INCOME TAX ON INDIVIDUALS
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)
GENERAL PRINCIPLES OF TAXATION
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:
Resident Citizens
Non-Resident Citizens
Resident Alien
Non-Resident Aliens (whether
engaged in trade or business or not)
Earned within the
Philippines
Taxable
Taxable
Taxable
Taxable
Earned outside the
Philippines
Taxable
Non-Taxable
Non-Taxable
Non-Taxable
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:
Domestic Corporations
Resident Foreign Corporations
Non-Resident Foreign Corporations
Earned within the
Philippines
Taxable
Taxable
Taxable
Earned outside the
Philippines
Taxable
Non-Taxable
Non-Taxable
RULES ON SITUS (whether earned within or outside the Philippines):
1. Interest – the situs of interest income is the residence of the debtor. Thus, if the debtor is a resident of the Philippines, it is considered earned within the
Philippines.
2.
Dividends – the following are considered earned WITHIN the Philippines, dividends received from:
a. A domestic corporation;
b. A foreign corporation, unless less than 50% of the gross income of such foreign corporation for the 3 year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources
within the Philippines; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period
derived from sources within the Philippines bear to its gross income from all sources.
In summary: if the gross income from the PH of the foreign corporation in relation to its worldwide gross income is:
i. Less than 50% - all are treated as income from without the Philippines;
ii. 50% or more – that same percentage is treated as earned within the Philippines in relation to the dividend received.
In BIR Ruling No. 102-1994 (dated May 4, 1994), Pfizer Panama, by way of property dividends, distributed the shares of stock it owns in Pfizer PH.
Its parent company Pfizer USA received such dividends. In short, there was a dividend declaration made by a Non-Resident Foreign Corporation (Pfizer
Panama) in favor of its stockholders (including Pfizer USA, another Non-Resident Foreign Corporation). The BIR ruled that the same is not subject to
any Philippine Tax. Moreover, citing the above provision, the BIR deemed that the dividends were all derived from sources without the Philippines
since not more than 50% of the gross income of Pfizer Panama were derived from the Philippines within the three-year period prior to declaration.
In BIR Ruling No. 252-1991 (dated November 20, 1991), the BIR ruled that the dividends received by SMNV from SMAB (a foreign corporation) is not
subject to Philippine tax since the income derived by SMAB from PH sources amounted only to 1.6% of its worldwide income in 1987 and 1.7% in
1988. Therefore, the property dividends were treated as income not derived from sources within the Philippines.
The above rulings were likewise reiterated and cited by the BIR in BIR Ruling [DA-594-1999] dated October 7, 1999.
The same ruling was made by the BIR in BIR Ruling [DA-632-2004] (dated December 14, 2004), holding that the property dividends issued by SAHL
to its stockholder Marubeni Corporation (both non-resident foreign corporations) shall not be considered income derived from the Philippines since
less than 50% of the worldwide income of SAHL in the three year period preceding the dividend declaration is derived within the Philippines pursuant
to Section 42(A) of the Tax Code.
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.
6.
Sale of Personal Property
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.
2.
3.
There must be gain or profit.
The gain must be realized or received
The gain must not be excluded by law or treaty from taxation. (Commissioner of Internal Revenue vs. The Court of Appeals, et.al ., G.R. No. 108576,
January 20, 1999 301 SCRA 152)
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)
(2)
(3)
(4)
2.
Those
Those
Those
Those
who are citizens of the Philippines at the time of the adoption of this Constitution;
whose fathers or mothers are citizens of the Philippines;
born before January 17, 1973, of Filipino Mothers, who elect Philippine citizenship upon reaching the age of majority; and
who are naturalized in accordance with law.
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, 2018 with the intention of residing
permanently in the Philippines, shall be considered a non-r resident citizen for his income from January 1 to June 30, 2018 (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.
4.
Non-resident alien (NRA)
a. An alien who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished.
b.
One who may either be a:
i.
NRA engaged in trade or business (NRAETB) in the Philippines or
ii. NRA not engaged in trade or business (NRANETB) in the Philippines.
An NRA who shall come to the Philippines and stay for an aggregate of more than 180 days shall be deemed a NRAETB.
B.
SOURCES OF INCOME FOR INDIVIDUAL TAXPAYERS
1. Compensation Income – all remuneration received for services performed by an employee for his employer under an employee-employer
relationship. (Section 2.78.1 (A) of RR No. 2-98)
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 livelihood, rather 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 but in ONE tax return, which provides for separate columns and sections for the spouse. In fact, it
is encouraged by the BIR that spouses file their income together in one return.
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.
C.
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.
ALLOWABLE DEDUCTIONS FOR INDIVIDUAL TAXPAYERS
Compensation Income – for individuals earning purely compensation income, there is no allowable deduction. However, the first P250,000 of their income is
subject to 0% income tax.
