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1 TAXATION 2 – Atty.

Justice Aurelio-Yap

March 1, 2019 corporations, partnerships and/or


associations
TYPES OF WITHHOLDING TAX

1. Withholding tax on compensation i. Percentage Taxes – taxes withheld by


(WTC) – applies to all employed National Government Agencies (NGAs) and
individuals whether citizens or aliens instrumentalities, including government-
deriving income from compensation for owned and controlled corporations (GOCCs)
services rendered in the Philippines. and local government units (LGUs), before
making any payments to non-VAT-registered
If your income exceeds 250, 000 annually, then taxpayers/suppliers/payees
you are subject to withholding tax. If not
exceeding 250, 000 then your income is not ii. Value Added Taxes (VAT) – taxes withheld by
subject to WTC, you are exempted. National Government Agencies (NGAs) and
instrumentalities, including government-
2. Expanded withholding tax (EWT) - a
owned and controlled corporations (GOCCs)
kind of withholding tax which is
and local government units (LGUs), before
prescribed only for certain payors and is
making any payments to VAT-registered
creditable against the income tax due of
taxpayers/suppliers/payees on account of
the payee for the taxable quarter year.
their purchases of goods and services.
Before, withholding tax refers to compensation
only. But now there is this EWT which increases
the coverage of WT including other income
payments, i.e. Rental income. Difference between the WTC and EWT
from the final withholding tax
The Secretary of Finance may, upon the
recommendation of the Commissioner, require WTC and EWT are creditable withholding tax
the withholding of tax on the items of income (CWT) not final, while final withholding tax
payable to natural or juridical persons residing in (FWT) is final.
the Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than Creditable withholding tax is a WT which can be
one percent (1%) but not more than thirty-two used to credit whatever tax you paid.
percent (32%), which shall be credited against
Example: In your annual income tax return,
the income tax liability of the taxpayer for the pwede nimo icredit didto ang imong nabayad na
taxable year.
na tax.
3. Final withholding tax
Withholding tax is a medium of collecting taxes,
Example: You are a private supplier who is a it is not a tax in itself.
VAT registered taxpayer. Now you enter into a
If the withholding tax has already been withheld
contract with the government, the government is
from you, you can use that amount withheld to
required to withhold a final withholding tax upon
be credited from your total income tax liability.
the VAT of 5%.
But your final withholding tax cannot be
RECALL: The rate of VAT is 12%
credited. In the example above, the 5% withheld
Out of the 12%, the government will withhold by the government from the 12% VAT is a final
5%, which is a final withholding tax. withholding tax, it cannot be credited. So the
taxpayer will declare only 7% VAT, since the 5%
4. Withholding Tax on Government has already been finally withheld by the
Money Payments – withheld by government. The taxpayer does not need to
government offices and declare the 5%.
instrumentalities, including government-
owned or controlled corporations and Under the FWT system, the amount of income
local government units, before making tax withheld by the withholding agent is
any payments to private individuals, constituted as a full and final payment.

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2 TAXATION 2 – Atty. Justice Aurelio-Yap

If CWT, it can be used to credit from your tax Withholding tax is like an advance payment.
liability. But if you say FWT, it cannot be used Kuhaan na ka daan sa imong income para sure
against your tax liability, and it shall be the final payment gyud sa tax.
tax that you paid. And since the FWT cannot be
credited, you are not anymore required to
declare that since that is already final. CONSEQUENCES IF THE WITHHOLDING
AGENT FAILS TO WITHHOLD TAXES

EXPANDED WITHHOLDING TAX UNDER If the withholding agent fails to withhold


expanded withholding tax, he/she will need to
THE TRAIN LAW
pay penalties amounting to:
Expanded Withholding Tax (EWT) is a kind of tax
1. 25%-50% surcharge based on tax
that is taken in advance by the buyer
unpaid;
(withholding agent) from the seller’s income, on
2. 12% annual interest based on tax
behalf of the government.
unpaid;
If you’re a withholding agent, you’re required to 3. Compromise Penalty P1, 000 – 25,000
collect withholding tax on behalf of the every time you fail to withhold
government, in order to avoid unnecessary
penalties.
If the government will know that you have
The tax withheld is used as a deduction to the
Income tax of the seller. income payments to suppliers, sellers, lessors or
professionals and you did not withhold tax, you
are liable for interest and penalties.

