Austria 1.5% of the purchase price of the car is deemed to be the monthly income taxable to the employee. See International Fiscal Association, Taxation of Employee Fringe Benefits 70 (1993) [hereinafter IFA]. In the U.K., under ICTA 1988, s.157 and schedule 6, the use of company cars is valued at 35 percent of the price of the car, with a reduction where the employee shows that the car was used at least a specified amount for business purposes.
4In Slovenia 0.5 - 2 percent of the book value is included in the employee income.
5In Germany 10% of the cost of furniture per year over a ten-year period is treated as income of the employee. See IFA, supra note 2, at 116.
6Under Australia's rules these so-called in-house property (goods produced or sold by the employer) fringe benefits are valued at 75% of the arm's length price of the item. Gerard Middleton: Fringe Benefits Tax Valuation Rules, No. 12, Australian Tax Forum (1995). In Canada free or discounted travel in equipment operated by the employer is valued as the difference between 50% of economy fare and the amount paid by employee. See IFA, supra note 2, at 94.
7Ireland: life insurance provided to employees is taxed based on the actual premium paid by the employer. Id. at 136.
8In Luxembourg and Belgium for meals provided on the premises a standard set amount is taken into account. In Belgium under the rules in force in 1993, tables with values were provided for taxable values of cars, e.g. BEF 60,000 per year for a small car, BEF 80,000 for a family car and BEF 100,000 for a large car. Id. at 140-45, 77-85.
9In the Netherlands tables set out the taxable amounts in the case of work clothes, telephone, free travel (within the country), stock options, child care, etc. Id. at 146-154.
10In the United Kingdom the value is established in part by reference to fair rental value and in part by applying an official interest rate to the cost of living accommodation. See Income and Corporation Taxes Act 1988, sections 145, 146.
11 In Australia a statutory formula is used to calculate the value to be included in employee income in the case of remote housing. FBTAA sec. 29, Gerard Middleton: Fringe Benefits Tax Valuation Rules, No. 12, Australian Tax Forum (1995).
12The actual benefit to the employee may be higher (e.g. the financial situation of the employee may be such that under market conditions no bank would have granted the employee an loan of an equal amount). It would nevertheless be rather impractical to look for the market value in the case of each waived loan. Gerard Middleton: Fringe Benefits Tax Valuation Rules, No. 12, Australian Tax Forum (1995).