We’re changing lives. Withholding Taxes 1 1

Nature of Withholding Tax Obligation imposed by law on income payors to withhold or deduct from their income payments certain amount to cover income taxes and directly remit the same to the BIR. Rationale: To ensure that income recipient pays his taxes or an approximation of the taxes due to the government. NOTES

WITHHOLDING TAX ON WAGES

Withholding Tax on Wages Withholding Tax on Wages applies when there is a payment of wages or compensation and there is an employer-employee relationship between the payor and the payee. This is a creditable tax in the sense that the employee, in preparing his income tax return, credits the taxes withheld against the taxes due from him. NOTES Tax Assessments Assistance in handling of BIR audit and assessments, protest, claim for refund or tax credits, including preparation of position papers Tax Rulings Assistance in drafting, filing and follow-up of request for rulings Tax Opinions Issuance of tax opinions as requested

Substituted Filing of Income Tax Return Revenue Regulations No. 3-2002 dated March 22, 2002 provides that employees receiving compensation income from only one employer for one taxable year whose tax due is equal to tax withheld qualify for substituted filing of Income Tax Return (ITR). This applies for all income earned starting 2002 onwards

Substituted Filing of Income Tax Return In substituted filing of ITR, the employer's annual information return (BIR Form No. 1604-CF) may be considered the "substituted ITR of the employee inasmuch as the information he would have provided the BIR in his own ITR (BIR Form No. 1700) would have been exactly the same information contained in the employer's annual information return.

Substituted Filing of Income Tax Return Substituted filing applies only if all the following circumstances are present: 1. The employee receives purely compensation income (regardless of amount) during the taxable year; 2. The employee receives the income only from one employer during the taxable year; 3. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; and 4. The employee's spouse also complies with all the three (3) conditions stated above.

FINAL WITHHOLDING TAX

Final Withholding Tax 1. It is constituted as a full and final payment of the income tax due from the payee on a particular type of income subject to FWT (e.g., interest on deposits, royalties, etc.) Finality of withholding tax is limited only to the payee’s income tax liability and does not extend to other taxes that may be imposed on said income. 2. The liability for the payment of the tax rests primarily on the payor as withholding agent. 3. The payee is not required to file an income tax return for the particular income subjected to FWT. 1

Payments Subject to FWT For Domestic and Resident Foreign Corporations Interest income from any currency deposit, yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements derived from Philippine sources - 20% Royalties derived from sources within the Philippines - 20% (except on books, literary works and musical compositions which shall be subject to 10% FWT) Interest income from FCDU deposits - 7.5% 3

Payments Subject to FWT For Domestic and Resident Foreign Corporations Income of FCDUs or OBUs from foreign transactions with local commercial banks, including branches of foreign banks authorized by the BSP to do business with FCDUs or OBUs including interest income on foreign currency loans granted to residents - 10% Presumed Capital gains on the sale of real property located in the Philippines classified as capital assets based on selling price or fair market value or zonal value whichever is higher – 6% 3

Payments Subject to FWT For Domestic and Resident Foreign Corporations Branch Profits Remittances on any profit remitted by the Philippine branch of a foreign corporation to its head office abroad based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except for PEZA- registered activities) - 15% Gross income derived from contracts by subcontractors from service contractors engaged in petroleum operations – 8% 3

Payments Subject to FWT For Non-Resident Foreign Corporations In general, all gross income from all sources within the Philippines - 35% Interest on foreign loans - generally, 20% Dividends from a domestic corporation - 15% subject to the condition that country of domicile of the non-resident foreign corporation allows tax credits against foreign tax due on said income equivalent to taxes deemed to have been paid in the Philippines at 17%; or does not impose tax on the dividends 3

Payments Subject to FWT For Non-Resident Foreign Corporations 4. Gross income from Philippine sources derived by non-resident cinematographic film owners, lessors or distributors- 25% 5. Gross rentals/lease/charter fees derived by non-resident owner or lessor of vessels chartered by Phil. nationals - 4 1/2% 6. Gross rentals or fees of non-resident owner or lessor of aircrafts, machineries and other equipment - 7 1/2% 3

