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REVENUE MEMORANDUM ORDER NO.

1-2000
REVENUE MEMORANDUM ORDER NO. 1-2000 issued January 4, 2000 prescribes
the procedures for processing tax treaty relief applications, amending RMO No. 10-92
dated February 1, 1992. The Order covers exclusively applications for tax treaty relief,
including claims or requests for tax exemption, preferential tax treaty rate and refund or
credit of taxes on income derived or to be derived by the taxpayer under existing tax
treaties. The processing for tax treaty relief shall be transferred from Law Division to the
International Tax Affairs Division (ITAD). Any availment of the tax treaty relief shall be
preceded by an application by filing BIR Form No. 0901 (Application for Relief from
Double Taxation) with ITAD at least 15 days before the transaction (i.e. payment of
dividends, royalties, etc.), accompanied by supporting documents justifying the relief.
Consequently, BIR Form Nos. TC 001 and TC 002 prescribed under RMO No. 10-92 are
declared obsolete. Claims for tax credit/refund pertinent to the tax treaty relief requested
shall be filed with ITAD within the two year period prescribed by Section 229 of the
NIRC, as amended under RA 8424. The Tax Credit Certificate (TCC) for this purpose
shall be issued for the account of the "non-resident taxpayer/recipient of the income".
Issuance of the TCC shall be done by the Appellate Division upon receipt of
endorsement memo from ITAD recommending the issuance of such. The release of the
signed TCC to the taxpayer/applicant, however, shall be done by ITAD.
WITHHOLDING TAX (RR 02-98)
April 17, 1998
REVENUE REGULATIONS NO. 02-98
SUBJECT : Implementing Republic Act No. 8424, "An Act Amending The National
Internal Revenue Code, as Amended" Relative to the Withholding on Income Subject to
the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on
Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes
TO : All Internal Revenue Officers and Others Concerned
Pursuant to Sec. 244 of the National Internal Revenue Code, as amended, in relation to
Sections 57 to 59, Sections 78 to 83, Section 114(C) and Sections, 116 to 127 of
Republic Act 8424, these regulations are hereby promulgated which shall govern the

collection at source on income paid on or after January 1, 1998 and prescribing the
Revised Withholding Tax Tables on compensation.
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system 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. Thus, in case of his failure to
withhold the tax or in case of under withholding, the deficiency tax shall be collected
from the payor/withholding agent. The payee is not required to file an income tax return
for the particular income.
The finality of the withholding tax is limited only to the payee's income tax liability on the
particular income. It does not extend to the payee's other tax liability on said income,
such as when the said income is further subject to a percentage tax. For example, if a
bank receives income subject to final withholding tax, the same shall be subject to a
percentage tax.
(B) Creditable Withholding Tax. Under the creditable 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 an
income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended, to
report the income and/or pay the difference between the tax withheld and the tax due on
the income. Taxes withheld on income payments covered by the expanded withholding
tax (referred to in Sec. 2.57.2 of these regulations) and compensation income (referred
to in Sec. 2.78 also of these regulations) are creditable in nature.
SECTION 2.57.1. Income Payments Subject to Final Withholding Tax. The following
forms of income shall be subject to final withholding tax at the rates herein specified;
(A) Income payments to a citizen or to a resident alien individual;
(1) Interest from any peso bank deposit, and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements; royalties (except
on books as well as other literary works and musical compositions), prizes (except
prizes amounting to ten thousand pesos (P10,000.00) or less which shall be subject

to tax under Sec. 24 (A) of the Code) and other winnings (except Philippine Charity
Sweepstakes winnings and lotto winnings) derived from sources within the
Philippines Twenty percent (20%).
(2) Royalties on books, as well as other literary works and musical compositions Ten
percent (10%).
(3) Interest income received by a resident individual taxpayer from a depository bank
under the Foreign Currency Deposit System Seven and one-half percent (7.5%).
(4) Interest income from long-term deposit or investment in the form of savings, common
or individual trust funds, deposit substitutes, investment management accounts and
other investments evidenced by certificates in such form prescribed by the Bangko
Sentral ng Pilipinas which was pre-terminated by the holder before the fifth (5th) year at
the rates herein prescribed to be deducted and withheld from the proceeds thereof
based on the length of time that the instrument was held by the taxpayer
Holding Period Rate
Four (4) years to less than five (5) years 5%
Three (3) years to less than four (4) years 12%
Less than three (3) years 20%
(5) Cash and/or property dividends actually or constructively received from a domestic
corporation, joint stock company, insurance or mutual fund companies or on the share
of an individual partner in the distributable net income after tax of 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 of which he is a
member or a co-venturer.
6% - beginning January 1, 1998
8% - beginning January 1, 1999 and
10% - beginning January 1, 2000 and thereafter
The tax on cash and property dividends shall only be imposed on dividends which are
declared from profits of corporations made after December 31, 1997.

(6) On capital gains presumed to have been realized from the sale, exchange or other
disposition of real property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales based on the gross
selling price or fair market value as determined in accordance with Sec. 6(E) of the
Code (i.e. the authority of the Commissioner to prescribe the real property values),
whichever is higher Six percent (6%).
In case of dispositions of real property made by individuals to the government or any of
its political subdivisions or agencies or to government-owned or controlled corporations,
the tax to be imposed shall be determined either under Section 24(A) of the Code for
normal income tax for individual citizens and residents or under Section 24(D)(1) of the
Code for the final tax on capital gains from sale of property at six percent (6%), at the
option of the taxpayer.
(B) Income Payment to Non-resident Aliens Engaged in Trade or Business in the
Philippines. The following forms of income derived from sources within the
Philippines shall be subject to final withholding tax in the hands of a non-resident alien
individual engaged in trade or business within the Philippines, based on the gross
amount thereof and at the rates prescribed therefor:
(1)
On Certain Passive Income A tax of twenty (20%) percent is hereby imposed
on certain passive income received from all sources within the Philippines.
(a) Cash and/or property dividend from a domestic corporation or from a joint stock
company, or from an insurance or mutual fund company or from a regional operating
headquarter of a multinational company;
(b) Share in the distributable net income after tax of a partnership (except general
professional partnership) of which he is a partner, or share in the net income after tax of
an association, a joint account, or a joint venture of which he is a member or a coventurer;
(c) Interests from any currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements;
(d) Royalties (except royalties on books, as well as other literary works and musical
compositions which shall be subject to 10% final withholding tax);

(e) Prizes (except prizes amounting to ten thousand pesos (P10,000.00) or less subject
to tax under Sec. 25 (A) (1) of the Code for the normal rates of income tax for
individuals) and other winnings (except Philippine Charity Sweepstakes winnings and
lotto winnings);
(2) Interest income derived from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management accounts
and other investments evidenced by certificates in such form prescribed by the Bangko
Sentral ng Pilipinas which was pre-terminated by the holder before the fifth (5th) year at
the rates herein prescribed to be deducted and withheld from the proceeds thereof
based on the length of time that the instrument was held by the taxpayer
Holding Period Rate
Four (4) years to less than five (5) years 5%
Three (3) years to less than four (4) years 12%
Less than three (3) years 20%
(3) On capital gains presumed to have been realized from the sale exchange or other
disposition of real property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales based on the gross
selling price or fair market value as determined in accordance with Sec. 6(E) of the
Code (i.e. the authority of the Commissioner to prescribe zonal values), whichever is
higher Six percent (6%).
In case of dispositions of real property made by individuals to government or any of its
political subdivisions or agencies or to government-owned or controlled corporations,
the tax to be imposed shall be determined either under Section 24(A) of the code for the
normal rate of income tax for individual citizens and residents or under Section 24(D)(1)
of the Code for the final tax on capital gains from sale of property at six percent (6%), at
the option of the taxpayer.
(C) Income Derived from All Sources Within the Philippines by a Non-resident Alien
Individual Not Engaged in Trade or Business Within the Philippines. The following
forms of income derived from all sources within the Philippines shall be subject to a final
withholding tax in the hands of a non-resident alien individual not engaged in trade or

business within the Philippines based on the following amounts and at the rates
prescribed therefor:
1 On the gross amount of income derived from all sources within the Philippines by a
non-resident alien individual who is not engaged in trade or business in the
Philippines 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
Twenty five percent (25%). pr
(2) On capital gains presumed to have been realized from the sale, exchange or other
disposition of real property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales based on the gross
selling price or fair market value as determined in accordance with Sec. 6(E) of the
Code (i.e. the authority of the Commissioner to prescribe the real property values),
whichever is higher Six percent (6%).
In case of dispositions of real property made by individuals to government or any of its
political subdivisions or agencies or to government-owned or controlled corporations,
the tax to be imposed shall be determined either under Sec. 24(a) of the Code for the
rates of income tax for individual citizens and residents or under Sec. 24(D)(1) of the
Code for the final tax on capital gains from sale of property at six percent (6%), at the
option of the taxpayer.
(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters
and Regional Operating Headquarters of Multinational Companies. A final
withholding tax equivalent to fifteen percent (15%) shall be withheld by the withholding
agent from the gross income received by every alien individual occupying managerial
and technical positions in regional or area headquarters and regional operating
headquarters and representative offices established in the Philippines by multinational
companies as salaries, wages, annuities, compensation, remuneration, and other
emoluments, such as honoraria and allowances, except income which is subject to the
fringe benefits tax, from such regional or area headquarters and regional operating
headquarters.
The same tax treatment shall apply to Filipinos employed and occupying the same as
those of alien employed by these multinational companies.

The term "multinational company" means a foreign firm or entity engaged in


international trade with its affiliates or subsidiaries or branch offices in the Asia Pacific
Region and other foreign markets.
(E) Income Derived by Alien Individuals Employed by Offshore Banking Units. A final
withholding tax equivalent to fifteen (15%) shall be withheld by the withholding agent
from the gross income of alien individuals occupying managerial or technical positions in
offshore banking units established in the Philippines, as salaries, wages, annuities,
compensations, remuneration and other emoluments such as honoraria and
allowances, received from such offshore banking units.
The same tax treatment shall apply to Filipinos employed and occupying the same
positions as those of aliens who are employed by these offshore banking units.
(F) Income of Aliens Employed by Foreign Petroleum Service Contractors and
Subcontractors. A final withholding tax equivalent to fifteen percent (15%) shall be
withheld from the gross income of an alien individual who is a permanent resident of a
foreign country but who is employed and assigned in the Philippines by a foreign service
contractor or by a foreign service subcontractor who is engaged in petroleum operations
in the Philippines. His gross income includes salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and allowances, received from
such contractor or subcontractor.
The same tax treatment shall apply to Filipinos who are employed and occupying the
same positions as those of aliens employed by a foreign petroleum service contractor or
subcontractor.
(G) Income Payment to a Domestic Corporation. The following items of income shall
be subject to a final withholding tax in the hands of a domestic corporation, based on
the gross amount thereof and at the rate of tax prescribed therefor:
1 Interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust fund and similar arrangements derived from
sources within the Philippines Twenty Percent (20%).
(2) Royalties derived from sources within the Philippines Twenty percent (20%)

.
(3) Interest income derived from a depository bank under the Expanded Foreign
Currency Deposit System, otherwise known as a Foreign Currency Deposit Unit (FCDU)
Seven and one-half percent (7.5%).
(4) Income derived by a depository bank under the Expanded Foreign Currency Deposit
System from foreign transactions with local commercial banks including branches of
foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with Foreign Currency Deposit System Units and other depository
banks under the expanded foreign currency deposit system including interest income
from foreign currency loans granted by such depository bank under the said expanded
foreign currency deposit system to residents Ten percent (10%).
(5) On capital gains presumed to have been realized from the sale, exchange or other
disposition of real property located in the Philippines classified as capital assets,
including pacto de retro sales and other forms of conditional sales based on the gross
selling price or fair market value as determined in accordance with Sec. 6(E) of the
Code, whichever is higher Six percent (6%).
(H) Income Payment to a Resident Foreign Corporation. The following forms of
income shall be subject to a final withholding tax in the hands of a foreign corporation,
based on the gross amount thereof and at the rate of tax prescribed therefor:
1 Offshore Banking Units On income derived by offshore banking units authorized by
the Bangko Sentral ng Pilipinas (BSP) from foreign currency transactions with local
commercial banks and branches of foreign banks that may be authorized by the BSP
to transact business with offshore banking units and other OBUs including interest
income derived from foreign currency loans granted to resident Ten percent (10%).
(2) Tax on Branch Profit 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
those registered with the Philippine Economic Zones Authority (PEZA) and other
companies within the special economic zones such as Subic Bay Metropolitan Authority
(SBMA) and Clark Development Authority (CDA) Fifteen percent (15%).

Interests, dividends, rents, royalties (including remunerations for technical services),


salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual
periodic or casual gains, profits, income and capital gains received by a foreign
corporation during each taxable year from all sources within the Philippines shall not be
considered as branch profits unless the same are effectively connected with the conduct
of its trade or business in the Philippines.
(3) Interest on any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements and royalties derived
from sources within the Philippines Twenty percent (20%).
(4) Interest income derived from a Depository Bank under the Expanded Foreign
Currency Deposit system Seven and one-half percent (7.5%).
(5) Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with local commercial banks including
branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas to
transact business with foreign currency deposit system units and other depository banks
under the expanded foreign currency deposit system including interest income from
foreign currency loans granted by such depository banks under the said expanded
foreign currency deposit system to resident Ten percent (10%).
(I) Income Derived From all Sources Within the Philippines by Non- Resident Foreign
Corporation. The following shall be subject to final withholding tax based on the
gross amount of income and at the rate of tax prescribed therefor:
1 In general On gross income derived from all sources within the Philippines such as
interests, dividends, rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments, or other fixed or determinable annual, periodic or
casual gains, profits and income and capital gains (except capital gains realized from
sale, exchange, disposition of shares of stock in any domestic corporation which is
subject to capital gains tax under Sec. 28(B)(5)(c) at the following rates:
34% - beginning January 1, 1998
33% - beginning January 1, 1999 and
32% - beginning January 1, 2000 and thereafter

(2) Gross income from all sources within the Philippines derived by non-resident
cinematographic film owners, lessors or distributors Twenty five percent (25%).
(3) On the gross rentals, lease and charter fees, derived by non-resident owner or
lessor of vessels from leases or charters to Filipino citizens or corporations as approved
by the Maritime Industry Authority Four and one-half percent (4.5%).
(4) On the gross rentals, charter and other fees derived by non-resident lessor of
aircraft, machineries and other equipment Seven and a half percent (7.5%).
(5) Interest on foreign loans contracted on or after August 1, 1986 Twenty percent
(20%).
(6) Dividends received from a domestic corporation Fifteen percent (15%) of the cash
and/or property dividends received from a domestic corporation subject to the condition
that the country in which the nonresident foreign corporation is domiciled (a) shall allow
a credit against the tax due from the said nonresident foreign corporation which are
equivalent to taxes deemed to have been paid in the Philippines equal to twenty percent
(20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999 and
seventeen percent (17%) thereafter, which represents the difference between the
regular income tax of thirty-five percent (35%) in 1997, thirty four percent (34%) in 1998,
thirty three percent (33%) in 1999, and thirty two percent (32%) thereafter on
corporations and the fifteen percent (15%) tax on dividends as herein provided; or, (b)
does not impose any income tax on dividends received from a domestic corporation.
(J) Fringe Benefits Granted to the Employee (Except Rank and File Employee). There
shall be imposed a final tax of 34% beginning January 1, 1998; 33% beginning January
1, 1999 and 32% beginning January 1, 2000 and thereafter, on the grossed-up
monetary value of fringe benefits, granted or furnished by the employer to his
employees (except rank and file as defined in the Code). Fringe benefits however, which
are required by the nature of or necessary to the trade, business or profession of the
employer, or where such fringe benefit is for the convenience and advantage of the
employer shall not be subject to the fringe benefits tax.
The term fringe benefit means any good, service or other benefit furnished or granted in
cash or in kind by an employer to an individual employee (except rank and file
employees) such as but not limited to, the following:

(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows.
Fringe benefits granted to the following employees and taxable under Sec. 25 (B), (C),
(D) and (E) shall also be subject to the fringe benefit tax to wit:
Sec. 25(B) Non-resident alien individual not engaged in trade or business in the
Philippines.
Sec. 25(C) Alien individual employed by regional or area headquarters and regional
operating headquarters of a multinational company, including any of its Filipino
employees employed and occupying the same position as those of its aforesaid alien
employees;
Sec. 25(D) Alien individual employed by an offshore banking unit of a foreign bank
established in the Philippines, including any of its Filipino employees employed and
occupying the same position as those of its aforesaid alien employees;
Sec. 25(E) Alien individual employed by a foreign service contractor and subcontractor
engaged in petroleum operations in the Philippines, including any of its Filipino
employees employed and occupying the same position as those of its aforesaid alien
employees.
The computation and the scheme for withholding the tax on fringe benefits shall be
governed by such revenue orders that the Commissioner shall issue as guidelines and
clarifications for its proper and consistent implementation.

(K) Informer's Reward to Persons Instrumental in the Discovery of Violations of the


National Internal Revenue Code and the Discovery and Seizure of Smuggled Goods.
The following rewards shall be subject to a final withholding tax at the rate of ten percent
(10%):
1 Those given to persons, except an internal revenue official or employee, or other
public official or employee or his relative within the sixth degree of consanguinity, who
voluntarily gives definite and sworn information not yet in the possession of the BIR,
leading to the discovery of frauds upon the Internal Revenue Laws or violations of
any of the provisions thereof, thereby resulting in the recovery of revenues,
surcharges and fees and/or the conviction of the guilty party and/or imposition of any
fine or penalty.
(2) Those given to an informer where the offender has offered to compromise the
violation of law committed by him and his offer has been accepted by the Commissioner
and collected from the offender.
The amount of reward shall be equivalent to ten percent (10%) of the revenues,
surcharges or fees recovered and/or fine or penalty imposed and collected or one
million pesos (P1,000,000.00) per case whichever is lower.
The reward shall be paid under the rules and regulations issued by the Secretary of
Finance, upon the recommendation of the Commissioner. However, such person shall
not be entitled to a reward, should no revenue, surcharges or fees be actually recovered
or collected nor shall apply to a case already pending or previously investigated or
examined by the Commissioner or any of his deputies or agents or examiners, or the
Secretary of Finance or any of his deputies or agents.
(3) Those given to persons instrumental in the discovery and seizure of such smuggled
goods.
The amount of reward shall be equivalent to ten percent of the market value of the
smuggled and confiscated goods or one million pesos (P1,000,000.00) per case
whichever is lower.
SECTION 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates
Prescribed Thereon. Except as herein otherwise provided, there shall be withheld a

creditable income tax at the rates herein specified for each class of payee from the
following items of income payments to persons residing in the Philippines:
A Professional fees, talent fees, etc., for services rendered by individuals On the
gross professional, promotional and talent fees or any other form of remuneration for
the services of the following individuals Ten percent (10%);
1 Those individually engaged in the practice of professions or callings: lawyers;
certified public accountants; doctors of medicine; architects; civil, electrical, chemical,
mechanical, structural, industrial, mining, sanitary, metallurgical and geodetic
engineers; marine surveyors; doctors of veterinary science; dentist; professional
appraisers; connoisseurs of tobacco; actuaries; and interior decorators;
(2) Professional entertainers such as but not limited to actors and actresses, singers
and emcees;
(3) Professional athletes including basketball players, pelotaris and jockeys;
(4) All directors involved in movies, stage, radio, television and musical productions;
(5) Insurance agents and insurance adjusters;
(6) Management and technical consultants;
(7) Bookkeeping agents and agencies;
(8) Other recipients of talent fees;
(9) Fees of directors who are not employees of the company paying such fees, whose
duties are confined to attendance at and participation in the meetings of the board of
directors.
The amounts subject to withholding under this paragraph shall include not only fees, but
also per diems, allowances and any other form of income payments. In the case of
professional entertainers, athletes, and all recipient of talent fees, the amount subject to
withholding tax shall also include amounts paid to them in consideration for the use of
their names or pictures in print, broadcast, or other media or for public appearances, for
purposes of advertisements or sales promotion.
(B) Professional fees, talent fees, etc. for services of taxable juridical persons On the
gross professional, promotional and talents fees, or any other form of remuneration
enumerated in the preceding subparagraph for the services of taxable juridical persons
Five percent (5%).