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 deductible from their gross
sales/receipts if they opt to avail of the 8% flat rate of income tax. Otherwise, if they avail of the graduated rates or failed to signify that they are availing of
the 8% flat rate of income tax, the first P250,000 is subject to 0% income tax therein.
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.”
1.
Itemized Deductions (Sec. 34 of the Tax Code)
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. (See handout on Income Tax on Corporations and Deductions)
2.
Optional Standard Deduction (OSD)
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.
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 completeness of the reported 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.
Non-resident aliens: The OSD cannot be claimed by Non-Resident Aliens.
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)
3.
Special Allowable Itemized Deductions
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.
All of the above deductions (no. 1 to 3) are not available:
a. Against compensation income – no deductions are allowed for a taxpayer who is a purely compensation income earner. If the taxpayer is a mixed-income
earner, the deductions are available only against the business income or income from practice of profession and not against compensation income.
b. If the taxpayer opted to avail the 8% income tax since the tax base for this tax is gross sales/receipts (before the above deductions, including costs of
sales)
4.
Basic Personal Exemption
In accordance with the provisions of Revenue Regulations (RR) No. 10-2008 implementing Republic Act No. 9504, each taxpayer shall be allowed a Basic
Personal Exemption of Fifty Thousand Pesos (P50,000).
This amount is available to all individuals, regardless of status, whether single, married or head of the family.
Non-resident alien engaged in trade or business: is allowed a basic personal exemption, provided:
a. His country has an income tax law and it allows a similar privilege to Filipinos residing therein (reciprocity rule);
b. The amount allowable as basic personal exemption shall not exceed P50,000 (that given in the Philippines);
c. An accurate statement of his income from all sources within the Philippines is filed.
Non-resident alien NOT engaged in trade or business: is not given any Basic Personal Exemptions since he is taxable on gross income.
5.
Additional Exemption – P25,000 for each qualified dependent child, not to exceed four (4).
Dependent: A dependent means a legitimate, illegitimate or legally adopted child (including a FOSTER child):
a.
b.
c.
d.
e.
Chiefly dependent upon AND living with* the taxpayer;
Not more than twenty-one (21) years of age;
Unmarried; and
Not gainfully employed;
Or regardless of age, is incapable of self-support because of mental or physical defect.
*the term “living with” does not necessarily require that the child and the taxpayer are under the same residence at all times and under all circumstances. The
terms till applies even if the parent is absent on business; the child is away for school or on a visit; a parent, through force of circumstances, is obliged to
maintain his dependent children with relatives or in a boarding house while living elsewhere.
If, however, without the necessity, the dependent continuously makes his home elsewhere, his benefactor is not entitled to additional exemption irrespective of
the question of support. Thus, a resident alien with children abroad is not thereby entitled to credit for additional exemption. (Ampongan, Income Taxations,
8th edition, p. 170-171)
Married Individuals: For purposes of claiming additional exemptions for married individuals, only the Husband can claim them except when:
(1) The Husband is unemployed;
(2) The Husband is a non-resident citizen deriving income from foreign sources; or
(3) The Husband waives his right to additional exemptions in favor of his wife through a waiver executed for that purpose.
Legally Separated Spouses: In case of legally separated souses, additional exemptions are claimed by the spouse who has custody of the child or children.
Relatives other than a child: A brother, sister, mother, father, uncle, aunt, grandparent is not considered a qualified dependent for purposes of additional
exemptions, regardless if they are actually dependent on the taxpayer since the law limits the additional exemptions to a child. Except only in case of a PWD.
Persons with Disabilities: while RA No. 9054 limited qualified dependents to “children”, Sec. 14 of the Implementing Rules and Regulations of RA No. 10754
provides that “[f]or purposes of granting the incentives, persons with disability shall be treated as dependents under Sec. 35(b) of the Tax Code, as amended,
and as such, individual taxpayers providing care for them shall be accorded the privileges granted by the Code insofar as having dependents under the same
section is concerned.”
Thus, those caring for and living with a person with disability, up to the fourth degree of affinity or consanguinity, shall be granted the above tax incentive.
However, the maximum number of dependents is still limited to four.
Foster Children: under RA No. 10165, the term “dependent” under Sec. 35(B) of the Tax Code now includes a “foster child”. As such, the foster parent shall be
allowed to claim a foster child as his qualified dependent for an additional exemption.
Non-resident aliens: same rules for the basic personal exemptions apply in case of a non-resident alien.
Change of status:
1.
2.
3.
If a qualified dependent child turns 21 during the year, say August 12, the taxpayer may still claim P25,000 additional exemption on said child for the
taxable year, as if he turned 21 at the close of the year.
The same rule will apply if the child became gainfully employed or got married.
If a qualified dependent child is born during the year, say November 30, 2016, the taxpayer may claim in full additional exemption of P25,000 for the
taxable year 2016, as if the child was born at the beginning of the year.
