Taxation I - Part Ii Compilation of Cited Bir Issuances, Etc

TAXATION 1 PART 2
BIR ISSUANCES, ETC
Pages 3-14 of the Syllabus
TAXATION I PART II COMPILATION OF CITED BIR ISSUANCES, ETC. NOTE: REVENUE REGULATIONS NO. 2-40 HAS A SEPARATE COPY / FILE.
REVENUE REGULATIONS NO. 2-98 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 piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. cdrep 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 precomputed 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.
UP College of Law Block A2010
1st Sem 2008-09; Prof. Movido
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(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. cdrep 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:
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(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. cdasia (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. cdasia EXAMPLE: A's business is that of operating a sawmill. He employs B, a carpenter, at an hourly wage to repair his
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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 Pag-Ibig contributions, and union dues of individual employees.
REVENUE AUDIT MEMORANDUM ORDER NO. 1-87 SUBJECT : Guidelines in the Verification of Housing, Travel Representation Entertainment and Advertising Expenses, and other deductions from taxable income TO : All Internal Revenue Officers and Others Concerned 1. Background There are claimed business expenses the verification of which has given cause for misunderstanding between the examiner and the taxpayer. To minimize areas of conflict between the Bureau and the taxpaying public, the following guidelines are issued for the observance of all concerned effective with the examination of tax returns for the year 1986 - provided that any affected taxpayer who would want to amend his returns to conform with these said guidelines may file an amended return without penalty on or before September 30, 1987. casia These guidelines shall be used in connection with the interpretation of Sec. 30 of the NIRC and in particular the words "ordinary and necessary expenses", reasonable allowance for salaries and other compensation" and all other expenses that have heretofore been the subject of improper interpretation of the part of the taxpayer and/or the examiner. Unless otherwise provided, substantiation, i.e. (a) receipts or adequate records (b) amount of expense (c) date and place of expense (d) purpose of expense (e) professional or business relationship of expense, must support each claimed business or professional expense otherwise it shall be disallowed. 2. Housing and Meals 2.1 If an employee receives a remuneration for services salaries and/or allowances and in addition thereto living quarters and/or meals, the value to such person of the quarters and meals so furnished shall be added to the remuneration otherwise paid for the purpose of determining the amount of compensation subject to withholding tax.
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2.2 The value of lodging furnished to an employee by or on behalf of the employer shall be excluded from the employee's gross income, if the lodging is furnished in the business premises of the employer; and the employee is required to accept such lodging as a condition of his employment. 2.3 The value of meals furnished to an employee by or on behalf of his employer shall be excluded from the employee's gross income if the meals are furnished on the business premises of the employer and the meals are furnished for the convenience of the employer. Meals furnished without charge to an employee as regarded as furnished for the convenience of the employer where they are furnished to the employee during his work day to have the employee available for work during his meal period. 2.4 Business premises of the employer means the place where the employee performs a significant portion of his duties or where the employer conducts a significant portion of his business. In case of doubt, the criteria to be used shall be (a) time, more than 50% of the employee's work time or (b) value of business, more than 50% of the production of the said employee. 2.5 Notwithstanding the provisions of the preceding paragraphs, if an employee is provided by his employer with company housing or living quarters outside the business premises, and such employee, because of his position in the employer-company, also uses said house or living quarters for the benefit of the latter, like entertaining and putting up houseguests and guest of the employer-company, then fifty percent (50%) of such allowance, rental value, or depreciation if the living quarters are owned by the employer, shall be added to the compensation paid to such employee and be subject to the withholding tax on wages. The employer may deduct the said housing expense as a business expense. 2.6 Privileges such as "courtesy discounts" on purchases of company merchandise of a value not to exceed 1/2 basic month's salary of an employee or an officer shall not be added to the remuneration of the employee. cdt 2.7 Entertainment of and gifts to company officers and employees shall not be a deductible expense except for Christmas and major anniversary celebrations (e.g. 25th year of company's establishment), sports tournament, company picnics not to exceed one a year provided that the value of the gift when it is not a service award for length of service shall not exceed in value of 1/2 month's of the basic salary of the employee receiving the gift. 3. Transportation, Representation and Other Allowances 3.1 Transportation, representation and other allowances, which are received by an employee in addition to the regular compensation fixed for his position or office is compensation subject to withholding tax. 3.2 However, reimbursement for transportation, representation or entertainment expenses shall not constitute taxable compensation if: a) it is for necessary traveling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade or business of the employer, and b) the employee is required to, and does, make an accounting/liquidation for such expense in accordance with the specific requirements of substantiation for each category or expense. Advances in excess of actual expenses, if not returned to the employer constitutes taxable compensation. 