(C) Rentals On gross rental for the continued use or possession of real property used
in business which the payor or obligor has not taken or is not taking title, or in which he
has no equity Five percent (5%).
(D) Cinematographic film rentals and other payments On gross payments to resident
individuals and corporate cinematographic film owners, lessors or distributors Five
percent (5%).
(E) Income payments to certain contractors On gross payments to the following
contractors, whether individual or corporate One percent (1%).
1 General engineering contractors Those whose principal contracting business in
connection with fixed works requiring specialized engineering knowledge and skill
including the following divisions or subjects:
(a) Reclamation works;
(b) Railroads;
(c) Highways, streets and roads;
(d) Tunnels;
(e) Airports and airways;
(f) Waste reduction plants;
(g) Bridges, overpasses, underpasses and other similar works;
(h) Pipelines and other systems for the transmission of petroleum and other liquid or
gaseous substances;
(i) Land leveling;
(j) Excavating;
(k) Trenching;
(l) Paving; and
(m) Surfacing work.
(2) General Building contractors Those whose principal contracting business is in
connection with any structure built, for the support, shelter and enclosure of persons,
animals, chattels, or movable property of any kind, requiring in its construction the use
of more than two unrelated building trades or crafts, or to do or superintend the whole or
any part thereto. Such structure includes sewers and sewerage disposal plants and
systems, parks, playgrounds, and other recreational works, refineries, chemical plants
and similar industrial plants requiring specialized engineering knowledge and skills,

powerhouse, power plants and other utility plants and installation, mines and
metallurgical plants, cement and concrete works in connection with the abovementioned fixed works.
(3) Specialty Contractors Those whose operations pertain to the performance of
construction work requiring special skill and whose principal contracting business
involves the use of specialized building trades or crafts.
(4) Other contractors
(a) Filling, demolition and salvage work contractors and operators of mine drilling
apparatus;
(b) Operators of dockyards;
(c) Persons engaged in the installation of water system, and gas or electric light, heat or
power;
(d) Operators of stevedoring, warehousing or forwarding establishments;
(e) Transportation contractors which include common carriers for the carriage of goods
and merchandise of whatever kind by land, air or water, where the gross payments by
the payor to the same payee amounts to at least two thousand pesos (P2,000) per
month, regardless of the number of shipments during the month;
(f) Printers, bookbinders, lithographers and publishers except those principally engaged
in the publication or printing of any newspaper, magazine, review or bulletin which
appears at regular intervals, with fixed prices for subscription and sale;
(g) Messengerial, janitorial, private detective and/or security agencies, credit and/or
collection agencies and other business agencies;
(h) Advertising agencies, exclusive of gross payments to media;
(i) Independent producers of television, radio and stage performances or shows;
(j) Independent producers of "jingles";
(k) Labor recruiting agencies
(l) Persons engaged in the installation of elevators, central air conditioning units,
computer machines and other equipment and machineries and the maintenance
services thereon;
(m) Persons engaged in the sale of computer services;
(n) Persons engaged in landscaping services;
(o) Persons engaged in the collection and disposal of garbage;
(p) TV and radio station operators on sale of TV and radio airtime; and
(q) TV and radio blocktimers on sale of TV and radio commercial spots.

(F) Income distribution to the beneficiaries. On income distributed to the beneficiaries


of estates and trust as determined under Sec. 60 of the Code, except such income
subject to final withholding tax and tax exempt income Fifteen percent (15%);
(G) Income payments to certain brokers and agents. On gross commissions of
customs, insurance, real estate and commercial brokers and fees of agents of
professional entertainers Five percent (5%);
(H) Income payments to partners of general professional partnerships. Income
payments made periodically or at the end of the taxable year by a general professional
partnership to the partners, such as drawings, advances, sharings, allowances,
stipends, etc. Ten percent (10%);
(I) Professional fees paid to medical practitioners. Any amount collected for and paid
to medical practitioners by hospitals and clinics or paid by patients to the medical
practitioners through the hospital or clinic Ten percent (10%);
(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of . Real property, other than capital
assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and
the seller/transferor is habitually engaged in the real estate business in accordance with
the following schedule
Those which are exempt from a withholding
tax at source as prescribed in Sec. 2.57.5 of
these regulations Exempt
With a selling price of five hundred thousand
pesos (P500,000.00) or less 1.5%
With a selling price of more than five hundred
thousand pesos (P500,000.00) but not more
than two million pesos (P2,000,000.00) 3.0%
With selling price of more than two million pesos
(P2,000,000.00) 5.0%

A seller/transferor must show proof of registration with HLURB or HUDCC to be


considered as habitually engaged in the real estate business.
Real property, other than capital asset, by an individual, estate, trust, trust fund or
pension fund or by a corporation who is not habitually engaged in the real estate
business Seven and one-half percent (7.5%).
Gross selling price shall mean the consideration stated in the sales document or the fair
market value determined in accordance with Section 6 (E) of the Code, as amended,
whichever is higher. In an exchange, the fair market value of the property received in
exchange, as determined in the Income Tax Regulations shall be used.
Where the consideration or part thereof is payable on installment, no withholding of tax
is required to be made on the periodic installment payments where the buyer is an
individual not engaged in trade or business. In such a case, the applicable rate of tax
based on the entire consideration shall be withheld on the last installment or
installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a corporation or
otherwise, the tax shall be deducted and withheld by the buyer on every installment.
(K) Additional income payments to government personnel from importers, shipping and
airline companies, or their agents. On gross additional payments by importers,
shipping and airline companies, or their agents to government personnel for overtime
services as authorized by law Fifteen percent (15%);
For this purpose, the importers, shipping and airline companies or their agents, shall be
the withholding agents of the Government;
(L) Certain income payments made by credit card companies. On the gross amounts
paid by any credit card company in the Philippines to any business entity, whether a
natural or juridical person, representing the sales of goods/services made by the
aforesaid business entity to cardholders One half percent (1/2%);

(M) Income payments made by the top five thousand (5,000) corporations. Income
payments made by any of the top five thousand (5,000) corporations, as determined by
the Commissioner, to their local supplier of goods One percent (1%);
1 The term "goods" pertains to tangible personal property. It does not include intangible
personal property as well as real property.
(2) The term "local suppliers of goods" pertains to a supplier from whom any of the top
five thousand (5,000) corporations, as determined by the Commissioner, regularly
makes its purchases of goods. As a general rule, this term does not include a casual
purchase of goods, that is, purchases made from non-regular suppliers and oftentimes
involving single purchases. However, a single purchase which involves one hundred
thousand pesos (P100,000.00) or more shall be subject to a withholding tax.
(3) A corporation shall not be considered a withholding agent for purposes of this
Section, unless such corporation has been determined and duly notified in writing by the
Commissioner that it has been selected as one of the top five thousand (5,000)
corporations.
(4) The withholding agent shall submit on a semestral basis a list of its regular suppliers
of goods to the Revenue District Office (RDO) having jurisdiction over the withholding
agent's principal place of business on or before July 31 and January 31 of each year.
(N) Income payments by government. Income payments, except any single purchase
which is P10,000 and below, which are made by a government office, national or local,
including government-owned or controlled corporations, on their purchases of goods
from local suppliers One percent (1%);
A government-owned or controlled corporation which is listed as one of the top five
thousand (5,000) corporations shall withhold the tax in its capacity as a governmentowned or controlled corporation rather than as one of the top five thousand (5,000)
corporations.
SECTION 2.57.3. Persons Required to Deduct and Withhold. The following persons
are hereby constituted as withholding agents for purposes of the creditable tax required
to be withheld on income payments enumerated in Section 2.57.2:

(A) In general, any juridical person, whether or not engaged in trade or business;
(B) An individual, with respect to payments made in connection with his 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;
(C) All government offices including government-owned or controlled corporations, as
well as provincial, city and municipal governments.
SECTION 2.57.4. Time of Withholding. The obligation of the payor to deduct and
withhold the tax under Section 2.57 of these regulations arises at the time an income is
paid or payable, whichever comes first, the term "payable" refers to the date the
obligation become due, demandable or legally enforceable.
SECTION 2.57.5. Exemption from Withholding. The withholding of creditable
withholding tax prescribed in these Regulations shall not apply to income payments
made to the following:
(A) National government and its instrumentalities, including provincial, city or municipal
governments;
(B) Persons enjoying exemption from payment of income taxes pursuant to the
provisions of any law, general or special, such as but not limited to the following:
(1) Sales of real property by a corporation which is registered with and certified by the
Housing and Land Use Regulatory Board (HLURB) or HUDCC as engaged in socialized
housing project where the selling price of the house and lot or only the lot does not
exceed one hundred eighty thousand pesos (P180,000) in Metro Manila and other
highly urbanized areas and one hundred fifty thousand pesos (P150,000) in other areas
or such adjusted amount of selling price for socialized housing as may later be
determined and adopted by the HLURB, as provided under Republic Act No. 7279 and
its implementing regulations;
(2) Corporations registered with the Board of Investments and enjoying exemption from
the income tax provided by Republic Act No. 7916 and the Omnibus Investment Code of
1987;

(3) Corporations which are exempt from the income tax under Sec. 30 of the NIRC, to
wit: the Government Service Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation
(PAGCOR); However, the income payments arising from any activity which is conducted
for profit or income derived from real or personal property shall be subject to a
withholding tax as prescribed in these regulations.
SECTION 2.58. Returns and Payment of Taxes Withheld at Source.
(A) Monthly return and payment of taxes withheld at source
(1) WHERE TO FILE Creditable and final withholding taxes deducted and withheld by
the withholding agent shall be paid upon filing a return in duplicate with the authorized
agent banks located within the Revenue District Office (RDO) having jurisdiction over
the residence or principal place of business of the withholding agent. In places where
there is no authorized agent banks, the return shall be filed directly with the Revenue
District Officer, Collection Officer or the duly authorized Treasurer of the city or
municipality where the withholding agent's residence or principal place of business is
located, or where the withholding agent is a corporation, where the principal office is
located except in cases where the Commissioner otherwise permits.
(2) WHEN TO FILE
(a) The withholding tax return, whether creditable or final, shall be filed and payments
should be made within ten (10) days after the end of each month except for taxes
withheld for December which shall be filed on or before January 25 of the following year.
(b) For large taxpayers, the filing of the return and the payment of tax shall be made
within twenty five (25) days after the end of each month.
(c) The return for final withholding taxes on interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and
similar arrangements shall be filed and the payment made within twenty five (25) days
from the close of each calendar quarter.
(B) Withholding tax statement for taxes withheld Every payor required to deduct and
withhold taxes under these regulations shall furnish each payee, whether individual or

corporate, with a withholding tax statement, using the prescribed form (BIR Form 2307)
showing the income payments made and the amount of taxes withheld therefrom, for
every month of the quarter within twenty (20) days following the close of the taxable
quarter employed by the payee in filing his/its quarterly income tax return. Upon request
of the payee, however, the payor must furnish such statement to the payee
simultaneously with the income payment. For final withholding taxes, the statement
should be given to the payee on or before January 31 of the succeeding year. dctai
(C) Annual information return for income tax withheld at source. The payor is required
to file with the Commissioner, Revenue Regional Director, Revenue District Officer,
Collection Agent in the city or municipality where the payor has his legal residence or
principal place of business, where the government office is located in the case of a
government agency, on or before January 31 of the following year in which payments
were made, an Annual Information Return of Income Tax Withheld at Source (Form No.
1604), showing among others the following information:
(1) Name, address and taxpayer's, identification number (TIN); and
(2) Nature of income payments, gross amount and amount of tax withheld from each
payee and such other information as may be required by the Commissioner.
If the payor is the Government of the Philippines or any political subdivision or agency
thereof, or any government-owned or controlled corporation, the return shall be made by
the officer or employee having control of the payments or by any designated officer or
employee.
SECTION 2.58.1. Income of Recipient. Income upon which any creditable tax is
required to be withheld at source shall be included in the return of its recipient. The
excess of the withheld tax over the tax due on his return shall be refunded to him subject
to the authority of the Commissioner to refund taxes under Sec. 204 of the NIRC. If the
income tax collected at source is less than the tax due on his return, the difference shall
be paid in accordance with the provisions of Sec. 56 of the Code.
The taxes withheld by the withholding agents shall be maintained in separate accounts
and should not be commingled with any other funds of the withholding agent. They shall
be considered as a trust fund held for government until they are remitted.

SECTION 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of


land or land and building/improvement thereon arising from sales, barters, or exchanges
subject to the creditable expanded withholding tax shall not be recorded by the Register
of Deeds unless the Commissioner or his duly authorized representative has certified
that such transfers and conveyances have been reported and the expanded withholding
tax, inclusive of the documentary stamp tax, due thereon have been fully paid, pursuant
to the provisions of Sections 57 and 196 of the Code, respectively.
The Register of Deeds shall annotate on the Transfer Certificate of Title of the said
property such information required under Section 58 (E) of the Code. In case of any
violation of the said requirement, he shall be liable to the penalties provided under
Section 269 of the said Code.
SECTION 2.58.3. Claim for Tax Credit or Refund.
(A) The amount of creditable tax withheld shall be allowed as a tax credit against the
income tax liability of the payee in the quarter of the taxable year in which income was
earned or received.
(B) Claims for tax credit or refund of any creditable income tax which was deducted and
withheld on income payments shall be given due course only when it is shown that the
income payment has been declared as part of the gross income and the fact of
withholding is established by a copy of the withholding tax statement duly issued by the
payor to the payee showing the amount paid and the amount of tax withheld therefrom.
Proof of remittance is the responsibility of the withholding agent.
(C) Excess Credits An individual or corporate taxpayer's excess expanded
withholding tax credits for the taxable quarter/year shall automatically be allowed as a
credit against his income tax due for the taxable quarters/years immediately succeeding
the taxable quarters/years in which the excess credit arose, provided he submits with
his income tax return, a copy of the first page of his income tax return for the previous
taxable period showing the amount of his excess withholding tax credits, and on which
return he has not opted for a cash refund or tax credit certificate.
(1) If in lieu of the automatic application of his excess credit, the taxpayer wants a cash
refund or a tax credit certificate for use in payment of his other national internal revenue
tax liabilities, he shall make a written request therefor, within two years after the
payment of the tax (Ref. Secs. 204(c) and 229 of the Code), provided however, that if

the taxpayer has indicated in his income tax return his option for either a cash refund or
a tax credit certificate, such indication shall be considered sufficient for the purpose.
Upon filing of his request, the taxpayer's income tax return showing the excess
expanded withholding tax credits shall be examined. The excess expanded withholding
tax so determined, shall be refunded/credited to the taxpayer.
(2) Sample computation of application of excess credits-ordinary
Taxable Period
1997 1998-QTR1 1998-QTR2 1998-QTR3
Tax Due 1,000 200 200 500
Less: Tax
Withheld (1,500) (500) (300) 0
Net Tax
Payable/
Creditable (500) (300) (100) 500
In the above illustration, there is an excess credit in 1997 that can be applied to the
subsequent quarter. And if the option to apply the excess credit is initiated in the first
quarter of 1998, the taxpayer cannot avail of a refund/tax credit certificate of the excess
credit of P500 in 1997.
SECTION 2.58.4. Verification of Returns and Statement. Any return, statement or
other documents required to be filed under these Regulations shall contain a written
declaration that it is made under penalties of perjury and such declaration shall be
under oath.
It shall be the duty of tax officials to accept the income tax return or other documents
submitted under oath.
SECTION 2.58.5. Requirement for Deductibility. Any income payment which is
otherwise deductible under the Code shall be allowed as a deduction from the payor's
gross income only if it is shown that the income tax required to be withheld has been
paid to the Bureau in accordance with Secs. 57 and 58 of the Code.

A deduction will also be allowed in the following cases where no withholding of tax was
made:
(A) The payee reported the income and the withholding agent/taxpayer pays the tax,
including the interest incident to the failure to withhold the tax, and surcharges, if
applicable, at the time of the original audit and investigation;
(B) The recipient/payee failed to report the income on the due date thereof, but the
withholding agent/taxpayer pays the tax, including the interest incident to the failure to
withhold the tax and surcharges, if applicable, at the time of the original audit and
investigation;
(C) The withholding agent erroneously underwithheld the tax but pays the difference
between the correct amount and the amount of tax withheld, including the interest,
incident to such error, and surcharges, if applicable, at the time of the original audit and
investigation.
SECTION 2.58.6. Tax Paid by Recipient of Income. Every person who is required to
withhold the tax from the compensation of an employee is liable for the payment of such
tax to the BIR. Such liability stays even if the employee subsequently pays the tax. The
payment of the tax by the employee does not relieve the employer from the liability for
penalties and/or additions to the tax for failure to deduct and withhold within the time
prescribed by law or regulations. The employer will not be relieved of his liability for
payment of the tax required to be withheld unless he can show that the tax has been
paid by the employee. The amount of any tax withheld/collected by the employer is a
special fund in trust for the government of the Philippines.
SECTION 2.78. Withholding Tax on Compensation. The withholding of tax on
compensation income is a method of collecting the income tax at source upon receipt of
the income. It applies to all employed individuals whether citizens or aliens, deriving
income from compensation for services rendered in the Philippines. The employer is
constituted as the withholding agent.
SECTION 2.78.1. Withholding of Income Tax on Compensation Income.

(A) Compensation Income Defined. In general, the term "compensation" means all
remuneration for services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by the Code.
The name by which the remuneration for services is designated is immaterial. Thus,
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 Code; taxable pensions and retirement pay; and other income of a
similar nature constitute compensation income.
The basis upon which the remuneration is paid is immaterial in determining whether the
remuneration constitutes compensation. Thus, it may be paid on the basis of piecework, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or
annually.
Remuneration for services constitutes compensation even if the relationship of employer
and employee does not exist any longer at the time when payment is made between the
person in whose employ the services had been performed and the individual who
performed them.
(1) Compensation paid in kind. Compensation may be paid in money or in some
medium other than money, as for example, stocks, bonds or other forms of property. If
services are paid for in a medium other than money, the fair market value of the thing
taken in payment is the amount to be included as compensation subject to withholding.
If the services are rendered at a stipulated price, in the absence of evidence to the
contrary, such price will be presumed to be the fair market value of the remuneration
received. If a corporation transfers to its employees its own stock as remuneration for
services rendered by the employee, the amount of such remuneration is the fair market
value of the stock at the time the services were rendered.
(2) Living quarters or meals. If a person receives a salary as remuneration for
services rendered, and in addition thereto, living quarters or meals are provided, the
value to such person of the quarters and meals so furnished shall be added to the
remuneration paid for the purpose of determining the amount of compensation subject
to withholding. However, if living quarters or meals are furnished to an employee for the

convenience of the employer, the value thereof need not be included as part of
compensation income.
(3) Facilities and privileges of a relatively small value. Ordinarily, facilities and
privileges (such as entertainment, medical services, or so called "courtesy" discounts
on purchases), furnished or offered by an employer to his employees generally, are not
considered as compensation subject to withholding if such facilities or privileges 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.
Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld is
available for payment to the Commissioner.
(4) Tips and gratuities. 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.
(5) Pensions, retirement and separation pay. Pensions, retirement and separation pay
constitute compensation subject to withholding, except those provided under Subsection
B of this section.
(6) Fixed or variable transportation, representation and other allowances
(a) IN GENERAL, fixed or variable transportation, representation and other allowances
which are received by a public officer or employee or officer or employee of a private
entity, in addition to the regular compensation fixed for his position or office, is
compensation subject to withholding.
(b) Any amount paid specifically, either as advances or reimbursements for travelling,
representation and other bonafide ordinary and necessary expenses incurred or
reasonably expected to be incurred by the employee in the performance of his duties
are not compensation subject to withholding, if the following conditions are satisfied:
(i) It is for ordinary and necessary travelling and representation or entertainment
expenses paid or incurred by the employee in the pursuit of the trade, business or
profession; and

(ii) The employee is required to account/liquidate for the foregoing expenses in


accordance with the specific requirements of substantiation for each category of
expenses pursuant to Sec. 34 of the Code. The excess of actual expenses over
advances made shall constitute taxable income if such amount is not returned to the
employer. Reasonable amounts of reimbursements/ advances for travelling 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 subject to the requirement
of substantiation and to withholding.
(7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick
leave credits" which are paid to an employee constitute compensation. Thus, the salary
of an employee on vacation or on sick leave, which are paid notwithstanding his
absence from work, constitutes compensation. However, the monetized value of
unutilized vacation leave credits of ten (10) days or less which were paid to the
employee during the year are not subject to income tax and to the withholding tax.
(8) Deductions made by employer from compensation of employee. Any amount
which is required by law to be deducted by the employer from the compensation of an
employee including the withheld tax is considered as part of the employee's
compensation and is deemed to be paid to the employee as compensation at the time
the deduction is made.
(9) Remuneration for services as employee of a nonresident alien individual or foreign
entity. The term "compensation" includes remuneration for services performed by an
employee of a nonresident alien individual, foreign partnership or foreign corporation,
whether or not such alien individual or foreign entity is engaged in trade or business
within the Philippines. Any person paying compensation on behalf of a non-resident
alien individual, foreign partnership, or foreign corporation which is not engaged in trade
or business within the Philippines is subject to all provisions of law and regulations
applicable to an employer.
(10) Compensation for services performed outside the Philippines. Remuneration for
services performed outside the Philippines by a resident citizen for a domestic or a
resident foreign corporation or partnership, or for a non-resident corporation or
partnership, or for a non-resident individual not engaged in trade or business in the
Philippines shall be treated as compensation which is subject to tax.