4.
If a qualified dependent child dies during the taxable year, the taxpayer may still claim the additional exemption of P25,000, as if the child died at the close
of the taxable year.
In general, changes would be treated in a way that is favorable to the taxpayer and no pro-rata application is necessary.
6.
Premium Payment on Health and/or Hospitalization Insurance (PHHI) (Sec. 34[M], Tax Code)
Premiums paid during the taxable year for insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction for income tax
purposes.
For
a.
b.
c.
purposes of claiming this deduction, the following rules must be observed:
Amount Deductible – P2,400 per family (P200 a month) or actual payment whichever is lower.
Total Family Income must not exceed P250,000 in order to claim deduction.
In case of married taxpayers, the one claiming additional exemptions shall be the one allowed to claim deduction for PHHI.
TRAIN AMENDMENT: Basic Personal and Additional Exemptions and Premiums on Health and/or Hospitalization Insurance are no longer
available beginning Jan. 1, 2018.
D.
BASIC FORMAT OF COMPUTATIONS
1.
Pure Compensation Income
Gross Taxable Compensation Income
Less: Non-Taxable Compensation Income*
Taxable Income**
P XXX
(XXX)
XXX
Tax Due
Less: Withholding Tax on Compensation
Tax Payable (Refundable)
XXX
(XXX)
XXXX
*non-taxable compensation income includes those benefits provided by the employer which are considered de minimis or otherwise exempted from income tax
such as mandatory government and other contributions.
**Less Basic and Personal Exemptions if prior to Jan. 1, 2018
2.
Pure Business or Professional Income Availing of the Graduated Rates
Gross Sales/Receipts from Business/Profession*
Less: Costs and Allowable Deductions (OSD or Itemized)
Taxable Income**
Tax Due
Less: Withholding Tax
Creditable Tax
Tax Payable (Refundable)
P XXX
(XXX)
XXX
XXX
XXX
XXX
(XXX)
XXXX
*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.
**Less Basic and Personal Exemptions if prior to Jan. 1, 2018
3.
Pure Business or Profession Income availing of the 8% Income Tax
Gross Sales/Receipts*
Other Operating Income
Less: First P250,000 exempt from Income Tax
Taxable Sales/Receipts
Tax Rate
Income Tax
Less: Withholding Tax
XXX
Creditable Tax
XXX
Tax Payable (Refundable)
P XXX
XXX
(P250,000)
XXX
8%
XXX
(XXX)
XXXX
*No deduction for costs or any other items of deduction, save for sales returns, discounts and allowances.
Note that the 8% is available only beginning Jan. 1, 2018, so there is no instance that the 8% will be applicable to a taxable year when the basic and personal
exemptions are still allowed.
4.
Mixed Income Earners (from compensation and income from business or practice of profession) can be taxable as follows:
a. COMPENSATION INCOME - is ALWAYS subject to the graduated rights.
b. INCOME FROM BUSINESS/PRACTICE OF PROFESSION:
i.
If the taxpayer’s gross sales/receipts, together with other non-operating income, do not exceed P3,000,000: either
a) 8% income tax rate without the first P250,000 exempt (since this will be considered in the application of the graduated rates for
income from compensation); or
b) Graduated rates
ii.
If the taxpayer’s gross sales/receipts, together with other non-operating income, exceeds P3,000,000 – graduated rates.
E.
INCOME TAX RATES
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:
Upto December 31, 2017
But Not
Over
10,000
30,000
70,000
140,000
250,000
500,000
-
Tax
5%
500
2,500
8,500
22,500
50,000
125,000
Plus
Of Excess
Over
10%
15%
20%
25%
30%
32%
10,000
30,000
70,000
140,000
250,000
500,000
Over
250,000
400,000
800,000
2,000,000
8,000,000
But Not
Over
250,000
400,000
800,000
2,000,000
8,000,000
-
Tax
30,000
130,000
490,000
2,410,000
Plus
Of Excess
Over
20%
25%
30%
32%
35%
250,000
400,000
800,000
2,000,000
8,000,000
Over
250,000
400,000
800,000
2,000,000
8,000,000
But Not
Over
250,000
400,000
800,000
2,000,000
8,000,000
-
Tax
22,500
102,500
402,5000
2,202,500
Plus
Of Excess
Over
15%
20%
25%
30%
35%
250,000
400,000
800,000
2,000,000
8,000,000
Over
10,000
30,000
70,000
140,000
250,000
500,000
January 1, 2018 to December 31, 2022:
Effective January 1, 2023 and onwards:
The
a.
b.
c.
d.
e.
f.
above rates shall apply to:
Purely compensation income earners
Mixed income earners as regards their compensation income
Those earning income from business or practice of profession whose sales/receipts and other income EXCEEDS P3,000,000
Those earning income from business or practice of profession whose sales/receipts and other income DOES NOT exceed P3,000,000 and the taxpayer
opted to avail of the graduated income tax rates or opted to avail of optional VAT registration.
