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*
I. INTRODUCTION
1. The withholding tax system or the method of collecting the tax in advance or
upon the receipt of income by the tax authority is an important feature of the income tax
administration in the Philippines. It is designed to ensure the continuous and steady
collection of revenues for the government. Among the advantages of this scheme are: (a) it
makes tax administration more efficient by improving the collection of tax revenues; (b) it
encourages tax compliance and minimizes tax evasion and avoidance practices; (c) it relieves
the taxpayer from financial difficulties in raising the entire amount of tax when it falls due;
and (d) it provides the government a continuous cash flow to finance its services.
2. At present, the withholding tax is applied on the following1:
a. Employment income;
b. Dividends from a domestic corporation;
c. Royalties (in general and those on books, other literary works and musical
compositions);
d. Share in the distributable net income after tax of a partnership;
e. Interest income (Philippine currency bank deposits and deposit substitutes, longterm deposits pre-terminated before the fifth year, and foreign currency bank
deposits);
* Prepared by Roselyn C. Domo, Senior Tax Specialist, reviewed by Donaldo M. Boo, OIC, Direct
Taxes Branch NTRC.
1
National Tax Research Center, Department of Finance, Short Guide to Philippine Taxes, Manila,
pp. 25-31.
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f. Prizes exceeding P10,000 and winnings (except sweepstakes and lotto winnings)
g. Gains from sale of shares of stock and real property classified as capital asset;
h. Informer’s reward;
i. Other fixed or determinable gains, profit and income;
j. Income derived from contracts from service contractors engaged in petroleum
operations;
k. Disposition of real property classified as capital asset to the government or any of
its political subdivisions;
l. Gross income by nonresident cinematographic film owners, lessors or
distributors;
m. Professional fees and talent fees;
n. Rentals of real property used in business;
o. Income payments made to resident individuals and corporate cinematographic
film owners, lessors or distributors;
p. Income payments made to general engineering, building, specialty and other
contractors;
q. Commissions paid to certain brokers and agents;
r. Commissions of independent and exclusive distributors, medical/technical and
sales representatives, and marketing agents of multi-level marketing companies;
s. Income distributed to the beneficiaries of estates and trust (except such income
subject to FWT and tax exempt income);
t. Income payments to partners of general professional partnerships (GPPS);
u. Additional income of government personnel from importer, shipping and airline
companies, or their agents;
v. Payments made by the government to its local/resident supplier of goods and
local/resident supplier of services other than those covered by other rates of
withholding tax (except any single purchase of P10,000 and below);
w. Payments made to embalmers for services rendered to funeral companies;
x. Payments made by pre-need companies to funeral parlors;
y. Payments made to suppliers of agricultural products;
z. One-half of the gross amount paid by credit card companies to any business entity
representing the sales of goods/services to cardholders;
aa. Amount paid to the seller/owner for the sale, exchange or transfer or real property
classified as ordinary asset; and
bb. MERALCO Payments as refund arising from Supreme Court Case GR No. 14814
and interest income on the refund of meter deposit.
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3. While the withholding tax system facilitates the collection of taxes, several
instances of abuses and leakages have been identified, exposing the weaknesses of the
system. In the case of individual income taxes, these practices range from non -reporting
or under-reporting of income to irregularities in the claims of tax credits. The situation is
further aggravated by the lack of reliable data on the total number of individual
taxpayers.
4. This paper discusses the present withholding tax system on individual
taxpayers. It identifies the abuses and leakages that weaken the system and recommends
ways to strengthen the system.
II. BACKGROUND INFORMATION
A. Withholding Tax System in the Philippines
A.1 Historical Background
1. The withholding tax system was first proposed on May 2, 1950 under
House Bill (HB) No. 1127. 2 The two main justifications for the proposal were
that: “first, it will provide a convenient manner for meeting the employee’s
income tax liability on wages and, second, it will assure the Government of the
collection of the income tax on wages which otherwise would have been lost or
substantially reduced through failure of the employees concerned to file the
corresponding income tax returns.” 3 The proponents deemed it necessary to put
the system in place for the reason that there are a large number of cases where
an employee fails to file an income tax return (ITR) and/or pay the income tax
for the “simple reason that he/she did not set aside from his/her income
sufficient amounts to meet his/her tax liability payable the following year.” 4
Withholding of the tax on wages when these are earned was seen as the solution
to the problem. In addition, an approximately P 18 million in additional income
tax was expected to be collected by the system. The authors also noted that the
system is already in force and is receiving the full cooperation of all concerned
in other countries with modern tax collection methods such as the United States,
Great Britain and Australia and is commonly referred to as ‘pay-as-you-earn’
(PAYE) or ‘pay-as-you-go’ (PAYG). The Philippines adopted the system four
months after it was introduced by virtue of Republic Act (RA) No. 590 5 which
took effect on January 1, 1951.