3.3 Foreign Travelling Expenses. 3.3.1 The cost of foreign travel away from the Philippines in pursuit of the trade or business of the employer shall not constitute taxable compensation to the employee to the extent that it does not exceed the cost of a business class plane ticket for such travel or its equivalent. The excess over the cost of a business plane ticket or its equivalent, whether paid directly by the employer to the airline company or reimbursed to the employee, shall not be deductible by the employer from its taxable income. 3.3.2 Allowances which are pre-computed by the employer on a daily basis or reimbursement for cost of meals and lodging en route to one's foreign destination in pursuit of employer's trade or business and during the duration of the stay thereat to the extent that they do not exceed one hundred fifty United States dollars (US$150.00) per day for trips to the United States, Australia, Canada, Europe, Middle East and Japan, and one hundred United States dollars (US$100.00) for other places, shall not be considered taxable compensation to the employee. Any excess shall not be deductible to the employer even if substantiated. 3.3.3 Reimbursements for travel taxes, airport fees and other charges, if duly receipted or substantiated, shall not constitute taxable compensation and may be deductible by the employer as a business expense. 3.3.4 The foregoing rules shall apply to similar expenses incurred within a one-day period before arrival at the foreign destination and after departure therefrom. 3.3.5 Subject to the preceding rules, expenses incurred in attending two (2) foreign professional conventions a year shall constitute a deductible expense and shall not constitute taxable compensation. 3.3.6 Subject to the foregoing expenses limits and rules of substantiation the home leave of an expatriate employee shall be considered a deductible expense of the employer and shall not form part of compensation income. If the family expenses of the employee is paid for by the employer the employer may opt not to deduct the same as a business expense or to deduct the same as such as expense in which case the same shall constitute taxable compensation of the employee. 3.3.7 The cost of maintaining and operating company vehicles needed in the pursuit of the company's business such as delivery or tank trucks, sales representation unit, maintenance other motor vehicles and the like shall be a tax deductible expense but only one vehicle can be assigned to the use of any company officer or employee, to qualify as such an expense and shall not constitute taxable income for the employee or officer. cda
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3.4 Representation and Entertainment Expenses 3.4.1 Reimbursements for expenses relating to entertainment shall be excluded from compensation income and shall be deductible by the employer, if (i) used primarily for the furtherance of employer's trade or business (ii) only to the extent allowable, the same is directly related to the active conduct of the employer's trade or business and (iii) subject to the rule of substantiation. 3.4.2 Dues paid to any one social, athletic, or sporting club or organization per officer shall not be considered compensable income and may be deductible as a business expense. This does not include, however, purchase of proprietary shares and playing rights nor does it include expenses in the said club or organization unless said expense complies with the rules on substantiation. These rules do not cover dues on company memberships which constitute deductible expense. 3.4.3 Dues or fees paid to professional or business organizations and civic club such as Lions, Rotary, Kiwanis shall not be taxable to the employee and shall be taxable deductible to the employer to the extent of one club. 3.4.4 Unless fully substantiated as incurred exclusively in the pursuit of trade or business, reimbursements for grocery, market, drugstore, department store and similar expense shall be considered taxable income subject to withholding and shall not be deductible to the employer. 4. Advertising and Promotional Expenses As a general rule, the company or business concerned shall decide the kind and size of advertising and/or promotional expense that has to be expended to promote its product or image subject to the following special requirements if the taxpayer intends to deduct said expense as a tax deductible expense: a) The rules on substantiation must be followed. b) All payments for the purchase of promotional giveaways, contest prizes, or similar material must be properly receipted. c) All payments for services such as radio and TV time, print ads, talent fees, advertising expertize or knowhow must be subject to withholding tax. Otherwise, the same cannot be claimed as a deductible expenses. cd (Sgd.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue
REVENUE REGULATIONS NO. 1-82 SECTION 7. Definition of gross compensation income. Gross compensation income is defined as income arising out of employer-employee relationship. Generally, an employer-employee relationship exists when the person from whom services are 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 that result is accomplished.
