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Income Tax is a tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on the pertinent
items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions and/or personal and additional exemptions, if any,
authorized for such types of income, by the Tax Code, as amended, or other special laws.
A person means an individual, a trust, estate or corporation. (Sec. 22[A] of the Tax Code)
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived
from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad
as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the
Philippines.
Taxability of Individuals:
For simplicity, resident citizens are taxable on their worldwide income, while all the rest (Non-resident Citizen and Aliens [whether resident or non-resident) are
taxable only on their income from sources within the Philippines.
Taxability of Corporations:
Example: Z Corporation received P10,000 dividends from X Corporation, a Japanese firm, which earned P200,000 from Philippine sources and P300,000
from Japan. The amount of dividends received by Z Corporation as from Philippine sources is only P4,000 (P10,000 * P200,000/P500,000).
3. Services – where performed. Thus, if performed within the Philippines, it is considered earned herein.
4. Rentals and Royalties – where the property is located or the place of use of the intangible. As such, if the property or any interest in such is located in
the Philippines, rentals and royalties therefrom are considered earned within the Philippines.
5. Sale of real property – where the real property is located. As such, gains, profits and income from the sale of real property located in the Philippines are
considered earned herein.
Purchase: where the property is sold. If the personal property was purchased outside the Philippines, but sold herein, the gains, profits and income derived
therefrom are considered earned within the Philippines. On the other hand, even if it was purchased in the Philippines and sold outside, gains therefrom
shall be treated earned from outside the Philippines.
Produced: if the personal property is produced in the Philippines and sold outside, it shall be treated as derived from sources partly within and partly
without the Philippines. (see no. 7)
Except: sale of shares of stock of a domestic corporation, which shall be considered entirely within the Philippines even if sold outside.
7. Income partly within and partly without the Philippines: aside from sale of personal property produced in the Philippines, income from transportation
and other services rendered partly within and partly without, is covered by this number.
In these cases, the net income may first be computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto and a
ratable part of any expenses, losses or other deductions which cannot definitely be allocated to some items or class of gross income; and the portion of
such net income attributable to sources within the Philippines may be determined by processes and formulas of general apportionment prescribed by the
Secretary of Finance.
Requisites of Income:
1. There must be gain or profit.
Income tax only applies only when there is income, gain or profit. Income, in its broad sense, means all wealth that flows into the taxpayer other than as
a mere return of capital. Unless otherwise specified, it means cash or its equivalent.
2. The gain must be realized or received
TAX ON INDIVIDUALS
A. CLASSIFICATION OF INDIVIDUALS
1. Resident Citizens – A citizen of the Philippines residing therein. Under Sec. 1, Art. IV of the 1987 Constitution, the following are citizens of the Philippines.
(1) Those who are citizens of the Philippines at the time of the adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino Mothers, who elect Philippine citizenship upon reaching the age of majority; and
(4) Those who are naturalized in accordance with law.
2. Non-resident citizen
a. A citizen of the Philippines whose physical presence abroad is with a definite intention to reside therein – to the satisfaction of the Commissioner
of Internal Revenue.
b. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a
permanent basis.
A good example would be Overseas Contract Workers (OCW) or Overseas Filipino Workers (OFW) who were issued an overseas employment permit.
For purposes of income tax, a seaman is considered an OCW.
c. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad
most of the time during the taxable year.
“Most of the time” meaning at least 183 days. (Sec. 2 of RR No. 1-79)
d. A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year with respect to his income derived from sources
abroad until the date of his arrival in the Philippines. (Sec. 22[E] of the Tax Code)
So, if the taxpayer, who is previously considered a non-resident citizen arrived in the Philippines on July 1, 2016 with the intention of residing
permanently in the Philippines, shall be considered a non-resident citizen for his income from January 1 to June 30, 2016 (prior to his date of arrival)
and a resident citizen for the rest of the year.
3. Resident Alien
a. An alien who lives in the Philippines with no definite intention as to his stay (floating intention);
b. One who comes to the Philippines for a definite purpose which in its nature would require an extended stay and to that end makes his home
temporarily in the Philippines;
c. An alien who has acquired residence in the Philippines and retains his status as such until he abandons the same and actually departs from the
Philippines.
A NRA who shall come to the Philippines and stay for an aggregate of more than 180 days shall be deemed a NRAETB.
It includes salaries, wages, emoluments and honoraria, allowances, commissions (e.g., transportation, representation, entertainment and the like);
fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except
those which are subject to the fringe benefits tax under Sec. 33 of the NIRC; taxable pensions and retirement pay; and other income of a similar
nature.
2. Business or Professional Income – income earned by an individual from his sole proprietorship business, from the practice of profession, or share
in the income of a general professional partnership subject to Income Tax and Expanded Withholding Tax, whenever applicable.
“Professional” is a person the activities formally certified by a professional body to a specific profession by virtue of having completed a required
examination or course of studies and/or practice, whose competence can usually be measured against an established set of standards, such as CPAs,
Lawyers, Doctors, etc.
It likewise includes a person who engages in some art or sport for money, as a means of liveiihood, rarher than as a hobby, such as athletes, artists,
bookkeeping agents, and other recipients of professional, promotional or talent fees. (RR No. 8-2018)
Income owned in common with the spouse: if there is a disposal of an asset which is conjugally owned by the spouses, the gain therefrom shall
be divided equally to both the husband and the wife. Same is true with expenses incurred conjugally, which are deductible, and it is not determinable
who among the spouses actually incurred the same, they shall share in such deduction equally.
Note that there are no other rules applicable to spouses with regards income tax, since they compute for their own income tax liabilities; however,
spouses can opt to report their income separately in ONE tax return, which provides for separate columns and sections for the spouse.
3. Passive Income - income generated without any active conduct. These are income generated by assets which can be in the form of real properties
that return rental income, shares of stock in a corporation that earn dividends or interest income received from savings. (Chamber of Real Estate and
Builders Associations, Inc. vs. the Hon. Executive Secretary Alberto Romulo, et. Al)
Specific rates of final withholding tax are provided for certain passive incomes, such as interest from deposits, dividends, royalties, etc. However, if
they are not covered by such rate, it will form part of the taxpayer’s gross income subject to income tax.
4. Capital Gains are those arising from the sale of capital assets which may be subject to Capital Gains Tax, for sale of real property and shares of
stock not traded in a local stock exchange; or as part of gross income subject to income tax for all other types of capital assets.
Business Income – for those earning business income or income from the practice of profession, the individual is allowed to claim itemized deductions or the
optional standard deduction. If they earn income purely from business or practice of profession, the first P250,000 of such income is exempt from income tax.