2
Introduced by then Congressman Ferdinand E. Marcos and Congressman Tito V. Tizon.
3
Congressional Record, House of Representatives, Second Congress of the Republic, First Session,
Vol. I No. 74, May 10, 1950, Consideration of House Bill No. 1127, p. 2227.
4
Congressional Record, House of Representatives, May 10, 1950, loc. cit.
5
Entitled, “An Act to Amend Certain Sections of Commonwealth Act Numbered Four Hundred and
Sixty-Six, As Amended, Otherwise Known as the National Internal Revenue Code, and to Add to Title II
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2. The withholding tax system is said to have improved the revenue intake
of the government. Based on available data, collection from withholding tax on
wages for Fiscal Year (FY) 1952 (covering July 1, 1951 to June 30, 1952)
amounted to P 11.2 million and accounted for 27% of total individual income tax
collection for that fiscal year. As contained in the FY 1952 BIR Annual Report,
the first and second quarter collections in 1952 which amount to P 5.3 million is
7.5% higher than those collected during the same period in 1951 despite a
decrease in the number of employers for that FY.6 Due, however, to data
constraints, no comparison can be made with respect to the collections prior to the
introduction of the withholding tax system.
3. Under the withholding tax system, the person or the organization that
pays the income is given the responsibility of withholding the tax from the
income payments and then remitting the same to the government. The tax should
be withheld when income is paid or becomes payable 7, whichever comes first.
Thus the obligation to withhold a tax starts on the date when the salary of an
employee is payable, and not on the date when it is actually paid. 8
A.2 Kinds of Withholding Tax
1. There are two basic kinds of withholding tax: creditable and final.
Creditable withholding tax (CWT) is the tax withheld from income payments
which is allowed to be credited against the taxpayer’s final tax liability which is
then adjusted accordingly. The amount withheld is only an estimate of the income
tax that should be paid. In this regard, the payee is still required to file an income
tax return on that particular income but needs to pay only the difference between
the estimated amount withheld and the actual amount of tax due. On the other
hand, a final withholding tax (FWT) is a tax wherein the payer withholds an
amount from the payee’s income, and pays this amount to the government on
behalf of the payee. The payee then no longer needs to file an income tax return
for this income.
Thereof a Supplement Providing for the Withholding of the Income Tax on Wages, and For Other Purposes”,
approved, September 22, 1950. Except for the provision on the withholding tax (Section 12), other provisions
of the law became effective on January 1, 1950. Alongside the introduction of the withholding tax system was
the creation of the Withholding Tax Unit by virtue of Memorandum Order No. V-188. The unit was placed
under the Income Tax Division of the Assessment Department. (http://www.bir.gov.ph)
6
The Annual Report of the Collector of Internal Revenue for Fiscal Year Ending June 30, 1952,
Manila: Bureau of Printing, pp. 79-80. (As gathered from the Philippine National Library)
7
The term ‘payable’ refers to the date when the obligation becomes due, demandable or legally
enforceable.
8
Comprehensive Tax Reform Program, Implementing Rules & Regulations (IRR), Questions and
Answers in English. A project of the Department of Finance, undertaken by AQY & Associates, p. 6.
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2. The CWT includes the expanded withholding tax and compensation
income tax. Incomes that are subject to the CWT are incomes from employment
(compensation income), and fees such as professional fees, talent fees, rental
income, service income, etc. The FWT is usually applicable to income from
dividends, interest, royalties, capital gains from sale of property, etc., and income of
foreign companies and their employees. It is to be noted however, that in the case
of individual taxpayers with only one employer, their withholding tax on
compensation becomes a final tax for the reason that the amount of tax that is
withheld from the taxpayer is equal to the amount of tax that is due him or her for
the year.9
B. Trends and Developments in Withholding Tax
1. In recent years, the withholding tax system has ensured a consistent supply of
revenues for government. Based on available data from the Bureau of Internal Revenue
(BIR), during the last ten (10) years (2000 to 2009), collections on withholding taxes
generally increased as follows: withholding taxes on wages by P 47.8 billion or 74.6%;
creditable withholding tax (expanded) by P 2.4 billion or 59.3%, and other withholding
taxes at source by P 2.3 billion or 100.3% (Table 1). Similarly, the scheme has greatly
facilitated tax compliance. With respect to the number of withholding tax returns filed
for the period 2000 to 2009, the same went up as follows: Form 1601-C (Monthly
Remittance Return of Income Taxes Withheld on Compensation) by 228,652 returns or
11.4%, Form 1601-E [Monthly Remittance Return of Creditable Income Taxes
Withheld (Expanded)] by 2,406,718 returns or 400.2%, and Form 1601-F (Monthly
Remittance Return of Final Income Taxes Withheld) by 45,769 returns or 90.1%.