Example 1: The buyer bought goods from the The bases for those penalties are those
seller. Upon payment for those goods, the buyer withholding taxes which you supposedly
will automatically deduct withholding tax. The withheld.
buyer now becomes the withholding agent. He
As mentioned, not all taxpayers are required to
will pay the tax in behalf of the seller.
withhold taxes.
Example 2: You are a lessee, and you pay rents
There are only a few certain taxpayers who are
for 10, 000/month. The withholding tax on rent
required to withhold taxes, those who are
is 5%. The payment you make to your lessor
included in the top 20, 000 taxpayers. Once you
should have been deducted the WT upon
payment. So instead of paying the whole 10, 000 are included in the top taxpayers, you will be
given a notification by the BIR that you are now
to the lessor, you pay him 9, 500 and you
required to withhold taxes.
withhold the 500 (5% of 10, 000).

But upon payment, you should give your lessor


BIR form 2307 as an evidence that you withheld WHO ARE REQUIRED TO FILE AND PAY
P500. EXPANDED WITHHOLDING TAX?
Q: What is the use of the BIR form 2307? Not everyone is a withholding agent. You will be
a Withholding Agent only if your payment is
A: Such form shall be used by the lessor once he
included in the list of Income Payments subject
declares his annual income tax. Upon his
declaration of his annual income tax, he will to Expanded Withholding Tax.
include the fact that he received 10, 000 from I have mentioned earlier that only the top
his property leased. Then his income tax liability taxpayers are required to withhold.
shall be computed. From that income tax
liability, he will deduct the 500 withheld by his However, there is also a list of Income Payments
lessee. subject to Expanded Withholding Tax which is
required to be withheld. These are the standard

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income payments required to be withheld by seller/transferor is habitually


everyone, not only by the top taxpayers. engaged in the real estate
business:
With a selling price of five hundred 1.5%
thousand pesos (P500,000.00) or
INCOME PAYMENTS SUBJECT TO less
EXPANDED WITHHOLDING TAX [TRAIN With a selling price of more than five 3.0%
hundred thousand pesos
LAW, RR No. 11-2018]
(P500,000.00) but not more than
1. PROFESSIONAL FEES, TALENT FEES, two million pesos (P2,000,000.00)
With selling price of more than two 5.0%
ETC. FOR SERVICES RENDERED
million pesos (P2,000,000.00)
3. Where the seller/transferor is 6.0%
not habitually engaged in the
Income Payments subject to Tax
real estate business
Expanded Withholding Tax Rate
G) Gross Additional income payments to 15%
A) Professional fees, talent fees, etc. for -
government personnel from
service rendered
importers, shipping and airline
1. Individual Payee - companies, or their agents
Gross Income for the current year 5% H) On one-half (1/2) of the gross 1%
did not exceed P3m amounts paid by any credit card
Gross income is more than P3m 10% company in the Philippines
2. Non-individual Payee - I) Income payments made by any of
Gross income for the current year 10% the top withholding agents
didn’t exceed P720k 1. Supplier of goods 1%
Gross income is more than P720k 15% 2. Supplier of services 2%
B) Gross Rentals or Lease of: J) Income payments, except any single
1. Real Properties 5% purchase which is P10,000 and
2. Personal Properties 5% below, which are made by a
3. Poles, Satellites, and 5% government office
Transmission Facilities 1. Supplier of goods 1%
4. Billboards 5% 2. Supplier of services 2%
5. Cinematographic film rentals and 5% K) On the gross processing/tolling fees 5%
other payments paid for the conversion of molasses
C) Gross payments to certain 2% to its by-products and raw sugar to
Contractors refined sugar
1. General Engineering Contractors 2% L) Gross payments made by pre-need 1%
2. General Building Contractors 2% companies to funeral parlors for
3. Specialty Contractors 2% funeral services rendered
4. Other Contractors 2% M) On the gross payments made to 1%
D) Income Distribution to the 15% embalmers for embalming services
beneficiaries of estates and trust rendered to funeral companies
E) Income Payments to partners of - N) Income payments made to suppliers 1%
General Professional Partnerships of agricultural products
1. If the gross income exceeds 15% O) Income payments on purchases of 5%
P720K minerals, mineral products and
2. If the gross income does note 10% quarry resources
exceeds P720k P) MERALCO Payments
F) Gross selling price or total amount of - 1. Refund given by MERALCO to 25%
consideration or its equivalent paid customers with active contract
to the 2. Refund given by MERALCO to 32%
seller/owner for the sale, exchange, customers with terminated
or transfer of real property classified contract
as Q) Interest income on the refund paid
ordinary asset either through direct payment or
1. Where the seller/transferor is Exempt application against customers’
exempt from the creditable billings by other electric Distribution
withholding tax in accordance Utilities (DUs)
with Sec. 2.57.5 of these 1. Resident Customers 10%
regulations 2. Non-resident Customers 20%
2. Upon the following values of real - R) Income payments made by political 5%
property, where the parties and candidates of local and

