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WELCOME TO THE WITHHOLDING TAX SYSTEM

WELCOME TO THE WITHHOLDING TAX SYSTEM. The withholding tax system

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WELCOME TO THE WITHHOLDING TAX SYSTEM

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  1. WELCOME TO THE WITHHOLDING TAX SYSTEM

  2. The withholding tax system The withholding of tax is a system used to collect tax in advance. Withholding tax is not an internal revenue tax. The system is used to equal or at least approximate or collect in full the tax due from the payee on certain income payments. The taxes deducted and withheld by the withholding agent shall be held as a special trust fund in trust for the government until paid or remitted by the withholding agent to collection officers/banks [Section 58(A), Tax Code].

  3. Importance of the withholding tax system • BIR experiences proved that the withholding tax system is an effective tool in the collection of taxes. It is important for the following reasons: • It encourages voluntary compliance; • It reduces cost of production effort; • It prevents delinquencies and revenue loss; and • It prevents dry spells in the fiscal condition of the government by providing revenues throughout the taxable year.

  4. Types of withholding taxes • Withholding Tax on Compensation; • Withholding Tax at Source or Expanded Withholding Tax; • Final Withholding Tax or simply known as Final Tax; and • Withholding Tax on Government Money Payment • - to NON-VAT registered payees subject to • percentage tax • - to VAT-registered payees

  5. Kinds of withholding taxes 1. Creditable withholding tax– Under this kind of withholding tax, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income payments. The income recipient is still required to file income tax return or business tax return to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on transactions subject to expanded withholding tax (EWT), withholding tax on compensation (WTC) and government Money Payment to Non-VAT taxpayers (GMP) subject to percentage tax are creditable in nature. 2. Non-creditable or final withholding tax– Under this kind of withholding tax, the amount of tax withheld by the withholding agent is constituted as a full and final payment of the tax due from the payee on the said income. The liability for payment/remittance of the tax withheld rests primarily on the payor as the withholding agent.

  6. WITHHOLDING TAX ON COMPENSATION Requirement: There must be an employer-employee relationship as defined under Section 2.78.3 of Revenue Regulations No. 2-98 (RR 2-98). Note: Minimum wage earners are no longer subject to income tax including their statutory minimum wage, overtime pay, holiday pay, hazard pay and night shift differential pay pursuant to RA 9504 as implemented by RR 10-2008.

  7. For a taxable income earner: • The following should be considered in the computation of withholding tax per payroll period: • Gross compensation income – all remuneration for services performed by an employee for his employer under an employer-employee relationship • -Non-taxable items of the gross compensation income: • Exclusions from gross income [Section 32(B), Tax Code] • Allowable deductions [Section 34(M), Tax Code] • Personal (P50,000)and additional exemptions (P25,000)per qualified dependent child not exceeding four (4) • Payroll period • Withholding tax table per payroll period

  8. GROSS COMPENSATION INCOME All remuneration for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash. [Section 78(A), Tax Code]

  9. EXCLUSIONS FROM GROSS INCOME • 13TH Month pay and other BENEFITS up to P30,000.00 for the TAXABLE YEAR. [see RA 6686 and PD 851, as amended by Memorandum Order No. 28 8-13-86; Section 32(B)(7)(e), Tax Code] • GSIS, SSS, MEDICARE, PAG-IBIG Contributions and Union Dues of individuals [Section32(B)(7)(f), Tax Code]

  10. ALLOWABLE DEDUCTIONS FROM GROSS INCOME • PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE Provided that: • Gross Income per family is not more than P250,000.00 for the taxable year. • Only the spouse, in case of married individuals • claiming the additional exemption for dependent children shall be entitled. • It shall be taken at the year-end-adjustment with substantiation (employee submits policy contract, • receipts, etc.)