REVENUE REGULATIONS NO. 03-98 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. cda 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 34% Effective January 1, 1999 33% Effective January 1, 2000 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 66%
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Effective January 1, 1999 67% Effective January 1, 2000 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. cdtai 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%). cdrep 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
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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. cdasia (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
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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. Cdpr (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 non-personal 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. prcd (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
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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. cda (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 onehalf () 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; dctai (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
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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: Monthly rental for the residential house P66,000.00 Grossed-up monetary benefit granted (P66,000.00 divided by 66% factor for calendar year 1998 times 50% taxable portion) P50,000.00 Fringe benefit tax due thereon (34%) P17,000.00 ========= 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 P66,000 Debit: Fringe Benefit Tax Expense P17,000 Credit: Cash P83,000 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 VicePresident 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:
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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 companyowned 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. LLjur SALVADOR M. ENRIQUEZ, JR. Secretary Recommending Approval: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue
April 5, 2006 BIR RULING [DA-212-06] Section 32(B)(4), RR No. 2-98 BIR Ruling Nos. 057-83, 238-86, DA-205-02, DA-485-03, SB-004-99 & SB-051-99 Department of Labor and Employment Intramuros, Manila Attention : Atty. Rosario O. Caise Chief of Staff for Labor Relations Gentlemen : This refers to your faxed letter dated October 11, 2005 requesting for legal opinion on the taxability of backwages awarded through arbitration. cCaIET As represented, the Office of the Secretary assumes jurisdiction over collective bargaining deadlock issues which include the issue of wage increases and improvement of benefits. It has been a concern of your Office that this matter of taxability of back wages is being raised by companies directed to pay the award. In reply, please be informed as follows: Every employer is liable for payment of compensation for services rendered by his/its employees and required to withhold from compensation paid an amount computed in accordance with Section 2.79 of Revenue Regulations (Rev. Regs.) No. 2-98, as amended. In general, the employer shall deduct and withhold from such compensation a tax determined in accordance with the prescribed withholding tax tables of Rev. Regs. No. 2-98. There are four (4) withholding tables prescribed in the regulations: monthly, semi-monthly, weekly and daily tax tables. If the compensation is paid other than daily, weekly, semi-monthly or monthly, the tax to be withheld shall be computed annually or quarterly and semi-annually. Annualized withholding tax method shall be used when the employeremployee relationship is terminated before the end of the calendar year. Back wages being compensation are therefore subject to withholding tax. The employer is considered a withholding agent required to withhold the proper tax on back wages. Under Section 44 of the Tax Code of 1997, if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year. All items of income shall be included in gross income or gross compensation income, as the case may be, for the taxable year in which received by the taxpayer except those expressly excluded and already subjected to the final income tax, and exemption as well as deductions taken accordingly pursuant to Sections 24, 33 and 34 in relation to Section 45, all of the Tax Code of 1997. Salaries, commissions, tips, director's fees and other forms of compensation are income in the year received, and not in the year earned [par. 717, p. 231, U.S. Master Tax Guide (1969)]. Thus, a taxpayer whose income is from salary or the like is required to file his income tax return on the cash basis. This is true for additional pay or "back pay" which does not arise from a case involving illegal dismissal. In a case of illegal dismissal, the employee should be accorded special treatment i.e., allowed to allocate or spread his back wages, allowances and benefits through the years he was suspended from service, having been denied payment of his wages when they were due because of circumstances not of his own making and, therefore beyond his control. Accordingly, an illegally dismissed employee comes within the scope of the inequity for which this ruling is