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national elections on all their ACCOUNTING PERIOD AND METHODS OF


purchase of goods and services ACCOUNTING
related to campaign expenditures
S) Interest income derived from any 20% Section 43. General Rule. - The taxable income shall
other debt instruments not within the be computed upon the basis of the taxpayer's annual
coverage of ‘deposit substitutes’ and accounting period (fiscal year or calendar year, as the
Revenue Regulations 14-2012 case may be) in accordance with the method of
T) Income payments to Real Estate 1% accounting regularly employed in keeping the books
Investment Trust (REIT)
of such taxpayer, but if no such method of accounting
U) Income payments on sugar 1%
has been so employed, or if the method employed
does not clearly reflect the income, the computation
shall be made in accordance with such method as in
Q: In the withholding tax for compensation, who
the opinion of the Commissioner clearly reflects the
is the withholding agent?
income. If the taxpayer's annual accounting period is
A: Employer other than a fiscal year, as defined in Section 22(Q),
or if the taxpayer has no annual accounting period, or
That is also creditable. If you are a mixed does not keep books, or if the taxpayer is an
income earner, you are required to file an annual individual, the taxable income shall be computed on
income tax return. But if you are a purely the basis of the calendar year.
compensation earner, you are not required to
file an annual income tax return. Because the
BIR Form 2316 prepared by the Er, that will Fiscal accounting period is the taxable period
constitute your income tax return. adopted by corporations using the “fiscal year”
which is a period of twelve (12) months ending
[BAR Q] Substituted filing is when the on the last day of any month other than
employer’s annual return may be considered as December.
the “substitute” ITR of employee inasmuch as
the information provided in his income tax return Calendar accounting period is the taxable
would exactly be the same information contained period adopted by individuals or corporations
in the employer’s annual return. using the “calendar year,” which is a period of
12 months starting from January 1 and ending
So your BIR Form 2316 will be the substitute for on December 31.
your ITR.
INSTANCES WHEN THE TAXABLE INCOME
If you are a mixed income earner, you are not shall be computed on the basis of the
allowed to avail of the substituted filing. You CALENDAR YEAR:
have a BIR Form 2316 at the end of the year,
and at the same time you are required to file an 1. If the taxpayer's annual accounting
ITR. period is other than a fiscal year, as
defined in Section 22(Q), or
Since as a mixed income earner, all your income 2. If the taxpayer has no annual
will be collated, the tax withheld from your accounting period, or
compensation by your employer is creditable. 3. If the taxpayer does not keep books, or
You attach the Form 2316 in your ITR, and have 4. If the taxpayer is an individual.
it deducted from your ITR. And you only pay for
the remaining.