(Table 3)
2. To strengthen the withholding tax system, the BIR has established ties with
national government agencies (NGAs) and local government units (LGUs) for the
prompt remittance of withholding taxes. In the year 2000, a Memorandum of
Agreement (MOA) was signed with NGAs in collaboration with the Department of
Finance (DOF), the Department of Budget and Management (DBM) and the
Commission on Audit (COA). Consequently, DOF-DBM-COA Joint Circular No. 1200010 was issued in January 3, 2000 setting the guidelines in the use of the Tax
Remittance Advice (TRA)11 as a new mode of payment for taxes withheld by NGAs.
9
See Annex A for a summary of withholding tax rates for individuals.
10
This was amended by Joint Circular No. 1-2000A dated July 31, 2001 specifically on the guidelines
in the use of the revised TRA.
11
TRA, as defined under RMO No.16-2000, as amended by RMO No. 02-2007, refers to a serially
numbered document to be distributed by the BIR to NGAs. It shall be accomplished by the NGAs and attached
to every Withholding Tax Return (WTR) filed for payment of taxes withheld, duly certified by the Chief
Accountant and approved by the Head of the concerned NGA or his/her duly authorized representative. This
shall be the basis for the BIR and Bureau of Treasury (BTr) to record the collection in their respective books of
accounts.
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Revenue Memorandum Order (RMO) No. 16-200012, on the other hand, implemented
the said Joint Circular providing for the policies and procedures for the processing and
monitoring of withholding tax payments from NGAs. This was later amended by RMO
Nos. 27-200113 and 02-200714.
3. In March 2001, Revenue Memorandum Circular (RMC) No. 21-200115
circularized the MOA16 entered into by and among the DOF, the BIR, the Department of
Interior and Local Government (DILG), League of Provinces of the Philippines (LPP),
League of Cities of the Philippines (LCP), League of Municipalities of the Philippines
(LMP) and the Liga ng mga Barangay sa Pilipinas (LBP). The MOA’s objectives are to:
(a) increase tax collections by increasing the taxpayer base and collecting internal
revenue taxes from concerned taxpayers; (b) implement continuing Tax Campaign
programs in order to increase the level of tax compliance as well as for the fast, efficient
and courteous delivery of service to the taxpaying public; (c) recognize the importance
of a collaboration effort among the concerned groups in meeting the national and local
tax collection targets; and (d) ensure compliance by all LGUs with the pertinent
provisions of internal revenue tax laws, rules and regulations.
4. Under the MOA, the DILG will help the BIR in facilitating compliance of
LGUs with withholding tax laws and regulations, as well as in the remittance of the
withheld taxes on time. The LGUs, on the other hand, shall help Revenue District
Offices (RDOs) in tracking down unregistered and delinquent taxpayers. They shall
likewise allow the BIR to gain access to their tax records, among others. In return, it is
the BIR’s responsibility to provide LGUs with the annual revenue tax collections and to
facilitate the issuance of copies of certificates needed by LGUs, among others. In July
13, 2006, RMO No. 13-2006 was issued to ensure the efficient compliance by
designated withholding agents in the LGUs with existing withholding tax laws, rules
and regulations and other related issuances and to ensure the efficient implementation
and monitoring of monthly withholding tax collections from LGUs.17
12
Issued on April 3, 2000.
13
Issued on October 22, 2001.
14
Issued on March 19, 2007.
15
Issued on March 21, 2001.