Basic and Additional Personal Exemption and Premiums for Health and/or Hospitalization Insurance has now been removed under the Republic Act No. 10963,
otherwise known as the “Tax Reform for Acceleration and Inclusion (TRAIN) Act.”
Expenses incurred in conducting the business or in the practice of profession are allowed as deductions for income tax purposes provided that they meet all the
requirements for deductibility.
In lieu of the itemized (per item) expenses mentioned above, the Individual may opt to claim Optional Standard Deduction. Accordingly, no other deductions
for expenses, such as Cost of Sales, Cost of Services, Rent, Selling or any Administrative Expenses, or other business expenses or those incurred in the practice
of profession, shall be allowed. Moreover, it is not available against compensation income nor can it be claimed by an individual earning purely compensation
income or an individual who has gross sales/receipts not exceeding P3,000,000 and opted to be subject to the 8% income tax on gross sales/receipts.
Purpose: The purpose of OSD is to make the BIR Audit a little less complex since the BIR need not go through all the documents evidencing, and necessary to
support, itemized deductions; the BIR audit would then be limited to the propriety of the gross sales or receipts and items of tax credits, if any.
Basis of computation: The OSD is 40% of Gross Sales or Receipts. If the individual has mixed income (from business and compensation) the basis for the 40%
will not include compensation income. Note that the basis for the OSD is gross sales or receipts which is the amount BEFORE any deduction for cost of sales or
cost of services.
Period to elect: as to the use of OSD or Itemized Expenses shall be made on the first quarter of the taxable year, upon filing of the first quarter return and shall
be irrevocable for the said year. (RR No. 2-10)
In addition to the regular itemized deductions, these are the deductions allowed by regular and special laws such as Rooming-in and Breast-feeding Practices
under RA 7600, Adopt a School Program under RA 8525, Senior Citizen Discount under RA 9257, etc.
*non-taxable compensation income includes those benefits provided for by the employer which are considered de minimis or otherwise exempted from income
tax such as mandatory government and other contributions.
**The amount reported as business/professional income shall be gross of any applicable withholding taxes. Note that creditable withholding taxes are deducted
from the Tax Due; not as reductions to gross income to arrive at Taxable Income.
***If the taxpayer also earns compensation income but elected to avail of the 8% income tax rate, there is no longer a first P250,000 non-taxable income;
likewise, the compensation income shall be subject to the graduated tax rate.
Graduated Income Tax Rate for Individuals (sometimes referred to as basic income tax or schedular income tax or regular income tax of individuals)
Under Section 24(A)(2) of the National Internal Revenue Code, the tax shall be computed in accordance with and at the rates established in the following
schedule:
The 8% Income Tax Rate: this income tax rate applies ONLY to income from business or practice of profession where the gross sales or receipts do not
exceed P3,000,000.
Those earning mixed income (from compensation and income from business or practice of profession) can be taxable as follows:
a. 8% income tax rate but only as to the income from business or practice of profession without the first P250,000 exempt (since this will be considered in
the application of the graduated rates for income from compensation)
b. Income from compensation is ALWAYS subject to the graduated rights.
ILLUSTRATION: Ms. X operates a convenience store while she offers bookkeeping services to her clients. In 2018, her gross sales amounted to
P800,000.00, in addition to her receipts from bookkeeping services of P300,000.00 and incurred costs and expenses of P300,000 and P100,000,
respectively. How much is her tax due using the 8% tax rate?
1. Ms. X’s gross sales/receipts from business and practice of profession did not exceed P3,000,000. Thus, she can avail of the 8% income tax rate.
2. The tax base is the gross sales/receipts. Thus, cost of sales, expenses or even the optional standard deduction is not allowed as a deduction.
3. Since she is earning purely from such business and practice of profession, the first P250,000 is considered non-taxable.
c. if the taxpayer is a mixed-income earner, i.e., he earns compensation income too, the first P250,000 treated as non-taxable is not applicable
ILLUSTRATION: In the above illustration, Mx. X likewise earned P1,000,000 from employment with XYZ Company for which P180,000 was tax withheld
and remitted to the BIR. How much is her income tax due and payable?
1. Ms. X’s gross sales/receipts from business and practice of profession did not exceed P3,000,000. Thus, she can avail of the 8% income tax rate
applicable only to such income.
2. The tax base is the gross sales/receipts. Thus, costs, expenses or even the optional standard deduction is not allowed as a deduction.
3. Income from compensation is always subject to the graduated rates.
4. Since she is a mixed-income earner there is no first P250,000 considered non-taxable as to her business income and income from the practice of
profession, since this amount (the non-taxable P250,000) has already been considered in the graduated rates.
5. Note that Ms. X will not qualify for substituted filing since she has income other than compensation. Thus, she would need to file her individual
income tax return using BIR Form No. 1701.
d. The 8% income tax shall be in lieu of the percentage tax under Sec. 116. Accordingly, the taxpayer shall not be subject to the 3% other percentage tax
on his gross sales/receipts.
e. Availment of the 8% income tax rate shall be made on the 1 st quarter Income Tax Return or on the initial quarter return of the taxable year after the
commencement of a new business or practice of profession. Such election shall be irrevocable, and no amendment of option shall be made for the said
taxable year. Accordingly, the taxpayer shall compute for the final annual income tax due using such rate.
f. Otherwise if the taxpayer failed to make such election, the taxpayer shall be considered to have availed of the graduated rates.
In the above illustration, if Ms. X failed to signify her intention to be subjected to the 8% income tax rate, she shall be subject to the graduated tax and
her income tax liability shall be computed as follows:
Aside from being subjected to the graduated tax rates, Ms. X shall likewise be liable for 3% percentage tax on her gross sales/receipts.
g. The Financial Statements (FS) is not required to be attached to the final income tax return. However, existing rules and regulations on bookkeeping and
invoicing/receipting shall still apply.
h. If the taxpayer’s gross sales/receipts and other non-operating income exceeds P3,000,000, he/she shall be authomatically subjected to the graduated
rates. In such case, his/her income tax shall be computed under the graduated income tax rates and shall be allowed a tax credit for the previous quarter/s
income tax payment/s under the 8% income tax rate option.
ILLUSTRATION: Mr. ABC earned P3,000,000 on his practice of profession for the first three quarters of 2018 for which he filed quarterly income tax
returns and availed of the 8% income tax rate, and on the fourth quarter, he earned P3,500,000. For the taxable year, he incurred cost of sales and
operating expenses amounting to P3,000,000 and P1,440,000, respectively. How much is his tax due and tax still payable for taxable year 2018?
Since the gross receipts exceeded the P3,000,000 threshold, Mr. ABC shall automatically be subject to the graudated rates. However, he can claim the
8% income tax paid for the first three quarters as tax credits.