  11. ALLOWABLE EXEMPTIONS • PERSONAL EXEMPTIONS allowed for individuals: P50,000.00 (50% beginning July 6, 2008 / 100% beginning 2009 ) • (pursuant to RA 9504 as implemented by RR 10-2008) • ADDITIONAL EXEMPTIONSfor each qualified dependent child not exceeding four (4) - P25,000.00

  12. WHO IS A QUALIFIED DEPENDENT CHILD? • Legitimate, illegitimate or legally adopted child chiefly dependent upon & living with the taxpayer, not more than 21 years old and not gainfully employed • A dependent child, although above 21 years old may still be qualified as a dependent if such child is incapable of self-support because he/she is mentally or physically challenged. Medical certificate is required.

  13. EXEMPTION CERTIFICATES Important documents: • BIR FORM 1902 (TRU Form) to be submitted by employee to employer within ten (10) days upon commencement of employment. • BIR FORM 2305 - to be submitted by employee to employer within ten (10) days after the change of exemption unit. The employer is required to submit the documents to the BIR within thirty (30) days after receipt of aforesaid documents from the employees • WAIVER - The wife (if working) may claim the additional exemption for the qualified dependent children upon husband’s execution of waiver.

  14. DE MINIMIS BENEFITS (Latest amendment is RR 5-2011) • Monetized unused VACATION LEAVE credits of private employees not exceeding 10 days during the year; • Monetized value of vacation and sick leave credits paid to government officials and employees; • Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125.00/month; • Rice subsidy - P1,500.00 or one sack of 50 kg. rice/month • amounting to not more than P1,500.00; • Uniform & clothing allowance - Not exceeding P4,000.00 per annum ; • Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance and routing consultations, not exceeding P10,000.00 per year

  15. DE MINIMIS BENEFITS • Laundry allowance- not exceeding P300.00/month • Employees achievement awards – for length of service or safety achievement which must be in the form of a personal tangible property other cash or gift certificate with an annual monetary value not exceeding P10,000.00 received by the employee under an established written plan which does not indiscriminate in favor of highly paid employees; • Gifts given during Christmas & anniversarycelebrations - not exceeding P5,000.00 per employee per annum • (Flowers, fruits, books or similar items given to employees under special circumstances – revoked) • Daily meal allowance for overtime work and night/grave- yardshift not exceeding 25% of the basic minimum wage on a per region basis.

  16. ALL OTHER BENEFITS GIVEN BY EMPLOYERS WHICH ARE NOT INCLUDED IN THE ABOVE ENUMERATION SHALL NOT BE CONSIDERED AS “DE MINIMIS” BENEFITS, AND HENCE, SHALL BE SUBJECT TO INCOME TAX AS WELL AS WITHHOLDING TAX ON COMPENSATION INCOME.

  17. OTHER INFORMATION • PAYROLL PERIOD - period of services for which payment of compensation is ordinarily made to an employee by his employer. [Section 2.78.2, RR 2-98] • Daily, weekly, semi-monthly, monthly, etc. • WITHHOLDING TAX TABLE • Daily, weekly, semi-monthly & monthly

  18. OTHER INFORMATION Requirement of withholding: Every employer must withhold from compensation paid an amount computed using the withholding tax table. The statutory minimum wage, holiday pay, overtime pay, hazard pay and night shift differential pay received by minimum wage earners (MWEs) shall not be subject to income tax and withholding tax. [Section 2.79(A), RR 10-2008]

  19. RETIREMENT PAY • Generally TAXABLE • EXEMPT if the following requirements are met by employers in • the private sector: • a. There must be a reasonable retirement benefit plan duly • approved by the BIR; • b. The retiring official or employee has been in the service • of the same employer for at least ten (10) years and not • less than fifty (50) years of age at the time of retirement; and • c. The retiring official or employee should not have previously • availed of the privilege under the retirement benefit plan of the • same or another employer. OR • d. If the retirement qualifies under RA 7641 (for employers • without retirement benefit plan)

  20. SEPARATION PAY Any amount received by an official, employee or by his heirs from the employer due to death, sickness or other physical disabilityor for any cause beyond the control of the said official or employee is NOT TAXABLE [Section 32(B)(6)(b) of the Tax Code] (Please refer also to RMO 25-91 and RMO 26-2011) Any amount received by the employee on account of dismissal is taxable [Section 2.78.1(B)(b), RR 2-98

  21. Annualized Withholding Tax (Year-End-Adjustment)

  22. Annualized Withholding Tax (Year-End-Adjustment) PURPOSE: TAX DUE = TAX WITHHELD WHEN: • On or before the end of the calendar year but prior to the payment of compensation for the last payroll period. • If terminated, on the day on which the last payment of compensation is made.