A non-resident citizen as defined in these regulations is taxable only on income derived


from sources within the Philippines. In general, the situs of the income whether within or
without the Philippines, is determined by the place where the service is rendered.
(B) Exemptions from withholding tax on compensation. The following income
payments are exempted from the requirement of withholding tax on compensation:
(1) Remunerations received as an incident of employment, as follows:
(a) Retirement benefits received under Republic Act under 7641 and those received by
officials and employees of private firms, whether individual or corporate, under a
reasonable private benefit plan maintained by the employer which meet the following
requirements:
(i) The plan must be reasonable;
(ii) The benefit plan must be approved by the Bureau;
(iii) The retiring official or employee must have been in the service of the same employer
for at least ten (10) years and is not less than fifty (50) years of age at the time of
retirement; and
(iv) The retiring official or employee should not have previously availed of the privilege
under the retirement benefit plan of the same or another employer.
(b) Any amount received by an official or employee or by his heirs from the employer
due to death, sickness or other physical disability or for any cause beyond the control of
the said official or employee, such as retrenchment, redundancy, or cessation of
business.
The phrase "for any cause beyond the control of the said official or employee" connotes
involuntariness on the part of the official or employee. The separation from the service
of the official or employee must not be asked for or initiated by him. The separation was
not of his own making. Whether or not the separation is beyond the control of the official
or employee, being essentially a question of fact, shall be determined on the basis of
prevailing facts and circumstances. It shall be duly established by the employer by
competent evidence which should be attached to the monthly return for the period in
which the amount paid due to the involuntary separation was made.
Amounts received by reason of involuntary separation remain exempt from income tax
even if the official or the employee, at the time of separation, had rendered less than ten

(10) years of service and/or is below fifty (50) years of age.


Any payment made by an employer to an employee on account of dismissal, constitutes
compensation regardless of whether the employer is legally bound by contract, statute,
or otherwise, to make such payment.
(c) Social security benefits, retirement gratuities, pensions and other similar benefits
received by residents or non-resident citizens of the Philippines or aliens who come to
reside permanently in the Philippines from foreign government agencies and other
institutions private or public;
(d) Payments of benefits due or to become due to any person residing in the Philippines
under the law of the United States administered by the United States Veterans
Administration;
(e) Payments of benefits made under the Social Security System Act of 1954 as
amended; and
(f) Benefits received from the GSIS Act of 1937, as amended, and the retirement
gratuity received by government officials and employees.
(2) Remuneration paid for agricultural labor
(a) Remuneration for services which constitute agricultural labor and paid entirely in
products of the farm where the labor is performed is not subject to withholding. In
general, however, the term, "agricultural labor" does not include services performed in
connection with forestry, lumbering or landscaping.
(b) Remuneration paid entirely in products of the farm where the labor is performed by
an employee of any person in connection with any of the following activities is excepted
as remuneration for agricultural labor:
(i) The cultivation of soil;
(ii) The raising, shearing, feeding, caring for, training, or management of livestock, bees,
poultry, or wildlife; or
(iii) The raising or harvesting of any other agricultural or horticultural commodity. The
term "farm" as used in this subsection includes, but is not limited to stock, dairy, poultry,
fruits and truck farms, plantations, ranches, nurseries ranges, orchards, and such

greenhouse and other similar structures as are used primarily for the raising of
agricultural or horticultural commodities.
(c) The remuneration paid entirely in products of the farm where labor is performed for
the following services in the employ of the owner or tenant or other operator of one or
more farms is not considered as remuneration for agricultural labor, provided the major
part of such services is performed on a farm:
(i) Services performed in connection with the operation, management, conservation,
improvement, or maintenance of any such farms or its tools or equipments; or
(ii) Services performed in salvaging timber, or clearing land brush and other debris left
by a hurricane or typhoon.
The services described in (i) above may include for example, services performed by
carpenters, painters, mechanics, farm supervisors, irrigation engineers, bookkeepers,
and other skilled or semi-skilled workers, which contribute in any way to the conduct of
the farm or farms, as such, operated by the person employing them, as distinguished
from any other enterprise in which such person may be engaged. Since the services
described in this paragraph must be performed in the employ of the owner or tenant or
other operator of the farm, the exception does not extend to remuneration paid for
services performed by employees of a commercial painting concern, for example, which
contracts with a farmer to renovate his farm properties.
(d) Remuneration paid entirely in products of the farm where labor is performed by an
employee in the employ of any person in connection with any of the following operations
is not considered as remuneration for agricultural labor without regard to the place
where such services are performed:
(i) The making of copra, stripping of abaca, etc.;
(ii) The hatching of poultry;
(ii) The raising of fish;
(iv) The operation or maintenance of ditches, canals, reservoirs, or waterways used
exclusively for supplying or storing water for farming purposes; and
(v) The production or harvesting of crude gum from a living tree or the processing of
such crude gum into gum spirits or turpentine and gum resin, provided such processing
is carried on by the original producer of such crude gum.

(e) Remuneration paid entirely in products of the farm where labor is performed by an
employee in the employ of a farmer or a farmer's cooperative, organization or group in
the handling, planting, drying, packing, packaging, processing, freezing, grading, storing
or delivering to storage or to market or to carrier for transportation to market, of any
agricultural or horticultural commodity, produced by such farmer or farmer-members of
such organization or group, is excepted as remuneration for agricultural labor. Services
performed by employees of such farmer or farmer's organization or group in handling,
planting, drying, packaging, processing, freezing, grading, storing, or delivering to
storage or to market or to carrier for transportation to market of commodities produced
by persons other than such farmer or members of such farmer's organization or group
are not performed "as an incident to ordinary farming operation".
All payments made in cash or other forms other than products of the farm where labor is
performed, for services constituting agricultural labor as explained above, are not within
the exception.
(3) Remuneration for domestic services. Remuneration paid for services of a
household nature performed by an employee in or about the private home of the person
by whom he is employed is not subject to withholding. However, the services of
household personnel furnished to an employee (except rank and file employees) by an
employer shall be subject to the fringe benefits tax pursuant to Sec. 33 of the Code, as
amended.
A private home is the fixed place of abode of an individual or family. If the home is
utilized primarily for the purpose of supplying board or lodging to the public as a
business enterprise, it ceases to be a private home and remuneration paid for services
performed therein is not exempted.
In general, services of a household nature in or about a private home include services
rendered by cooks, maids, butlers, valets, laundresses, gardeners, chauffeurs of
automobiles for family use.
The remuneration paid for the services above enumerated which are performed in or
about rooming or lodging houses, boarding houses, clubs, hotels, hospitals or
commercial offices or establishments is considered as compensation;
Remuneration paid for services performed as a private secretary, even if they are
performed in the employer's home is considered as compensation;

(4) Remuneration for casual labor not in the course of an employer's trade or business.
The term "casual labor" includes labor which is occasional, incidental or regular. The
expression "not in the course of the employer's trade or business" includes labor that
does not promote or advance the trade or business of the employer.
Thus, any remuneration paid for labor which is occasional, incidental or irregular, and
does not promote or advance the employer's trade or business, is not considered as
compensation.
EXAMPLE: A's business is that of operating a sawmill. He employs B, a carpenter, at an
hourly wage to repair his home. B's work is irregular and he spends, the greater part of
two days in completing the work. Since B's labor is casual and is not in the course of A's
business, the remuneration paid for such services is exempted.
Any remuneration paid for casual labor, that is, labor which is occasional, incidental or
irregular, but which is rendered in the course of the employer's trade or business, is
considered as compensation.
EXAMPLE: E is engaged in the business of operating a department store. He employs
additional clerks for a short period. While the services of the clerks may be casual, they
are rendered in the course of the employer's trade or business and therefore the
remuneration paid for such services is considered as compensation.
Any remuneration paid for casual labor performed for a corporation is considered as
compensation;
(5) Compensation for services by a citizen or resident of the Philippines for a foreign
government or an international organization. Remuneration paid for services
performed as an employee of a foreign government or an international organization is
exempted. The exemption includes not only remuneration paid for services performed
by ambassadors, ministers and other diplomatic officers and employees but also
remuneration paid for services performed as consular or other officer or employee of a
foreign government or as a non-diplomatic representative of such government.
(6) Damages. Actual, moral, exemplary and nominal damages received by an
employee or his heirs pursuant to a final judgment or compromise agreement arising out
of or related to an employer-employee relationship.

(7) Life Insurance. The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or otherwise,
provided however, that interest payments agreed under the policy for the amounts which
are held by the insured under such an agreement shall be included in the gross income.
(8) Amount received by the insured as a return of premium. The amount received by
the insured, as a return of premium or 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 of the contract.
(9) Compensation for injuries or sickness. Amounts received through Accident or
Health Insurance or under Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amount of any damages received whether by suit
or agreement on account of such injuries or sickness.
(10) Income exempt under treaty. Income of any kind to the extent required by any
treaty obligation binding upon the Government of the Philippines.
(11) Thirteenth (13th ) month pay and other benefits.
(a)
Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic
salary of officials and employees of the government, (whether national or local),
including government-owned or controlled corporations, and or private offices
received after the twelfth (12th) month pay; and
(b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award,
gifts in cash or in kind and other benefits of similar nature actually received by officials
and employees of both government and private offices.
The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the
year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00)
which may be increased through rules and regulations issued by the Secretary of
Finance, upon recommendation of the Commissioner, after considering, among others,
the effect on the same of the inflation rate at the end of the taxable year.

(12) GSIS, SSS, Medicare and other contributions. GSIS, SSS, Medicare and PagIbig contributions, and union dues of individual employees.
SECTION 2.78.2. Payroll Period. The term "payroll period" means the period of
services for which a payment of compensation is ordinarily made to an employee by his
employer. It is immaterial that the compensation is not always paid at regular intervals.
EXAMPLE: if an employer ordinarily pays the weekly wages of his employees at the end
of the week, but if for some reason a particular employee receives payment of his
salaries for the past week in the middle of the current week and receives the remainder
at the end of the same week, the payroll period is still the calendar week; or if, instead,
the employee is sent on a three (3)-week trip by his employer and receives at the end of
the trip a single compensation payment for three (3)-week services, the payroll period is
still the calendar week, and the compensation payment shall be treated as though it
were three (3) separate weekly compensation payments.
For the purpose of determining the tax, an employee can have but one payroll period
with respect to the compensation paid by any one employer. Thus, if an employee is
paid a regular compensation for the weekly payroll and in addition thereto is paid
supplemental compensation (for example taxable bonuses) determined with respect to a
different period, the payroll period is the weekly payroll period.
SECTION 2.78.3. Employee. The term "employee" is an individual performing
services under an employer-employee relationship. The term covers all employees,
including officers and employees, whether elected or appointed, of the Government of
the Philippines, or any political subdivision thereof or any agency or instrumentality.
In general, the relationship of the employer and employee exists when the person for
whom services were performed has the right to control and direct the individual who
performs the services, not only as to the result to be accomplished by the work but also
as to the details and means by which the result is accomplished. An employee is subject
to the will and control of the employer not only as to what shall be done, but how it shall
be done. In this connection, it is not necessary that the employer actually directs or
controls the manner in which the services are performed. It is sufficient that he has the
right to do so.
The right to dismiss an employee is also an important factor indicating that the person
possessing that right is an employer. Other factors or characteristics of an employer,

which may not be necessarily present in every case, are furnishing the tools and
furnishing of a place to work, to the individual who performs the services. In general, an
individual is not considered an employee if he is subject to the control or direction of
another merely on to the result to be accomplished by the work, and not on to the
means and methods for accomplishing the result.
In general, individuals who follow an independent trade, business, or profession, in
which the offer their services to the public, are not employees.
The measurement, method or designation of compensation is also immaterial if the
relationship of employer and employee in fact exists.
No distinction is made between classes or grades of employees. Thus superintendents,
managers, and others belonging to similar levels are employees. An officer of a
corporation is an employee of the corporation. An individual, performing services for a
corporation, both as an officer and director, is an employee subject to withholding on
compensation, including director's fees.
SECTION 2.78.4. Employer. The term employer means any person for whom an
individual performs or performed any service, of whatever nature, under an employeremployee relationship. It is not necessary that the services be continuing at the time the
wages are paid in order that the status of employer may exist. Thus for purposes of
withholding, a person for whom an individual has performed past services and from
whom he is still receiving compensation is an employee".
A Person for whom the services are or were performed does not have control. The
term "employer" also refers to the person having control of the payment of the
compensation in cases where the services are or were performed for a person who
does not exercise such control. For example, where compensation, such as certain
types of pensions or retirement pay, are paid by a trust and the person for whom the
services were performed has no control over the payment of such compensation,
the trust is deemed to be the "employer".
(B) Person paying compensation on behalf of a nonresident. The term "employer"
also means any person paying compensation on behalf of a non-resident alien
individual, foreign partnership, or foreign corporation, who is not engaged in trade or
business within the Philippines.

It is the responsibility of the employer to withhold, pay, or refund the tax and furnish the
statements required under these Regulations. The term "employer" as defined in (A)
and (B) above is intended to determine who is the withholding agent.
As a matter of business administration, certain mechanical details of the withholding
process may be handled by representatives of the employer. Thus, in the case of a
corporate employer with branch offices, the branch manager or other representative
may actually, as a matter of internal administration, withhold the tax or prepare the
statements required under the law. Nevertheless, the legal responsibility for withholding,
paying and returning the tax and furnishing such statements rests with the corporate
employer.
An employer may be an individual, a corporation, a partnership, a trust, an estate, a
joint-stock company, an association, or a syndicate, group, pool, joint venture, or other
unincorporated organization, group or entity. A trust or estate, rather than the fiduciary
acting for or on behalf of the trust or estate, is generally the employer.
The term "employer" embraces not only an individual and an organization engaged in
trade or business, but it also includes an organization exempt from income tax, such as
charitable and religious organizations, clubs, social organizations and societes, as well
as the Government of the Philippines, including its agencies, instrumentalities, and
political subdivisions.
(C) Compensation paid on behalf of two or more employers. If a payment of
compensation is made to an employee by an employer through an agent, fiduciary, or
other person who has the control, receipt, custody, or disposal of, or pays the
compensation payable by another employer to such employee, the amount of tax
required to be withheld on each compensation payment made through such agent,
fiduciary, or person shall, whether the compensation is paid separately on behalf of
each employer or paid in lump-sum on behalf of all such employers, be determined
based on the aggregate amount of such compensation payment or payments in the
same manner as if such aggregate amount had been paid by one employer. Hence, the
tax shall be determined based on the aggregate amount of the compensation paid.

In any such case, each employer shall be liable for the return and payment of a pro-rata
portion of the tax so determined in accordance with the ratio of the amount contributed
by each employer relative to the aggregate of such compensation.
A fiduciary, agent, or other person acting for two or more employers may be authorized
to withhold the tax under these regulations with respect to the wages of the employees
of such employers. Such fiduciary, agent, or other person may also be authorized to
make and file returns of the tax withheld at source on such compensation and to furnish
the receipts required under these Regulations. Application for the authorization to
perform such act should be addressed to the Commissioner or his duly authorized
representative. If such authority is granted by the Commissioner, all provisions of the law
(including penalties) and regulations prescribed in pursuance of the law applicable in
respect of an employer for whom such fiduciary, agent or other person acts shall remain
subject to all provisions of law (including penalties) and regulations prescribed in
pursuance of the law applicable in respect of employers.
SECTION 2.79. Income Tax Collected at Source on Compensation Income.
A Requirement of Withholding. Every employer must withhold from compensations
paid, an amount computed in accordance with these regulations. Provided, that no
withholding of tax shall be required where the total compensation income of an
individual does not exceed the statutory minimum wage or five thousand pesos
(P5,000.00) monthly (sixty thousand pesos (P60,000.00) a year), whichever is
higher.
Employees whose total annual compensation, as determined in the preceding
paragraph, does not exceed P60,000.00 shall be given two options with which to pay his
income tax due to wit:
1 His compensation income shall be subjected to withholding tax, but he shall not be
required to file the income tax return prescribed in Sec. 51 of the Code (filing of an
individual return) except when covered by any of the situations enumerated in Sec.
2.83.4 of these Regulations.
(2) His compensation income shall not be subject to a withholding tax but he shall file
his annual income tax return and pay the tax due thereon, annually.

Where the employee has opted to have his compensation income subjected to
withholding so as to be relieved of the obligation of filing an annual income tax return
and paying his tax due on a lump sum basis, he shall execute a waiver in a prescribed
BIR form of his exemption from withholding which shall constitute the authority for the
employer to apply the withholding tax table provided under these Regulations.
The employee who opts to file the Income Tax Return shall file the same not later than
April 15 of the year immediately following the taxable year.
(B) Computation of Withholding Tax on Compensation Income in General. The
procedures provided herein below shall govern the computation of withholding tax on
the taxable compensation income of the employees. Provided, however, that taxable
fringe benefits received by employees other than the rank and file, as defined in the
Labor Code of the Philippines, as amended, shall be subject to a Fringe Benefits Tax,
instead of the rates prescribed in the Withholding Tax Tables pursuant to Sec. 24(A) of
the Code, as amended (refer to Sec. 2.79.D of these Regulations).
1 Use of Withholding Tax Tables. In general, every employer making payment of
compensation shall deduct and withhold from such compensation a tax determined in
accordance with the prescribed new withholding tax tables effective January 1, 1998
(Annex A) of these Regulations.
There are four (4) withholding tables prescribed in these regulations, as follows:
(a) Monthly Tax Table to be used by employers using the monthly payroll period;
(b) Semi-Monthly Tax Table to be used by employers using the semi-monthly payroll
period;
(c) Weekly Tax Table to be used by employers using the weekly payroll period;
(d) Daily Tax Table to be used by employers using the daily payroll period.
If the compensation is paid other than daily, weekly, semi-monthly or monthly, the tax to
be withheld shall be computed as follows:
a Annually use the annualized computation referred to in Sec. 2.79 (B)(5)(b) of
these Regulations;

(b) Quarterly and semi-annually divide the compensation by three (3) or six (6),
respectively, to determine the average monthly compensation. Use the monthly
withholding tax table to compute the tax, and the tax so computed shall be multiplied by
three (3) or six (6) accordingly.
(2) Components of the Withholding Tax Table.
(a) Each tax table is grouped into Tables A, B and C.
A Table for employees without dependent children
B Table for heads of family with dependent children
C Table for married employees with qualified dependent children
(b) The columns in the Tables reflect the following:
1st column reflects the exemption status of employee represented by letter symbols.
(refer to the explanation of the legend of symbols in letter (d) below)
2nd column reflects the total amount of personal and additional exemption, in pesos,
to which an employee is entitled.
(c) Column numbers 1 to 10 reflect the portion of the amount of taxes to be withheld on
the amount of compensation of the employees. Every amount in all the columns within
Tables A, B and C represent the compensation level.
(d) Legend of symbols The symbols used in the new withholding tax table represent
the following:
Z Zero exemption for (a) employee with multiple employers simultaneously,
with respect to second, third, etc., employer and (b) for employee who fails to file
an application for registration (BIR Form 1902) or an exemption certificate; (BIR
Form 2305)
S Single, legally separated spouses/widow/widower without any qualified
dependent;
ME Married employee who is not legally separated;
HF Head of the family who is either single/legally separated spouse/widow or
widower with a qualified dependent parent; sister or brother; legitimate,

recognized natural or legally adopted child; or a qualified senior citizen as defined


by these regulations pursuant to Sec. 2 of R.A. No. 7432.
In view however, of the promulgation of the Family Code which makes no distinction
between the spurious and natural child, an illegitimate child can now be considered as a
qualified dependent and qualifies the claimant to the status of head of the family.
The numerals (1-4) affixed to the status symbols "ME" and HF" represent the number of
qualified legitimate, illegitimate, or legally adopted children;
Exemption means the amount of exemption in thousand pesos an employee is
entitled to claim as a deduction from gross compensation income in accordance with the
status and number of qualified dependent children.
(3) Steps to determine the amount of tax to be withheld:
Step 1. Use the appropriate tables for the payroll period; monthly semi-monthly weekly
or daily as the case may be.
Step 2. Determine the total monetary and non-monetary compensation paid to an
employee for the payroll period, segregating gross benefits which includes thirteenth
(13th) month pay, productivity incentives, Christmas bonus, and other benefits received
by the employee per payroll period. Gross benefits which are received by officials and
employees of public and private entities in the amount of thirty thousand pesos
(P30,000) or less shall be exempted from income tax and from withholding tax.
Step 3. Segregate the taxable compensation from the non-taxable income paid to the
employee for the payroll period. The taxable income refers to all remuneration paid to an
employee not otherwise exempted by law from income tax and consequently from
withholding tax. The non-taxable income are those which are specifically exempted from
income tax by the Code or by other special laws as listed in Sec. 2.78.1 (B) of these
Regulations (e.g. benefits not exceeding P30,000, non-taxable retirement benefits and
separation pay).
Step 4. Segregate the taxable compensation income as determined in Step 3 into
regular taxable compensation income and supplementary compensation income.
Regular compensation includes basic salary, fixed allowances for representation,
transportation and other allowances paid to an employee per payroll period.