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precisely designed to remedy. Considering that such back wages, allowances and benefits constitute remuneration for services that would have been performed by the said employees for their employer prior to the year when actually received, or during the period of their suspension from the service, it is felt that a liberal construction of the statute is called for in this particular case if only to protect said employees who, in fact, had been deprived of the payment of their wages and other forms of remuneration, from the payment of a tax heavier than what have been imposed if their employer had promptly met its obligation. DIEACH In the case of Commissioner of Internal Revenue v. Joseph G.R. Robillard & Margaret H. Robillard (C.A., 308 F. 2d 518, 519), it was held that income received by a taxpayer in 1957 as "back pay" or additional pay for services rendered to his employer for the period from July 1, 1955 through December 1956 which, indubitably, would have been paid prior to 1957 except for the intervention of an event similar in nature to a dispute as to the liability of the employer to pay the remuneration in question, is entitled to a special treatment and was properly allocable to the taxable years 1955 and 1956. Section 2.57. (B) of Revenue Regulations No. 2-98, as amended, implementing Republic Act No. 8424. "An Act Amending The National Internal Revenue Code, As Amended" relative to the Withholding on Compensation, provides, viz: "Sec. 2.57. Withholding of Tax at Source. (A) ... (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 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." Accordingly, the employer shall withhold only the income tax corresponding to the income actually received as salaries by an employee found to be illegally dismissed, from the time he was reinstated. Whether an employee found to be illegally dismissed is reinstated or opts for separation, he is required to report such income (back wages) for the years he was suspended from service, as he files and pays his corresponding income tax thereon by allocating or spreading his back wages, allowances and benefits through the years from the time of his suspension to actual reinstatement or actual separation (if he opts for separation instead of reinstatement), as the case may be, crediting in the process the corresponding income tax withheld from said wage payments. Thus, in computing an illegally dismissed employee's net income tax, the amount deducted and withheld during calendar years he was suspended from service by his employer shall be allowed as a credit against the tax imposed under Section 24(A) of the Tax Code of 1997 pursuant to Section 79(C)(2) of the same Code. Moreover, said employee is allowed to deduct personal and additional exemptions during the said years in accordance with Section 35(A) and (B) of the Tax Code of 1997. On the other hand, the award of attorney's fees and costs to the extent of actual expenses only is not subject to income tax and consequently, to the withholding tax since the same are merely a reimbursement of the illegally dismissed employee's expenses/advances in the course of the hearing of his case. However, any amount in excess of actual expenses of the concerned employee shall be taxable. In respect to the award of moral and exemplary damages, Section 32(B)(4) of the Tax Code of 1997 provides "SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (4) 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 amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness." The Federal Income Tax of the U.S.A. to which our tax laws are patterned contains a similar provision which provides that amounts received as damages (other than punitive damages) on account of personal physical injuries or physical sickness are excludable from income (Sec. 104(a)(2), U.S. Tax Code). However, nowhere in either the U.S. Tax Code or the Philippine Tax Code is there a provision exempting from income tax moral and exemplary damages arising from a case of illegal dismissal. Accordingly, the award of moral and exemplary damages arising from illegal dismissal case is subject to income tax and consequently, to the withholding tax. caTESD Anent an illegally dismissed employee's separation benefits, in case he opts to be separated rather than be reinstated, Section 32(B)(6)(b) of the Tax Code of 1997 provides that any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of 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.