  23. Annualized Withholding Tax or the Year-End-Adjustment Section 79(H), Tax Code, Section 2.79(B)(5)(b), RR 2-98, as amended by RR 10-2008 STEP 1 - Determine the taxable regular and Supplementary compensation paid to the employee for the entire calendar year; STEP 2 - If the employee has previous employment/s within the year, add the amount of taxable regular and supplementary compensation paid to the employee by the previous employer;

  24. Annualized Withholding Tax (Year-End-Adjustment) STEP 3 - Deduct from the aggregate amount of compensation computed in Step 2 the amount of the total personal and additional exemptions of the employee; Personal Exemptions: - P50,000.00 Additional Exemption: P 25,000 for each qualified dependent child not exceeding four (4)

  25. Annualized Withholding Tax (Year-End-Adjustment) STEP 4 - Deduct the amount of premium payments on Health and or Hospitalization Insurance of employees who have presented evidence that they paid the same during the taxable year. NOTE: The deductible amount shall not exceed P 2,400/ annum or P 200/month whichever is lower and the total family gross income does not exceed P 250,000 for the calendar year. The employee is required to furnish employer with copies of policy contract and proof of payments before the employer does the year-end adjustment.

  26. Annualized Withholding Tax (Year-End-Adjustment) STEP 5 - Compute the amount of tax on the difference arrived at in Step 4. Not over P10,000 5% over P10,000 but not over P30,000 P500 + 10% of the excess over P10,000 over P30,000 but not over P70,000 P2,500 + 15% of the excess over P30,000 over P70,000 but not over P140,000 P8,500 + 20% of the excess over P70,000 over P140,000 but not over P250,000 P22,500 + 25% of the excess over P140,000 over P250,000 but not over P500,000 P50,000 + 30% of the excess over P250,000 over P500,000 P125,000 + 32% of the excess over P500,000

  27. Annualized Withholding Tax (Year-End-Adjustment) STEP 6 - Determine the deficiency or excess, if any, of the tax computed in Step 5 over the cumulative tax already deducted and withheld since the beginning of the current calendar year.

  28. Year-End Adjustment - Formula GROSS COMPENSATION INCOME (previous + present employer) P x x x LESS: Non-Taxable Items a. 13th month pay, Christmas bonus loyalty Award, gift in cash/kind and other benefits [Sec. 2.78.1 (b)(11), RR 2-98] P 30,000.00 b. SSS, GSIS, Medicare, Pag-ibig and union dues of individual employees x x x x x c. 10 days monetized vacation leave x x x x x d. Other non-taxable compensation income x x x x x x x x x GROSS TAXABLE COMPENSATION INCOME P x x x Less: Total Exemptions P x x x Premium paid on Health or Hospitalization Insurance (Maximum of P2,400.00) x x x x x x Taxable Compensation Income P x x x Tax Due: Refer to Annualized Tax Table, Section 24(A), Tax Code P x x x Less: Tax Withheld (Jan. to November, from previous & present employer) x x x Amount to be withheld in December /refunded on Jan. 25 ff year P x x x

  29. Annualized Withholding Tax or the Year-end Adjustment RESULTS OF THE YEAR-END ADJUSTMENT: COLLECTIBLE: Tax Due > Tax Withheld ----collect before payment of last wage/compensation REFUNDABLE: Tax Due < Tax Withheld ----- refund on or before Jan. 25th of the ff. year/last payment of wages BREAK-EVEN: Tax Due = Tax Withheld ----- do not withhold from December salary

  30. Sample Problem 1 Mr. Dexter, single receives P 25 ,000 (net of SSS, Philhealth, HDMF and other non-taxable items of gross income) as monthly regular compensation starting January 1, 2009, he filed his resignation effective June 30, 2009. The tax withheld from January to May was P15,000.00