Those who failed to signify that they are availing the 8% flat rate in their 1st quarter income tax return.
Those who are not allowed to avail the 8% flat rate of income tax.
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 and only beginning the 2018 taxable year.
Rules applicable to the 8% income tax rate:
a. The tax base shall be the gross sales/receipts including other non-operating income, unlike the graduated rates which are based on taxable income.
Returnable Deposits: In general, all deposits received are included in the definition of Gross Receipts under Section 2(g) of RR No. 8-2018. However,
returnable deposits held in trust and recorded as liability (e.g., security deposit) are excluded. (Q&A No. 26, RMC No. 50-2018)
b.
For those earning purely from business or practice of profession, the tax base shall be that in excess of P250,000
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?
Answer: P68,000, computed as follows:
Gross Sales – convenience store
Gross Sales – bookkeeping services
Total Sales/Receipts
Less: Non-taxable portion
Taxable Income
Tax Rate
Income Tax Due
1.
P800,000
300,000
P1,100,000
(250,000)
P850,000
8%
P68,000
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.
3.
c.
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.
Since she is earning purely from such business and practice of profession, the first P250,000 is considered non-taxable.
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?
Answer: P278,000 and P98,0000 computed as follows:
On her business income and income from the practice of profession:
Gross Sales – convenience store
Gross Sales – bookkeeping services
Total Sales/Receipts
Tax Rate
Income Tax Due
P800,000
300,000
P1,100,000
8%
P88,000
Compensation Income
P1,000,000
Tax on the first P800,000
On the excess (P1,000,000 – 800,000) * 30%
Income Tax Due
P130,000
60,000
P190,000
Income Tax on income from self-employment
Income Tax on compensation income
Total Income Tax Due
Tax Withheld
Income Tax Still Payable
P88,000
190,000
P278,000
(180,000)
P98,000
On her compensation income:
Total Income Tax Liability:
1.
2.
3.
4.
5.
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.
The tax base is the gross sales/receipts. Thus, costs, expenses or even the optional standard deduction is not allowed as a deduction.
Income from compensation is always subject to the graduated rates.
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.
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.
If the compensation income is less than P250,000, the excess of the P250,000 over the actual compensation income is NOT DEDUCTIBLE against the
gross sales/receipts from practice of profession or from business. (Sec. 3[D], RR No. 8-2018)
d.
e.
f.
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.
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.
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:
Total Sales/Receipts
Less: Cost of Sales
Gross Income
Less: Operating Expenses
Taxable Income
P1,100,000
(300,000)
800,000
(100,000)
P700,000
Income Tax Due
On the first P400,000
On the excess (P700,00 – 400,000) * 25%
Income Tax Due
P30,000
75,000
P105,000
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.
h.
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.
If the taxpayer’s gross sales/receipts and other non-operating income exceeds P3,000,000, he/she shall be automatically 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?
Answer: P509,200 and P289,200, computed as follows:
Total Sales
Less: Cost of Sales
Gross Income
Less: Operating Expenses
Taxable Income
Income Tax Due
Tax Due based on graduated rates
Less: 8% Income Tax paid for the first three quarters
(P3,000,000 – P250,000) * 8%
Income Tax Payable
P6,500,000
(3,000,000)
3,500,000
(1,440,000)
P2,060,000
P509,200
(220,000)
P289,200
Since the gross receipts exceeded the P3,000,000 threshold, Mr. ABC shall automatically be subject to the graduated rates. However, he can claim the
8% income tax paid for the first three quarters as tax credits.
In addition, Mr. ABC shall be liable to business taxes, as follows:
1. Percentage Tax – on the gross sales/receipts upto P3,000,000
2. VAT – on gross sales/receipts after exceeding the P3,000,000 threshold.
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.
i.
The
1.
2.
3.
4.
5.
6.
following are not allowed to avail of the 8% flat rate of income tax:
Purely compensation income earners.
VAT-registered taxpayers, regardless of the amount of gross sales/receipts and other non-operating income.
Non-VAT taxpayers whose gross sales/receipts exceed P3,000,000 VAT threshold.
Taxpayers who are subject to percentage taxes other than the 3% OPT under Sec. 116 (e.g., those subject to common carrier’s tax, amusement tax,
gross receipts tax, etc.)
Partners of GPPs as to their share in the net income thereof (note, however, that they can still claim the 8% flat rate of income tax as to their own
business income, provided the gross sales/receipts thereof do not exceed P3,000,000). This is because their share is already net of applicable costs
and expenses; and
Individuals enjoying income tax exemption such as those registered under the Barangay Micro Business Enterprises (BMBEs), etc., since taxpayers
are not allowed to avail of double or multiple tax exemptions under different laws unless specifically provided by law. (Q&A 16, RMC No. 50-2018)
Alien individuals employed by:
a.
Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies – 15% of gross income received from such
establishment. Provided, that the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by
these multinational companies. (Sec. 25[C])
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.
b.
c.
The employee must be performing a managerial or technical position;
The gross compensation, exclusive of fringe benefits subject to FBT, must be at least P975,000.
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 Subsection (F) to Section 25 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 (provided under Sec. 25 (C to E)
untouched but limiting its availment to entities already availing of the same prior to the TRAIN, as included by Subsection F (the non-vetoed portion). 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.
Non-resident aliens NOT engaged in trade or business:
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.
Remittance of the Tax:
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
1.
2.
3.
4.
this transaction:
the P100 interest is the passive income of A
X Bank will remit the P20 final tax on interest to the BIR
A will receive the interest net of the tax, P80.
The P100 interest will no longer be included in A’s taxable income subject to income tax.
Rates and Income Items Subject to Final Withholding Tax
The following types of income are subject to the following rates of income tax for Citizens and Resident Aliens:
20%
15%
10%
Exempt
5%
12%
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.
Prizes (except prizes amounting to P10,000 or less)
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.
Interests from depository banks under the Foreign Currency Deposit System (prior
to the TRAIN, the rate applicable is 7.5%)
Royalties from books and other literary works and musical compositions
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:
4 years to less than 5 years
3 years to less than 4 years
Less than 3 years
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 a Resident Foreign Corporation,
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.
Winnings
Prizes (except prizes amounting to P10,000 or less)
10%
Exempt
Cash and/or property dividends
Royalties from books and other literary works and musical compositions
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:
5%
4 years to less than 5 years
12%
20%
Exempt
3 years to less than 4 years
Less than 3 years
Interest from depository banks under the Foreign Currency Deposit System
Philippine Charity Sweepstakes and Lotto Winnings*
*The TRAIN did not amend Section 25(A)(2) providing for the 20% Final Withholding Tax for NRAETB. As it is, the winnings from Philippine Charity Sweepstakes
and Lotto are still considered exempt.
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. Philippine Charity Sweepstakes and Lotto Winnings – exempt still under the TRAIN.
3. Interest Income from FCDUs – exempt.
Income derived from the foreign currency deposit system: for non-residents (whether individual or corporation), ANY 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.
G.
GAINS FROM DISPOSITION OF ASSETS
Capital Assets are those not falling within the definition of an ordinary asset.
Ordinary Assets, on the other hand, means:
1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year;
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
3. Property used in the trade or business, of a character which is subject to the allowance for depreciation;
4. Real property used in trade or business of the taxpayer.
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.
Amount of cost or basis or adjusted basis of computing gain or loss:
1.
2.
3.
4.
Purchase – the cost;
Inheritance – fair market value as of the date of acquisition;
Gift – the basis is the same as if it would be in the hands of the donor or the last preceding owner who did not acquire the property by gift; however, if
the same exceeds the fair market value at the time of the gift, then for purposes of determining loss, the fair market value.
Property acquired for less than an adequate consideration in money or money’s worth – the amount paid by the transferee;
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.
2.
Capital gains tax; or
Ordinary income tax.
Capital Gains Tax: is applicable only to
(1) sale of shares of stock of a domestic corporation NOT listed or traded through a local stock exchange held as capital assets; and
(2) sale of real property located in the Philippines held as a capital asset.
All other capital gains are subjected to regular income tax.
Transactions Subject to Capital Gains 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.
b.
c.
A dealer in securities;
Investor in shares of stock in a mutual fund company; and
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:
Rate
5%
10%
Net Capital Gain
Not over P100,000
On any amount in excess of P100,000
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 –
(1) The fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, or
(3) The fair market value as determined by Independent Appraiser. (Sec. 7 of RR No. 6-08, as amended by RR No. 6-2013)
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.
Not subject to the Capital Gains Tax:
a.
b.
c.
d.
The
The
The
The
sale is made through the local stock exchange;
shares of stock are of a foreign corporation (not domestic corporations);
shares are NOT held as capital assets, e.g., the seller is a dealer in securities.
sale resulted in a capital loss.
2.
Sale of Real Property located in the Philippines
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.
Fair Market Value: shall be the higher between:
a.
b.
Zonal Value as determined by the BIR;
Fair Market Value per local assessor.
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:
Taxable Amount
=
*CGT base is the higher between the FMV and the Selling Price.
Unutilized Portion
Gross Selling Price
X
CGT base*
The CGT then would be 6% of the Taxable Amount computed above.
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?
Answer: P60,000, computed as follows:
1,000,000
3,000,000
1.
2.
3.
4.
X
3,000,000
= 1,000,000 * 6% = P60,000
Unutilized Portion is 1,000,000 (3,000,000 selling price less the utilized portion of 2,000,000)
CGT Base is P3,000,000 (the higher between the selling price and fair market value)
Taxable Amount is P1,000,000, the ratio of unutilized portion over the selling price multiplied by the CGT base
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?