Payments Subject to FWT For Individuals Cash and Property Dividends from a domestic corporation, joint stock company, insurance or mutual fund companies or on the share of an individual partner in a partnership (except general professional partnership) or on the share of an individual in the net income after tax of an association, a joint account or a joint venture or consortium - 10% - beginning January 1, 2000 and thereafter The tax on the dividends shall be imposed on dividends which are declared from profits made after 12/31/97. 3

Tax Information Return Certificate of Final Taxes Withheld (BIR Form 2306) - to be given to payees on or before January 31 of the succeeding year unless requested by payee Annual Information Return of Taxes Withheld (BIR Form No. 1604 - CF) - to be filed with the revenue district office on or before January 31 of the following year in which payments were made 9

EXPANDED WITHHOLDING TAX

Expanded Withholding Tax It is a means of collecting the tax in advance. Illustration: Assuming (A) withholds 10% EWT from its payments of management fees to (B), a vat registered entity, amounting to 1,000,000 (exclusive of VAT). Monthly remittance return of (A) EWT Due (10% of P1,000,000) P100,000 Income Tax Return of (B) Tax Due P320,000 Creditable tax 100,000 Income Tax Payable P270,000 It is creditable against the payee’s income tax liability.

Nature of EWT The taxes withheld are considered trust funds held for the Government to be maintained by the withholding agent in separate accounts

Basic Principles Only payments enumerated under the EWT regulations are subject to EWT. However, the EWT shall attach to all purchase of goods and services from its resident suppliers by a Top 10000 corporations (duly notified in writing by the BIR as such) whether or not such payments are enumerated under the existing EWT regulations. The payee and the payor must be residents of the Philippines. The EWT is not a final tax.

Withholding Agents 1. Any juridical person, whether or not engaged in trade or business; 2. All government offices including government-owned or controlled corporations as well as provincial, city, and municipal governments and barangays; An individual with respect to payments in connection with his trade or business.

Withholding Agents (RR. No. 30-2003) Agents, employees or any person purchasing goods or services/paying for and in behalf of the aforesaid withholding agents shall likewise withhold in their behalf, provided that the official receipts of payment/sales invoice shall be issued in the name of the person whom the former represents and the corresponding certificate of taxes withheld (BIR Form No. 2307) shall immediately be issued upon withholding of the tax;

Withholding Agents (RR. No. 30-2003) The obligation to withhold is imposed upon the buyer-payor of income although the burden of tax is really upon the seller-income earner hence, unjustifiable refusal of the seller-income earner to be subjected to withholding tax shall be a ground for the mandatory audit of his income tax liabilities upon verified complaint of the buyer-payor.

Exemption from EWT No withholding is required on income payments to the following: National government and its instrumentalities, including provincial, city or municipal governments and barangays, except government-owned or controlled corporations. Persons enjoying exemption from payments of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following:

Exemption from EWT Sales of real property by a corporation which is registered with and certified by the HLURB or HUDCC as engaged in socialized housing projects where the selling price of the house and lot or only the lot does not exceed P180,000 in Metro Manila and other highly urbanized areas and P150,000 Corporations registered with the Board of Investments, PEZA, SBMA enjoying exemption from the income tax Exempt corporations under Section 30 of the Tax Code including, SSS, GSIS, PHIC, and PCSO. However, income derived from real or personal property, or from any activity conducted for profit by these corporations are withholding tax. Joint ventures or consortia formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government.

Time of Withholding The obligation of the payor to deduct and withhold the tax arises at the time an income payment is: paid, or payable (obligation becomes due and demandable or legally enforceable), or accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books Whichever comes first Provided, however that where income is not yet paid or payable but the same has been recorded as an expense or asset in the books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes.