Withholding tax is only a method to ensure the In no instance shall individual taxpayers be
collection of taxes. The burden to collect is given authorized to establish a fiscal year as basis for
to the withholding agent who will collect in filing their returns and computing their income.
behalf of the government.
If the problem says that an individual started his
Withholding tax is not a tax, but manner of operations on February, it may appear that he
collecting. uses fiscal year since he did not start on
January. BUT since the law says that an
individual shall not use fiscal year, he should use

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calendar year. So his tax shall be computed for 2. ACCRUAL BASIS


the entire taxable year of February to December.
In ACCRUAL METHOD, income is recognized in
Section 44. Period in which Items of Gross the period it is earned, regardless of whether it
Income Included. - The amount of all items of has been received or not. In the same manner,
gross income shall be included in the gross income for expenses are accounted for in the period they
the taxable year in which received by the taxpayer, are incurred and not in the period they are paid
unless, under methods of accounting permitted under
Section 43, any such amounts are to be properly Say you bought goods, even if you did
accounted for as of a different period. In the case of not actually pay for them because they
the death of a taxpayer, there shall be included in
were loaned; you still have to record
computing taxable income for the taxable period in
them as expense.
which falls the date of his death, amounts accrued up
to the date of his death if not otherwise properly
includible in respect of such period or a prior period.
Example: I am leasing a building. I wasn’t able
Section 45. Period for which Deductions and
to pay rentals for three months. Under accrual
Credits Taken. - The deductions provided for in this
Title shall be taken for the taxable year in which 'paid method, the rental for three months is already
or accrued' or 'paid or incurred', dependent upon the considered as expense even if they were not yet
method of accounting the basis of which the net paid. Because the transaction is recorded at the
income is computed, unless in order to clearly reflect time it was incurred.
the income, the deductions should be taken as of a
different period. In the case of the death of a When you say cash basis however, since I
taxpayer, there shall be allowed as deductions for the wasn’t actually able to pay for the rentals for
taxable period in which falls the date of his death, three months, I will not record it as expense.
amounts accrued up to the date of his death if not
otherwise properly allowable in respect of such period
or a prior period.
We will not delve into the details of these
Section 46. Change of Accounting Period. If a concepts. You just have to understand that
taxpayer, other than an individual, changes his depending on the method which the taxpayer
accounting period from fiscal year to calendar year, adopts, whether cash or accrual basis, you will
from calendar year to fiscal year, or from one fiscal know how to compute your income tax at the
year to another, the net income shall, with the
end of the taxable year; which income or
approval of the Commissioner, be computed on the
expenses to include or exclude.
basis of such new accounting period, subject to the
provisions of Section 47.

Section 51. Individual Return. -


(A) Requirements. -
METHODS OF ACCOUNTING (1) Except as provided in paragraph (2) of this
Subsection, the following individuals are required
(as previously explained) to file an income tax return:
(a) Every Filipino citizen residing in the
Different accounting methods under the
Philippines;
Tax Code (b) Every Filipino citizen residing outside the
Philippines, on his income from sources within
1. CASH BASIS the Philippines;
(c) Every alien residing in the Philippines, on
In CASH METHOD, income is recognized only income derived from sources within the
upon actual or constructive receipt of cash Philippines; and
payments or property but no deductions are (d) Every nonresident alien engaged in trade or
allowed from the cash income unless actually business or in the exercise of profession in the
disbursed through an actual or constructive Philippines.
payment in cash or property.
(2) The following individuals shall not be required
It depends on cash inflow or cash to file an income tax return;
outflow. You only recognize them as
(a) An individual whose taxable income does
expense upon actual payment.

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not exceed Two hundred fifty thousand pesos employers at any time during the
(P250,000) under Section 24(A)(2)(a): taxable year; and
Provided, That a citizen of the Philippines and 3. An individual whose pure compensation
any alien individual engaged in business or
practice of profession within the Philippines
income derived from sources within the
shall file an income tax return, regardless of Philippines exceeds Sixty thousand
the amount of gross income; pesos (P60, 000).