Answer: P66,000, computed as follows:
1,000,000
3,000,000
X
3,300,000
= 1,100,000 * 6% = P66,000
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.
4. CGT, therefore, is P66,000, 6% of the taxable amount.
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 income tax: Note that the CGT applies only to two disposals of two classes of assets, i.e., real
property and shares of stock of a domestic corporation not listed or traded in the local stock exchange. Thus, if a capital asset, not among the said two classes,
resulted in a gain, they are considered “capital gains” still but subject to regular income tax.
Transactions resulting in capital gains and losses even if no sale of capital assets include:
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)
Rules applicable to capital gains:
1.
Percentage taken into account:
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
100%
50%
Applicability
If the capital asset has been held for NOT more than 12 months;
If the capital asset has been held for MORE than 12 months.
(Sec. 39[B] of the Tax Code)
This rule is not applicable to corporations.
2.
Limitation on Capital Losses:
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)
3.
Net Capital Loss Carry-Over
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)
This rule is likewise not applicable to a corporation.
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.
5.
Sale of shares of stock subject to 15% CGT
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 Benefit means any good, service or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual
(Sec. 33[B]).
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.
A.
DIFFERENT KINDS OF EMPLOYEES
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.
B.
1.
2.
3.
4.
5.
Fringe Benefits SUBJECT to Fringe Benefit Tax
Housing;
Expense account;
Vehicle of any kind;
Household personnel such as maid, driver and others;
Interest on loan at less than market rate to the extent of the difference between the market rate and the actual rate granted (12% benchmark rate);
6.
7.
8.
9.
10.
Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs and similar organizations;
Expenses for foreign travel;
Holiday and vacation expenses;
Educational assistance to the employee or hid dependents;
Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
C.
1.
2.
3.
4.
5.
6.
Fringe Benefits NOT SUBJECT to Fringe Benefit Tax
Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law;
Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;
Benefits given to rank and file, whether granted under a collective bargaining agreement or not;
De minimis benefits;
Benefits granted to employee which are required by the nature of, or necessary to the trade, business or profession of the employer; or
Benefits granted for the convenience or advantage of the employer.
D.
MONETARY VALUE AND EXEMPTIONS FROM FBT
In case of housing privilege and motor vehicle:
a. If there is NO transfer of ownership, the monetary value of the benefit is 50% of the value of the benefit.
b. If there is transfer of ownership, the monetary value shall be the same as the value of the benefit, or 100% thereof.
In case of other fringe benefits, the monetary value shall be the same as the value of the benefit.
1.
Monetary value of HOUSING PRIVILEGE:
Employer leases residential property for the use of the employee
Employer OWNS the residential property which is assigned to the
employee for his use
Employer PURCHASES residential property on the instalment
basis and allows employee to use the same as his residence
Employer PURCHASES a residential property and TRANSFERS
ownership to the employee
Employer PURCHASES a residential property and TRANSFERS
ownership to the employee at a PRICE LOWER than the
acquisition cost
Value of the benefit
Rental paid
5%* of the FMV of the land and
improvements
5% of the acquisition cost exclusive
of interest
Employer’s acquisition cost or FMV,
whichever is higher
The difference of the FMV and the
payment of the employee
Monetary value of the benefit
50% of the value of the benefits
50% of the value of the benefits
50% of the value of the benefits
Entire value of the benefit
Entire 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.
Exempt housing privileges:
a.
b.
c.
If the house is within the maximum of 50 meters from the perimeter of the business premises;
Housing privilege of military officials of Armed Forces of the Philippines;
Temporary housing for an employee who stays in a housing unit for 3 months or less.
2.
Monetary value for VEHICLES of any kind:
Employer OWNS and maintains a fleet of motor vehicles
for the use of the business and employees
Employer LEASES motor vehicles for the use of the
business and the employees
Employer PURCHASES the motor vehicle in the name of
the employee
Employer PROVIDES CASH to the employee for the
purchase of a vehicle in the name of the employee
Employer SHOULDER A PORTION of the purchase price
of the motor vehicle in the name of the employee
Employer purchases the car on instalment in the name
of the employee
Note:
Value of the benefit
Acquisition cost of all motor vehicles not
normally used for business divided by 5 years
Amount of rental payments for motor vehicles
not normally used for business purposes
Acquisition cost
Monetary value of the benefit
50% of the value of the benefit
Cash received by employee
Entire value of the benefit
Amount shouldered by employer
Entire value of the benefit
Acquisition cost exclusive of interest divided by
5 years
Entire value of the benefit
50% of the value of the benefit
Entire value of the benefit
a.
b.
c.
d.
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).