Effects of Failure to Withhold 1. Disallowance of expense as a deduction for income tax purposes 2. Fines and Penalties a. Surcharge 25% - if not due to willful neglect 50% - if due to willful neglect or with intent to defraud the government

Effects of Failure to Withhold b. Interest 20% per annum or the prevailing market rate fixed and published by the Central bank on the first Monday of each month, known as the Manila Reference Rate (MRR), whichever is higher. 3. Fines and imprisonment Taxpayer/withholding agent may be subject to criminal liability for non-withholding of the tax. Said liability, however, may be extrajudicially settled through compromise.

Effects of Failure to Withhold 4. Other Penalties If the withholding agent is the government or any of its agencies, political subdivisions or instrumentalities or a government –owned or controlled corporation, the employee responsible for the withholding and remittance of the tax is liable to fine of P5,000 to P50,000 or imprisonment of not less than 6 months and 1 day, but not more than 2 years or both.

Treatment of VAT From the point of view of the recipient of income, the portion of the purchase/contract price which pertains to the VAT is not considered income but the same is treated as a liability. For this reason, since the subject of the EWT covers income payments, only that portion of the purchase/ contract price, exclusive of VAT shall be the basis of withholding. (VAT Ruling No. 067-97)

Payments Subject to EWT Payee Tax Base Rate Taxable Individuals Individual practicing professionals (e.g., CPAs, Doctors, Engineers, and all other professions requiring government licensure examination and/or regulated by the Professional Regulatory Commission, Supreme Court etc.) Insurance agents and adjusters Management and technical consultants Gross professional, promotional, and talent fees, or any other form or remuneration. (Fees, per diems, allowances, and any other form of income payments NOT subject to withholding tax on compensation) 15% - if the current year’s gross income exceeds P720,000 10% - if the current year’s gross income does not exceed P720,000

Payments Subject to EWT Payee Tax Base Rate Taxable Individuals 4. Bookkeeping agents and agencies 5. Professional entertainers (i.e., actors, singers, emcees, lyricists, composers etc.) 6. Professional athletes (i.e., basketball players, jockeys, etc 7. Directors & producers involved in movies, stage, radio, TV and musical productions 8. Other recipients of talent fees. Gross professional, promotional, and talent fees, or any other form or remuneration. (Fees, per diems, allowances, and any other form of income payments NOT subject to withholding tax on compensation) 15% - if the current year’s gross income exceeds P720,000 10% - if the current year’s gross income does not exceed P720,000

Payments Subject to EWT Payee Tax Base Rate Taxable Individuals 9. Fees of Directors who are NOT employees of the company paying such fees, whose duties are confined to attendance at and participation of the board of directors. Gross professional, promotional, and talent fees, or any other form or remuneration. (Fees, per diems, allowances, and any other form of income payments NOT subject to withholding tax on compensation) 15% - if the current year’s gross income exceeds P720,000 10% - if the current year’s gross income does not exceed P720,000

Special Issues Determining the Applicable Tax Rate (10% or 15%) Submit a notarized, sworn declaration of his gross income for the current year on June 30 of each year, or within fifteen (15) days after the end of the month wherein said gross income for the current year reaches P720,000, whichever comes earlier Copy furnish all current payors with the said declaration duly stamped received by the BIR (Withholding Tax Division, National Office)

Special Issues Determining the Applicable Tax Rate (10% or 15%) (con’t) In case the talent’s gross income as of June 30 is less than P720,000, he/she shall submit a second sworn declaration within fifteen (15) days after the end of the month his/her gross income for the current year-to-date reaches P720,000. In case the payee fails to submit the annual declaration/disclosure to the BIR, the payor shall withhold the tax at 15%

Payments Subject to EWT Payee Tax Base Rate B. Taxable Juridical Persons Gross professional, promotional, and talent fees, or any other form or remuneration. 15% - if the current year’s gross income exceeds P720,000 10% - if the current year’s gross income does not exceed P720,000 C. Lessor or Properties Real Properties Personal Properties Gross rental on business property Gross rental in excess of 10,000 per payment 5%