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The abovementioned law requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, namely: (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of the illegally, dismissed employee is due to the exercise of management's prerogative to terminate his employment (although he was found to be illegally dismissed by the NLRC), the same connotes involuntariness for being beyond the control of the concerned employee. hence, any and all amounts received by him as a result thereof, consisting of the separation pay package and other benefits, are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter X, Title II of the Tax Code of 1997 as implemented by Revenue Regulations No. 2-98, as amended. The payment of salaries, however, is subject to income tax and consequently to withholding tax. Please be guided accordingly. Very truly yours, (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service
December 8, 1994 REPUBLIC ACT NO. 7833 AN ACT TO EXCLUDE THE BENEFITS MANDATED PURSUANT TO REPUBLIC ACT NO. 6686 AND PRESIDENTIAL DECREE NO. 851, AS AMENDED, AND OTHER BENEFITS FROM THE COMPUTATION OF GROSS COMPENSATION INCOME FOR PURPOSES OF DETERMINING TAXABLE COMPENSATION INCOME, AMENDING FOR THE PURPOSE SECTION 28(B)(8) OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED SECTION 1. A new sub-paragraph to be known as sub-paragraph (F) is hereby inserted at the end of Section 28(b)(8) of the National Internal Revenue Code, as amended, which shall read as follows: "(F) 13th month pay and other benefits. casia "(i) Benefits received by officials and employees of the national and local governments pursuant to Republic Act No. 6686; "(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; "(iii) Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended; and "(iv) Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding Twelve thousand pesos (P12,000) which shall be integrated in the 13th month pay solely for purposes of this Act." aisa dc "Provided, however, That the exclusion shall only apply to the first Thirty thousand pesos (P30,000)." SECTION 2. The exclusion herein provided shall cover benefits paid or accrued beginning January 1, 1994. For purposes of reimbursing the officials or employees who may have received the benefits covered by this Act before its effectivity, the withholding agents are hereby authorized not to deduct the withholding taxes in the immediately succeeding payroll periods corresponding to the amount previously withheld from the benefits. SECTION 3. The Secretary of Finance shall, upon the recommendation of the Commissioner of Internal Revenue, promulgate the necessary rules and regulations for the effective implementation of the provision of this Act. SECTION 4. All laws, decrees, orders, rules and regulations and other issuances inconsistent with this Act are hereby repealed or amended accordingly. SECTION 5. This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in any two (2) newspapers of general circulation, whichever comes earlier. cda Approved: December 8, 1994 Published in the Philippine Times Journal and Malaya on December 16, 1994. Published in the Official Gazette, Vol. 91 No. 6 page 838 on February 6, 1995.
January 3, 1995 REVENUE REGULATIONS NO. 2-95 SUBJECT : Implementing Republic Act No. 7833, An Act to Exclude the Benefits Mandated Pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as Amended, and other Benefits from the Computation of Gross Compensation Income for the Purposes of Determining Taxable Compensation Income, Amending for the Purpose Section 28 (b) (8) of the National Internal Revenue Code, as Amended. TO : All Internal Revenue Officers and Others Concerned. SECTION 1. Scope. Pursuant to Section 245 and 72 of the National Internal Revenue Code (NIRC), as amended, in relation to Section 3 of Republic Act No. 7833, these Regulations are hereby promulgated to implement the provisions of Section 28 (b) (9) (6) of the NIRC, as amended, excluding from the computation of gross
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compensation income, for purposes of determining taxable compensation income, the 13th month pay and other benefits. SECTION 2. Definition of Terms. For purposes of these Regulations, the following definitions of words and phrases are hereby adopted: a) "Act" refers to Republic Act No. 7933. b) "Exclusions" shall mean the total benefits which are not included in the computation of gross compensation income for purposes of determining taxable compensation income and are, therefore, exempt from the withholding tax on wages. c) "Gross compensation income" means all remunerations for services performed by an employee for his employer, whether paid in cash or in kind, unless specifically excluded under Secs. 27 and 28 of the NIRC, as amended. d) "Immediately succeeding payroll period" refers to the payroll period beginning January, 1995. e) "Other benefits" refer to all benefits