16
Signed in March 2001 by then DILG Secretary Jose D. Lina, Jr., DOF Secretary Alberto G. Romulo,
BIR Commissioner Rene G. Bañez and the Presidents of the four (4) major leagues of LGUs, namely: Governor
Hilario De Pedro III, for the League of Provinces of the Philippines; Mayor Alipio Fernandez, Jr., for the
League of Cities of the Philippines; Mayor Jinggoy Estrada, for the League of Municipalities of the Philippines
and James Marty Lao Lim, for the Liga ng mga Barangay sa Pilipinas.
17
The underlying basis for the issuance of RMO 13-2006 are the reports made by field personnel and
the number of abatement cases filed by designated officials of LGUs required to withhold and remit taxes with
the Technical Working Committee on Abatement. It has been gathered that a number of LGUs have been
remiss and/or are delayed in remitting withheld taxes, thereby resulting in the non-compliance by the LGUs
with the withholding tax rules and regulations.
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III. COMMENTS AND OBSERVATIONS
1.
Despite its substantial contribution in facilitating tax compliance, the
withholding tax system still suffers from weaknesses that diminish its role as an effective tax
collection mechanism. According to a National Tax Research Center (NTRC) Study18, the
estimated individual income tax gap from 2002 to 2006 averaged P37.17 billion annually. A
substantial part of potential income taxes that remained uncollected came from selfemployed and professionals (i.e., P26.12 billion or 64.5%). Uncollected taxes from
compensation earners averaged P11.06 billion annually. The estimated gap may be
attributed to the following weaknesses in the present withholding tax system:
a. Non-Collection or Non-Remittance of Withholding Tax by Employers/Withholding
Agents
There are instances when the person required to make the withholding does
not do so, or in the event the withholding is made, the collection is not remitted to the
BIR at all. With the requirement to file Income Tax Returns (ITRs) already
dispensed with under Revenue Regulations (RR) No.19-2002 (Substituted Filing of
ITRs)19 particularly for those whose income tax has been withheld correctly (i.e., tax
due equals tax withheld), there is greater possibility of employers as withholding
agents continuing with the said practice. In this case, the BIR should be keen on
monitoring claims for deduction on wages by withholding agents or employers. An
employer acting as withholding agent cannot claim a deduction for income payments
made to an employee unless the taxes were withheld and paid to the BIR 20. In
addition to the withholding agent not being allowed to claim such deduction, he/she is
liable for the withholding tax that should have been collected plus the corresponding
penalties which include a 25% surcharge and 20% interest on the total amount due.
b. Nonreporting of multiple employment income of certain individuals
When an employee has more than one source of employment income,
problems in withholding also arise. In this case, the total amount of tax withheld will
be accurate only if the principal employer knows the details of the employment
income paid by others. While in some cases this may be possible, an employee may
not wish to disclose the existence of other employment income to his or her primary
18
National Tax Research Center, Estimate of the Income Tax Gap, CY 2002 to 2006, January 11, 2008.
19
An individual taxpayer receiving purely compensation income from only one employer is no longer
required to file the Annual Income Tax Return (Form 1700) if the income tax has been correctly withheld by
the employer. The Annual Information Return of Income Taxes Withheld on Compensation and Final
Withholding Taxes filed by the employers shall be equivalent to the substituted filing of income tax returns by
said employees.
20
10
Section 34(K), National Internal Revenue Code (NIRC) of 1997.
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employer21 in order to avoid being taxed for such other income. It should be
mentioned that the present withholding tax system is not capable of putting in
safeguards to prevent this practice of not disclosing secondary and other sources of
income.
c. Fictitious Claims of Personal and Additional Exemption Allowances and Premium
Payments on Health and/or Hospitalization Income
c.1 Many taxpayers at present, are able to deduct from their gross income
amounts of personal and additional exemption allowances that are more
than what they are entitled to for the reason that the system does not provide
for a strict monitoring and verification of claims for such allowances.
Although the present system of registration of taxpayer information and its
update has greatly minimized incidence of fictitious claims for dependents,
there are still taxpayers who are able to claim additional exemption
allowance for dependents who are either non-existent or not qualified. The
fact also that personal exemption allowances have been made uniform
regardless of status may be of great help in removing incidence of fictitious
claims as to status.
c.2 Similarly, a number of taxpayers are able to claim the P 2,400 annual
premium payments on health/and or hospitalization insurance deduction
although their annual family income exceeds P 250,000. This provision is
not also strictly monitored by the system.
c.3
It should be mentioned that although this problem is not specifically about
the withholding tax system, this practice has an impact on the system
particularly on collection. This is because the base of the withholding tax is
not maximized, that is, the taxable income of individual taxpayers is
reduced by the amounts of false claims for deductions.