  31. Sample Problem 1 Computation: Total compensation received from January 1 to May 31, 2009 P 125,000.00 Add: Compensation to be received on June 25,000.00 Gross Compensation Jan. – June, 2009 P150,000.00 Less: Personal Exemption 50,000.00 Taxable Compensation P 100,000.00 Tax Due * P 14,500.00 Less: Tax Withheld from Jan. to May 15,000.00 Excess tax withheld to be refunded by employer P 500.00 on or before June 30, 2009 of the current year * Tax Due on P70,000.00 P 8,500.00 Tax on excess (P30,000 x 20%) 6,000.00 Tax on P23,000 P 14,500.00

  32. Sample Problem 2 Ms. Allister, married with 2 qualified dependent children (with husband’s waiver) receives P25,000 monthly compensation (net of SSS, Philhealth, HDMF contributions) in 2009 while tax withheld was P35,000.00. Total Compensation Jan. - Nov. (P25,000 x 11 mos.) P 275,000.00 Add: Compensation to be received in Dec. 25,000.00 Gross Compensation Income P 300,000.00 Less: Personal Exemption - Married P 50,000 Additional Exemptions - 2 x P25,000 50,000P100,000.00 Taxable Compensation Income P200,000.00 Tax Due* P 37,500.00 Less Tax Withheld from Jan. to Nov. 35,000.00 To be withheld from employee’s December salary P 2,500.00 Tax on P140,000.00 P22,500.00 Tax on excess (P60,000.00 x 25%) 15,000.00 *TAX DUE P37,500.00

  33. Employers are REQUIRED to file Annual Information Return (BIR Form 1604CF) and the Alphabetical List of Employees FOR NON-EFPS FILERS: 1. Manual Submission - 3 copies of BIR Form 1604-CF and the alphabetical list of employees . 2. Diskette Submission - Employers with ten (10) or more employees are required to submit 3.5- inch diskette. FOR EFPS FILERS: Submit through e-submission or any other required e-filing systems

  34. Employers are required to submit the ANNUAL INFORMATION RETURN OF INCOME TAXES WITHHELD ON COMPENSATION AND FINAL WITHHOLDING TAXES (BIR Form No. 1604-CF) and the ALPHABETICAL LIST OF EMPLOYEES • WHEN : On or before January 31of the following year • - WHERE: RDO, LTDO, LTS • RETENTION:3 years in a secondary storage (diskette)

  35. Substituted Filing of Income Tax Return (BIR Form No. 1700) A scheme where the employee shall no longer be required to file ITR and in lieu thereof, the employer’s filing of the Annual Information Return and issuance of BIR Form No. 2316 shall be sufficient provided that conditions set forth in applicable Revenue Regulations and other issuances on the matter are complied with by both the employer and employee.

  36. Individuals Qualified for Substituted Filing and are not required to file BIR Form No. 1700 (RRs 3-2002, 19-2002, 10-2008, RMC 1-2003) • 1. Receiving purely compensation income regardless of amount; • 2. Working for one employer in the Philippines for the calendar year; • 3. Income tax has been withheld correctly by the employer (TAX DUE = TAX WITHHELD) • 4. The employee’s spouse also complies with all the three conditions stated above, and • Employer file the Annual Information Return of Income Taxes • Withheld on Compensation and Final Withholding Taxes (BIR Form 1604-CF).

  37. NOTE: All of the above requisites must be present. The Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form 1604-CF) filed by their respective employers duly stamped “Received”, shall be tantamount to the substituted filing of income tax returns by said employees.

  38. Individuals NOT qualified for substituted filing and MUST file BIR Form no. 1700 1. Individuals with two or more employers concurrently and successively at anytime during the taxable year. 2. Employees whose income tax has not been withheld correctly resulting to collectible or refundable return. 3. Employees whose monthly gross income does not exceed P5,000 or the statutory minimum wage, whichever is higher, and opted for non-withholding of tax on said income. - DELETED BY RR 10-2008

  39. Individuals NOT qualified for substituted filing and MUST file BIR Form no. 1700 4. Individuals deriving other non-business, non-profession- related income in addition to compensation income not otherwise subject to a final tax. 5. Individuals receiving purely compensation income from a single employer whose income tax has been correctly withheld but whose spouse does not qualify for substituted filing. 6. Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income or compensation income and other non-business, non- professional-related income.