Payments Subject to EWT What constitutes personal properties ? Personal properties includes but not limited to the following: Land , air and water transport equipments Industrial, commercial, scientific equipments Agricultural machinery and equipment Construction/civil engineering machinery and equipments Telecommunication Equipments Office furniture, machines and equipment Main frame computer and all other computer machines and equipment Material handling equipment and auxiliary equipment

Payments Subject to EWT Payee Tax Base Rate C. Lessor or Properties 3. Poles, satellites & transmission facilities Examples: switchboards, landlines, aerial cables, underground cable and submarine cables Gross rentals for the use of poles, satellites and transmission facilities 5% 4. Billboards Gross rentals or lease of spaces used in posting advertisement in the form of billboards or similar structure thereto posted in public places

Payments Subject to EWT Payee Tax Base Rate D. Cinematographic film owner, lessors, or distributors, whether individual or corporate Gross payment 5% E. Contractors General engineering contractors, whether individual or corporate. Those whose principal contracting business is in connection with fixed works requiring specialized engineering knowledge and skill (e.g., reclamation works, highways, bridges, railroads, tunnels, etc.) 2%

Payments Subject to EWT Payee Tax Base Rate E. Contractors Specialty contractors, whether individual or corporate – Those whose operations pertain to the performance of construction work requiring special skills and whose principal contracting business involves the use of specialized building trades or crafts. Gross payment 2%

Payments Subject to EWT Payee Tax Base Rate E. Other Contractors Filling demolition and salvage work contractors and operations of mine drilling apparatus; Operators of dockyards; Persons engaged in the installation of water system gas or electric light, heat or power Operators of stevedoring, warehousing or forwarding establishments. Printers, bookbinders, lithographers and publishers except those engaged in the publication or printing of any newspaper, magazine, review or bulleting which appears at regular interval, with fixed prices for subscription and sale; Persons engaged in landscaping services Persons engaged in the collection and disposal of garbage; Gross payment 2%

Payments Subject to EWT Payee Tax Base Rate E. Other Contractors Person engaged in the sale of computer services now include computer programmers, software/ program developer/ desginer, internet service provider, web page designing, computer date processing, conversion or base services and other computer related activities Labor recruiting agencies and/or labor only contractors Persons engaged in the installation of elevators, central air-conditioning units, computer machines, and other equipment and machinery and the maintenance services thereon; Messengerial, janitorial, private detective and/or security agencies and other business agencies. TV and radio station operators on sale of radio and TV airtime TV and radio blocktimers on sale of TV and radio commercial spots. Gross payment 2%

Payments Subject to EWT Payee Tax Base Rate F. Beneficiaries of estates and trusts Income distribution except exempt income and income already subjected to final withholding tax 15% G. Partners of general professional partnerships Drawings, advances, sharing, allowances, other payments 15% - if the current year’s gross income exceeds P720,000 10% - if the current year’s gross income does not exceed P720,000

Payments Subject to EWT Payee Tax Base Rate H. Customs, insurance, stock, real estate, commercial and immigration brokers and agents of professional entertainers Gross commissions or Service Fees 10%

Payments Subject to EWT Payee Tax Base Rate I. Medical practitioners (including doctors of medicine, veterinarians, dentists, med tech and allied health workers and other medical practitioners) Professionals fees (whether paid through hospitals clinics or paid directly to the medical practitioners by such hospital clinics or paid directly to medical practitioners by health maintenance practitioner and/or similar establishment.) 15% - if the current year’s gross income exceeds P720,000 10% - if the current year’s gross income does not exceed P720,000

Payments Subject to EWT Payee Tax Base Rate J. Sellers of Real Property other than capital assets, sold by an individual, corporate, estate, trust, trust fund, or pension fund and the seller/transferor is habitually engaged in real estate business. Where the selling price is P500,000 or less More than P500,000 but not more than P2,000,000 More than P2,000,000 1.5% 3.0% 5.0% K. Sellers of Real Property Real Property other than capital assets, sold by an individual, corporate, estate, trust, trust fund, or pension fund and the seller/transferor is not habitually engaged in real estate business. Gross selling price 6%