However, there shall be no penalties for the percentage taxes if timely paid on the due date immediately following the month/quarter when the taxpayer
ceased to be a non-VAT taxpayer.
b. Offshore Banking Units (OBUs) – 15% of gross income therefrom. Provided, that the same treatment shall apply to Filipinos employed and occupying
the same position as those aliens employed by these OBUs. (Sec. 25[D])
c. Petroleum Service Contractor and Subcontractor – 15% of the salaries, wages, annuities, compensation, remuneration and other emoluments,
such as honoraria and allowances received from such contractor or subcontractor with the same preferential treatment for Filipino employees therein.
(Sec. 25[E])
d. Any other income from all sources within the Philippines by the above alien employees shall be subject to the pertinent income tax, as the case may be,
imposed under the Tax Code.
Multinational Companies means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific
Region and other foreign markets.
Requirements: for a Filipino employed by an ROHQ/AHQ/RHQs to qualify for the 15% preferential tax rate, the following requisites must be present:
a. The employee must be performing a managerial or technical position;
5 Cesar Nickolai F. Soriano Jr.
University of Santo Tomas – AMV College of Accountancy 2010-6213
Arellano University School of Law 2011-0303
INCOME TAX
b. The gross compensation, exclusive of fringe benefits subject to FBT, must be at least P975,000.
c. The employee must be exclusively working for the RHQ or ROHQ as a regular employee and not just a consultant or contractual personnel. (RR No. 11-
10)
Ineffective Veto: The TRAIN included a provision under Subsection (F) providing that entities registered January 1, 2018 onwards can no longer avail of the
preferential tax rate of 15% for its qualified employees. Such subsection likewise provided that “PROVIDED, HOWEVER, THAT EXISTING RHQS/ROHQS, OBUS
OR PETROLEUM SERVICE CONTRACTORS AND SUBCONTRACTORS PRESENTLY AVAILING OF PREFERENTIAL TAX RATES FOR QUALIFIED EMPLOYEES SHALL
CONTINUE TO BE ENTITLED TO AVAIL OF THE PREFERENTIAL TAX RATE FOR PRESENT AND FUTURE QUALIFIED EMPLOYEES.”
The President vetoed the part of the provision in capital letters above, effectively leaving the 15% preferential tax rate untouched but limiting its availment to
entities already availing of the same prior to the TRAIN. However, the BIR, under RR No. 8-2018 and eventually RR No. 11-2018, deemed the veto a valid
removal of the preferential rate, thus treating special aliens and their filipino counterparts as subject to the graduated rates.
Except for sale of capital assets (shares of stock and real property) covered by Sec. 24 (C) and (D) of the Tax Code, the entire income received from all
sources within the Philippines by every non-resident alien NOT engaged in trade or business within the Philippines such as interest, cash and/or property
dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual
gains, profits and income, and capital gains – the applicable tax rate is 25% (Sec. 25[B])
F. PASSIVE INCOME
There are items of passive income which are specifically enumerated in the Tax Code as subject to final withholding tax and thus are not included in the Gross
Income of the Taxpayer for purposes of computing his taxable income subject to the graduated/scheduler/basic income tax or the 8% tax rate.
The final withholding tax is the amount of tax which constitutes the full and final payment of the income tax due from the payee of the said income.
The liability for the payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of
underwithholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to include the income subject to final
withholding tax to his gross income subject to income tax.
The final tax is withheld at source; thus, the income earner need not file a return for the income subjected to Final Tax.
Example: A earned P100 interest from his deposits with X Bank, X Bank withheld P20 final tax due on the interest.
In this transaction:
1. the P100 interest is the passive income of A
2. X Bank will remit the P20 final tax on interest to the BIR
3. A will receive the interest net of the tax, P80.
4. The P100 interest will no longer be included in A’s taxable income subject to income tax.
The following types of income are subject to the following rates of income tax for Citizens and Resident Aliens:
20% Interest from any currency bank deposit; Yield or other monetary benefit from
deposit substitutes and from trust funds and similar arrangements.
20% Royalties, except on books and other literary works and musical compositions.
20% Prizes (except prizes amounting to P10,000 or less)
20% Winnings (except Philippine Charity Sweepstakes and Lotto winnings amounting to
P10,000 or less)
Note that prior to the TRAIN: winnings from the PCSO and Lotto are exempt
regardless of amount.
10% Royalties from books and other literary works and musical compositions
15% Interests from depository banks under the Foreign Currency Deposit System (prior
to the TRAIN, the rate applicable is 7.5%)
10% Cash and/or property dividends*
Interest Income from LONG TERM deposit or investment are generally exempt from
tax, but if they are PRETERMINATED before the 5th year the final tax would be:
Passive Income earned from outside the Philippines: if a resident citizen earns any of the above income items from abroad, the same is not subject to
final withholding tax but to the regular income tax and will thus form part of his taxable income subject to the same. Note that the above rates apply only for
income earned from Philippine sources.
*dividends must come from a domestic corporation to be subject to the 10% FWT. Thus, if the dividend income is received from Resident Foreign Corporations,
it will be subject to regular income tax and not to final withholding tax.
The following rates shall apply on the income of Non-Resident Alien ENGAGED in Trade or Business in the Philippines (NRAETB):
20% Interest from any currency bank deposit; Yield or other monetary benefit from
deposit substitutes and from trust funds and similar arrangements.
Royalties, except on books and other literary works and musical compositions.
Note that prior to the TRAIN: winnings from the PCSO and Lotto are exempt
regardless of amount.
A NRAETB is subject to the same rates as that of a citizen or resident alien, except for the following:
1. Dividend Income – 20%;
2. Interest Income from FCDUs – exempt.
Income derived from the foreign currency deposit system: for non-residents (whether individual or corporation), income derived from foreign currency deposit
units of banks are EXEMPT from tax. (Sec. 27[D][3], last par. of the Tax Code)
Non-Resident Aliens NOT engaged in trade or business are subject to the 25% Final Tax on his entire income, save for capital gains on shares of stocks
not listed or traded in a local stock exchange. The above rates do not apply.
However still, a NRANETB’s income from an FCDU is exempt because he is still a non-resident.
Capital Assets are those not falling within the definition of an ordinary asset.
Thus, "capital assets" refers to taxpayer’s property that is NOT any of the following:
1. Stock in trade;
2. Property that should be included in the taxpayer’s inventory at the close of the taxable year;
3. Property held for sale in the ordinary course of the taxpayer’s business;
4. Depreciable property used in the trade or business; and
5. Real property used in the trade or business. (SMI-ED Philippines Technology, Inc. vs. CIR)
Determination of gain or loss: the gain shall be the excess of the amount realized from the disposition of property over the basis or adjusted basis for
determining the gain; on the other hand, the loss is the excess of the basis or adjusted basis for determining loss over the amount realized.