  40. Individuals NOT qualified for substituted filing and MUST file BIR Form no. 1700 NOTE: In case of married individuals who are still required to file returns, only ONE RETURN FOR THE TAXABLE YEAR SHALL BE FILED by either of the spouses to cover income of both. It shall be SIGNED BY BOTH HUSBAND AND WIFE unless physically impossible to do so, in which case, signature of one of the spouses would be sufficient

  41. Certificate of Income and Tax Withheld on Compensation (BIR Form No. 2316) Who shall issue: Employer When to issue : a) on or before January 31 of the following calendar year; or b) on the day of last payment of compensation, if there is termination Number of copies: Three (3) copies Signed by: : Both employer and employee (under the penalty of perjury)

  42. Certificate of Income and Withheld on Compensation (BIR Form 2316) In case of successive employment: The employee is required to furnish his new employer with his duly certified copy of the Certificate issued by the previous employer, both within the taxable year.

  43. Uses of BIR Form No. 2316 1. Proof of financial capacity for purposes of loan, credit card, or other applications; 2. Proof of payment of tax or for availing tax credit in the employee’s home country; 3. Securing travel exemption, when necessary; and 4. Other purposes with various government agencies.

  44. JERRY N. BENANING Withholding Tax Division Telephone Numbers: 926-93-47 / 927-09-98 Telefax: 926-93-28 e-mail: jerry.benaning@bir.gov.ph

  45. Another type of creditable withholding tax is the CREDITABLE WITHHOLDING TAX AT SOURCE or commonly known as EXPANDED WITHHOLDING TAX. Again, under the expanded withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file income tax returns, report or declare the income and pay the difference between the tax withheld and the tax due , as the case may be, on said income.

  46. WITHHOLDING TAX AT SOURCE OR EXPANDED WITHHOLDING TAX (EWT)

  47. EXPANDED WITHHOLDINGTAX • STATUTORY BASES - Sec. 57-59, R.A. 8424 as implemented by RR Nos. 2-98, 6-2001, 12-2001, • 4-2002, 14-2002, 17-2003, 30-2003, 1-2004, 3-2004, • 8-2005, 7-2008, 2-2009; 6-2009; 8-2009; 10-2009 • B. RATES - 1% to 32% • C.TIME OF WITHHOLDING- When paid or when • recognized as a payable in the book of accounts of • the payor, whichever comes first. (RR 12-2001)

  48. EXPANDED WITHHOLDING TAX D. FILING AND REMITTANCE - [with MAP, RR 2-2006)] For regular withholding agents, filing and remittance of return shall be on or before the 10th day of the following month after withholding was made for the months of January to November. On or before January 15 of the following year for the month of December.[with MAP (RR 2-2006) For EFPS filers, filing of return shall be governed by the provisions of RR 26-2002 (grouping by industry) while remittance shall be additional five (5) days from that of regular withholding agents. Remittance returns are BIR Form No. 1601-E and BIR Form No. 1606 (for real property transactions subject to EWT)

  49. EXPANDED WITHHOLDING TAX E. CERTIFICATES - BIR Form No. 2307 - Certificate of Creditable Tax Withheld at Source is issued by the WA to payee within 20 days after close of quarter or upon request/demand. However, for individual payees, upon request for the 1st calendar quarter. F. ANNUAL RETURN - Withholding Agent shall file the Annual Information Return (BIR Form No. 1604-E) on or before March 1 of the following year together with the Alphabetical List of payees in hard copy, in diskette, thru e-submission or other mode of submission.

  50. WITHHOLDING TAX AT SOURCE G. NATURE OF TAX WITHHELD - Creditable against the quarterly or annual income tax due. H. TAX BASE – Gross amount paid excluding VAT for VAT taxpayers. I. INCOME PAYMENTS SUBJECT TO EWT:

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