other than the 13th month pay, such as, the annual Christmas bonus given by private offices, 14th month pay, mid-year productivity incentive bonus, gifts in cash or in kind and other similar benefits received by an official or employee for one calendar year in an amount not exceeding Twelve Thousand Pesos (P12,000.00) as maximum limit. f) "Taxable compensation income" means gross compensation income less personal and additional exemptions provided for under Sec. 29 (l) of the NIRC, as amended. g) "13th month pay" refers to the mandatory one month basic salary of an official or employee of the National Government, Local Government Units, agencies and instrumentalities, including government-owned and -controlled corporations, and of private offices received after the 12th month pay. h) "Total benefits" refer to the sum of all the benefits received by an official or employee for one calendar year in accordance with the provisions of the "Act." i) "Which shall be integrated in" shall mean "which shall be added to". SECTION 3. Benefits Exempted from Income Tax. For purposes of determining the taxable compensation income, the following benefits shall be excluded from the gross compensation income, viz: a) 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 and -controlled corporations, and of private offices received after the 12th month pay beginning CY 1994; and b) Other benefits, such as, Christmas bonus given by, private offices to their officials and employees, productivity incentives 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 in an amount not exceeding Twelve Thousand Pesos (12,000.00) for one (1) calendar year. The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued beginning January 1, 1994 but shall be limited only to an amount not exceeding Twelve Thousand Pesos (P12,000.00) in the case of the "other benefits" contemplated under paragraph (b) above, provided, however, that when added to the 13th month pay, the total amount of tax exempt benefits shall not exceed Thirty Thousand Pesos (P30,000.00). ILLUSTRATIONS: CASE NO. 1. During CY 1994, Mr. "A", and official of a private corporation, received the following 13th month pay and other benefits from his employer, such as: 13th month pay P30,000.00 Other benefits: Christmas bonus P15,000.00 14th month pay 30,000.00 Mid-year productivity bonus 10,000.00 55,000.00 TOTAL BENEFITS RECEIVED for CY 1994 P85,000.00 ======== In this illustration, Mr. "A" shall only be exempted on his 13th month pay of P30,000. His "other benefits" amounting to P55,000 are subject to the withholding tax on wages. CASE NO. 2. On the other hand, Mr. "B", a government employee, received the following 13th month pay and other benefits, such as: 13th month pay/Christmas bonus Other benefits: Productivity incentives bonus P8,000.00 P12,000.00
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Cash gift1,000.00 13,000.00 TOTAL BENEFITS RECEIVED for CY 1994 P21,000.00 ======== Mr. "B" shall only be exempt on a total of P20,000.00, representing 13th month pay of P8,000.00 plus "other benefits" of P12,000.00 only. SECTION 4. Computation of Refundable/Creditable Taxes Withheld on the Exempt 13th Month Pay and Other Benefits. (a) In general. The employer shall compute the refundable/creditable amount of taxes withheld on the exempt 13th month pay and other benefits of employees through the annualized computation prescribed in Section 71(8)(2)(b) of Revenue Regulations No. 6-82, as amended by RR No. 4-93, implementing R.A. No. 7497, otherwise known as the "Final Withholding Tax on Compensation Income." (b) Refund/Credit to Employees of Excess Taxes Withheld. Any excess in the taxes withheld resulting from the annualized computation shall be credited/refunded to the employees. In return, the employer is entitled to deduct the amount refunded/credited from the remittable amount of taxes withheld from compensation income in the current month in which refund/credit was made, and in the succeeding months thereafter until the amount refunded/credited by the employer is fully repaid. ILLUSTRATIONS: 1. The year-end adjustment computation resulted to a REFUND. (aa) Employee with Only One Employee During the Year. ABC COMPANY Employee "A" (single) Salaries P78,000.00 13th month pay 12,000.00 Other Benefits 10,000.00 Gross Compensation Income P100,000.00 Less: Non-taxable Benefits: 13th month pay P12,000 Other benefits 10,000 22,000.00 P78,000.00 Less: Personal Exemption 9,000.00 Taxable Compensation P69,000.00 Tax Due P7,785.00 Less: Tax Withheld (13,675.00) AMOUNT TO BE REFUNDED by (P5,890.00) ABC CO. to Employee "A" ======== on or before JANUARY 25, 1995 OR TO BE CREDITED against Taxes Withheld due from the Employee for Succeeding Month/s Beginning following Sample Computation No. 1 (cc). (bb) Employee with Successive Employment Within the Year. Employee "B" (single) ABC Co. DEF. Co. (Previous Employer) (Present Employer) Jan.-June, 1994 Nov.-Dec., 1994 Salaries/Allowances P78,000.00 Salaries P20,000.00 13th Month Pay 12,000.00 13th month pay 8,000.00 Other Benefits 10,000.00 Other Benefits 3,000.00 P100,000.00 P31,000.00