Amount realized: is the sum of the money plus the fair market value of the property received.
The above amounts are adjusted by amounts of improvements that materially add to the value of the property or appreciably prolong its life less accumulated
depreciation. (RR No. 6-08)
No gain or loss: generally, upon the sale or exchange of property, the entire amount of the gain or loss as the case may be, shall be recognized. Except in the
following instances where no gain or loss shall be recognized in pursuance of a plan of merger or consolidation:
a. A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or
consolidation; or
b. A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation, also a party to
the merger or consolidation; or
c. A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities
in another corporation, a party to the merger or consolidation. (Sec. 40[C][2] of the Tax Code)
Tax Free Exchange: no gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation
in such a corporation of which as a result of such exchange said persons, alone or together with others, not exceeding four (4) persons, gains control of the
corporation: Provided, that stocks issued for services shall not be considered as issued in return for property. (Sec. 40[C], last par. of the Tax Code)
Treatment of Ordinary Gains: or those arising from the sale of ordinary assets will form part of the taxable income subject to the graduated/basic/regular
income tax. Likewise, losses arising from such sale may be claimed as deductible expense, without any limitation as to amount, unlike in capital losses. (see
limitation on capital losses)
Treatment of Capital Gains: depending on the nature of the property, the gains derived from sale or disposition of capital assets may be subject to:
1. Capital gains tax; or
2. Ordinary income tax.
1. Sale of Shares of Stock of a Domestic Corporation NOT listed and traded through a local stock exchange
Held as capital assets: means all stocks and securities held by taxpayers other than dealers in securities. (Sec. 2[a] of RR No. 6-2008)
Not applicable: the Capital Gains Tax does not apply if the sale of shares of stock was made by
a. A dealer in securities;
b. Investor in shares of stock in a mutual fund company; and
c. Other persons exempt under special law. (Sec. 4 of RR No. 6-2008)
Capital Gains Tax Rate: is now 15%. Prior to the TRAIN, the rates are:
Tax base: is the net capital gain, which is the excess of the selling price/fair market value (less cost to sell) over the cost of the shares.
Determination of cost/fair market value: the value of the shares of stock at the time of sale shall be the fair market value. In determining the value of the shares,
the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus the liability
values is the indicated value of the equity. The appraised value of real property at the time of sale shall be the higher of –
Shares listed or traded through the stock exchange: if the shares are disposed through the stock exchange, the same is not subject to CGT but to the Stock
Transaction Tax of 6/10 of 1% of the selling price (prior to the TRAIN, the rate was ½ of 1%), which is a business tax (this is part of the discussion in Percentage
Taxes). However, this tax constitutes the final tax on such sale since the Tax Code provides that the same shall be exempt from income tax. Thus, any gain
resulting from such disposition will no longer be included in the taxpayer’s gross income subject to regular income tax.
However, if the shares, although listed in the stock exchange, are sold over-the-counter, or directly to the buyer, and not through such stock exchange, then it
will still be subject to the CGT.
A 6% Capital Gains Tax of 6% is imposed on the presumed gain from sale of real property, based on the gross selling price or the fair market value, whichever
is higher.
Note: for individuals, real property subject to CGT consists of ALL real properties (classified as capital assets); whereas for domestic corporations, the only real
property subject to capital gains tax are LANDS and BUILDINGS. Sale of machineries, even though classified as a capital asset, shall be subject to the regular
corporate income tax.
Sale of real property to government or any of its political subdivisions or agencies or GOCCs may be treated as subject to capital gains tax or ordinary income
tax, at the option of the taxpayer. (Sec. 22[D] of the Tax Code)
Sale of Principal Residence: sale of principal residence of natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal
residence within 18 calendar months from the date of sale or disposition is not subject to the 6% CGT. Subject to the following requirements:
a. The historical cost or adjusted basis of real property sold or disposed is carried over to the new principal residence;
b. The exemption can only be availed once every 10 years;
c. The BIR is notified by the taxpayer within 30 days from the date of sale or disposition of his intention to avail of the tax exemption.
If there is no full utilization of the proceeds, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to the 6%
CGT, as follows:
Unutilized Portion
Taxable Amount = X CGT base*
Gross Selling Price
*CGT base is the higher between the FMV and the Selling Price.
ILLUSTRATION: Mr. F sold his principal residence which he acquired for P1,000,000 for P3,000,000. At the time of sale, the fair market value is P2,500,000.
After 1 year, Mr. F bought a house and lot for P3,200,000.
Assuming all other requisites are present, how much is the CGT due on the sale?
Answer: P0. The proceeds of P3,000,000 was fully utilized to acquire a new principal residence.
If, however, the new principal residence was acquired for only P2,000,000, how much is the CGT?
1,000,000
X 3,000,000 = 1,000,000 * 6% = P60,000
3,000,000
1. Unutilized Portion is 1,000,000 (3,000,000 selling price less the utilized portion of 2,000,000)
2. CGT Base is P3,000,000 (the higher between the selling price and fair market value)
3. Taxable Amount is P1,000,000, the ratio of unitilized portion over the selling price multiplied by the CGT base
4. CGT, therefore, is P60,000, 6% of the taxable amount.
If, however, fair market value of the principal residence was P3,300,000, how much is the CGT?
1,000,000
X 3,300,000 = 1,100,000 * 6% = P66,000
3,000,000
1. Unutilized Portion is P1,000,000 (3,000,000 selling price less the utilized portion of 2,000,000)
2. CGT Base is P3,300,000 (the higher between the selling price and fair market value)
3. Taxable Amount is P1,100,000, the ratio of the unutilized portion (P1,000,000) over the selling price (P3,000,000). Note that the denominator is ALWAYS
the selling price (and not the fair market value) because this is the total amount which can possibly be utilized for the acquisition or construction of a
new principal residence considering that this will be the total amount of proceeds that will be collected from the buyer.
Real Property located abroad: is not subject to CGT. Note that what is subject to the 6% CGT is sale of real property LOCATED IN THE PHILIPPINES. Thus, if
the property is located abroad, gain from such disposal, if taxable in the Philippines, is subject to regular income tax.
Forced Sale of Real Property: the fact that the sale is involuntary, e.g., from a court order of foreclosure sale, does not affect the classification of the property
in the hands of the seller, either as capital asset or ordinary asset, and are thus subject to the rules applied therefor.
Capital Gains not subject to CGT; subject to regular/graduated income tax: All gains resulting from sales not subject to capital gains tax, are subject
to ordinary/regular income tax.