d. Non-filing of Returns Among Self-Employed Individuals
There is apparent inequity in the current tax system which makes fixed
income earners contribute more to the total individual income tax collection than the
self-employed and/or professionals. The said inequity exists because unlike fixed
income earners who are subject to a withholding tax system that effectively captures
their total tax due, the self-employed and/or professionals are subject to an
incomplete withholding tax system that gives them the opportunity not to pay their
full tax due at the end of the year. This situation, however, is not really the fault of
self-employed individuals and/or professionals but more of the system as they are
allowed to claim deductions from their gross income which in the first place is not a
fixed amount, hence it is impossible for them to compute their final tax due which
would be the basis of withholding. Hence, a more efficient and effective system must
21
Victor Thuronyi, Tax Law Design and Drafting, Vol. 2 (Washington D.C.: External Relations
Department, Publication Services International Monetary Fund, 1998), p.560.
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be put in place in order to lessen the incidence of non-reporting or underreporting of
income of said taxpayers and thus improve tax compliance among them and enable
them to give their due share in total individual income tax collection.
e. Irregularities in the Claims for Tax Credits
A withholding tax statement/certificate is an important document that is
required to be presented when a taxpayer claims for a tax credit. There are cases,
however, when the person from whom the taxes were withheld does not bother to get
a copy of the said document or, there are instances when the withholding agent
himself/herself fails to furnish the income recipient a copy of the said document,
whether intentionally or unintentionally. It should be noted, however, that despite the
lack of necessary attachments, some taxpayers are still able to claim tax credits.
2. While there are penalties imposed for violation of the withholding tax provisions
under pertinent sections of the NIRC and Sec. 2.80 of Revenue Regulations (RR) 2-98,
compromise penalties for violation of withholding tax provisions by a government officer
only range from P5,000 to P50,000 while fines for violation of other provisions of the Code
or regulations in general for which the law does not provide specific penalty are not more
than P1,000.22 In these cases, the amounts of fines and compromise penalties may be too
small and may have to be increased.
3. Another issue relates to the lack of reliable data on the number of individual
taxpayers which has made more difficult the simulations and analysis for purposes of
reforming the withholding tax system. In the case of compensation earners, there is a huge
gap of over 4 million employees between the number of compensation income earners per
BIR records vis-à-vis the number of salaried employees as suggested by the records of the
Social Security System (SSS), the Government Service Insurance System (GSIS), the
Department of Labor and Employment, (DOLE), the Armed Forces of the Philippines (AFP)
and the Philippine National Police (PNP). Also, the BIR data do not tally with third party
data such as the number of taxable families from the National Statistics Office (NSO) and
other indicators of income such as the number of privately-owned vehicles and motorcycles
registered with the Land Transportation Office (LTO). These third party indicators can
somehow give an idea on the number of individual taxpayers.23
4. In many developing countries, it has been observed that small and medium
enterprises (SMEs) employ the majority of taxpayers. However, many SMEs remain to be in
22
These violations are also subject to criminal penalties.
23
Other third party data that Cong. Herminio G. Teves suggests that the BIR should look into are the
names of car/truck owners, number of cars/trucks owned, list of business establishments and the amount of
sales tax paid to LGUs and assessed value of properties and real property tax paid; list of sugar mills, list of
farmers/planters whose share for the crop is 300 per 50 kilobags or more; and owners of fishing vessels. He
also recommends mandating the RDO to submit to the Commissioner and the Secretary of Finance on or before
15th of March their projections as to the number of individuals income tax filers, the projected revenue and the
percentage increase in the number of tax filers and the tax that will be collected. [Herminio G. Teves, Ways and
Means for Tax Collection Efficiency (Quezon City: House of Representatives, 2006), pp. 24 to 25.]
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the informal sector for reasons such as lack of sufficient resources, administrative concerns
and accounting sophistication to comply with government tax regulations. Because these
taxpayers cater largely to the population for cash, withholding tax from their income is not
practicable. For this reason, one of the measures being employed in order to capture the
income of these taxpayers who lack financial transparency is the system of presumptive
income taxation. Under this method, income is no longer assessed from accounting records
but from certain indicators such as the value of a farmer’s land, gross turnover of an SME, or
signs of individual wealth.