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Less: Personal ADD: Income From Exemption 9,000.00 Previous Employer 100,000.00 LESS: Net Taxable Non Taxable Income 91,000.00 Benefits: 13th Month Pay TAX DUE P11,965.00 ABC Co. P12,000 TAX WITHHELD P11,965.00 DEF Co. 8,000 P20,000 *Other Benefits ABC Co. P10,000 DEF Co. 3,000 P13,000 10,000 30,000.00 P101,000.00 LESS: Personal Exemption 9,000.00 Taxable Compensation Income P92,000.00 TAX DUE TAX WITHHELD ABC Co. P11,965.00 DEF Co. 3,279.66 P12,155.00 (15,244.66)
AMOUNT TO BE REFUNDED BY DEF Co. to EMPLOYEE "B" on or before (P3,089.66) JANUARY 25, 1995 OR TO BE CREDITED against Taxes Withheld due from Employee for Succeeding Month/s beginning January 1995. (Please see Sample Computation No. 1 (cc). (cc) Crediting of Refundable Amounts Against Taxes Withheld Due From Employees For The Succeeding Month/s. Amount of refund to be credited against taxes withheld due from Employee "B" [Based on Sample Computation No. 1 (bb) above) beginning January, 1995 P 3,089.66 Computation of Taxes Withheld for the month of January, 1995 Salaries/Allowances Taxable: P10,000.00 Tax Required to be Withheld for the month of January, 1995 (Use Line 2 Col. 8 of the Withholding Tax Table): P1,359.66 Less: Refund for CY 1994 due to Non-Taxability of Bonus and Other Benefits beginning Jan. 1995 (3,035.66) Balance to be credited in succeeding month/s (P1,730.00)
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February. 1995 Tax Required to be Withheld for the Month of February P1,359.66 Amount to be credited for February (1,730.00) Balance of Amount to be Credited for the Month of March (P370.34) March. 1995 Tax Required to be Withheld for the Month of March P1,359.66 Amount to be Credited for March (370.34) Amount to be Remitted for March on or before April 10, 1995 P989.32 ======= 2. The year-end adjustment resulted to a COLLECTIBLE AMOUNT (instead of a refund). During CY 1994, an employee (single) of a private corporation, received the following compensation, month pay and other benefits: Salaries/allowances P5,000/mo. x 12 mos. 13th Month pay 5,000.00 Gift in kind 5,000.00 Cash gift 10,000.00 Christmas Bonus 5,000.00 Total Gross Compensation Income P85,000.00 P60,000.00
Less: 13th Month Pay P5,000 Other Benefits 12,000 17,000.00 Gross Compensation Income After Deducting Exclusions Under RA 7333 68,000.00 Less: Personal Exemption 9,000.00 Taxable Compensation Income P59,000.00 Tax Due P3,925.00 Tax Withhold Jan.-Nov., 1994 P393.80/mo. x 11 mos. (4,331.80) Tax Collectible to be Withheld from P1,593.20 December salary ========= Note: NO REFUND OF WITHHOLDING TAX FOR BONUS AND OTHER BENEFITS WOULD RESULT DUE TO UNDER WITHOLDING IN PREVIOUS MONTHS OF THE YEAR. SECTION 5. Refund/Credit of Taxes Withheld from employees Separated from Employment. a) An employee separate from the service of his previous employer but is presently employed by another employer shall be refunded/credited the taxes withheld on his exempt 13th month pay and other benefits by his present employer. The present employer shall compute the aforesaid excess withholding tax using the annualized computation set forth in Section 7I (B) (2) (b) of RR No., 6-82, as amended by RR No. 4-93. (b) An employee who has been separated from a previous employer but has no present employment shall claim his refund of excess tax withheld on his 13th month pay and other benefits by filing with the BIR a refundable income tax return for CY 1994, provided that the refundable ITR for 1994 reflects the taxes withheld on his 13th month pay and other benefits. SECTION 6. Concurrent Multiple Employments. An employee is employed by two or more employers at the same time during the taxable year shall be refunded/credited the taxes withheld on his 13th month pay and "other benefits" by his main employer, e.g., the employer paying the highest wage/salary. The said main employer shall determine the maximum allowable 13th month pay and "other benefits" received from both main and secondary employer/s in annualizing the taxable compensation income at year-end adjustment. For this purpose, the secondary