Transactions resulting in capital gains and losses even if no sale of capital assets:
1. Retirement of bonds: amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness
issued by a corporation with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.
2. Short sales of property – gains or losses from short sales of property shall be considered as gains or losses from exchanges of capital assets.
Short sales: is a transaction in which the speculator sells securities which he does not own (he merely borrows the stock certificate through or from his
stock broker) in anticipation of a decline in its price, and within a reasonably short period of time buys or covers the stock to complete the transaction.
3. Option gains and losses – an option is a contract granting a person the exclusive privilege to buy or not to buy certain objects at any time within the
agreed period at a fixed price. It is a contract different from the contract which the parties may enter into; it is one supported by a consideration (called
option money) which is distinct from the purchase price.
The law considers the option or the privilege as the capital asset itself.
Thus, if X wanted to buy the cellphone of A, and gave P100 as option money to decide within 3 days, but forfeits the same, the P100 is considered capital
loss of X and A likewise recognizes a capital gain of P100.
4. Securities becoming worthless – loss from shares of stock, held as capital asset, which have become worthless during the taxable year shall be treated
as capital loss at the end of the year. However, this loss is not deductible against the capital gains realized from the sale, barter or exchange or other forms
of disposition of shares of stock during the taxable year, but must be claimed against other capital gains to the extent of capital gains. (RR No. 6-2008)
Note that in order to be subject to 5% and 10% CGT, there must be actual disposition of the shares of stock.
5. Liquidating Dividends - Upon surrender by the investor of the shares in exchange for cash and property distributed by the issuing corporation upon its
dissolution and liquidation of all assets and liabilities, the investor shall recognize either capital gain or capital loss upon such surrender of shares computed
by comparing the cash and fair market value of property received against the cost of the investment in shares. The difference between the sum of the
cash and the fair market value of property received and the cost of the investment in shares shall represent the capital gain or capital loss from the
investment, whichever is applicable. (Sec. 8, RR No. 6-08)
In case the distribution is in instalments: the first payments are applied against the cost. The gain is returnable only when he has completely recovered.
The loss can be taken only upon the distribution of the final liquidating dividend.
6. Retirement or Redemption for Cancellation of Preferred Shares - when preferred shares are redeemed at a time when the issuing corporation is
still in its "going-concern" and is not contemplating in dissolving or liquidating its assets and liabilities, capital gain or capital loss upon redemption shall be
recognized on the basis of the difference between the amount/value received at the time of redemption and the cost of the preferred shares.
This, however, does not apply if a corporation acquires its own shares and books it as treasury shares. (Sec. 9, RR No. 6-08)
The following percentages of the gain or loss recognized upon the sale or exchange of capital assets shall be taken into account in computing net capital gain,
loss or net income:
Percentage Applicability
100% If the capital asset has been held for NOT more than 12 months;
50% If the capital asset has been held for MORE than 12 months.
(Sec. 39[B] of the Tax Code)
The capital losses realized during the taxable year are deductible only to the extent of capital gains from the same type of transaction during the same period.
This rule likewise applies to sales of shares of stock subject to 15% CGT.
Exception: banks and trust companies whose business is the receipt of deposits, sells any bond, debenture, note or certificate or other evidence of indebtedness.
Any loss resulting from such sale shall not be subject to the foregoing limitation and not included in determining the applicability of such limitation to other
losses. (Sec. 39[C] of the Tax Code)
If the individual sustains in any taxable year a net capital loss, such loss, in an amount not to exceed the net income of such year, shall be treated in the
succeeding taxable year as a loss from the sale or exchange of asset held for not more than 12 months. (Sec. 39[D] of the Tax Code)
4. Corporations
Based on the above, only the rule on limitation on capital losses apply to corporations; and if the corporation sustains a net capital loss, the same cannot be
carried over in the succeeding taxable year.
For sale, barter, exchange or other forms of disposition of shares of stock subject to the 15% capital gains tax, if the transferor of the capital asset is an
individual, the rule on holding period and capital loss carry-over will not apply.
FRINGE BENEFITS
Fringe benefits given to non-rank-and-file employees are generally subject to fringe benefits tax; while fringe benefits received by rank-and-file employees are
subject to withholding tax on compensation.
Fringe Benefits Tax is 35% effective January 1, 2018 (32% from Jan. 31, 2000 to December 31, 2017). Fringe benefits tax is paid by the employer and
is considered a final tax. Accordingly, the fringe benefits received by the employee is no longer included in his taxable income subject to income tax.
Rank and File Employees are those who are not holding managerial or supervisory positions
Managerial Employees are those who are vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend,
lay-off, recall, discharge, assign or discipline employees.
Supervisory Employees are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not
merely routinary or clerical in nature but requires the use of independent judgment.
In case of other fringe benefits, the monetary value shall be the same as the value of the benefit.
*5% is used in the computation to equate depreciation, on the presumption of the regulations that the economic useful life of a house is 20 years.
ILLUSTRATIONS:
a. If an employer rents a house for an employee for P10,000 a month, the P10,000 is the value of the benefit. For purposes of computing the FBT, P5,000
would be the monetary value, or 50% of the value of the benefit, since there is no transfer of ownership.
b. If an employer owns the house with a FMV of P1,000,000 and allows the employee to use the same as residence, the value of the benefit would be
P50,000 (5% of P1,000,000) and the monetary value for FBT would be P25,000 (50% of the value of the benefit, since there is no transfer of ownership).
c. If an employer purchased a house for P1,200,000 on an instalment basis where the P200,000 is for the interest throughout the instalment period, and
allows the employee to use the same, the value of the benefit would be P1,000,000*5% (without the interests) or P50,000. For FBT, the monetary
value would be P25,000, or 50% of the value since there is no transfer of ownership.
d. If an employer purchased a house for P1,000,000 with a FMV of P800,000, and transfers the same to the employee, the value of the benefit would be
P1,000,000 (Higher acquisition cost) and the monetary value for FBT would be the same, or 100% of the value since there was transfer of ownership.
e. If in (d) above, the employee is required to pay half of the purchase price (P500,000), the value of the benefit would only be P300,000 which is the
difference between the FMV (P800,000) and the amount paid by the employee (P500,000), the monetary value would be the same since there as
transfer of ownership.
2. FORGONE INTEREST:
For loans with no or less interest than that of the market rate (12%), the monetary value would be the difference between the market interest and
the interest paid, if any.
ILLUSTRATION: If the employee extends a loan to an employee with a 7% interest rate in the amount of P100,000, the annual monetary value would be
5% (12%-7%) of P100,000 or P5,000 for FBT purposes.