Supplementary compensation includes payments to an employee in addition to the


regular compensation such as commission, overtime pay, taxable retirement pay,
taxable bonus and other taxable benefits, with or without regard to a payroll period.
Step 5. Fix the compensation level as follows:
(i) Determine the line (horizontal) corresponding to the status and number of qualified
dependent children using the appropriate symbol for the taxpayer status.
(ii) Determine the column to be used by taking into account only the total amount of
taxable regular compensation income. The compensation level is the amount indicated
in the line and column to which the regular compensation income is equal to or in
excess, but not to exceed the amount in the next column of the same line.
Step 6. Compute the withholding tax due by adding the tax predetermined in the
compensation level indicated at the top of the column, to the tax on the excess of the
total regular and supplementary compensation over the compensation level, which is
computed by multiplying the excess by the rate also indicated at the top of the same
column.
(4) Sample Computations on the use of the Withholding Tax Table:
EXAMPLE I: Mr. A, single, with no qualified dependent receives P6,000 as regular
monthly compensation.
COMPUTATION: Using the monthly withholding tax table, the monthly withholding tax is
computed by referring to Table A line 2 of column 4 which shows a tax of P208.33 on
P4,167.00 plus 15% of the excess (P6,000.00 - 4,167.00 = P1,833.00)
Total taxable compensation P 6,000.00
Less: compensation level
(line A-2 Column 4) 4,167.00

P 1,833.00

Tax on P4,167.00 P 208.33


Tax on excess (P1,833.00 x 15%) 274.95

Monthly withholding tax P 483.28

EXAMPLE II: Mr. B, head of the family (with a qualified dependent parent) receives
P6,200.00 as monthly regular compensation and P800.00 as supplementary
compensation for January or a total of P7,000.00.
COMPUTATION: Using the monthly withholding tax table, the withholding tax for
January is computed by referring to Table A line 3 HF of column 4 (fix compensation
level taking into account only the regular compensation income of P6,200.000) which
shows a tax of P208.33 on P4,583.00 plus 15% of the excess (P7,000.00 - 4,583.00 =
P2,417.00).
Total taxable compensation P 7,000.00
Less: compensation level
(line A-3 Column 4) 4,583.00

Excess P 2,417.00

Tax on (P4,583.00) P 208.33


Tax on excess (P2,417.00 x 1 5%) 362.55

Withholding tax for January P 570.88

EXAMPLE III: Mrs. C, married with two (2) qualified dependent children receives
P5,500.00 as regular monthly compensation. Mr. C, her husband is also employed and
claims for the additional exemptions.
COMPUTATION: Using the monthly withholding tax table, the withholding tax due is
computed by referring to table A line 4 ME of column 4 which shows a tax of P208.33 on
P5,167.00 plus 15% of the excess (P5,500.00 - P5,167.00 = P333.00).
Total taxable compensation P 5,500.00
Less: compensation level
(Line A- 4 Column 4) 5,167.00

Excess P 333.00

Tax on P5,167,00 P 208.33


Tax on excess (P333.00 x 15%) 49.95

Monthly withholding tax P 258.28

EXAMPLE IV: Mr. D, married with two (2) qualified dependent children receives
P3,550.00 as regular semi-monthly compensation. Mrs. D, his wife is also employed. Mr.
D did not waive his right in favor of the wife to claim for the additional exemptions.
COMPUTATION: Using the semi-monthly withholding tax tables, the withholding tax due
is computed by referring to Table C line 2 ME 2 of column 4 which shows a tax of
P104.17 on P3,250.00 plus 15% of the excess (P3,550.00 - 3,250.00 = P300.00)
Total taxable compensation P3,550.00
Less: compensation level (line C-2 Column 4) 3,250.00

Excess P 300.00

Tax on P3,250.00 P 104.17


Tax on excess (P300.00 x 15%) 45.00

Semi-monthly withholding tax P 149.17

EXAMPLE V: Mr. E, married with two (2) qualified dependent children receives
P3,300.00 as regular semi-monthly compensation. Mrs. E, his wife is not employed.
COMPUTATION: Using the semi-monthly withholding tax tables, the withholding tax due
is computed by referring to Table C line 2 ME2 of Column 4 which shows a tax of
P104.17 on P3,250 plus 15% of the excess (3,300 - 3,250 = P50.00)
Total taxable compensation P3,300.00
Less: compensation level (Line C-2 Column 4) 3,250.00

Excess P 50.00

Tax on P3,250.00 P 104.17


Tax on excess (P50.00 x 15%) 7.50

Semi-monthly withholding P 111.67

EXAMPLE VI: On June, 1998, Mr. F, single receives P30,000.00 as regular monthly
salary and half of his 13th month pay amounting to P15,000.00 plus other benefits such
as productivity pay of P10,000.00 and loyalty pay of P6,000.00. Compute the
withholding tax of Mr. F for the month of June, 1998.
COMPUTATION:
Regular Wage P30,000.00
Gross Benefits:
13th month pay P15,000
Productivity 10,000
Loyalty pay P6,000

Total Gross Benefits P 31,000.00

Add Taxable Gross Benefits (P31,000 - 30,000 = P1,000)* 1,000.00

Total Taxable Compensation Income P31,000.00


Less Compensation level 22 500.00

Excess P 8,500.00

Tax on P22,500 (line A2, col. 7) P 4,166.67


Tax on excess (P8,500.00 x 30%) 2,550.00

Withholding tax for the month of June P 6,716.67

* gross benefit of P31,000 less the maximum total exemptions of the gross
benefit of P30,000
(5) Use of Exceptional Computations

(a) Cumulative average method. If in respect of a particular employee, the regular


compensation is exempt from withholding because the amount thereof is below the
compensation level, but supplementary compensation is paid during the calendar year;
or the supplementary compensation is equal to or more than the regular compensation
to be paid; or the employee was newly hired and had a previous employer/s within the
calendar year, other than the present employer doing this cumulative computation, the
present employer shall determine the tax to be deducted and withheld in accordance
with the cumulative average method provided hereunder:
Step 1. Add the amount of taxable regular and supplementary compensation to be paid
to an employee for the payroll period subject of computation to the sum of the taxable
regular and supplementary compensation since the beginning of the current calendar
year including the compensation paid by the previous employers within the same
calendar year, if any;
Step 2. Divide the aggregate amount of compensation computed in step 1 by the
number of payroll period to which the amount relates;
Step 3. Compute the tax to be deducted and withheld on the cumulative average
compensation determined in Step No. (2) in accordance with the withholding tax table;
Step 4. Multiply the tax computed in Step No. (3) by the number of payroll period to
which it relates;
Step 5. Determine the excess, if any, of the amount of tax computed in Step No. (4) over
the total amount of tax already deducted and withheld from the beginning payroll period
to the last payroll period, including that withheld by the previous employer/s within the
calendar year, if any. The excess, as computed, shall be deducted and withheld from the
compensation to be paid for the last payroll period of the current calendar year.
The cumulative average method, once applicable to a particular employee at any time
during the calendar year, shall be the same method to be consistently used for the
remaining payroll period/s of the same calendar year.
EXAMPLE VII: (Regular monthly compensation is exempt from withholding but
supplementary compensation is paid during the calendar year) Mr. G, married with
three (3) qualified dependent children whose spouse is not employed received the
following compensation:

Month Regular Supplementary Total


Compensation Compensation Compensation
Jan. P4,500.00 P1,750.00 P6,250.00
Feb. 4,500.00 1,750.00 6,250.00
Mar. 4,400.00 1,500.00 5,500.00
COMPUTATION:
1. For Jan. - P6,250.00 + 0 = P 6,250.00
For Feb. - P6,250.00 + 6,250.00 = P12,500.00
For Mar. - P6,250 + 6,250 + 5,500 = P18,000.00
2. For Jan. - P6,250/1 = P 6,250.00
For Feb. - P12,500/2 = P 6,250.00
For Mar. - P18,000/3 = P 6,000.00
3. For January
Tax on P5,500.00 (Line C.3, Col. 3) P 41.67
Tax on excess (P750.00 x 10%) 75.00

Tax on P6,250.00 P 116.67

For February
Tax on P5,500 (line C.3, col. 3) P 41.67
Tax on excess (P750.00 x 10%) 75.00

Tax on P6,250 P 116.67

For March
Tax on P5,500 (line C.3, col. 3) P 41.67
Tax on excess (P500.00 x 15%) 50.00

Tax on P6,000.00 P 91.67

4. For Jan. - P116.67 x 1 = P 116.67


For Feb. - P116.67 x 2 = P 233.34
For Mar. - P91.67 x 3 = P 275.01
5. For Jan. - P116.67 - 0 = P 116.67

For Feb. - P233.34 - 116.67 = P 116.67


For Mar. - P275.01 - 233.34 = P 41.67
EXAMPLE VIII: (Supplemental compensation is equal to or more than the regular
compensation) Mr. H, married with one (1) qualified dependent and whose spouse is
also employed received the following compensation. Mr. H waived his right to claim for
the additional exemptions in favor of his wife.
Month Regular Supplementary Total
Compensation Compensation Compensation
Jan. P3,000.00 P3,000.00 P6,000.00
Feb. 3,000.00 3,500.00 6,500.00
Mar. 3,000.00 5,000.00 8,000.00
COMPUTATION:
1. For Jan. - P6,000.00 + 0 = P 6,000.00
For Feb. - P6,000.00 + 6,500.00 = P12,500.00
For Mar. - P8,000.00 + 6,000.00 + 6,500.00 = P20,500.00
2. For Jan. - P6,000/1 = P 6,000.00
For Feb. - P12,500/2 = P 6,250.00
For Mar. - P20,500/3 = P 6,833.33
3. For January
Tax on P5,167.00 (line A4, col. 4) P 208.33
Tax on excess (P833.00 x 15%) P 124.95

Tax on P6,000.00 P 333.28

For February
Tax on P5,167.00 (line A4, col. 4) P 208.33
Tax on excess (P1,083.00 x 15%) P 162.45

Tax on P6,250.00 P 370.78

For March
Tax on P5,167.00 (line A 4 col. 4) P 208.33
Tax on excess (P1,666.33 x 15%) P 249.95

Tax on P6,833.33 P 458.28

4. For Jan. - P333.28 x 1 = P 333.28


For Feb. - P370.78 x 2 = P 741.56
For Mar. - P458.28 x 3 = P 1,374.84
5. For Jan. - P333.28 - 0 = P 333.28
For Feb. - P741.56 - 333.28 = P 408.28
For Mar. - P1,374.84 - 741.56 = P 633.28
EXAMPLE IX: (Computation of monthly withholding tax for a new employee with
previous employer during the year) Ms. I, single was hired by X Co. on July,
1998. Her total taxable income per month is P10,000.00. She was previously
employed by W Co. from January to June with a monthly taxable income of
P6,000.00. Per Form No. 2316 (Certificate of Income Tax Withheld on
Compensation) issued by the previous employer, which was presented by Ms. I to
her present employer, the total tax withheld is P2,899.68. In computing for the tax
withheld on the compensation of Ms. I starting the month of July, X Co. shall use
the cumulative average method, as follows: ll
Present Total Total
Compensation Previous Taxable
Month Income Income Income
JULY 10,000.00 36,000.00 46,000.00
AUG 10,000.00 10,000.00
SEPT 10,000.00 10,000.00
OCT 10,000.00 10,000.00
NOV 10,000.00 10,000.00
DEC 10,000.00 10,000.00

60,000.00 36,000.00 96,000.00

COMPUTATION:
Step 1
For July 36,000 +10,000 = 46,000.00
For August 46,000 + 10,000 = 56,000.00
For September 46,000 + 10,000 + 10,000 = 66,000.00
For October 46,000 + 10,000 + 10,000 + 10,000 = 76,000.00

For November 46,000 + 10,000 + 10,000 + 10,000 + 10,000 = 86,000.00


Step 2
For July 46,000/7 = 6,571.43
For August 56,000/8 = 7,000.00
For September 66,000/9 = 7,333.33
For October 76,000/10 = 7,600.00
For November 86,000/11 = 7,818.18
Step 3
For July P6,571.43
Tax on P4,167 = P 208.33
Tax on excess (2,404.43 x 15%) = 360.66

Tax on P6,571.43 = P568.99

For August P7,000.00


Tax on P4,167 = P208.33
Tax on excess (P2,833.00 x 15%) = 424.95

Tax on P7,000 = P633.28

For September P7,333.33


Tax on P4,167 = P208.33
Tax on excess (P3,166.33 x 15%) = 474.95

Tax on P7,333.33 = P683.28

For October P7,600.00


Tax on P7,500 = P708.33
Tax on excess (P100 x 20%) = 20.00

Tax on P7,600 = P728.33

For November P7,818.18


Tax on P7,500 = P708.33
Tax on excess (P318.18 x 20%) = 63.64

Tax on P7,818.18 = P771.97


Step 4
For July P568.99 X 7 = P3,982.93
For August P633.28 X 8 = P5,066.24
For September P683.28 X 9 = P6,149.52
For October P728.33 X 10 = P7,283.30
For November P771.97 X 11 = P8,491.67
Step 5
For July P3,982.93 - 2,899.68 = P1,083.26
For August P5,066.24 - 3,982.93 = P1,083.31
For Sept. P6,149.52 - 5,066.24 = P1,083.28
For October P7,283.30 - 6,149.52 = P1,133.78
For Nov. P8,491.67 - 7,283.30 = P1,208.37
(b) Annualized withholding tax method. (i) When the employer-employee relationship
is terminated before the end of the calendar year; and (ii) when computing for the yearend adjustment, the employer shall determine the amount to be withheld from the
compensation on the last month of employment or in December of the current calendar
year in accordance with the following procedures:
Step 1. Determine the taxable regular and supplementary compensation paid to the
employee for the entire calendar year. Refer to Steps 2 to 5 of Sec. 2.79 (B)(1)(b) of
these Regulations, using as basis the compensation received for the 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 doing the annualized computation to the taxable compensation income
received from previous employer/s during the calendar year:
(i) When the employer-employee relationship is terminated before December The
taxable regular and supplementary compensation income shall be the amount paid
since the beginning of the current calendar year to the termination of employment.
(ii) Year-end adjustment The taxable regular and supplementary compensation
income shall be the amount paid since the beginning of the current calendar year to
December.
(iii) Taxable fringe benefits received by employees holding managerial or supervisory
positions shall be subject to a final fringe benefit tax as prescribed in Section 2.79 (D) of

these Regulations. Hence, the same shall not form part of the taxable supplementary
compensation, of managers and supervisors, subject to the withholding tax tables.
Step 3. Deduct from the aggregate amount of compensation computed in Step No. (2)
the amount of the total personal and additional exemptions of the employee.
Step 4. Deduct the amount of premium payments on Health and/or Hospitalization
Insurance of employees who have presented evidence that they have paid during the
taxable year premium payments (the deductible amount shall not exceed P2,400 or
P200 per month whichever is lower) and that their family's total gross income does not
exceed P250,000 for the calendar year. For purposes of substantiating the claim of
insurance expense, the policy contract shall be presented to the employer together with
the original official receipt of the premium payment, in addition to the documents which
will be prescribed by the BIR in a separate regulation to determine the aggregate of his
family income.
Total family income includes primary income and other income from sources received by
all members of the nuclear family, i.e. father, mother, unmarried children living together
as one household, or a single parent with children. A single person living alone is
considered as a nuclear family.
The spouse claiming the additional exemptions for the qualified dependent children shall
be the same spouse to claim the deductions for premium payments.
Step 5. Compute the amount of tax on the difference arrived at in Step 4, in accordance
with the schedule provided in Sec. 24 (A) of the Code, as follows:
Over But Not Amount Rate Of Excess
Over Over
not over 10,000 5%
10,000 30,000 500+10% 10,000
30,000 70,000 2,500+15% 30,000
70,000 140,000 8,500+20% 70,000
140,000 250,000 22,500+25% 140,000
250,000 500,000 50,000+30% 250,000
500,000 over 125,000+34% 500,000
(33% in 1999)

(32% in 2000 and thereafter)


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. The deficiency tax (when the amount of tax computed in Step 5 is greater
than the amount of cumulative tax already deducted and withheld or when no tax has
been withheld from the beginning of the calendar year) shall be deducted from the last
payment of compensation for the calendar year. If the deficiency tax is more than the
amount of last compensation to be paid to an employee, the employer shall be liable to
pay the amount of tax which cannot be collected from the employee. The obligation of
the employee to the employer arising from the payment by the latter of the amount of tax
which cannot be collected from the compensation of the employee is a matter of
settlement between the employee and employer.
The excess tax (when the amount of cumulative tax already deducted and withheld is
greater than the tax computed in Step 5) shall be credited or refunded to the employee
not later than January 25 of the following year. However, in case of termination of
employment before December, the refund shall be given to the employee at the payment
of the last compensation during the year. In return, the employer is entitled to deduct the
amount refunded from the remittable amount of taxes withheld from compensation
income in the current month in which the refund was made, and in the succeeding
months thereafter until the amount refunded by the employer is fully repaid.
EXAMPLE X: (Use of annualized computation when employer-employee relationship
was terminated before December) Mr. X, head of the family with a qualified
dependent brother receives P8,000 as monthly regular compensation starting January
1, 1998. On June 1, 1998, he filed his resignation effective June 30, 1998. The tax
withheld from January to May was P3,624.65.
COMPUTATION: (To be done before payment of the compensation for June 1998):
Total compensation received from
January 1 to May 31, 1998 P40,000.00
Add: Compensation to be received on June 8,000.00

Gross compensation Jan-June P48,000.00


Less: Personal Exemption 25,000.00

Net Taxable Compensation P23,000.00

Tax Due* P1,800.00


Less: Tax Withheld from Jan to May 3,624.00

To be refunded to Employee Mr. X (P1,824.65)