5. Presumptive income taxation is said to be the optimal method of curbing
widespread noncompliance among a specific group of taxpayers without necessarily
imposing excessive government tax revenue measures. Broadening the tax base or enabling
taxpayers (individuals and businesses) to enter the formal tax net from the informal sector, is
what may be considered as the foremost goal of presumptive taxation. It is likewise often
argued to help reduce corruption in tax administration. The two forms of assessment being
used by countries that employ presumptive taxation in estimating income and assessing tax
liability are the standard and estimated assessments.
6. Under the standard assessments method, lump-sum taxes are assigned to taxpayers
on the basis of occupation or business activity. In addition to being less equitable than
estimated assessments and less open to corruption, this method is also said to broaden the tax
base with limited disincentives. This method, however, can be poor in mobilizing revenue if
the fixed payments are not indexed to inflation (or increased regularly) and if taxpayers are
not moved to categories as their taxable income increases over time. It can likewise be
regressive by imposing equal tax on individuals in the same category with different incomes
because it does not take into account the specific conditions of a taxpayer such as family size
or losses. The estimated assessment method, on the other hand, estimates individually
taxpayer’s income using indicators or proxies of wealth specific to a given profession or
economic activity (e.g., location of property or numbers of skilled employees, value of gross
assets or gross turnover). The tachshiv of Israel is widely referred as the most elaborate
standard assessment method. France’s forfait (contractual method), on the other hand, is
recognized as the most elaborate estimated assessment method.24 These two countries are
recognized as having the most highly developed presumptive tax regimes.
7. The use of presumptive taxation in the country may be explored for the purpose of
estimating the income of taxpayers in the hard-to-tax group thereby determining what their
correct tax dues should be. However, in introducing the scheme, the following factors must
be taken into consideration.
a. The scheme must be properly structured and overall administrative environment
and capacity in the tax administration must be considered. This is for the reason
that although this scheme is meant to address the problem of corruption in tax
24
Valevich, Y., Klesewetter, D. and Chubrik, A., 2004, IPM Research Center, Proposals for Further
Improvement of the System of Presumptive Income Taxation of Individual Entrepreneurs in Belarus, viewed on
March 11, 2009, <http://pdc.ceu.hu/archive/00002169/.>.
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administration, the same may still allow and even increase corrupt practices in a
worst case scenario because of the discretionary powers given to tax officials.
b. Methods of estimating income must be well-thought of and planned in order to
analyze the profitability of various economic activities and the indexes that will
effectively calculate presumptive incomes. This is primarily intended to avoid
unfair and ineffective taxation of taxpayers, such as small businesses.
c. The probability of taxpayers remaining under the presumptive tax regime must
also be avoided. As earlier mentioned, presumptive taxation seeks to broaden the
tax base by enabling taxpayers in the informal sector to enter the tax net.
However, as experienced by countries that applied the presumptive taxation, such
as in Israel, what happened is that taxpayers either remain in the presumptive
taxation scheme or revert from formal taxation to presumptive taxation schemes
because the taxpayers realize that they are levied a lower tax burden under the
latter. The taxpayers either underreported their income or simply pretended that
they do not keep accurate records of their income in order to remain in the
presumptive income regime and enjoy its benefits. 25
IV. CONCLUSION AND RECOMMENDATIONS
1. The withholding tax system as institutionalized is an effective and convenient
means to facilitate the collection and payment of taxes. This is because under this system,
the tax is collected in advance by the taxing authority. With the withholding tax system, the
tax evasion and avoidance practices particularly of compensation income earners have been
kept minimal.
2. The problem on the non-remittance of withholding taxes of employers/withholding
agents can be remedied by establishing a database of information in the BIR where historical
information of taxpayers and their respective employers/withholding agents can be verified
in order to check if taxes withheld from taxpayers are continuously being remitted to the
BIR. The BIR should likewise be strict in monitoring claims for deduction on wages or
income payments made by employers to an employee. Such claims must not be allowed and
be considered void if the withholding agent or employer has no proof of remitted
withholding taxes on such payments.
3. In order to solve the problems on the non-reporting of the multiple employment
income of some individuals, the full cooperation of withholding agents should be required as
they will be responsible for reporting changes in the tax status of taxpayers, and in effecting
25
World Bank, Presumptive Direct Taxes, viewed on March 11, 2009, <http://web.worldbank.org/
WBSITE/EXTERNAL/TOPICS/EXXTPUBLICSECTORANDGOVERNANCE/EXTPUBLICFINANCE/0..
contentMDK:20233950~isCURLY:Y~menuPK:1747624~pagePK:148956~piPK:216618~theSitePK:1339564,
00.html.>
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the collection and remittance of withheld taxes. The BIR should be able to verify from the
list furnished by schools, insurance and realty companies, etc. as withholding agents, whether
the taxpayers/s under their employ disclosed or filed a separate tax return for their secondary
source of income.