Starting 2013, however, the Bangko Sentral ng Pilipinas has already lowered the market rate of interest to 6%. However, no Revenue Regulation has been
issued by the BIR to implement such change in the market rate.
Note:
a. Treatment of the above for FBT purposes is similar to that of the housing privilege except that the presumptive economic useful life of the vehicles is 5
years (20 years for housing privileges).
b. The same rule applies, the monetary value is 50% of the benefit if there is no transfer of ownership
c. The vehicles owned by the company used for business purposes although provided to a managerial or supervisory employee is not subject to FBT.
d. Use of an aircraft and helicopters owned and maintained by the employer is treated as business expense and is not subject to FBT.
4. EXPENSE ACCOUNTS which are personal to the employee (such as groceries for personal consumption) are subject to FBT based on the amount
reimbursed to the employee. If, however, they are not personal (such as food expensed for a meeting with a client) and duly receipted in the name of the
EMPLOYER, they will be treated as valid reimbursable expenses and is not subject to FBT.
Fixed amounts: if the amounts are given regularly on a monthly basis, this will not be considered as fringe benefits subject to FBT. They will form part
of the regular compensation of the employee subject to withholding tax on compensation.
5. EDUCATIONAL ASSISTANCE provided to an employee is generally subject to FBT, except if the study is directly related with the trade or business or
profession or if there is a “bond” where the employee is required to stay in the employ of the employer for some period after finishing.
6. EDUCATIONAL ASSISTANCE PROVIDED TO A DEPENDENT of an employee is generally subject to FBT, except if awarded through a competitive
scheme under a scholarship program.
7. INSURANCE PREMIUMS paid by the employer for the employee is generally subject to FBT, except those exempt under the law (SSS, GSIS, etc.) and
those which are for the group insurance of the employee.
8. EXPENSES FOR FOREIGN TRAVEL are generally subject to FBT, except if in connection with attending business meetings or conventions at an average
of $300 a day (excluding lodging costs). For all others, the cost of economy and business class airplane tickets shall NOT be subject to FBT and 70% of
the cost of first class tickets shall likewise be exempt.
Limitation on deductibility: The benefit cannot be claimed as FRINGE BENEFIT EXPENSE for computation of the taxable income if the house/vehicle or
depreciable asset is already subjected to DEPRECIATION and such is claimed as a deduction already.
a. Retirement benefits received under Republic Act (RA) No. 7641 AND those received by officials and employees of private firms, whether individual or
corporate, under a reasonable private benefit plan.
(1) Those received under a reasonable private benefit plan: is exempt subject to the following requisites:
i. Plan is reasonable;
ii. Plan is approved by the BIR;
iii. Retiring employee must have been in the service of the same employer for at least 10 years
iv. Retiring employee is 50 years old or older at the time of retirement; and
v. Retiring employee has not previously availed of the privilege under the retirement benefit plan of the same or another employer
(2) Retirement benefits under R.A. 7641 (amendment to the Labor Code granting retirement pay under Art. 287 thereof) where:
i. No private retirement plan or retirement plan under the CBA/employment contract.
ii. Must have served the company for at least 5 years
iii. Retiree at least 60 years old but not more than 65 years of age at the time of retirement.
b. Any amount received by an employee or by his heirs from the employer due to death, sickness, or other physical disability or for the cause beyond the
control of the said employee such as retrenchment, redundancy, or cessation of business.
i. The cause of separation by the employee from the service was beyond his control.
ii. Amounts received by involuntary separation remain exempt from income tax even if the employee, at the time of separation, had rendered less than
10 years of service and/or is below 50 years old;
However, any payment made by an employer to an employee on account of dismissal constitutes compensation regardless of legal contract, statute,
or otherwise to make such payment - thus not exempted.
c. Social security benefits, retirement gratuities, pensions and other similar benefits received by resident and non-resident citizens of the Philippines or aliens
who reside permanently in the Philippines from foreign entities whether private or public
d. Payments of benefits due or to become due to any person residing in the Philippines under the law of the US administered by the US Veterans Administration
e. Payments of benefits made under the Social Security System Act of 1954, as amended
f. Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received by government officials and employees
2. Remuneration for casual labor not in the course of an employer's trade or business (Sec. 2.78.1 (B)(4) of RR No. 2-98)
Remuneration paid for labor which is occasional, incidental, or irregular AND does not promote or advance the employer's trade or business;
The above is exempt from withholding tax on compensation because there may be no employer-employee relationship between the employer and the
casual laborer. However, the remuneration received by the laborer is part of his taxable income for income tax purposes.
3. Compensation for services by a citizen or resident of the Philippines performed for a foreign government or international organization. (Sec.
2.78.1 (B)(5) of RR No. 2-98)
i. Includes remuneration paid for services performed by ambassadors, ministers, and other diplomatic officers and employees;
ii. Includes remuneration paid for services performed as consular or other employee of a foreign government or a non-diplomatic representative of such
government
4. Damages (Sec. 2.78.1 (B)(6) of RR No. 2-98): Actual, moral, exemplary and nominal damages received by an employee or his heirs pursuant to a final
judgment or compromise agreement.
5. Life Insurance (Sec. 2.78.1 (B)(7) of RR No. 2-98): proceeds of life insurance policies paid to heirs or beneficiaries upon death of the insured, whether
single sum or otherwise; Provided that interest payments agreed under the policy for the amounts which are held by the insured shall be included in gross
income.
6. Amount received by the insured as a return of premium. (Sec. 2.78.1 (B)(8) of RR No. 2-98): the amount received by the insured, as a return of
premiums paid by him under life insurance, endowment, or annuity contracts either during the term or at the maturity of the term mentioned in the contract
or upon surrender.
7. Compensation for injuries or sickness (Sec. 2.78.1 (B)(9) of RR No. 2-98): Amounts received through Accident or Health Insurance or under Workmen's
Compensation Act, as compensation for personal injuries or sickness. It likewise includes the amount of any damages received whether by suit or agreement
on account of injuries or sickness.
8. Income exempt under treaty (Sec. 2.78.1 (B)(10) of RR No. 2-98): income required by any treaty obligation binding on the Government of the
Philippines.
9. Thirteenth (13th) month pay or other benefits (Sec. 2.78.1 (B)(11) of RR No. 2-98; RR No. 3-2015): 13th month pay and other benefits such as
Christmas bonus, loyalty awards, gifts in cash or kind, and other benefits of similar nature; Provided that the total amount shall not exceed ₱90,000
(as amended by RR No. 11-18, previously ₱82,000).