* Tax on P10,000.00 P 500.00


Tax on excess (P13,000 x 10%) 1,300.00

Tax on P36,000 P 1,800.00

EXAMPLE XI. (Year-end adjustments computation) For taxable year 1998, Asian
Mfg. has the following employees:
1. Mr. K, married with 2 qualified dependent children who received the following
compensation for the year:
Basic Monthly Salary P45,000
Overtime Pay for November P 5,000
Thirteenth Month pay P45,000
Other Benefits P12,000
2. Mr. L, married, whose wife is also employed, with two dependent children. The
second child was born in December. He received for the year, the following:
Basic Monthly Salary P6,500
Thirteenth Month Pay P6,500
Other Benefits P6,000
3. Ms. M, single, who was hired in July received the following:
Basic Monthly Salary P20,000
Thirteenth Month Pay P20,000
Monthly Salary from Previous Employer (January-June) P 6,000
She paid for the year an annual premium on health and hospitalization insurance
amounting to P2,400.00.
4. Mrs. N, married, whose husband is also working received the following:

Basic Monthly Salary P35,000


Thirteenth Month Pay (50%) P17,500
She resigned effective, July 30, 1998
COMPUTATION OF WITHHOLDING TAX FOR DECEMBER:
1. Mr. K
Received
Compensation for the year Non-Taxable Taxable
Basic Salary P540,000 P540,000
Overtime (Nov.) 5,000 5,000
13th month pay 45,000 30,000 15,000
Other benefits 12,000 12,000

Totals P602,000 P30,000 P572,000
Less: Personal and additional exemptions 48,000

Net taxable compensation P 524,000

Tax due* P133,160.00


Less: Tax w/held from previous months (Jan-Nov.) 130,788.79

Tax to be withheld for December P 2,371.21

* Tax Due is computed by using the rates prescribed in Sec. 24 (A), NIRC
(refer to schedule on page 43 of these regulations)
2. Mr. L
Received
Compensation for the year Non-Taxable Taxable
Basic Salary P 78,000 P78,000.00
13th month pay 6,500 P6,500
Other benefits 6,000 6,000

Totals P90,500 P12,500 P 78,000.00
Less: Personal and additional exemptions 48,000.00

Net taxable compensation P 30,000.00

Tax due P 2,500.00


Less: Tax withheld from previous month (Jan-Nov.) 2,291.63

Amount to be withheld for December P 208.37

3. Ms. M. Single Computation of withholding tax for December


Compensation from previous employer (Jan. to June) P 36,000.00
Compensation from present employer (July to Dec) 120,000.00

Total Taxable Compensation (Jan. to Dec.) P156,000.00


Less: Personal and additional exemptions P20,000.00
Premium payments on health &
hospitalization insurance 2,400.00 22,400.00

Net Taxable Compensation P133,600.00

Tax Due P 21,220.00


Less: Taxes withheld
*Previous employer P2,899.68
**Present employer 15,591.98 18,491.66

Amount of taxes withheld for the month of December P 2,728.34

* Refer to Certificate of Income Tax Withheld on Compensation issued by


previous employer.
** Taxes withheld from July to December computed by the present employer
using the cumulative computation.
4. Mrs. N married (computation of tax upon resignation):
Total compensation
Received for the year Non-Taxable Taxable
Basic Salary P245,000 P245,000
13th month pay 17,500 P17,500
Other benefits 6,000 6,000


P268,500 P23,000 P245,000

Less: Personal and additional exemptions 32,000

Net taxable compensation income P213,000

Tax due (Jan. to July 30) P40,750.00


Less Tax withheld (Jan. to June) 45,700.02

Over withheld Tax to be Refunded in the month of July P(4,950.02)

The annualized computation done for each employee shall be reflected by the employer
at the alphabetical list attached to the Form No. 1604.
(3) If the compensation is paid other than daily, weekly, semi-monthly or monthly,
compute the tax to be deducted and withheld as follows:
a) Annually refers to computation on annualized income;
b) Quarterly and semi-annually divide the compensation by three (3) or six (6),
respectively, to determine the average monthly compensation. Use the monthly
withholding tax table to compute the tax, and the tax so computed shall be multiplied by
three (3) or six (6), accordingly;
(c) Bi-weekly divide the compensation by two (2) to determine the average weekly
compensation. Use the weekly withholding tax table to compute the tax, and the tax so
computed shall be multiplied by two (2);
d) Miscellaneous if compensation is paid irregularly, or for a period other than those
mentioned above, divide the compensation by the number of days from last payment to
date of payment (excluding Sundays and holidays). Use the daily tax table, the tax so
computed shall be multiplied by the number of days.
(C) Computation of Withholding Tax on Salaries and Benefits Received by Employees
other than rank and file. The procedures provided herein below shall govern the
computation of withholding tax on the taxable compensation income of employees other
than the rank and file pursuant to Sec. 2.79 (B) of these regulations.

1 Determine the total monetary and non-monetary compensation, segregating gross


benefits which includes thirteenth (13th) month pay, productivity incentives,
Christmas bonus and fringe benefits received by the employee per payroll period.
When computing under the annualized computation, the total monetary and nonmonetary compensation shall be that received for the calendar year. Gross benefits
received by officials and employees of public and private entities shall be exempted
from income tax and from withholding tax; provided that the amount of exemption
shall not exceed thirty thousand pesos (P30,000);
(2) Segregate the taxable from the non-taxable compensation (excluding the fringe
benefits) paid to the employee. The taxable income refers to all remuneration paid to an
employee not otherwise exempted by law from income tax and consequently from
withholding tax. The non-taxable income are those which are specifically exempted from
income tax by the Code or other special laws as listed in Sec. 2.78.1 (B) of these
Regulations (e.g. benefits not exceeding P30,000, non-taxable retirement benefits and
separation pay);
(3) Segregate the taxable fringe benefit and subject the same to withholding pursuant to
Subsection D of these section of the Regulations;
(4) Compute withholding tax on the taxable regular and supplementary compensation in
accordance with the procedures prescribed in Sec. 2.79(B)(1)(b) of these regulations,
for purposes of withholding per payroll period; and Sec. 2.79(B)(2) for purposes of
computing under the cumulative average method or for the year-end adjustment.
(D) Computation of Withholding Tax on Fringe Benefit.
(1) Final withholding tax on Fringe Benefits paid to employees other than rank and file.
There shall be imposed a final tax of 34% beginning January 1, 1998, 33% beginning
January 1, 1999 and 32% beginning January 1, 2000 and thereafter, on the grossed-up
monetary value of fringe benefits pursuant to Sec. 33 of the Code and its implementing
regulations, granted or furnished by the employer to his employees (except rank and file
employees) unless the fringe benefit is required by the nature of or necessary to the
trade, business or profession of the employer, and when the fringe benefit is for the
convenience and advantage of the employer.

The fringe benefit tax shall be paid by the employer in the same manner as provided in
Sec. 2.58 of these Regulations. It shall not form part of the gross income of the
employee. The imposition of the fringe benefits tax should be the subject of a separate
set of rules and regulations which shall be issued for the purpose.
(2) Grossed-up monetary value of Fringe Benefit.
(a) In general the grossed-up monetary value of the fringe benefit shall be determined
by dividing the monetary value of the fringe benefit by sixty six percent (66%) in 1998;
sixty seven percent (67%) in 1999; and sixty eight percent (68%) in 2000 and thereafter.
(b) The grossed-up monetary value of fringe benefits furnished to employees and which
are taxable under subsections B, C, D, and E of Section 25 of the Code shall be
determined by dividing the monetary value of the fringe benefit by the difference
between one hundred percent (100%) and the applicable rates of income tax prescribed
on the aforesaid sub-sections of Section 25, to wit:
Subsection (B) Twenty-five percent on income derived from sources within the
Philippines by a non-resident alien individual not engaged in trade or business in
the Philippines.
Subsection (C) Fifteen percent (15%) on income of an alien individual
employed by regional or area headquarters of a multinational company or
regional operating headquarters of a multinational company, including any of its
Filipino employees employed and occupying the same position as those of its
aforesaid alien employees.
Subsection (D) Fifteen percent (15%) on income of an alien individual
employed by an offshore banking unit of a foreign bank established in the
Philippines, including any of its Filipino employees employed and occupying the
same position as those of its aforesaid alien employees.
Subsection (E) Fifteen percent (15%) on the income of an alien individual
employed by a foreign service subcontractor engaged in petroleum operations in
the Philippines, including any of its Filipino employees employed and occupying
the same position as those of its aforesaid alien employees.
(3) Non-taxable Fringe Benefits. The following fringe benefits are not subject to the
fringe benefits tax.

a Fringe benefits paid to rank and file employees. Fringe benefits furnished or
granted to rank and file employees shall form part of the employees gross
compensation income subject to the withholding tax table on compensation under
Section 2.79 (B) of these Regulations.
(b) Fringe benefits which are authorized and exempted from income tax and
consequently from withholding tax under the Code, as amended, or under any special
law.
(c) Contributions of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans.
(d) De minimis benefits. For purposes of determining whether the fringe benefit shall be
considered payments of de minimis benefits, the employer shall submit a written
representation to the Commissioner for the issuance of a ruling taking into account the
peculiar nature and special need of the said employer's trade, business or profession.
The term "de minimis benefits" which is exempt from the fringe benefit tax shall, in
general, be limited to facilities or privileges (such as entertainment, Christmas party and
other cases similar thereto; medical and dental services; or the so-called courtesy
discount on purchases), furnished or offered by an employer to his employees, provided
such facilities or privileges 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.
(E) Computation of Withholding Tax on Compensation Paid to Alien Employees of
Certain Employers. There shall be imposed a final withholding tax of fifteen percent
(15%) on the salaries, annuities, compensation, remuneration and other emoluments
such as honoraria and allowances paid to its alien employees occupying managerial
and technical positions and Filipino employees occupying similar positions by the
following employers:
(1) Area or regional headquarters of multinational corporations and regional operating
headquarters under Sec. 25 (C);
(2) Offshore banking units under Sec. 25 (D) and FCDU;
(3) Petroleum service contractors and sub-contractors under Sec. 25 (E) of the Code.

(F) Requirement for Deductibility. The provisions of Sec. 2.58.5 of these Regulations
shall apply.
(G) Tax Paid by Recipient. The provisions of Sec. 2.58.6 of these Regulations shall
apply.
(H) Non-deductibility of Tax and Credit for Tax Withheld. The tax deducted and
withheld at source on compensation income shall neither be allowed as a deduction
from the employer's gross income nor from the recipient's gross compensation income.
The entire amount of the compensation from which the tax is withheld shall be included
in gross income to be reported in the return required to be made by the recipient of the
income without deduction for such tax. The creditable tax withheld at source, however,
is allowable as a credit against the tax imposed by the NIRC to the recipient of the
income. Any excess of the tax withheld at source, over the tax ascertained to be due on
the income tax return shall be refunded or automatically credited, at the taxpayer's
option, to the recipient of the income. Such refund or credit shall be without prejudice to
whatever adjustments may be proper after field investigation or upon information relative
to the taxpayer's income tax liability under the main provisions of the Code, as
amended. If the tax has actually been withheld at source, a credit or a refund shall be
made to the recipient of the income even though such withheld tax has not been paid to
the government by the employer. For the purpose of the credit, the recipient of the
income is the person subject to tax, on whose compensation the tax was withheld.
Any excess of the tax which was withheld on compensation over the tax due from the
taxpayer shall be returned not later than July 15 of the following year. Refunds made
after such time shall earn interest at the rate of six percent (6%) per annum, starting
after the lapse of the three month period up to the date when the refund is made.
Refunds shall be made upon warrants drawn by the Commissioner or by his 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 I of Book V of Executive Order No.
292, otherwise known as the Administrative Code of 1987.
(I) Right to claim Withholding Exemptions. An employee receiving compensation shall
be entitled to withholding exemptions as provided in the Code, as amended. In order to
receive the benefit of such exemptions, the employee must file the Application for

Registration (BIR Form No. 1902), upon employment and a Withholding Compensation
and Exemption Certificate (Form No. 2305), in case of updates on changes in his
exemptions. The withholding exemptions to which an employee is entitled depends upon
his status as single, married, head of the family and the number of dependents qualified
for additional exemptions. Each employee shall be allowed to claim the following amount
of exemptions, with respect to compensation paid on or after January 1, 1998.
(1) Personal and additional exemptions.
(a) Basic personal exemptions.
(i) For single individual or married individual judicially decreed as legally separated with
no qualified dependents, the amount of personal exemption allowed is twenty thousand
pesos (P20,000.00);
(ii) For each legally married employee, the amount of personal exemption allowed is
thirty two thousand pesos (P32,000.00). A married individual deriving income within the
Philippines whose spouse is unemployed or is a non-resident citizen deriving income
from foreign sources, shall be entitled to a personal exemption of thirty two thousand
pesos (P32,000.00) only;
(iii) For head of a family, the amount of personal exemption allowed is twenty five
thousand pesos (P25,000.00). Head of the family means an unmarried or legally
separated man or woman with one or both parents or one or more brothers or sisters
whether of the whole or half blood or with one or more legitimate or illegitimate,
recognized natural or legally adopted children living with and dependent upon him for
their chief support, where such brothers or sisters or children are not more that twenty
one (21) years of age, unmarried and not gainfully employed or where such children,
brothers, or sisters, regardless of age are incapable of self-support because of mental
or physical defect. The term also includes an unmarried or legally separated man or
woman who is the benefactor of a qualified senior citizen.
A senior citizen is any resident citizen of the Philippines of at least sixty (60) years old,
including those who have retired from both government offices and private enterprises,
and has an income of not more than Sixty thousand pesos (P60,000) per annum subject
to the review of the National Economic Development Authority (NEDA) every three years
(definition taken from Republic Act No. 7432).

(b) Additional exemptions for taxpayer with dependents. A married individual or a


head of family shall be allowed an additional exemption of eight thousand pesos
(P8,000) for each qualified dependent child, provided that the total number of
dependents for which additional exemptions may be claimed shall not exceed four (4)
dependents. The additional exemptions for qualified dependent children shall be
claimed by only one of the spouses in the case of married individuals.
A dependent means a legitimate, illegitimate or legally adopted child chiefly dependent
upon and living with the taxpayer if such dependent is not more than twenty-one (21)
years of age, unmarried and not gainfully employed or if such dependent, regardless of
age, is incapable of self-support because of mental or physical defect.
The husband shall be the proper claimant of the additional exemption for qualified
dependent children unless he explicitly waives his right in favor of his wife in the
application for registration (BIR Form 1902) or in the withholding exemption certificate
(BIR Form 2305). Provided, however, that where the spouse of the employee is
unemployed or is a non-resident citizen deriving income from foreign sources, the
employed spouse within the Philippines shall be automatically entitled to claim the
additional exemptions for children.
SECTION 2.79.1. Application for Registration for Individuals Earning Compensation
Income (BIR Form No. 1902). The application for registration of employees shall be
accomplished by both employer and employee relating to the following information and
other requirements:
(A) Employee.
(1) Name/Taxpayer's Identification Number (TIN)/Address of employee/other information
required by the form;
(2) Status of employee whether SINGLE/legally separated/widow or widower with no
dependent child, married, or head of the family;
(3) Status of spouse of the employee. If the employee is legally married, the
Name/TIN, if any, of the spouse and whether said spouse is employed, unemployed,
employed abroad, or is engaged in trade or business should be indicated on the
application;

(4) Qualified dependents. Name and date of birth of qualified dependent/s (children,
parent/s, brother/s, sister/s or senior citizens);
(5) Claimant of exemption for children. The husband is the proper claimant of
additional exemptions for qualified children. However, the wife shall claim full additional
exemption for children in the following cases:
(a) Husband is unemployed;
(b) Husband is a non-resident citizen deriving income from foreign sources;
(c) The husband waives his right to claim the exemptions of children (waiver
should be for all children) in a sworn statement to be attached to his application
form for registration (1902) and that of his wife's, in accordance with the
procedures prescribed in this Section;
(6) Required forms and attachments. Upon filing the Application for registration (BIR
Form No. 1902), the taxpayer is required to attach any of the following documents to
establish the status of the taxpayer, if applicable, to the application:
(a) Marriage contract;
(b) Court decision of legal separation;
(c) Birth Certificate of each qualified dependent brother, sister or child;
(d) Certificate of employment of the husband if he is working abroad;
(e) Waiver of exemptions of children by the husband in case wife is claiming the
additional exemptions of the children;
(f) Waiver from exemption on withholding tax of taxpayers whose total
compensation income in a year does not exceed P60,000.00.
(g) Medical Certificate of dependent brother, sister or child, if physically or
mentally incapacitated;
(h) Court decision of legal adoption of children;
(i) Death certificate;
(j) Current certificate of income tax exemption of qualified senior citizen;
(k) Other documentary evidence, where the above documents are not available.
(7) Concurrent multiple employments. An employee who is employed concurrently by
two or more employers within the same period of time during the taxable year shall file
the Application (BIR Form No. 1902) with his main employer (employer paying the
higher/est wage) and shall furnish a copy of the duly received Application with his

secondary employers (2nd, 3rd, etc. employers). The employed husband and wife shall
each file a separate application with their respective employers;
(8) Successive multiple employment. An employee who transferred to another
employer during the taxable year, shall furnish his new Employer with an Exemption
Certificate (Form No. 2305) indicating therein his previous employments during the
taxable year (name of employer/s, address/s, TIN/s and the date/s of his separation)
and attach to the said certificate, a copy of the Certificate of Income Tax Withheld on
Compensation (BIR Form No. 2316) for the calendar year issued by previous
employer/s;
(9) Mixed income. An individual receiving a combination of compensation and
business/professional income shall first deduct the allowable personal and additional
exemptions from compensation income only the excess therefrom can be deducted,
from business or professional income. In the case of husband and wife, the husband
shall be the proper claimant of the exemptions unless he waives it in favor of his wife.
(B) Employer. The employer with whom the employee's Application for Registration
(Form No. 1902) is filed, must indicate the date of receipt thereon and accomplish Part
V of the said Application pertaining to Employer's Information such as TIN, Employer's
Registered Name, and other relevant information.
(C) Procedures for the filing of the Application (Form No. 1902)
1 All employers shall require their employees to accomplish in duplicate the Application
for Registration described above as follows:
(a) All employees who have not filed the Application for Registration (BIR Form
1902), as of December 31, 1997, shall accomplish and file the application with
their employers not later than April 30, 1998;
(b) New employees shall accomplish and file the Application within ten (10) days
from the date of commencement of employment;
(c) In case of changes in the information data in the Application (BIR Form 1902)
previously submitted by the employee, consisting of changes in personal and
additional exemptions, employment/working status of the spouse of the
employee, multiple employment status and amount of compensation income, an
Exemption Certificate (BIR Form 2305) reflecting the changes, together with the
required documents/evidence of changes must be submitted to the employer

within ten (10) days after such change. The employer shall then make the
necessary adjustments on the withholding tax of the employee based on the new
information;
(2) The employer shall transmit both the original and duplicate copies of the Application
or Certificate (after accomplishing the portion for Employer's information of either forms)
to the Revenue District Officer of the City or Municipality where the employer has his
legal residence or place of business within thirty (30) days following its receipt from the
employee. The duplicate copy duly stamped received by the BIR shall be given to the
employee.
(3) The employer shall review the exemptions of the employees and shall, in the
computation of taxes required to be withheld on the compensation of employees, apply
the correct and applicable exemptions as provided in these regulations.
(4) In case the husband waives his right to claim the additional exemptions of children in
favor of his wife, he shall accomplish a waiver form (BIR Form No. ____) in accordance
with the following procedures:
(a) Fill up three (3) copies of the prescribed waiver form (BIR Form No. ____)
(b) Submit to his employer within ten (10) days from employment, together with
the BIR Form 1902 said waiver form for acknowledgment in the space provided
for that purpose.
The employer of the husband shall:
(i) After filling up the acknowledgment portion of the waiver form, retain the
duplicate copy of the form and furnish the employee the original and triplicate
copies for submission to the employer of the wife and for file of the employee,
respectively.
(ii) Stop deductions of exemptions of children from the husband's compensation
income starting the following month.
The employer of the wife shall:
Upon receipt of copy of the waiver form duly acknowledged by the employer of
the husband, start deducting exemptions of children from the wife's income on
the month when the employer of the husband stopped deducting the exemptions
of children from the husband's income.