(b) An individual with respect to pure RECALL: If you are a non-resident citizen not
compensation income, as defined in Section 32 engaged in trade or business in the Philippines,
(A)(1), derived from sources within the you are not required to file an ITR, BECAUSE
Philippines, the income tax on which has been you pay 25% as FINAL TAX. So since the tax is
correctly withheld under the provisions of already final, you are not required to declare an
Section 79 of this Code: Provided, That an
individual deriving compensation concurrently ITR.
from two or more employers at any time
That is the concept of “final tax.” Unlike in
during the taxable year shall file an income tax
return: Provided, further, That an individual creditable, wherein you declare all your income,
whose compensation income derived from and deduct those withheld from you or credited.
sources within the Philippines exceeds Sixty If “final”, you are not required to declare and
thousand pesos (P60,000) shall also file an you have nothing to credit.
income tax return;
Example: Taxes on passive income are also final
(c) An individual whose sole income has been taxes. So the income from your bank deposits
subjected to final withholding tax pursuant to need not be declared because they are already
Section 57(A) of this Code; and
subject to final tax.
(d) An individual who is exempt from income
This is also the reason why NRANETB is not
tax pursuant to the provisions of this Code and
other laws, general or special. required to file an ITR, because he is subject to
(NIRC, Sec. 51 as amended) final income tax.

PERSONS LIABLE TO FILE ITR Exceptions: The following individuals shall


NOT be required to file an income tax
a. Individual Taxpayers return:
1. An individual whose taxable income does
GR: The following individuals are required not exceed Two hundred fifty thousand
to file an income tax return: pesos (P250,000) under Section
1. Every Filipino citizen residing in the 24(A)(2)(a): Provided, That a citizen of
Philippines; the Philippines and any alien individual
2. Every Filipino citizen residing outside the engaged in business or practice of
Philippines, on his income from sources profession within the Philippines shall file
within the Philippines; an income tax return, regardless of the
3. Every alien residing in the Philippines, amount of gross income
on income derived from sources within
the Philippines; and 2. Individual taxpayer receiving purely
4. Every nonresident alien engaged in compensation income, regardless of
trade or business or in the exercise of amount, from only one employer in
profession in the Philippines. the Philippines for the calendar year, the
income tax of which has been withheld
The following are also required to filed correctly by said employer
ITR: (Substituted Filing);
1. A citizen of the Philippines and any alien
individual engaged in business or Basis of Substituted Filing:
practice of profession within the
Philippines, regardless of the amount of Sec. 51-A. Substituted Filing of Income
gross income; Tax Returns by Employees Receiving
Purely Compensation Income. —
2. An individual deriving compensation
Individual taxpayers receiving purely
concurrently from two or more
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compensation income, regardless of amount, The date of transaction is the date of


from only one employer in the Philippines for notarization.
the calendar year, the income tax of which
has been withheld correctly by the said (D) Husband and Wife. - Married individuals,
employer (tax due equals tax withheld) shall whether citizens, resident or nonresident aliens, who
not be required to file an annual income tax do not derive income purely from compensation, shall
return. The certificate of withholding filed by file a return for the taxable year to include the income
the respective employers duly stamped
of both spouses, but where it is impracticable for the
‘received- by the BIR, shall be tantamount to
spouses to file one return, each spouse may file a
the substituted filing of income tax returns
by said employees. (NIRC, Sec. 51-A as separate return of income but the returns so filed
amended) shall be consolidated by the Bureau for purposes of
verification for the taxable year.
3. An individual whose sole income has (E) Return of Parent to Include Income of
been subjected to final withholding tax; Children. - The income of unmarried minors derived
from property received from a living parent shall be
Example: Passive Income and final tax imposed included in the return of the parent, except (1) when
on nonresident alien engaged in trade or the donor's tax has been paid on such property, or (2)
business. when the transfer of such property is exempt from
donor's tax.
4. A minimum wage earner or an individual
who is exempt from income tax (NIRC, (F) Persons Under Disability. - If the taxpayer is
unable to make his own return, the return may be
Sec. 51).
made by his duly authorized agent or representative
(B) Where to File. - Except in cases where the or by the guardian or other person charged with the
Commissioner otherwise permits, the return shall be care of his person or property, the principal and his
filed with an authorized agent bank, Revenue District representative or guardian assuming the responsibility
Officer, Collection Agent or duly authorized Treasurer of making the return and incurring penalties provided
of the city or municipality in which such person has for erroneous, false or fraudulent returns.
his legal residence or principal place of business in the
(G) Signature Presumed Correct. - The fact that
Philippines, or if there be no legal residence or place
an individual's name is signed to a filed return shall be
of business in the Philippines, with the Office of the
prima facie evidence for all purposes that the return
Commissioner.
was actually signed by him.
(C) When to File. -