10. GSIS, SSS, Medicare and Other Contributions (Sec. 2.78.1 (B)(12) of RR No. 2-98): GSIS, SSS, Medicare, Pag-ibig contributions and union dues of
individual employees. For purposes of computing taxable income subject to Income Tax and Withholding Tax on Compensation, the said contributions are
deducted to arrive at taxable income. However, for employees, the amount considered not taxable shall only pertain to the maximum required by law. Any
amount in excess of the mandatory amounts, voluntarily given as contribution by the employee, shall be taxable.
11. Facilities and privileges of relatively small value or “de minimis” benefits (Sec. 2.78 (A)(3)(c) of RR No. 2-98, as amended by RR No. 10-2008, as further
amended by RR No.5-2011) are 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,
including:
De Minimis Benefits
Maximum Value Per Year per Employee
1. Monetized unused vacation leave (VL) credits Equivalent to 10 days VL
2. Medical cash allowance to dependents, per employee ₱3,000
(₱1,500 per employee per semester or ₱250 per month)
(as amended by RR No. 11-18)
3. Rice subsidy ₱24,000
(₱2,400 or 1 sack of 50kg rice per month)
(as amended by RR No. 11-18)
4. Uniform and clothing allowance ₱6,000 (as amended by RR No. 11-18)
5. Actual medical assistance/allowance ₱10,000
6. Laundry allowance ₱3,600 (₱300 per month)
7. Employees achievement awards ₱10,000
(Must be in the form of tangible personal property other than cash or
gift certificate, received by employees under an established written plan
which does not discriminate in favor of highly paid employees)
8. Gifts given during Christmas and major anniversaries ₱5,000
9. Daily meal allowance for overtime or night/graveyard work 25% of basic minimum pay on a per region basis
Treatment: De Minimis benefits are considered non-taxable and are not included in the computation of taxable income and withholding tax on compensation,
as well as fringe benefits tax.
Amounts in excess of the above-mentioned ceiling will form part of OTHER BENEFITS, which is non-taxable only up to P90,000 together with other benefits
received by the employee including 13th month pay and other bonuses, etc. (BIR Ruling No. 030-2013)
12. COMPENSATION INCOME OF MINIMUM WAGE EARNERS (MWES) who work in the private sector and being paid the Statutory Minimum Wage
(SMW) (Sec. 2.78.1 (B)(13) of RR No. 2-98, as amended).
Coverage: No income tax and consequently, withholding of tax, shall be required on:
a. The SMW
b. Holiday pay
c. Overtime pay
d. Night shift differential; and
e. Hazard pay
Other Income earned by MWEs: Additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount to P90,000, taxable allowances and other taxable income given to an MWE by the same employer other than those which are expressly exempt above
shall be subject to income tax and consequently, withholding tax on compensation.
Likewise, MWEs receiving other income from other sources in addition to compensation income, such as income from other concurrent employers, from the
conduct of trade, business, or practice of profession except income subject to final tax, are subject to income tax only to the extent of income other than SMW,
holiday pay, overtime pay, night shift differential pay, and hazard pay earned during the taxable year.
The same shall still be not subject to income tax if it does not exceed P250,000 (not considering those which are exempt as enumerated above)
ILLUSTRATION: Mr. Brent Quito is employed by ABC Corporation. He received the SMW for 2018 in the total amount of ₱100,000 and 13th month pay
amounting to ₱75,000. In the same year, he also received overtime pay of ₱40,000 and nightshift differential of ₱25,000. He also received commission
income from the same employer of ₱20,000, thus, total income received amounted to ₱260,000. How much is his income tax due, if any?
1. Mr. Quito’s SMW, overtime pay and night shift differential are exempt from income tax.
2. Likewise, the 13th month pay not in excess of P90,000 is also exempt from income tax.
3. The taxable income is only P20,000, representing the commission received. However, since it did not exceed the P250,000, it is not subject to any
income tax.
13. Other benefits given to employees not included in the list, but are otherwise treated as non-taxable:
a. Living quarters or meals (Sec. 2.78.1 (A)(2) of RR No. 2-98), subject to the following conditions:
(1) The lodging and meals are furnished within the business premises of the employer;
Business premises of the employer means the place where the employee performs a significant portion of his duties or where the employer conducts
a significant portion of his business. In case of doubt, the criteria to be used shall be (a) time, more than 50% of the employee's work time or (b)
value of business, more than 50% of the production of the said employee. (Section (2)(2.4) of RAMO No. 1-87)
(2) The employee is required to accept the lodging as a condition of his employment; and
(3) The meals are furnished for the convenience of the employer. (RAMO No. 1-87; BIR Ruling [DA-197-97])
b. Tips and gratuities (Sec. 2.78.1 (A)(4) of RR No. 2-98): Tips or gratuities paid directly to an employee, by a customer of the employer, which are not
accounted for by the employee to the employer are considered as taxable income but not subject to withholding.
c. Other benefits and allowances:
(1) Transportation, Representation and Other Allowances (Sec. 2.78.1 (A)(6) of RR No. 2-98, as amended)
(2) Advances/Reimbursements
In general, fixed or variable transportation, representation and other allowances which are received by an employee in addition to his/her regular is
compensation subject to withholding. (Section 2.78.1(A)(6)(a) of RR No. 2-98, as amended)
To be considered as tax-exempt, all of the following conditions shall be met based on the rulings/opinions issued by the BIR, as follows:
1. It is incurred in the pursuit of trade or business of the employer;
2. the employee is required to, and does make an accounting/ liquidation for each expense; and
3. Liquidated in the Name of the employer.
Advances in excess of actual expense, if not returned to the employer constitutes taxable compensation/benefit.
Per Diem Allowances: reasonable amounts of reimbursements/ advances for traveling and entertainment expenses which are pre-computed on a daily
basis and are paid to an employee while he is on an assignment or duty need not be liquidated and not subject to withholding.
Concept: the concept of a withholding tax on income obviously and necessarily implies that the amount of the tax withheld comes from the income earned by
the taxpayer. Since the amount of the tax withheld constitutes income earned by the taxpayer, then that amount manifestly forms part the taxpayer’s gross
receipt. Because the amount withheld belongs to the taxpayer, he can transfer its ownership to the government in payment of his tax liability. The amount
withheld indubitably comes from income of the taxpayer, and thus forms part of his gross receipts (China Banking Corporation v. CA, 403 SCRA 634, 2003).
A manner of collection: A withholding tax on income is not a new kind of tax but simply a manner or system by which income taxes may be collected when the
income is paid or received. It is in the nature of advance tax payment by a taxpayer on the annual tax which may be due at the end of the taxable year.