Payments Subject to EWT Payee Tax Base Rate L. Business Establishments on payments made by credit card companies ½% of gross payments 1% M. Additional income payments for overtime services of government personnel from importers, shipping and airline companies, or their agents. Gross additional payments 15%

Payments Subject to EWT Payee Tax Base Rate N. Income payments made by top 5,000 corporations to their local suppliers of goods Gross Selling Price or total amount of goods or its equivalent 1% Income payments made by top 10,000 private corporations to their local suppliers of services other than those covered by other rates of withholding tax Gross payments 2%

Payments Subject to EWT Payee Tax Base Rate O. Income payments by the government including GOCCs on their purchases of goods and services from local suppliers Gross payments 1% on purchase of goods 2% on purchase of services P. Independent and/or exclusive sales representatives and marketing agents and sub-agents of companies including multi-level marketing companies. Gross commissions, rebates, discounts, and other similar considerations 10%

Payments Subject to EWT Payee Tax Base Rate Q. Payments to suppliers of agricultural products. (RR No.3-2004) Payments made by hotels, restaurants, resorts, caterers, food processors, canneries, supermarkets, livestock, poultry, fish and marine products dealers, hardwares, factories, furniture shops and all other establishments, except for income payments to marginal income earners 1%

Payments Subject to EWT Payee Tax Base Rate R. Sugar refineries Gross payments 5% S. Payment made by pre-need companies to funeral parlor 1% T. Embalmers U. Payments on purchase of minerals

Documentation Requirements 1. PRIVATE CORPORATIONS Notice as Top 10,000 Corporation issued by the BIR date June 2003 onwards or Notice as Top 5,000 Corporation in the case of an un-notified subscriber. Required only for private Corporations. BIR FORM NO. 2307 (Certificate of Creditable Tax Withheld At Source) evidencing the tax withheld, should be submitted together with the payments so that the gross amount collected (inclusive of the amount withheld) will be applied as payment.

Documentation Requirements The BIR Form No. 2307 should bear the calendar quarter during which the payment is made. EWT – simultaneous with the payment or within 20 days after the end of the quarter 2. GOVERNMENT CORPORATIONS BIR FORM NO. 2307 (Certificate of Creditable Tax Withheld At Source) should be submitted together with the payments so that the gross amount collected (inclusive of the amount withheld) will be applied as payment.

WITHHOLDING TAX UPDATES

RR No. 14-08 dated November 26, 2008 Top 20,000 Corporations Increased the coverage of withholding tax agents required to withhold 1% from regular suppliers of goods and 2% from regular suppliers of services from the Top Ten Thousand (10,000) Private Corporations to Top Twenty Thousand (20,000) Private Corporations. All taxpayers previously included in the list of top five thousand (5,000) private corporations under RR No. 12-94, as amended, and those who qualified as Top 10,000 Private Corporations under RR No. 17-2003 shall continue to withhold one percent (1%) for supplier of goods and 2% for supplier of services upon the effectivity of these Regulations, unless any of the following situations occur: (a) the Commissioner communicates in writing that they have ceased to qualify as taxpayers includible in the list of Top 20,000 Private Corporations, or (b) those officially identified to have ceased business operations, or undergone any of the business combinations wherein by operation of law the juridical personality of said taxpayers ceased. RMO No. 11-2009 provides for the Alphanumeric Tax Codes (ATCs) for income payments made by top 20,000 corporations – WI/WC 158 for goods and WI/WC 160 for services. These ATCs were previously for income payments made by top 10,000 corporations.

RR No. 6-09 dated June 3, 2009 Additional transactions subject to expanded withholding tax on income payments made by the Top 5,000 individuals engaged in business or in the practice of profession. Income payments made by the top 5,000 individual taxpayers engage in trade or business in the Philippines as determined by the CIR to their local/resident supplier of goods and services other than those covered by other rates of withholding tax. Supplier of goods 1% Supplier of services 2%