(1) The return of any individual specified above


shall be filed on or before the fifteenth (15th) day
of April of each year covering income for the
preceding taxable year. 56.06

(2) Individuals subject to tax on capital gains; b. Corporate Taxpayers


(a) From the sale or exchange of shares of
stock not traded thru a local stock exchange as
prescribed under Section 24(c) shall file a
return within thirty (30) days after each
transaction and a final consolidated return on General Professional Partnership (GPP)
or before April 15 of each year covering all Every GPP shall file, in duplicate, a return of its
stock transactions of the preceding taxable income, except items excluded from gross
year; and income, setting forth the items of gross income
and the deductions allowed, and the names,
(b) From the sale or disposition of real
TIN, addresses and shares of each of the
property under Section 24(D) shall file a return
within thirty (30) days following each sale or partners (NIRC, Sec. 55).
other disposition.

March 25, 2019


“(30) days after each transaction” Any obligation after this death cannot be
counted as liabilities
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The liability was contracted in good faith for full 1. Property involved must have been
consideration in money or money’s worth. transferred by a prior decedent to a
present decent through donation
So such claim must be proved.
2. Presentpresent decedent must have
Must be a debt valid in law and enforceable in 3. Property can be identified from the one
courts. received by the donor to the present
decedent
The indebtedness must not be condoned and the a. Through technical description
action of the decedent must not have 4. The property must have formed part of
prescribed. the gross estate of the decedent
5. Donors tax on the gift or the inheritance
Requisites for the deductibility:
must have been paid
1. The value of the claims against part of 6. Said property must be situated in the
the gross estate Philippines and now forms part of the
2. And it must be shown that they are gross estate of the decedent
insolvent 7. Amount of the deduction is the full
3. And the value of the claim must have amount and the amount decutible id
been added in the gross estate diminished years upon
8. VD must not ave been claimed by the
Unpaid mortgages and indebtedness previous estate involving the same
1. Where the value should be included in property
the value of the gross estat 9.
2. The value of the property mortgage The earlier the death of the
must be included in the gross estate.
3. Verified that such debt was contracted in Transfers for public use
good faith by the decedent during his
Disposition is in the last will and testament
lifetime.
4. Substantiated by proff that such debt In favour of the government
exists
5. Should have been included as part of Exclusively for public purpose
the gross estate
And value of the property is included in gross
Requisites for the estate

1. Said taxes must have accrued as of the


time of death
Losses
2. Remain unpaid at the time of death
1. Losses must be incurred during the
Estate taxes are no
settlement of thee estate
2. Arose from fires or other casualties
3. Not compensated for by insurance
Income received after death or 4. Not have been claimed for
5. Incurred not later than
Taxes on the income of such property
The mentioned deductions are call ordinary
Property taxes not accrued before his death
deductions.
Property previously taxed.

Special Deductions
Vanishing deduction
1. Family home
Pg 703 Revenue Regulation No. 12-2018
Place where family actually resides

The family home is deemed family home.


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Amounts received by heirs under RA 4967

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