The same rule applies, the monetary value is 50% of the benefit if there is no transfer of ownership
The vehicles owned by the company used for business purposes although provided to a managerial or supervisory employee is not subject to FBT.
Use of an aircraft and helicopters owned and maintained by the employer is treated as business expense and is not subject to FBT.
3.
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.
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 employer.
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.
E.
1.
TAX BASE AND TAX RATE
The Fringe Benefit Tax (FBT) is computed as follows:
Monetary Value
XXX
Divided by
65%
Grossed Up Monetary Value
XXX
Tax Rate
35%
Fringe Benefit Tax
XXX
For Non-Resident Aliens NOT Engaged in Trade or Business, the gross up rate is 75% and the FBT rate is 25%.
For Special Aliens and their Filipino counterparts and employees in Special Economic Zones it is 85%/15% respectively. (Note: the BIR is of the position
that Special Aliens and their Filipino counterparts are now subject to the regular rates, thus, the FBT as to them should be computed based on the 65%/35%
rate, following the veto of the President which provides that there is no longer a 15% preferential tax rate)
The FBT is imposed on the benefit received by the managerial or supervisory employee but the liability of paying FBT is on the employer. This is the reason
why the amount received by the employee is grossed up for the imposition of FBT, so that the tax base would be the total amount actually given; and the
amount received by the employee is already NET of the FBT.
The Fringe Benefit and the related FBT are both allowable deductions for the EMPLOYER’s taxable income computation.
2.
3.
4.
5.
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.
ITEMS EXEMPT FROM WITHHODING TAX ON COMPENSATION/FRINGE BENEFITS TAX
1.
Remunerations received as an incident of employment (Sec. 2.78.1 (B)(1) of RR No. 2-98)
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.
ii.
iii.
iv.
v.
Plan is reasonable;
Plan is approved by the BIR;
Retiring employee must have been in the service of the same employer for at least 10 years
Retiring employee is 50 years old or older at the time of retirement; and
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.
ii.
iii.
No private retirement plan or retirement plan under the CBA/employment contract.
Must have served the company for at least 5 years
Retiree at least 60 years old but not more than 65 years of age at the time of retirement.
“Applicability of RA No. 7641”
RA No. 7641 applies only in situations where: (1) there is no CBA or other applicable employment contract providing for retirement benefits of an employee;
or (2) there is a CBA or other applicable contract providing for retirement benefits for an employee, but it is below the requirements set by law. (Oxales
vs. Abbot Laboratories, Inc., GR No. 152991 dated July 21, 2008)
CBA or other employee contract providing retirement benefits to employees to be non-taxable:
•
If the CBA or other employee contract providing retirement benefits to employees provides for a less or equal benefit provided under RA No. 7641,
provided the requirements under RA No. 7641 are met. (under No. (2) above) (BIR Ruling No. DA-151-04 dated March 31, 2004)
•
If it provides more benefits than those under RA No. 7641, must comply with the requirements of Sec. 32(B)(6)(a) of the Tax Code or RA No. 4917
(under No. (1) above). (Oxales, BIR Ruling No. DA-151-04 dated March 31, 2004 and BIR Ruling No. 068-14 dated February 25, 2014)
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.
ii.
The cause of separation by the employee from the service was beyond his control.
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.
d.
e.
f.
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
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
Payments of benefits made under the Social Security System Act of 1954, as amended
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.
Note: The following remunerations constitutes compensation income, thus taxable:
•
•
3.
Remuneration paid for labor which is occasional, incidental, or irregular but is in the course of the employer's trade or business; and
Remuneration paid for casual labor performed for another corporation
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.
ii.
Includes remuneration paid for services performed by ambassadors, ministers, and other diplomatic officers and employees;
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 proceeds (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 are exempt. 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:
1.
2.
De Minimis Benefits
Monetized unused vacation leave (VL) credits*
Medical cash allowance to dependents, per employee
Maximum Value Per Year per Employee
Equivalent to 10 days VL
₱1,500 per employee per semester or ₱250 per month
3.
Rice subsidy
₱24,000
4.
5.
6.
7.
Uniform and clothing allowance
Actual medical assistance/allowance
Laundry allowance
Employees achievement awards
₱10,000
₱3,600 (₱300 per month)
₱10,000
8. Gifts given during Christmas and major anniversaries
9. Daily meal allowance for overtime or night/graveyard work
10. Benefits received by an employee by virtue of a collective
bargaining agreement (CBA) and productivity incentive schemes
(as amended by RR No. 11-18 from P750 per semester, or P125 per
month)
(₱2,000 or 1 sack of 50kg rice per month)
(as amended by RR No. 11-18, from P1,500 per month)
₱6,000 (as amended by RR No. 11-18 from P5,000 annually)
(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)
₱5,000
25% of basic minimum pay on a per region basis
₱10,000
(RR No. 1-2015)
Note:
a. *This applies only to employees of private entities. For government employees, the conversion of SL and VL credits to cash is considered exempt from
tax, regardless of number of days.
b. Only Medical Assistance/Allowance to the employee is required to be actually spent for the purpose. All other benefits need no proof that they have
actually been spent for, say, rice purchase, laundry, uniform, etc.
c. Only Employee Achievement Awards is required to be in tangible personal property and given NOT in cash or gift certificates. All other de minimis benefits
may be given, or are given, in cash.
d. Christmas Bonuses may fall under gifts given during Christmas and the excess thereof may form part of Other Benefits exempt upto P90,000.
e. Productivity Bonuses may fall under benefits received by virtue of a productivity incentive scheme and the excess thereof may form part of Other Benefits
exempt upto P90,000.