4. On the other hand, the problem of fictitious claims for personal 26 and additional
exemption allowances may be prevented by requiring taxpayers to submit authenticated
documents to support their claims, particularly for dependent/s, which, although required at
present, is barely being utilized since the ITRs of fixed income earners are not prioritized for
audit. Fictitious claims for premium payments on health/and or hospitalization insurance
deduction may be avoided by checking the income of the spouse and/or other family
members to make sure that the annual family income requirement is met.
5. The possibility of employing presumptive taxation can partially address the
problem of taxing businessmen and professionals. The objective is to estimate the income of
business and professional income earners for use as benchmark income or basis for checking
the accuracy of declared income.
6. Opportunities for irregularities in the claim for tax credit, on the other hand, may
be minimized or precluded if the procedures in processing claims for tax credits would be
strictly adhered to, particularly the need to attach the necessary documents that would prove
the veracity of the claim for a tax credit.
7. There may also be a need to upgrade the fines and compromise penalties for
violation of the withholding tax provisions to deter violators thereof.
8. Finally, the BIR must consider third party indicators such as those earlier
mentioned to be able to come up with a better picture on the number of individual taxpayers
which is a major data requirement for purposes of introducing reforms in the withholding tax
system.
26
Fictitious claims for personal exemption are deemed corrected already by RA 9504 which provides
for a P 50,000 personal exemption, regardless of the status of the taxpayer.
Study on Strengthening the Withholding Tax System on Individual Taxpayers
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Volume XXIII.2 March – April 2011
NTRC Tax Research Journal
Annex A
SUMMARY OF WITHHOLDING TAX RATES FOR INDIVIDUALS*
Resident
Citizen or
Alien
Individuals
Non-resident
Aliens Engaged
in Trade or
Business
Non-resident
Aliens Not
Engaged in Trade
or Business
10% final
20% final
25% final
20% final
20% final
25% final
10% final
10% final
25% final
Share in the distributable net
income after tax of a
partnership
---
20% final
25% final
Interest on Philippine
currency bank deposits and
deposit substitutes
20% final
20% final
25% final
Interest income on long-term
deposits pre-terminated before
the fifth year
Holding period
- 4 years to less than 5 years
- 3 years to less than 4 years
- less than 3 years
5% final
12% final
20% final
5% final
12% final
20% final
-------
Interest on foreign currency
bank deposits
7.5% final
Exempt
Exempt
20% final
20% final
25% final
5% -10% final
5% -10% final
25% final
Type of Income
Dividends from a domestic
corporation
Royalties (In general)
Royalties on books, other
literary works and musical
compositions
Prizes exceeding P10,000 &
winning (except Sweepstakes
and Lotto Winnings)
Gains from sale of shares of
stock
__________________
* The withholding tax rates are those provided under RR 2-98, as amended.
Source: National Tax Research Center, 2010. Short Guide to Philippine Taxes. Department of
Finance, Manila, pp. 24-31.