Kinds:
1. Withholding tax at source (Secs. 34K, 57-59);
a. Withholding tax on quarterly corporate income (Secs 75-76);
b. Withholding tax on quarterly individual income (Secs 74);
2. Withholding tax on employee’s compensation or wages (Secs. 78-83);
3. Withholding of value-added tax (Sec 114c); and
4. Withholding of percentage tax (Secs 116-128).
Withholding of Final Tax of Certain Income Payments: The amount of income tax withheld by the withholding agent is constituted as a full and final
payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. (see
Final Tax Rates on Passive Income)
Withholding of Creditable Tax at Source: Taxes withheld on certain income payments are intended to equal or at least approximate the tax due from the
payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and 52 of the Tax Code, to report the income
and/or pay the difference between the tax withheld and the tax due on the income. This is otherwise known as Expanded Withholding Tax (EWT) or the
Creditable Withholding Tax (CWT)
Final Withholding Tax (FWT) and Creditable Withholding Tax (CWT) distinguished
1. In FWT, the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on
the said income. In CWT, the taxes withheld on certain income payments are creditable against the income tax due on said income. The latter is more of
an advance payment of income tax but does not constitute the full income tax due on the income subject to the withholding tax.
2. In FWT, the liability for payment of the tax rests primarily on the payor as a withholding agent. In CWT, the payee of the income is required to report the
income and/or pay the difference between the tax withheld and the tax due on the income.
3. In FWT, the payee is not required to file an income tax return for the particular income or include the same in the computation of his taxable income
subject to regular income tax. In CWT, the income received by the payee is to be included in his gross income subject to normal income tax, and the tax
withheld is a credit/deduction from the income tax due thereon.
If the employer is the Government of the Philippines or any political subdivision, agency or instrumentality thereof, the return of the amount deducted and
withheld upon any wage shall be made by the officer or employee having control of the payment of such wage, or by any officer or employee duly designated
for the purpose (Section 81, NIRC).
Withholding Tax on Compensation: A method of collecting that income tax at source upon receipt of income. It applies to all employed individual whether
citizens or aliens, deriving income from compensation for services rendered in the Philippines, and the employer is constituted as the withholding agent.
The income recipient is the person liable to pay the income tax, yet to improve the collection of compensation income of employees, the State requires the
employer to withhold the tax upon payment of the compensation income.
Refunds or credits
a. Employer – when there has been an overpayment of tax under this Section, refund or credit shall be made to the employer only to the extent that the
amount of such overpayment was not deducted and withheld by the employer.
b. Employees – the amount deducted and withheld under the Code during any calendar year shall be allowed as a credit to the recipient of such income
against the income tax due. Refunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Secretary
of Finance, upon recommendation of the Commissioner.
Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of counter-signature by the
Chairman, Commission on Audit or the latter’s duly authorized representative as an exception to the requirement prescribed by Section 49, Chapter 8, Subtitle
B, Title 1 of Book V of the Administrative Code of 1987.
The deadline for either is May 15 (previously April 15) of the succeeding year.
SUBSTITUTED FILING OF INCOME TAX RETURN: under this rule, individual income taxpayers need not file their own ITR, provided the following
requisites are met:
a. The individual is receiving purely compensation income;
b. The amount of income tax has been correctly withheld by the employer;
c. There is only one employer during the taxable year.
The substituted filing of income tax return rule is now embodied under Sec. 52(A) of the Tax Code, as amended by the TRAIN.
2. Quarterly Income Tax Return (BIR Form No. 1701Q) – applicable only to individuals who earn business income or income from the practice of profession,
the deadline of which is 60 days following the close of the quarter, except for the first quarter return which should be filed on May 15 of the year.
Real Property subject to regular income tax: If the sale of real property is subject to regular income tax, the same shall likewise be subject to
CREDITABLE WITHHOLDING TAX, and such withholding tax shall be remitted on the 10th day following the month of transaction using BIR Form No. 1606.
C. WITHHOLDING TAX RETURNS (Withholding tax on compensation, Final Withholding Taxes, Expanded Withholding Taxes) – end of the month following
the close of the taxable quarter using the following returns:
For this purpose, the quarter shall follow the calendar quarter. As such, the first quarter ends on March 31, and the deadline for the filing would be April
30, the last day of the month following the close of the quarter.
Deadline for Payment: is likewise the same as the deadline for the filing of the returns.
However, Under RR No. 11-2018, the BIR requires that withholding agents file BIR Monthly Remittance Form (BIR Form No. 0619E and/or 0619F) every
tenth (10th) day of the following month when the withholding is made, regardless of the amount withheld. For withholding agents using EFPS facility, the
due date is on the fifteenth (15th) day of the following month. Withholding agents with zero remittance are still required to use and file the same form.
Quarterly Alphabetical List of Payees (QAP): The return filed shall be accompanied by the Quarterly Alphabetical List of Payees (QAP), reflecting the:
1. Name of income payees;
2. Taxpayer Identification Number (TIN);
3. The amount of income paid segregated per month with total for the quarter (all income payments prescribed as subject to withholding tax under
these regulations, whether actually subjected to withholding tax or not subjected due to exemption); and
4. the total amount of taxes withheld, if any
It is arguable, however, whether the BIR actually requires a QAP for BIR Form No. 1602, the return for Final Withholding Tax on Interest on Bank Deposits,
considering that this may violate Republic Act No. 1405, or the Bank Secrecy Law.
Timing of Withholding: Under Sec. 2.57.4 of RR No. 2-98, as amended, the obligation to withhold arises at the time the income payment is accrued or
recorded as an expense or asset, whichever is applicable, in the payor’s books, or when the payment becomes payable, whichever comes first.
Withholding Tax Statement at Source: Every payor required to deduct and withhold taxes under this subsection shall furnish each payee, a withholding
tax statement, in triplicate, within twenty (20) days from the close of the quarter.
The prescribed form (BIR Form No, 2307 for creditable withholding tax and BIR Form 2306 for final withholding tax) shall be used, showing the monthly
income payments made, the quarterly total, and the amount of taxes withheld. Provided, however, that upon request of the payee, the payor must furnish
such statement, simultaneously with the income payment.
Annual Information Returns: The withholding agent is required to file with the concerned office of the LTS/RR/RDO where the withholding agent is
registered, the following:
1. Annual Information Return of Creditable Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax (BIR Form No. 1604E) including
the corresponding Annual Alphabetical List of Payees - on or before March 1 of the following year in which payments were made; and
2. Annual Information Return on Final Income Taxes Withheld (BIR Form 1604F) including the corresponding Annual Alphabetical List of Payees – On or
before January 31 of the following year in which payments were made.
D. MANNER OF FILING: the returns can be filed (1) manually; (2) through electronic filing and payment system (EFPS); or (3) through the use of eBIR
Forms.
In case of filing through the eFPS, the deadlines are extended by 1 to 5 days depending on the industry classification of the taxpayer.