(c) The employed husband and wife shall apply the waiver in the computation of their
respective taxable income in the income tax return required to be filed by them following
the procedure for filing the waiver under Section 2.79.1 (C)(4) of these regulations, that
is, the husband shall not deduct exemptions of children from his compensation income
because he has waived the same (exemptions of children) in favor of his wife who will
now deduct said exemptions from her income in computing her tax due.
Waiver exercised during the calendar year shall be made only once in a calendar year
and shall take effect for the present calendar year and succeeding year/s until revoked
by the husband. Any waiver/revocation of such waiver shall take effect only starting the
succeeding calendar year. In no case should an employer of the wife deduct exemptions
of children from the wife's income unless the waiver by the husband has been duly
acknowledged by the employer of the husband.
SECTION 2.79.2. Failure to File Application for Registration (Form No. 1902 or
Exemption Certificate). Where an employee, in violation of these regulations either
fails or refuses to file an Application for Registration (1902) together with the required
attachments, the employer shall withhold the taxes prescribed under the Schedule for
Zero Exemption of the Revised Withholding Tax Table effective January 1, 1998. In case
of failure to file the Exemption Certificate (2305) together with the attachments, the
employer shall withhold the taxes based on the reported personal exemptions existing
prior to the change of status and without reflecting any change. Any refund or
underwithholding that shall arise due to the violations shall be covered by the penalties
prescribed in Section 80 of the NIRC, as amended (Liability for Tax).
SECTION 2.79.3. Withholding on the Basis of Average Compensation. The employer
may withhold the tax under the NIRC, as amended, on the basis of the employee's
average estimated compensation, with the necessary adjustments, for any
month/quarter/year.
SECTION 2.79.4. Husband and Wife. Where both husband and wife are each
recipients of compensation either from the same or different employers, taxes to be
withheld shall be determined on the following basis:
(A) The husband shall be deemed the proper claimant of the additional exemption in
respect to any dependent children, unless he explicitly waives his right in favor of his

wife in the application for registration or in the withholding exemption certificate. The
waiver may be done any time during the year.
(B) In general, taxes shall be withheld from the wages of the wife in accordance with the
schedule for a married person without any qualified dependent.
SECTION 2.79.5. Non-Resident Aliens. Compensation for services rendered in the
Philippines paid to non-resident aliens engaged in trade or business shall be subject to
withholding under these Regulations.
SECTION 2.79.6. Year-End Adjustment. On or before the end of the calendar year,
and prior to the payment of the compensation for the last payroll period, the employer
shall determine the sum of the taxable regular and supplementary compensation paid to
each employee for the entire year, including the last compensation to be paid and
compute for the amount of income tax on the annualized gross compensation income;
Provided however, that the taxable fringe benefits received by employees except those
given to the rank and file shall be subject to a final fringe benefits tax.
SECTION 2.80. Liability for Tax.
A Employer.
1 In general, the employer shall be responsible for the withholding and remittance of
the correct amount of tax required to be deducted and withheld from the
compensation income of his employees. If the employer fails to withhold and remit the
correct amount of tax, such tax shall be collected from the employer together with the
penalties or additions to the tax otherwise applicable.
(2) The employer who required to collect, account for and remit any tax imposed by the
NIRC, as amended, who willfully fails to collect such tax, or account for and remit such
tax or willfully assist in any manner to evade any payment thereof, shall in addition to
other penalties, provided for in the Code, as amended, be liable, upon conviction, to a
penalty equal to the amount of the tax not collected nor accounted for or remitted.
(3) Any employer/withholding agent who fails, or refuses to refund excess withholding
tax not later than January 25 of the succeeding year shall, in addition to any penalties
provided in Title X of the Code, as amended, be liable to a penalty equal to the total
amount of refund which was not refunded to the employee resulting from any excess of
the amount withheld over the tax actually due on their return.

(B) Employee. Where an employee fails or refuses to file the withholding exemption
certificate or willfully supplies false or inaccurate information thereunder after due
written notice by the employer, the tax otherwise to be withheld by the employer shall be
collected from him including penalties or additions to the tax from the due date of
remittance until the date of payment. On the other hand, where the employee, after due
written notice from the employer, willfully fails or refuses to file the application for
registration OR the withholding exemption certificate or willfully supplies false and
inaccurate information, the excess taxes withheld by the employer shall not be refunded
to the employee but shall be forfeited in favor of the government.
(C) Additions to Tax.
(1) There shall be imposed, in addition to the tax required to be paid, a penalty
equivalent to twenty five percent (25%) of the amount due, in the following cases:
(a) Failure to file any return and pay the tax due thereon as required under the
provisions of the Code or these regulations on the date prescribed; or
(b) Unless otherwise authorized by the Commissioner, filing a return with an
internal revenue officer other than those with whom the return is required to be
files; or
(c) Failure to pay the deficiency tax within the time prescribed for its payment in
the notice of assessment; or
(d) Failure to pay the full or part of the amount of tax shown on any return
required to be filed under the provisions of the Code or these regulations, or the
full amount of tax due for which no return is required to be filed, or before the
date prescribed for its payment; or
(e) In case of willful neglect to file the return within the period prescribed by the
Code or regulations, or in case a false or fraudulent return is willfully made, the
penalty to be imposed shall be fifty percent (50%) of the deficiency tax, in case
any payment has been made on the basis of such return before the discovery of
the falsity or fraud.
(f) The penalties imposed hereunder shall apply in the case of a deficiency tax
assessment which has become final and executory but which is not paid within
the time prescribed for payment. The interest shall be imposed on the total
amount due, inclusive of the deficiency increments.

(2) Interest There shall be assessed and collected on any unpaid amount of tax, an
interest at the rate of twenty percent (20%) per annum, or such higher rate as may be
prescribed for payment until the amount is fully paid.
(3) Deficiency Interest Any deficiency in the basic tax due, as the term is defined in
the Code, shall be subject to the interest prescribed in paragraph (a) hereof, which
interest shall be assessed and collected from the date prescribed for its payment until
the full payment thereof.
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
thereof responsible for the withholding and remittance of tax shall be personally liable
for the surcharge and interest imposed herein.
(D) Failure to File Certain Information Returns (Sec. 250 of the Code). In the case of
each failure to file an information return, statement or list, or keep any record, or supply
any information required by this Code or by the Commissioner on the date prescribed
therefor, unless it is shown that such failure is due to reasonable cause and not to willful
neglect, there shall, upon notice and demand by the Commissioner, be paid by the
person failing to file, keep or supply the same, one thousand pesos (P1,000) for each
such failure: Provided, however, That the aggregate amount to be imposed for all such
failures during a calendar year shall not exceed twenty-five thousand pesos (P25,000).
(E) Specific Penalties. Notwithstanding the penalties hereunder provided, the
following violations may be extrajudicially settled through compromise pursuant to Sec.
204 of the Code.
1 Failure to file return, supply correct and accurate information, pay tax, withhold and
remit tax and refund excess tax withheld on compensation (Sec. 255 of the Code).
Any person required under the Code, as amended, or by regulations to pay any tax,
make a return, keep any record/s, or supply correct and accurate information, who
willfully fails to pay such tax, make such return, keep any record/s, or supply correct
and accurate information, or withhold or remit taxes withheld, or refund excess taxes
withheld on compensation, at the time or times required by law, shall in addition to the
other penalties provided by law, upon conviction thereof, be fined not less than ten
thousand pesos (P10,000) and imprisonment of not less than one (1) year but not
more than the (10) years.

(2) Declarations under penalties of perjury (Sec. 267 of the Code). Any declaration,
return and other statements required under the Code, as amended, shall, in lieu of an
oath, contain a written statement that they are made under the penalties of perjury. Any
person who willfully files a declaration, return or statement containing information which
is not true and correct as to every material matter shall, upon conviction, be subject to
the penalties prescribed for perjury under the Revised Penal Code.
(3) Violation of withholding tax provision by a government officer (Sec. 272 of the Code).
Every officer or employee of the government of the Republic of the Philippines or any
of its agencies and instrumentalities, its political subdivisions, as well as governmentowned or controlled corporation including the Central Bank who, under the provisions of
the Code, as amended, or regulations promulgated thereunder, is charged with the duty
to deduct and withhold any internal revenue tax and to remit the same in accordance
with the provisions of the Code as amended, and other laws shall be guilty of any
offense herein below specified and upon conviction of each act or omission, be fined in
a sum not less than five thousand pesos (P5,000) but not more than fifty thousand
pesos (P50,000) or imprisoned for a term of not less than six months and one day but
not more than two years, or both:
(a) Those who fail or cause the failure to deduct and withhold any internal
revenue tax under any of the withholding tax laws and implementing regulations;
(b) Those who fail or cause the failure to remit taxes deducted and withheld
within the time prescribed by law, and implementing regulations; and
(c) Those who fail or cause the failure to file a return or statement within the time
prescribed, or render or furnish a false or fraudulent return or statement required
under the withholding tax laws and regulations.
(4) Violation of other provisions of the Code or regulations in general (Sec. 275 of the
Code). A person who violates any provision of the Code, as amended, or any
regulation, for which no specific penalty is provided by law shall, upon conviction for its
act or omission, be fined in a sum of not more than one thousand pesos or imprisoned
for a term of not more than six months, or both.
The specific schedule of penalties shall be provided in a separate regulation.
SECTION 2.81. Filing of Return and Payment of Income Tax Withheld on Compensation
(Form No. 1601). Every person required to deduct and withhold the tax on

compensation shall make a return and pay such tax on or before the 10th day of the
month following the month in which withholding was made to any authorized agent bank
within the Revenue District Office (RDO) or in places where there are no agent banks, to
the Revenue District Officer of the City or Municipality where the withholding
agent/employers legal residence or place of business or office is located; provided,
however, that taxes withheld from the last compensation (December) for the calendar
year shall be paid not later than January 25 of the succeeding year; Provided, further,
that large taxpayers as determined by the Commissioner shall remit taxes withheld on or
before the 25th day of the following month.
If the person required to withhold and pay the tax is a corporation, the return shall be
made in the name of the corporation and shall be signed and verified by the president,
vice-president, or authorized officers.
With respect to any tax required to be withheld by a fiduciary, the returns shall be made
in the name of the individual, estate, or trust for which such fiduciary acts, and shall be
signed and verified by such fiduciary. In the case of two or more joint fiduciaries the
return shall be signed and verified by one of such fiduciaries.
SECTION 2.82. Return and Payment in Case Where the Government is the Employer.
If the Government of the Philippines, its political subdivision or any agency or
instrumentality, as well as government-owned or controlled corporation is the employer,
the returns of the tax may be made by the officer or employee having control of payment
of compensation or other officer or employee appropriately designated for the purpose.
SECTION 2.83. Statement and Returns.
SECTION 2.83.1. Employees Withholding Statements (BIR Form No. 2316). In
general, every employer or other person who is required to deduct and withhold the tax
on compensation and fringe benefits shall furnish every employee from whose
compensation taxes have been withheld the Certificate of Income Tax Withheld on
Compensation (Form No. 2316, formerly Form No. W-2) on or before January 31 of the
succeeding calendar year, or if his employment is terminated before the close of such
calendar year, on the day on which the last payment of compensation is made.
The employer shall furnish each employee with the original and duplicate copies of
Form No. 2316 showing the name and address of the employer; employer's TIN; name

and address of the employee; employee's TIN; amount of exemptions claimed; amount
of premium payments on medical insurance not exceeding P2,400.00, if any; the sum of
compensation paid including the non-taxable benefits; the amount of tax due; the
amount of tax withheld during the calendar year and such other information as may be
required. The statement must be signed by both the employer or other authorized officer
and the employee, and shall contain a written declaration that it is made under the
penalties of perjury. If the employer is the Government of the Philippines, its political
subdivision, agency or instrumentality or government-owned or controlled corporation,
the statement shall be signed by the duly designated officer or employee.
An extra copy of Form 2316 shall be furnished by the employee, duly certified by him, to
his new employer.
SECTION 2.83.2. Annual Information Return of Income Tax Withheld on Compensation
(Form No. 1604, Formerly Form No. 1743IR). Every employer or other person
required to deduct and withhold the tax shall, on or before January thirty-first of the
succeeding year, file with either the Collection Agent or Authorized Municipal Treasurer
or Revenue District Officer or Commissioner the Annual Information Return of Income
Tax Withheld on Compensation (BIR Form No. 1604), to be submitted with an
alphabetical list of employees, both in duplicate copies.
(A) The Annual Information Return of Income Tax Withheld on Compensation must
show among others, the following:
(1) Withholding Agent's registered name, address and Taxpayer's Identification
Number (TIN);
(B) The alphabetical list of employees must show the following:
(1) Name and TIN of employees;
(2) Gross compensation paid by present and previous employers for the calendar
year;
(3) (a) Taxable 13th month pay/Other benefits for the rank and file employees
(b) Taxable fringe benefits for managerial employees
(4) Non-taxable 13th month pay/Other benefits (Present employer)
(5) Amount of exemptions;
(6) Amount of premium payments on medical insurance not exceeding
P2,400.00, if any;

(7) Tax required to be withheld computed in accordance with Sec. 24(A) of the
Code;
(8) Tax withheld by all present employers for calendar year; and
(9) Adjustment, if any.
(C) The alphabetical list of employees shall be prepared indicating among others,
separate listings of the following:
(1) Employees as of December 31 of the taxable year without previous
employment during the year;
(2) Employees as of December 31 of the taxable year with previous employment
within the year;
(3) Employees who were terminated prior to the year-end adjustment
computation showing the month of termination/month of last payment of
compensation during the year of termination; and
(4) Alien employees subject to final withholding tax.
In cases where no information was provided by a previous employer, such fact
should be annotated in Form 1604 and the present employer shall not be liable to
any penalties.
SECTION 2.83.3. Requirement for Income Payees List. In lieu of the manually
prepared alphabetical list of employees and list of payees and income payments subject
to creditable and final withholding taxes which are required to be attached as integral
part of the Annual Return (Form No. 1604), the Withholding Agent may, at its option,
submit computer-processed tapes or cassettes or diskettes, provided that the said list
has been encoded in accordance with the formats prescribed by Form 1604. dctai
SECTION 2.83.4. Filing of Income Tax Returns by Employees Receiving Purely
Compensation Income. Individual taxpayers receiving purely compensation income
from Philippine sources which does not exceed an aggregate amount of P60,000 for the
calendar year and the income tax on which has been withheld correctly by the employer
(tax withheld equals tax due) shall no longer file an income tax return (1700) required
under Sec. 51 of the Code. The following individuals, however, are still required to file
their income tax returns:
(A) Individuals deriving compensation concurrently from two or more employers at
anytime during the taxable year.

(B) Individuals whose purely compensation income for the taxable year exceeds
P60,000.
(C) Individuals receiving a combination of compensation and business income (mixed
income). This includes a married individual receiving purely compensation income
whose spouse derives income from business.
In case of married individuals who are still required to file returns, only one return for the
taxable year shall be filed by either spouse to cover the income of both spouses.
(D) Employees whose total 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, that is, that the total withholding tax does not equal the
total tax due on total compensation income for the taxable year.
(E) In case of married individuals where one of the spouses received compensation
income exceeding P60,000, a return shall be filed to include the income of the other
spouse whose compensation is P60,000 or less.
SECTION 2.83.5. Registration as Withholding Agent. Every person who makes
payment or expects to make payment of compensation in the amount of sixty thousand
pesos (P60,000.00) or more a year or five thousand pesos (P5,000.00) monthly, to any
single employee shall register by filing in duplicate, with the Revenue District Office
(RDO) of the City or Municipality where his legal residence or place of business is
located, an Application for Registration as a withholding agent using the form prescribed
by the Bureau not later than ten (10) days after becoming an employer.
SECTION 2.83.6. Applicability of Constructive Receipt of Compensation. The
withholding tax on compensation shall apply to compensation actually or constructively
paid. Compensation is constructively paid within the meaning of these Regulations
when it is credited to the account of or set apart for an employee so that it may be drawn
upon by him at any time although not then actually reduced to possession. To constitute
payment in such a case, the compensation must be credited or set apart for the
employee without any substantial limitation or restriction as to time or manner of
payment or condition upon which payment is to be made, and must be made available
to him so that it may be drawn upon at any time, and its payment brought with his
control and disposition. A book entry, if made, should indicate an absolute transfer from

one account to another. If the income is not credited, but it is set apart, such income
must be unqualifiedly subject to the demand of the taxpayer. Where a corporation
contingently credits its employees with a bonus stock, which is not available to such
employees until some future date, the mere crediting on the books of the corporation
does not constitute payment.
SECTION 2.83.7. Extension of Time for Furnishing Statements to Employee. An
extension of time, not exceeding thirty (30) days, within which to furnish the Certificate
of Income Tax Withheld on Compensation (Form No. 2316) required by Sec. 2.83 of
these Regulations upon termination of employment is hereby granted to any employer
with respect to any employee whose employment is terminated during the calendar year.
In the case of intermittent or interrupted employment where there is a reasonable
expectation on the part of both employer and employee or further employment, there is
no requirement that an employee's withholding statement be immediately furnished the
employee; but when such expectation cease to exist, the statement must be furnished
within thirty (30) days from the date of termination of employment. The extension
mentioned under this Section refers to extension of time for furnishing the Certificate of
Income Tax Withheld on Compensation (Form No. 2316) upon termination of
employment.
SECTION 4.114. Withholding of Creditable Value-Added Tax
In general, value-added tax due on sales of goods and services are not subject to
withholding since the tax is not determinable at the time of sale. However, sale of goods
and services to the government subject to VAT shall be subject to withholding pursuant
to Sec. 114 (C) of RA 8424.
(A) Rates and basis of creditable value-added tax to be withheld. The gross
payments made by the government to sellers of goods and services shall be subject to
withholding tax at the rates herein prescribed:
(1) In general, payments by the government or any of its political subdivisions,
instrumentalities or agencies including government-owned or controlled corporations
(GOCCs) on account of its purchase of goods from sellers and services rendered by
contractors who are subject to the value-added tax
On gross payment for the purchase of goods - 3%
On gross payment for services rendered - 6%

(2) Payments made to government public works contractors 8.5%


(3) Payments for lease or use of property or property rights to non-resident owners
10%
(B) Persons required to deduct and withhold. All local government units, represented
by the Provincial Treasurer in provinces, the City Treasurer in cities, the Municipal
Treasurer in municipalities, and Barangay Treasurer in barangays, Treasurers of GOCCs
and the Chief Accountant or any person holding similar position and performing similar
function in national government offices, as withholding agents, shall deduct and withhold
the prescribed creditable value-added tax before making any payment to seller of goods
and services.
Where the government as herein defined has regional offices, branches or units, the
withholding and remittance of the creditable VAT may be done on a decentralized basis
as such, the treasurer or the chief accountant or any person holding similar function in
said regional office, branch or unit shall deduct and withhold the creditable VAT before
making any payment to the seller of goods and services.
(C) Returns and payment of taxes withheld. The withholding agents shall accomplish
the Monthly Value-Added Tax Declaration (BIR Form 2550M) in duplicate and the
amount withheld paid upon filing the return with the authorized agent banks located
within the Revenue District Office (RDO) having jurisdiction over the place where the
government office is located. In places where there are no authorized agent bank, the
return shall be filed directly with the Revenue District Offices, Collection Offices or the
duly authorized Treasurer of the city or municipality where the government office is
located except in cases where the Commissioner otherwise permits.
The required return shall be filed and payments made within ten (10) days following the
end of the month the withholding was made except taxes withheld for the 3rd month of
the quarter which shall be remitted through a Quarterly Value-Added Tax Return (BIR
Form 2550Q) to be filed not later than the 25th day after the end of the calendar quarter.
(D) Certificate of Value Added Tax Withheld. Every withholding agent shall furnish
each seller of goods and services from whom taxes has been deducted and withheld,
the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) to be

accomplished in quadruplicate, the first three copies of which shall be given to the
seller/payee not later than the fifteenth day of the following month. The fourth copy shall
be the file copy of the withholding agent.
(E) Liability of designated officers.
1 Additions to the tax. The designated Treasurers, Chief Accountants and other
persons holding similar positions, who have the duty to withhold and remit the value
added tax in their respective offices shall be personally liable for the additions to the
tax prescribed in Sec. 247 of the Code.
(2) Punishable acts or omissions. Every officer or employee of the government of the
Republic to the Philippines or any of its agencies and instrumentalities, its political
subdivisions, as well as government owned or controlled corporations charged with the
duty to deduct and withhold any internal revenue tax and to remit the same in
accordance with these regulations shall, upon conviction for each act or omission
herein-below specified, be fined in a sum of not less than five thousand pesos
(P5,000.00) but not more than fifty thousand pesos (P50,000.00) or imprisoned for a
term of not less than six months and one day but not more than two years, or both.
(a) Fails or causes the failure to deduct and withhold any internal revenue tax
covered by these regulations;
(b) Fails or causes the failure to remit the taxes deducted and withheld within the
time prescribed therein;
(c) Fails or causes the failure to file the return or issue certificate required.
SECTION 5.116. Withholding of Percentage Tax
Bureaus, offices and instrumentalities of the government, including government-owned
or controlled corporations as well as their subsidiaries, provinces, cities and
municipalities making any money payment to private individuals, corporations,
partnerships and/or associations are required to deduct and withhold the taxes due from
the payees on account of such money payments.
(A) Internal revenue taxes required to be withheld. Percentage taxes on gross money
payments, to the following shall be subjected to withholding at the rates herein
prescribed:

(1) Persons exempt from value-added tax (VAT). On gross payments to persons who
are exempt under Sec. 109 (z) of the Code from payment of value-added tax and who is
not a VAT registered person except payment to cooperatives Three percent (3%) pr
(2) Domestic carriers and keepers of garages. On gross payments to operators of
cars for rent or hire driven by the lessee, transportation contractors, including those who
transports passengers for hire, and other domestic carriers by land, air or water, for
transport of passengers, except owner of bancas and owners of animal-drawn two
wheeled vehicle, and keepers of garages Three percent (3%)
(3) International carriers
(a) On gross payments to international air carriers doing business in the
Philippines Three percent (3%)
(b) On gross payments to international shipping carriers doing business in the
Philippines Three percent (3%)
(4) Franchises
(a) On gross payments to all franchises on radio and/or television broadcasting
companies whose annual gross receipts of the preceding year does not exceed
P10,000.00 Three percent (3%)
(b) On gross payments to franchises on electric, gas and water utilities Two
percent (2%)
(5) Banks and non-bank financial intermediaries
(a) On interest, commissions and discounts paid or given to banks and non-bank
financial intermediaries arising out of lending activities as well as financial leasing, on
the basis of the remaining maturities of the instrument
Short-term maturity (not exceeding 2 years) 5%
Medium-term maturity (over 2 year but not exceeding 4 years) 3%
Long-term maturity
(i) over 4 years but not exceeding 7 years 1%
(ii) over 7 years 0%

(b) On dividends 0%
(c) On royalties, rentals of property, real or personal, profits from exchange and all other
gross income Five percent (5%)
(6) Finance companies
a On interest, discounts and other items of gross income paid to finance companies
and other financial intermediaries not performing quasi-banking functions Five
percent (5%)
(b) On interests, commissions and discounts paid from their loan transactions from
finance companies as well as financial leasing based on the remaining maturities of the
instruments:
Short-term maturity (not exceeding 2 years) 5%
Medium-term maturity (over 2 years but not exceeding 4 years) 3%
Long-term maturity
(i) over 4 years but not exceeding 7 years 1%
(ii) over 7 years 0%
(7) Life insurance premiums On the total premiums paid to persons doing life
insurance business of any sort in the Philippines Five percent (5%)
However the following shall not be included in the taxable receipts and consequently not
subject to withholding tax:
(a) Premiums refunded within six (6) months after payment on account of
rejection of risk or returned for other reasons to the insured;
(b) reinsurance premiums where the tax has previously been paid;
(c) premiums collected or received by any branch of a domestic corporation, firm
or association doing business outside the Philippines on account of any life
insurance of a non-resident insured, if any tax on such premium is imposed by a
foreign country where the branch is established;
(d) premiums collected or received on account of any reinsurance, if the insured,
in case of personal insurance resides outside the Philippines, if any tax on such

premiums is imposed by a foreign country where the original insurance has been
issued or perfected;
(e) portion of the premiums collected or received by the insurance companies on
variable contracts in excess of the amounts necessary to insure the lives of the
variable contract workers.
(8) Agents of foreign insurance companies
(a) On premiums paid to every fire, marine, or miscellaneous insurance agent
legally authorized under the Insurance Code to procure policies of insurance on
risk located in the Philippines for companies not authorized to transact business
in the Philippines except on reinsurance premium Ten percent (10%)
(b) On premium payments obtained directly with foreign companies where the
owner of the property does not make use of the services of any agent, company
or corporation residing or doing business in the Philippines, in which case, it shall
be the duty of said owners to report to the Insurance Commissioner and to the
BIR Commissioner each case where insurance has been so effected Five
percent (5%)
(9) Amusements On gross payments to the proprietor, lessee, or operator of cockpits,
cabarets, night or day clubs, boxing exhibitions, professional basketball games, jai-alai
and racetracks at the rates herein prescribed:
(a) cockpits Eighteen percent (18%)
(b) Cabarets, night and day clubs Eighteen percent (18%)
(c) Boxing exhibitions except those wherein World or Oriental Championship in
any division is at stake and at least one of the contenders is a citizen of the
Philippines and promoted by a citizen/s of the Philippines or by a corporation or
association at least 60% of the capital of which is owned by such citizens Ten
percent (10%)
(d) Professional basketball games as envisioned in Presidential Decree No. 871
Fifteen percent (15%)
(e) Jai-alai and racetracks irrespective of whether or not any amount is charged
for admission Thirty percent (30%)
(10) Sale, barter or exchange of shares of stock listed and traded through the
local stock exchange. On the gross selling price or gross value in money
derived on every sale, barter or other disposition of shares of stock listed and

traded through the local stock exchange other than the sale by a dealer in
securities One-half of one percent (1/2 of 1%)
(11) Shares of stock sold or exchanged through initial public offering. On the gross
selling price or gross value in money derived on every sale, barter, exchange or other
disposition through initial public offering of shares of stock in closely held corporations in
accordance with the proportion of such shares to the total outstanding shares of stock
after the listing in the local stock exchange at the rates herein prescribed:
Not over 25% 4%
Over 25% but not exceeding 33 1/3% 2%
Over 33 1/3% 1%
(B) Returns and payments of taxes withheld. No money payments shall be made by
any government office or agency unless the taxes due thereon shall have been
deducted and withheld.
Taxes deducted and withheld shall be covered by the Monthly Return of Internal
Revenue Taxes withheld on Government Money Payments (BIR Form 1600) in duplicate
to be filed and the tax to be paid to the Authorized Agent Bank located within the
Revenue District Office (RDO) having jurisdiction over the place where the government
office is located. In places where there are no authorized agent bank, the return shall be
filed directly with the Revenue District Officer, Collection Officer or the duly authorized
Treasurer of the City or Municipality where the government office is located except in
cases where the Commissioner otherwise permits. The required return shall be filed and
payments made within ten (10) days following the end of the month the withholding was
made.
(C) Certificate of internal revenue taxes withheld. Every withholding government
office, agency or entity shall furnish each proprietor, operator, common carrier, franchise
holder, bank and non-bank financial intermediaries, finance company, insurance
company or agent from whom taxes under these regulations had been deducted and
withheld the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) to be
accomplished in triplicate, two copies to be given to the payee simultaneously with the
money payments not later than the fifteenth (15th) day of the month following the close
of the calendar quarter. The third copy of the certificate shall be the file copy of the
withholding government office, agency or entity.

(D) Liability of designated officers


(1) Additions to the tax The designated Treasurers, Chief Accountants and other
persons holding similar positions, who have the duty to withhold and remit the value
added tax in their respective offices shall be personally liable for the additions to the tax
prescribed in Sec. 247 of the Code.
(2) Punishable acts or omissions Every officer or employee of the government of the
Republic of the Philippines or any of its agencies and instrumentalities, its political
subdivisions, as well as government owned or controlled corporations charged with the
duty to deduct and withhold any internal revenue tax and to remit the same in
accordance with these regulations shall, upon conviction for each act or omission
herein-below specified, be fined in a sum of not less than five thousand pesos
(5,000.00) but not more than fifty thousand pesos (50,000.00) or imprisoned for a term
of not less than six months and one day but not more than two years, or both.
(a) Fails or causes the failure to deduct and withhold any internal revenue tax
covered by these regulations;
(b) Fails or causes the failure to remit the taxes deducted and withheld within the
time prescribed therein;
(c) Fails or causes the failure to file the return or issue certificate required.
REPEALING CLAUSE. All existing rules and regulations or parts thereof which are
inconsistent with the provisions of these regulations are hereby revoked.
EFFECTIVITY. These regulations shall take effect on compensation income paid
beginning January 1, 1998. No penalties shall apply until May 15, 1998 for noncompliance with the new features of the Code as implemented in these regulations.
BIR REGULATIONS NO. 2-2001
February 12, 2001
REVENUE REGULATIONS NO. 2 - 2001
SUBJECT: Implementing the Provision on Improperly Accumulated Earnings Tax Under
Section 29 of the Tax Code of 1997

TO: All Internal Revenue Officers and Others Concerned


SECTION 1. Scope. - Pursuant to Section 244 of the Tax Code of 1997, in relation to
Section 29 of the same Code, these Regulations are being issued to prescribe the rules
governing the imposition of Improperly Accumulated Earnings Tax.
SEC. 2. Concept of Improperly Accumulated Earnings Tax (IAET). - Pursuant to Section
29 of the Code, there is imposed for each taxable year, in addition to other taxes
imposed under Title II of the Tax Code of 1997, a tax equal to 10% of the improperly
accumulated taxable income of corporations formed or availed of for the purpose of
avoiding the income tax with respect to its shareholders or the shareholders of any other
corporation, by permitting the earnings and profits of the corporation to accumulate
instead of dividing them among or distributing them to the shareholders. The rationale is
that if the earnings and profits were distributed, the shareholders would then be liable to
income tax thereon, whereas if the distribution were not made to them, they would incur
no tax in respect to the undistributed earnings and profits of the corporation. Thus, a tax
is being imposed in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends tax on the earnings distributed to them
by the corporation.
The touchstone of the liability is the purpose behind the accumulation of the income and
not the consequences of the accumulation. Thus, if the failure to pay dividends is due to
some other causes, such as the use of undistributed earnings and profits for the
reasonable needs of the business, such purpose would not generally make the
accumulated or undistributed earnings subject to the tax. However, if there is a
determination that a corporation has accumulated income beyond the reasonable needs
of the business, the 10% improperly accumulated earnings tax shall be imposed.
SEC. 3. Determination of Reasonable Needs of the Business. - An accumulation of
earnings or profits (including undistributed earnings or profits of prior years) is
unreasonable if it is not necessary for the purpose of the business, considering all the
circumstances of the case. To determine the "reasonable needs" of the business in
order to justify an accumulation of earnings, these Regulations hereby adhere to the socalled "Immediacy Test" under American jurisprudence as adopted in this jurisdiction.
Accordingly, the term "reasonable needs of the business" are hereby construed to mean
the immediate needs of the business, including reasonably anticipated needs. In either

case, the corporation should be able to prove an immediate need for the accumulation
of the earnings and profits, or the direct correlation of anticipated needs to such
accumulation of profits. Otherwise, such accumulation would be deemed to be not for
the reasonable needs of the business, and the penalty tax would apply.
For purposes of these Regulations, the following constitute accumulation of earnings for
the reasonable needs of the business:
a

c
d
e
f

Allowance for the increase in the accumulation of earnings up to 100% of the


paid-up capital of the corporation as of Balance Sheet date, inclusive of
accumulations taken from other years;
Earnings reserved for definite corporate expansion projects or programs requiring
considerable capital expenditure as approved by the Board of Directors or
equivalent body;
Earnings reserved for building, plants or equipment acquisition as approved by
the Board of Directors or equivalent body;
Earnings reserved for compliance with any loan covenant or pre-existing
obligation established under a legitimate business agreement;
Earnings required by law or applicable regulations to be retained by the
corporation or in respect of which there is legal prohibition against its distribution;
In the case of subsidiaries of foreign corporations in the Philippines, all
undistributed earnings intended or reserved for investments within the Philippines
as can be proven by corporate records and/or relevant documentary evidence.

SEC. 4. Coverage. The 10% Improperly Accumulated Earnings Tax (IAET) is imposed
on improperly accumulated taxable income earned starting January 1, 1998 by
domestic corporations as defined under the Tax Code and which are classified as
closely-held corporations. Provided, however, that Improperly Accumulated Earnings
Tax shall not apply to the following corporations:
a
b
c
d
e
f

Banks and other non-bank financial intermediaries;


Insurance companies;
Publicly-held corporations;
Taxable partnerships;
General professional partnerships;
Non- taxable joint ventures; and

Enterprises duly registered with the Philippine Economic Zone Authority (PEZA)
under R.A. 7916, and enterprises registered pursuant to the Bases Conversion
and Development Act of 1992 under R.A. 7227, as well as other enterprises duly
registered under special economic zones declared by law which enjoy payment
of special tax rate on their registered operations or activities in lieu of other taxes,
national or local.

For purposes of these Regulations, closely-held corporations are those corporations at


least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent
(50%) of the total combined voting power of all classes of stock entitled to vote is owned
directly or indirectly by or for not more than twenty (20) individuals. Domestic
corporations not falling under the aforesaid definition are, therefore, publicly-held
corporations.
For purposes of determining whether the corporation is closely held corporation, insofar
as such determination is based on stock ownership, the following rules shall be applied:
1

Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a


corporation, partnership, estate or trust shall be considered as being owned
proportionately by its shareholders, partners or beneficiaries.
Family and Partnership Ownership. - An individual shall be considered as owning
the stock owned, directly or indirectly, by or for his family, or by or for his partner.
For purposes of this paragraph, the 'family of an individual' includes his brothers
or sisters (whether by whole or half-blood), spouse, ancestors and lineal
descendants.
Option to Acquire Stocks. - If any person has an option to acquire stock, such
stock shall be considered as owned by such person. For purposes of this
paragraph, an option to acquire such an option and each one of a series of option
shall be considered as an option to acquire such stock.
Constructive Ownership as Actual Ownership. - Stock constructively owned by
reason of the application of paragraph (1) or (3) hereof shall, for purposes of
applying paragraph (1) or (2), be treated as actually owned by such person; but
stock constructively owned by the individual by reason of the application of
paragraph (2) hereof shall not be treated as owned by him for purposes of again
applying such paragraph in order to make another the constructive owner of such
stock.

Provided, however, that a branch of a foreign corporation is not covered by these


Regulations, the same being a resident foreign corporation.
SEC. 5. Tax Base of Improperly Accumulated Earnings Tax. - For corporations found
subject to the tax, the "Improperly Accumulated Taxable Income" for a particular year is
first determined by adding to that year's taxable income the following:
a
b
c
d

income exempt from tax;


income excluded from gross income;
income subject to final tax; and
the amount of net operating loss carry-over (NOLCO) deducted.

The taxable income as thus determined shall be reduced by the sum of:
a
b
c

income tax paid/payable for the taxable year;


dividends actually or constructively paid/issued from the applicable year's taxable
income;
amount reserved for the reasonable needs of the business as defined in these
Regulations emanating from the covered year's taxable income.

The resulting "Improperly Accumulated Taxable Income" is thereby multiplied by 10% to


get the Improperly Accumulated Earnings Tax (IAET).
Once the profit has been subjected to IAET, the same shall no longer be subjected to
IAET in later years even if not declared as dividend. Notwithstanding the imposition of
the IAET, profits which have been subjected to IAET, when finally declared as dividends,
shall nevertheless be subject to tax on dividends imposed under the Tax Code of 1997
except in those instances where the recipient is not subject thereto.
For purposes of determining the source of earnings or profits declared or distributed
from accumulated income for each taxable year, the dividends shall be deemed to have
been paid out of the most recently accumulated profits or surplus and shall constitute a
part of the annual income of the distributee for the year in which received pursuant to
Section 73(C) of the Code. Provided, however, that where the dividends or portion of the
said dividends declared forms part of the accumulated earnings as of December 31,
1997, or emanates from the accumulated income of a particular year and, therefore, is

an exception to the preceeding statement, such fact must be supported by a duly


executed Board Resolution to that effect.
SEC. 6. Period for Payment of Dividend/Payment of IAET. - The dividends must be
declared and paid or issued not later than one year following the close of the taxable
year, otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter.
SEC. 7. Determination of Purpose to Avoid Income Tax. - The fact that a corporation is a
mere holding company or investment company shall be prima facie evidence of a
purpose to avoid the tax upon its shareholders or members. Likewise, the fact that the
earnings or profits of a corporation are permitted to accumulate beyond the reasonable
needs of the business shall be determinative of the purpose to avoid the tax upon its
shareholders or members. In both instances, the corporation may, by clear
preponderance of evidence in its favor, prove the contrary.
For purposes of these Regulations, the term "holding or investment company" shall refer
to a corporation having practically no activities except holding property, and collecting
the income therefrom or investing the same.
The following are prima facie instances of accumulation of profits beyond the
reasonable needs of a business and indicative of purpose to avoid income tax upon
shareholders:
a
b
c

Investment of substantial earnings and profits of the corporation in unrelated


business or in stock or securities of unrelated business;
Investment in bonds and other long-term securities;
Accumulation of earnings in excess of 100% of paid-up capital, not otherwise
intended for the reasonable needs of the business as defined in these
Regulations.

In order to determine whether profits are accumulated for the reasonable needs of the
business as to avoid the imposition of the improperly accumulated earnings tax, the
controlling intention of the taxpayer is that which is manifested at the time of
accumulation, not subsequently declared intentions which are merely the product of
afterthought. A speculative and indefinite purpose will not suffice. The mere recognition
of a future problem or the discussion of possible and alternative solutions is not
sufficient. Definiteness of plan/s coupled with action/s taken towards its consummation
are essential.

SEC. 8. Transitory Provision. - The IAET shall not apply on improperly accumulated
income as of December 31, 1997 in the case of corporations using the calendar year
basis. In the case of corporations adopting the fiscal year accounting period, the IAET
shall not apply on improperly accumulated taxable income as of the end of the month
comprising the twelve-month period of fiscal year 1997-1998.
Taxable income improperly accumulated, as heretofore discussed, prior to the effectivity
of these regulations if declared as dividend and paid/issued within one month from the
effectivity hereof will not be subjected to the 10% Improperly Accumulated Earnings Tax.
SEC. 9. Effectivity. - These Regulations shall take effect fifteen (15) days after
publication in any newspaper of general circulation and shall cover Improperly
Accumulated Taxable Income earned starting January 1, 1998.
REVENUE REGULATIONS NO. 03-98
May 21, 1998 January 1, 1998
SUBJECT: Implementing Section 33 of the National Internal Revenue Code, as
Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits
TO: All Internal Revenue Officers and Others Concerned
Pursuant to Section 244, in relation to Section 33 of the National Internal Revenue Code
of 1997, these Regulations are hereby promulgated to govern the collection at source of
the tax on fringe benefits which have been furnished, granted or paid by the employer
beginning January 1, 1998.
SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS
(A)
Imposition of Fringe Benefits Tax A final withholding tax is hereby imposed on
the grossed-up monetary value of fringe benefit furnished, granted or paid by the
employer to the employee, except rank and file employees as defined in these
Regulations, whether such employer is an individual, professional partnership or a
corporation, regardless of whether the corporation is taxable or not, or the government
and its instrumentalities except when: (1) the fringe benefit is required by the nature of
or necessary to the trade, business or profession of the employer; or (2) when the fringe

benefit is for the convenience or advantage of the employer. The fringe benefit tax shall
be imposed at the following rates:
Effective January 1, 1998
Effective January 1, 1999
Effective January 1, 2000

34%
33%
32%

The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the
employee which shall be withheld and paid by the employer on a calendar quarterly
basis as provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and
Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the Code.
The grossed-up monetary value of the fringe benefit shall be determined by dividing the
monetary value of the fringe benefit by the following percentages and in accordance
with the following schedule:
Effective January 1, 1998
Effective January 1, 1999
Effective January 1, 2000

66%
67%
68%

The grossed-up monetary value of the fringe benefit represents the whole amount of
income realized by the employee which includes the net amount of money or net
monetary value of property which has been received plus the amount of fringe benefit
tax thereon otherwise due from the employee but paid by the employer for and in behalf
of his employee, pursuant to the provisions of this Section.
Coverage These Regulations shall cover only those fringe benefits given or furnished
to managerial or supervisory employees and not to the rank and file.
The term, "RANK AND FILE EMPLOYEES" means all employees who are holding
neither managerial nor supervisory position. The Labor Code of the Philippines, as
amended, defines "managerial employee" as one who is 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.