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, Q&A No. 5, RMC No. 50-2018)
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.
b.
c.
d.
e.
The SMW
Holiday pay
Overtime pay
Night shift differential; and
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?
Answer: P0, computed as follows:
Total Income Received
Less: Income Exempt
SMW
13th month pay (not exceeding P90,000)
Night shift differential
Overtime pay
Taxable Income – Commission
P260,000
P100,000
75,000
25,000
40,000
Income Tax Due (not in excess of P250,000)
1.
2.
Mr. Quito’s SMW, overtime pay and night shift differential are exempt from income tax.
Likewise, the 13th month pay not in excess of P90,000 is also exempt from income tax.
(240,000)
P 20,000
-
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 not subject to withholding tax on compensation:
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)
b.
c.
(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])
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 tax on compensation.
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.
WITHHOLDING TAX SYSTEM
Amount reported as income is GROSS of creditable withholding tax: 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).
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).
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.
Reason for the system: the withholding tax system was devised for three primary reasons:
1. To provide the taxpayer a convenient manner to meet his probable income tax liability;
2. To ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns; and
3. To improve the government’s cash flow.
Kinds:
1.
2.
3.
4.
Creditable or Expanded Withholding Tax (Withholding Tax at Source);
Withholding tax on employee’s compensation or wages (Withholding Tax on Compensation/Wages);
Withholding of value-added tax; and
Withholding of percentage tax.
Final Withholding Tax (FWT) and Creditable Withholding Tax (CWT) distinguished
1.
2.
3.
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.
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.
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.
Persons Constituted as Withholding Agent (Sec. 3 of RR No. 14-2002)
1.
Any juridical person whether or not engaged in trade or business;
2.
3.
Any individual, with respect to payments made in connection with this trade or business. However, insofar as taxable sale, exchange or transfer of real
property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents; and
All government offices including GOCC, as well as provincial, city and municipal governments and barangays.
Return and Payment in Case of Government Employees: 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.
b.
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.
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.
FILING OF RETURNS FOR INDIVIDUALS
A. INCOME TAX RETURN
1. Annual Income Tax Return:
a. BIR Form No. 1700 – for individuals earning purely compensation income.
b. BIR Form No. 1701 – for self-employed individuals or mixed income earners (including Income Tax on Estates and Trusts)
The deadline for either is 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.
Employers fill-up BIR Form No. 2316 for employees covered by this rule in triplicate: a copy to the employee; one copy to the BIR; and one for their file.
The BIR Form No. 2316 constitutes the income tax return of the covered employee.
The substituted filing of income tax return rule is now embodied under Sec. 52(A) of the Tax Code, as amended by the TRAIN.
WHO ARE REQUIRED TO FILE AN INCOME TAX RETURN:
a. Individuals deriving compensation from two or more employers concurrently or successively at any time during the taxable year.
b. Employees deriving compensation income, regardless of the amount, whether from a single or several employers during the calendar year, the income
tax of which has not been withheld correctly.
c. Individuals deriving income other than compensation, such as business income or income from the practice of profession.
d. Individuals whose spouse is required to file an ITR.
e. Non-resident alien engaged in trade or business in the Philippines.
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.
B.
CAPITAL GAINS TAX
1. Shares of stock – 30 days after each transaction using BIR Form No. 1707; the consolidated return shall be filed on or before April 15 of the following
year.
2. Real Property – 30 days following each sale or other disposition using BIR Form No. 1706.
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:
Tax Type
Expanded (Creditable) Withholding Tax
Final Withholding Tax on Interest on Bank Deposits
Fringe Benefits Tax
All other Final Withholding Taxes
BIR
BIR
BIR
BIR
BIR Return
Form No. 1601EQ
Form No. 1602
Form No. 1603
Form No. 1601FQ
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.
2.
3.
4.
Name of income payees;
Taxpayer Identification Number (TIN);
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
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.
Prior to the TRAIN: the EWT Return (1601-E) and the FWT Return (1601-F) was filed on a monthly basis on or before the 10th day of the month following
the close of the month of withholding (or 11-15th day for EFPS filers) and the Alphabetical List of Payees was likewise submitted monthly.
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.