16
Study on Strengthening the Withholding Tax System on Individual Taxpayers
Volume XXIII.2 March – April 2011
NTRC Tax Research Journal
Type of Income
Gains from sale of real
property classified as capital
asset
Informer’s reward
Other fixed or determinable
gains, profit and income
Income derived from
contracts from Service
Contractors engaged in
petroleum operations
Disposition of real property
classified as capital asset to
the government or any of its
political subdivisions
Gross income by nonresident
cinematographic film owners,
lessors or distributors
Resident
Citizen or
Alien
Individuals
Non-resident
Aliens Engaged
in Trade or
Business
Non-resident
Aliens Not
Engaged in Trade
or Business
6% final
6% final
6% final
10% final
---
---
---
---
25% final
8% final
8% final
---
6% final or 5%
- 32%
6% final
6% final
---
25% final
---
---
---
Professional fees, talent fees
of the following individuals:
a. lawyers; certified public
accountants; doctors of
medicine; architects; civil,
electrical, chemical,
mechanical, structural,
industrial, mining, sanitary,
metallurgical and geodetic
engineers; marine
surveyors; doctors of
veterinary science; dentist;
professional appraisers;
connoisseurs of tobacco;
actuaries; and
interior decorators,
designers and all other
profession requiring
government licensure
examinations and/or
regulated by the
15% creditable
if the gross
income for the
current year
exceeds
P720,000; and
10% if
otherwise
Study on Strengthening the Withholding Tax System on Individual Taxpayers
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Volume XXIII.2 March – April 2011
NTRC Tax Research Journal
Resident
Citizen or
Alien
Individuals
Type of Income
Non-resident
Aliens Engaged
in Trade or
Business
Non-resident
Aliens Not
Engaged in Trade
or Business
---
---
Professional Regulations
Commission, Supreme
Court
b. actors and actresses;
singers; lyricists;
composers; emcees;
professional athletes;
directors and producers;
and other recipients of
talent fees
20% creditable
if the gross
income for the
current year
exceeds
P720,000; and
10% if
otherwise
Rentals of real or personal
property used in business,
poles, satellites and
transmission facilities, and
billboards
5% creditable
---
---
Income payments made to
resident individuals and
corporate cinematographic
film owners, lessors or
distributors
5% creditable
---
---
2% creditable
---
---
10% creditable
---
---
10% creditable
---
---
Income payments made to
general engineering, building,
and specialty and other
contractors
Commissions paid to certain
brokers and agents
Commissions of independent
and exclusive distributors,
medical/technical and sales
representatives, and marketing
agents of multi-level
marketing companies
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Study on Strengthening the Withholding Tax System on Individual Taxpayers
Volume XXIII.2 March – April 2011
NTRC Tax Research Journal
Resident
Citizen or
Alien
Individuals
Non-resident
Aliens Engaged
in Trade or
Business
Non-resident
Aliens Not
Engaged in Trade
or Business
15% creditable
---
---
---
---
---
---
---
---
1% creditable
---
---
Payments made by pre-need
companies to funeral parlors
1% creditable
---
---
Payments made to suppliers of
agricultural products
1% creditable
---
---
Type of Income
Income distributed to the
beneficiaries of estates and
trust (except such income
subject to FWT and tax
exempt income)
Income payments to partners
of General Professional
Partnerships
Additional Income of
Government Personnel from
importers, shipping and airline
companies, or their agents
15% creditable
if the gross
income for the
current year
exceeds
P720,000; and
10% if
otherwise
15% creditable
Payments made by the
1% creditable to
government to its
supplier of
local/resident supplier of
goods; 2%
goods and local/resident
creditable to
supplier of services other than
supplier of
those covered by other rates
services
of withholding tax (except any
single purchase of P10,000
and below)
Payments made to embalmers
for services rendered to
funeral companies
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Volume XXIII.2 March – April 2011
NTRC Tax Research Journal
Type of Income
Resident
Citizen or
Alien
Individuals
Non-resident
Aliens Engaged
in Trade or
Business
Non-resident
Aliens Not
Engaged in Trade
or Business
One-half (1/2) of the gross
amount paid by credit card
companies to any business
entity representing the sales of
goods/services to cardholders
1% creditable
---
---
Payment on purchases of
minerals, mineral products
and quarry resources
10% creditable
---
---
a. MERALCO Refund arising
from Supreme Court Case
GR No. 14814
25% for
customers with
active contract;
32% for
customers with
terminated
contract
---
---
b. Interest income on the
refund of meter deposit
10% creditable;
and 20% if nonresidential
customers with
monthly
electricity
consumption of
more than 200
kwh
---
---
Exempt
---
---
MERALCO Payments on:
Amount paid to the
seller/owner for the sale,
exchange or transfer of real
property classified as ordinary
asset:
a. Where the seller/transferor
is exempt from creditable
withholding tax
b. Where the seller/transferor
is habitually engaged in the
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Study on Strengthening the Withholding Tax System on Individual Taxpayers
Volume XXIII.2 March – April 2011
NTRC Tax Research Journal
Resident
Citizen or
Alien
Individuals
Non-resident
Aliens Engaged
in Trade or
Business
Non-resident
Aliens Not
Engaged in Trade
or Business
- P500,000 or less
1.5% creditable
---
---
- more than P500,000 but
less than P2,000,000
3.0% creditable
---
---
- more than P2,000,000
5.0% creditable
---
---
c. Where the seller/transferor
is not habitually engaged in
the real estate business
6.0% creditable
---
---
Type of Income
real estate business and the
selling price of real
property is:
Study on Strengthening the Withholding Tax System on Individual Taxpayers
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