Moreover, these regulations do not cover those benefits properly forming part of
compensation income subject to withholding tax on compensation in accordance with
Revenue Regulations No. 2-98.
Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by
these Regulations.
Determination of the Amount Subject to the Fringe Benefit Tax In general, the
computation of the fringe benefits tax would entail (a) valuation of the benefit granted
and (b) determination of the proportion or percentage of the benefit which is subject to
the fringe benefit tax. That the Tax Code allows for the cases where only a portion (i.e.
less than 100 per cent) of the fringe benefit is subject to the fringe benefit tax is clearly
stated in Section 33 (a) of R.A. 8424 which stipulates that fringe benefits which are
"required by the nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage of the
employer" are not subject to the fringe benefit tax. Thus, in cases where the fringe
benefits entail joint benefits to the employer and employee, the portion which shall be
subject to the fringe benefits tax and the guidelines for the valuation of fringe benefits
are defined under these rules and regulations.
Unless otherwise provided in these regulations, the valuation of fringe benefits shall be
as follows:
(1) If the fringe benefit is granted in money, or is directly paid for by
the employer, then the value is the amount granted or paid for.
(2) If the fringe benefit is granted or furnished by the employer in
property other than money and ownership is transferred to the
employee, then the value of the fringe benefit shall be equal to the
fair market value of the property as determined in accordance with
Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe
Real Property Values).
(3) If the fringe benefit is granted or furnished by the employer in
property other than money but ownership is not transferred to the
employee, the value of the fringe benefit is equal to the depreciation
value of the property.

Taxation of fringe benefit received by a non-resident alien individual who is not engaged
in trade or business in the Philippines A fringe benefit tax of twenty-five percent
(25%) shall be imposed on the grossed-up monetary value of the fringe benefit. The
said tax base shall be computed by dividing the monetary value of the fringe benefit by
seventy-five per cent (75%).
Taxation of fringe benefit received by (1) an alien individual employed by regional or
area headquarters of a multinational company or by regional operating headquarters of
a multinational company; (2) an alien individual employed by an offshore banking unit of
a foreign bank established in the Philippines; (3) an alien individual employed by a
foreign service contractor or by a foreign service subcontractor engaged in petroleum
operations in the Philippines; and (4) any of their Filipino individual employees who are
employed and occupying the same position as those occupied or held by the alien
employees. A fringe benefit tax of fifteen per cent (15%) shall be imposed on the
grossed-up monetary value of the fringe benefit. The said tax base shall be computed
by dividing the monetary value of the fringe benefit by eighty-five per cent (85%).
Taxation of fringe benefit received by employees in special economic zones Fringe
benefits received by employees in special economic zones, including Clark Special
Economic Zone and Subic Special Economic and Free Trade Zone, are also covered by
these regulations and subject to the normal rate of fringe benefit tax or the special rates
of 25% or 15% as provided above.
(B)
Definition of Fringe Benefit In general, except as otherwise provided under
these regulations, for purposes of this Section, the term "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 employee (except rank and file employee as
defined in these regulations) such as, but not limited to the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;

(6) Membership fees, dues and other expenses borne by the


employer for the employee in social and athletic clubs or other
similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums
or similar amounts in excess of what the law allows.
For this purpose, the guidelines for valuation of specific types of fringe benefits and the
determination of the monetary value of the fringe benefits are give below. The taxable
value shall be the grossed-up monetary value of the fringe benefit.
(1) Housing privilege
(a) If the employer leases a residential property for the use of his employee and the said
property is the usual place of residence of the employee, the value of the benefit shall
be the amount of rental paid thereon by the employer, as evidenced by the lease
contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the
value of the benefit.
(b) If the employer owns a residential property and the same is assigned for the use of
his employee as his usual place of residence, the annual value of the benefit shall be
five per cent (5%) of the market value of the land and improvement, as declared in the
Real Property Tax Declaration Form, or zonal value as determined by the Commissioner
pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real
Property Values), whichever is higher. The monetary value of the fringe benefit shall be
fifty per cent (50%) of the value of the benefit. cda
The monetary value of the housing fringe benefit is equivalent to the following:
MV = [5%(FMV or ZONAL VALUE] X 50%
WHERE:
MV = MONETARY VALUE
FMV = FAIR MARKET VALUE

(c) If the employer purchases a residential property on installment basis and allows his
employee to use the same as his usual place of residence, the annual value of the
benefit shall be five per cent (5%) of the acquisition cost, exclusive of interest. The
monetary value of fringe benefit shall be fifty per cent (50%) of the value of the benefit.
(d) If the employer purchases a residential property and transfers ownership thereof in
the name of the employee, the value of the benefit shall be the employer's acquisition
cost or zonal value as determined by the Commissioner pursuant to Section 6(E) of the
Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is
higher. The monetary value of the fringe benefit shall be the entire value of the benefit.
(e) If the employer purchases a residential property and transfers ownership thereof to
his employee for the latter's residential use, at a price less than the employer's
acquisition cost, the value of the benefit shall be the difference between the fair market
value, as declared in the Real Property Tax Declaration Form, or zonal value as
determined by the Commissioner pursuant to Sec. 6(E) of the Code (Authority of the
Commissioner to Prescribe Real Property Values), whichever is higher, and the cost to
the employee. The monetary value of the fringe benefit shall be the entire value of the
benefit.
(f) Housing privilege of military officials of the Armed Forces of the Philippines (AFP)
consisting of officials of the Philippine Army, Philippine Navy and Philippine Air Force
shall not be treated as taxable fringe benefit in accordance with the existing doctrine that
the State shall provide its soldiers with necessary quarters which are within or
accessible from the military camp so that they can be readily on call to meet the
exigencies of their military service.
(g) A housing unit which is situated inside or adjacent to the premises of a business or
factory shall not be considered as a taxable fringe benefit. A housing unit is considered
adjacent to the premises of the business if it is located within the maximum of fifty (50)
meters from the perimeter of the business premises.
(h) Temporary housing for an employee who stays in a housing unit for three (3) months
or less shall not be considered a taxable fringe benefit.
(2) Expense account

(a) In general, expenses incurred by the employee but which are paid by his employer
shall be treated as taxable fringe benefits, except when the expenditures are duly
receipted for and in the name of the employer and the expenditures do not partake the
nature of a personal expense attributable to the employee.
(b) Expenses paid for by the employee but reimbursed by his employer shall be treated
as taxable benefits except only when the expenditures are duly receipted for and in the
name of the employer and the expenditures do not partake the nature of a personal
expense attributable to the said employee.
(c) Personal expenses of the employee (like purchases of groceries for the personal
consumption of the employee and his family members) paid for or reimbursed by the
employer to the employee shall be treated as taxable fringe benefits of the employee
whether or not the same are duly receipted for in the name of the employer.
(d) Representation and transportation allowances which are fixed in amounts and are
regular received by the employees as part of their monthly compensation income shall
not be treated as taxable fringe benefits but the same shall be considered as taxable
compensation income subject to the tax imposed under Sec. 24 of the Code.
(3) Motor vehicle of any kind
(a) If the employer purchases the motor vehicle in the name of the employee, the value
of the benefit is the acquisition cost thereof. The monetary value of the fringe benefit
shall be the entire value of the benefit, regardless of whether the motor vehicle is used
by the employee partly for his personal purpose and partly for the benefit of his
employer.
(b) If the employer provides the employee with cash for the purchase of a motor vehicle,
the ownership of which is placed in the name of the employee, the value of the benefits
shall be the amount of cash received by the employee. The monetary value of the fringe
benefit shall be the entire value of the benefit regardless of whether the motor vehicle is
used by the employee partly for his personal purpose and partly for the benefit of his
employer, unless the same was subjected to a withholding tax as compensation income
under Revenue Regulations No. 2-98.

(c) If the employer purchases the car on installment basis, the ownership of which is
placed in the name of the employee, the value of the benefit shall be the acquisition cost
exclusive of interest, divided by five (5) years. The monetary value of the fringe benefit
shall be the entire value of the benefit regardless of whether the motor vehicle is used
by the employee partly for his personal purpose and partly for the benefit of his
employer.
(d) If the employer shoulders a portion of the amount of the purchase price of a motor
vehicle the ownership of which is placed in the name of the employee, the value of the
benefit shall be the amount shouldered by the employer. The monetary value of the
fringe benefit shall be the entire value of the benefit regardless of whether the motor
vehicle is used by the employee partly for his personal purpose and partly for the benefit
of his employer.
(e) If the employer owns and maintains a fleet of motor vehicles for the use of the
business and the employees, the value of the benefit shall be the acquisition cost of all
the motor vehicles not normally used for sales, freight, delivery service and other nonpersonal used divided by five (5) years. The monetary value of the fringe benefit shall
be fifty per cent (50%) of the value of the benefit.
The monetary value of the motor vehicle fringe benefit is equivalent to the following:
MV = [(A)/5] X 50%
where:
MV = Monetary value
A = acquisition cost
(f) If the employer leases and maintains a fleet of motor vehicles for the use of the
business and the employees, the value of the benefit shall be the amount of rental
payments for motor vehicles not normally used for sales, freight, delivery, service and
other non-personal use. The monetary value of the fringe benefit shall be fifty per cent
(50%) of the value of the benefit.
(g) The use of aircraft (including helicopters) owned and maintained by the employer
shall be treated as business use and not be subject to the fringe benefits tax.

(h) The use of yacht whether owned and maintained or leased by the employer shall be
treated as taxable fringe benefit. The value of the benefit shall be measured based on
the depreciation of a yacht at an estimated useful life of 20 years.
(4) Household expenses Expenses of the employee which are borne by the employer
for household personnel, such as salaries of household help, personal driver of the
employee, or other similar personal expenses (like payment for homeowners association
dues, garbage dues, etc.) shall be treated as taxable fringe benefits.
(5) Interest on loan at less than market rate
(a) If the employer lends money to his employee free of interest or at a rate lower than
twelve per cent (12%), such interest foregone by the employer or the difference of the
interest assumed by the employee and the rate of twelve per cent (12%) shall be treated
as a taxable fringe benefit.
(b) The benchmark interest rate of twelve per cent (12%) shall remain in effect until
revised by a subsequent regulation.
(c) This regulation shall apply to installment payments or loans with interest rate lower
than twelve per cent (12%) starting January 1, 1998.
(6) Membership fees, dues, and other expenses borne by the employer for his
employee, in social and athletic clubs or other similar organizations. These
expenditures shall be treated as taxable fringe benefits of the employee in full.
(7) Expenses for foreign travel
(a) Reasonable business expenses which are paid for by the employer for the foreign
travel of his employee for the purpose of attending business meetings or conventions
shall not be treated as taxable fringe benefits. In this instance, inland travel expenses
(such as expenses for food, beverages and local transportation) except lodging cost in a
hotel (or similar establishments) amounting to an average of US$300.00 or less per day,
shall not be subject to a fringe benefit tax. The expenses should be supported by
documents proving the actual occurrences of the meetings or conventions.

The cost of economy and business class airplane ticket shall not be subject to a fringe
benefit tax. However, 30 percent of the cost of first class airplane ticket shall be subject
to a fringe benefit tax.
(b) In the absence of documentary evidence showing that the employee's travel abroad
was in connection with business meetings or conventions, the entire cost of the ticket,
including cost of hotel accommodations and other expenses incident thereto shouldered
by the employer, shall be treated as taxable fringe benefits. The business meetings shall
be evidenced by official communications from business associates abroad indicating the
purpose of the meetings. Business conventions shall be evidenced by official
invitations/communications from the host organization or entity abroad. Otherwise, the
entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits
of the employee.
(c) Travelling expenses which are paid by the employer for the travel of the family
members of the employee shall be treated as taxable fringe benefits of the employee.
(8) Holiday and vacation expenses Holiday and vacation expenses of the employee
borne by his employer shall be treated as taxable fringe benefits.
(9) Educational assistance to the employee or his dependents
(a) The cost of the educational assistance to the employee which are borne by the
employer shall, in general, be treated as taxable fringe benefit. However, a scholarship
grant to the employee by the employer shall not be treated as taxable fringe benefit if
the education or study involved is directly connected with the employer's trade, business
or profession, and there is a written contract between them that the employee is under
obligation to remain in the employ of the employer for period of time that they have
mutually agreed upon. In this case, the expenditure shall be treated as incurred for the
convenience and furtherance of the employer's trade or business.
(b) The cost of educational assistance extended by an employer to the dependents of
an employee shall be treated as taxable fringe benefits of the employee unless the
assistance was provided through a competitive scheme under the scholarship program
of the company.

(10) Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows The cost of life or health insurance and other non-life
insurance premiums borne by the employer for his employee shall be treated as taxable
fringe benefit, except the following: (a) contributions of the employer for the benefit of
the employee, pursuant to the provisions of existing law, such as under the Social
Security System (SSS), (R.A. No. 8282, as amended) or under the Government Service
Insurance System (GSIS) (R.A. No. 8291), or similar contributions arising from the
provisions of any other existing law; and (b) the cost of premiums borne by the employer
for the group insurance of his employees.
(C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits
tax shall not be imposed on the following fringe benefits:
(1) Fringe benefits which are authorized and exempted from income tax under the Code
or under any special law;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans;
(3) Benefits given to the rank and file, whether granted under a collective bargaining
agreement or not;
(4) De minimis benefits as defined in these Regulations;
(5) If the grant of fringe benefits to the employee is required by the nature of, or
necessary to the trade, business or profession of the employer; or
(6) If the grant of the fringe benefit is for the convenience of the employer.
The exemption of any fringe benefit from the fringe benefit tax imposed under this
Section shall not be interpreted to mean exemption from any other income tax imposed
under the Code except if the same is likewise expressly exempt from any other income
tax imposed under the Code or under any other existing law. Thus, if the fringe benefit is
exempted from the fringe benefits tax, the same may, however, still form part of the
employee's gross compensation income which is subject to income tax, hence, likewise
subject to a withholding tax on compensation income payment.
The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in
general, be limited to 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 such as the following:

(1) Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year;
(2) Medical cash allowance to dependents of employees not exceeding P750 per
semester or P125 per month;
(3) Rice subsidy of P350 per month granted by an employer to his employees;
(4) Uniforms given to employees by the employer;
(5) Medical benefits given to the employees by the employer;
(6) Laundry allowance of P150 per month;
(7) Employee achievement awards, e.g. for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding one-half () month of the basic
salary of the employee receiving the award under an established written plan which
does not discriminate in favor of highly paid employees;
(8) Christmas and major anniversary celebrations for employees and their guests;
(9) Company picnics and sports tournaments in the Philippines and are participated
exclusively by employees; and
(10) Flowers, fruits, books or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc
(D) Tax Accounting for the Fringe Benefit Furnished to the Employee and the Fringe
Benefit Tax Due Thereon. As a general rule, the amount of taxable fringe benefit and
the fringe benefits tax shall constitute allowable deductions from gross income of the
employer. However, if the basis for computation of the fringe benefits tax is the
depreciation value, the zonal value as determined by the Commissioner pursuant to
Section 6(E) of the Code or the fair market value as determined in the current real
property tax declaration of a certain property, only the actual fringe benefits tax paid
shall constitute a deductible expense for the employer. The value of the fringe benefit
shall not be deductible and shall be presumed to have been tacked on or actually
claimed as depreciation expense by the employer.
Provided, however, that if the aforesaid zonal value or fair market value of the said
property is greater than its cost subject to depreciation, the excess amount shall be
allowed as a deduction from the employer's gross income as fringe benefit expense.
Illustrations on fringe benefit furnished or granted by the employer to an employee (other
than a rank-and-file employee)

(1) During the year 1998, ABC Corporation paid for the monthly rental of a residential
house of its branch manager (Mr. Dela Cruz) amounting to P66,000.00.
In this case, the monthly taxable grossed-up monetary value of the said fringe benefit
furnished or granted to its branch manager (Mr. Dela Cruz) shall be P50,000.00,
computed as follows:

P66,000.00

P50,000.00

P17,000.00
=========

Monthly rental for the residential house


Grossed-up monetary benefit granted
(P66,000.00 divided by 66% factor for
calendar year 1998 times 50% taxable
portion)
Fringe benefit tax due thereon (34%)

ABC Corporation shall take up in its books of accounts the P66,000.00 fringe benefit
furnished to Mr. Dela Cruz, under account title "Fringe Benefit Expense" and the amount
of 17,000.00 under the account title "Fringe Benefit Tax Expense". The aforesaid
amounts shall be fully allowed as deductions from the gross income of ABC Corporation
and shall be taken up in the said employer's books of accounts as follows:
Debit: Fringe Benefit Expense
Debit: Fringe Benefit Tax Expense
Credit: Cash P83,000

P66,000
P17,000

To record fringe benefit expense and fringe benefit tax paid on rental of the residential
property furnished to Mr. Dela Cruz for his residential use. (Note: If the fringe benefit
expense of P66,000.00 has already accrued but not yet paid, use the account title
"fringe benefit payable". If the fringe benefit tax has already accrued but not yet paid,
use the account title "fringe benefit tax payable).
(2) XYZ Corporation owns a condominium unit. During the year 1998, the said
corporation furnished and granted the said property for the residential use of its
Assistant Vice-President. The fair market value of the said property as determined by
the Commissioner pursuant to Section 6(E) of the Code amounts P10,000,000.00 while
its fair market value as shown in its current Real Property Tax Declaration amounts to
P8,000,000.00. In this case, the higher fair market value of P10,000,000.00 as
determined by the Commissioner shall be used in computing the monetary of the fringe
benefit so furnished or granted to said employee and the fringe benefit tax due thereon
shall be computed as follows:
Monthly rental value of the property
(P10,000,000 times 5% thereof times 50%
divided by 12 months)
P20,833.33
Grossed-up monetary value thereof as fringe
benefit (P20,833.33 divided by 66% factor for
calendar year 1998) P31,565.66
Fringe Benefit tax due thereon (34%)
P10,732.32
=========

In general, under this illustration, the XYZ Corporation shall not further claim deduction
for allowing its Assistant Vice-President the use of its residential property since the cost
for the use thereof has already been recovered as deduction from its gross income
under "Depreciation Expense". However, since the fringe benefit tax in the amount of
P10,732.32, assumed and paid by XYZ corporation has not as yet been recovered by
way of deduction from gross income, the same shall be allowed as a deduction from its
gross income. XYZ Corporation shall take up the foregoing in its books of accounts, as
follows:
Debit: Fringe Benefit Tax Expense P10,732.32
Credit: Cash/Fringe Benefit Tax Payable
P10,732.32
To record fringe benefit tax expense for the
residential property furnished to employees.
However, if the cost of the aforesaid condominium unit subject to depreciation allowance
(example: its acquisition cost is only P7,000,000.00) is lesser that its fair market value
as determined by the Commissioner (i.e. P10,000,000.00), the excess amount (i.e.
P3,000,000.00) shall be amortized throughout the remaining estimated useful life of the
residential property used in computing the said employer's depreciation expense and
allowed as a deduction from the said employer's gross income as fringe benefit
expense. Thus, if the remaining estimated useful life thereof during the year 1998 is
fifteen (15) years, its monthly amortization shall be computed as follows:
Monthly amortization (P3,000,000.00 divided by
15 years divided by 12 months)
P16,666.67
In this case, XYZ Corporation shall take up the foregoing in its books of accounts as
follows:
Debit: Fringe benefit expense
P16,666.67
Debit: Fringe benefit tax
P10,732.32
Credit: Income constructively realized
P16,666.67
Credit: Cash/Fringe benefit tax payable
P10,732.32
To record fringe benefit and fringe benefit tax expenses and income constructively
realized from the use of company-owned residential property furnished to employees.

REPEALING CLAUSE All existing rules and regulations or parts thereof which are
inconsistent with the provisions of these regulations are hereby revoked. LibLex
EFFECTIVITY These regulations shall take effect on fringe benefits furnished,
granted or paid beginning January 1, 1998.
TRANSITORY PROVISIONS No penalty shall be imposed for late payment of the
fringe benefit tax for the first quarter ending March 1998: Provided, however, that the
withholding tax return for the first quarter shall be filed and the tax is paid not later than
July 25, 1998.