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employer/s shall furnish the main employer a certification as to the amount of the 13th month pay and other benefits received by the employee. SECTION 7. The Employee's Withholding Statement (W-2). The employer shall furnish each employee with the original and duplicate copies of BIR Form W-2 showing the name and address of the employer, employer's TIN, name and address of the employee, taxpayer/employee's TIN, amount of exemptions claimed, the sum of compensation paid (excluding the total non-taxable benefits), the amount of tax due and the amount of tax withheld during the calendar year. 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. SECTION 8. Annual Return of Income Tax Withheld on Compensation. Every employer or other person required to deduct and withhold the tax shall, on or before January 31st of the succeeding year, file with either the Collection Agent or authorized Municipal Treasurer or Revenue District Officer or Commissioner of Internal Revenue the Annual Return of Income Tax Withheld on Compensation [BIR 1743-1R (Annex "A")] to be submitted with an alphabetical list of employees both in duplicate copies. The Annual Return of Income Tax Withheld on Compensation must show the following: a) Withholding agent's registered name, address and taxpayer's identification number (TIN); b) Amount and date of remittance for the 12 months of one calendar year; and c) Name of Bank, Bank Code/ROR (if any). The alphabetical list of employees must show the following: a) Name and TIN of employees/taxpayers; b) Gross compensation paid by all present and previous employers for the calendar year segregating the taxable from the non-taxable compensation income; c) Amount of exemptions; d) Tax required to be withheld computed in accordance with Section 21(a) of the Tax code; e) Tax withheld by all present and previous employers for the calendar year; and f) Adjustment, if any. The alphabetical list of employees shall be prepared indicating separate listings of the following: a. Employees as of December 31 of the taxable year; b. Employees terminated prior to the year-end adjustment computation showing the month of termination/month of last payment of compensation during the year of termination; c. Employees (non-resident citizen) whose services are rendered abroad; and d. Alien employees subject to final withholding tax. SECTION 9. Transitory Provision. Employers who have already given the 13th month pay and "other benefits" to their employees and had withheld and remitted the tax due thereon prior to the approval of R.A. No. 7833 on December 8, 1994 shall, in annualizing and computing the annual income and the tax due from their employees, exclude the 13th month pay and "other benefits", which shall be limited only to an amount not exceeding Twelve Thousand Pesos (P12,000.00) in the case of the "other benefits" contemplated under Sec. 3, par, (b) of these Regulations and provided, further, that when the amount of these said "other benefits" is added to the "13th month pay" contemplated under Sec. 3, par. (a) also of these Regulations, the total amount of tax exempt benefits shall not exceed Thirty Thousand Pesos (P30,000.00). SECTION 10. Repealing Clause. All laws, decrees, orders, rules, and regulations and other issuances inconsistent with the "Act" and these Regulations are hereby amended, modified or repealed accordingly. SECTION 11. Effectivity. These Regulations shall take effect fifteen (15) days after its publication in a newspaper of general circulation. ROBERTO F. DE OCAMPO Secretary of Finance Recommending Approval: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue Footnotes * The maximum allowable deduction for "Other Benefits" is P12,000.00. However, since the total 13th month pay and 'other benefits' should not exceed P 30,000, only P10,000.00 'other benefits" can be added to P 20,000, representing Mr. "B's" total 13th month pay from his previous and present employers.
May 21, 1998 REVENUE REGULATIONS NO. 03-98 SUBJECT : Implementing Section 33 of the National Internal Revenue Code, as Amended by Republic
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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. cda 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 34% Effective January 1, 1999 33% Effective January 1, 2000 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 66% Effective January 1, 1999 67% Effective January 1, 2000 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. cdtai 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
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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%). cdrep 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
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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. cdasia (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. Cdpr (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 non-personal 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.
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(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. prcd (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. cda (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
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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 onehalf () 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; dctai (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: Monthly rental for the residential house P66,000.00 Grossed-up monetary benefit granted (P66,000.00 divided by 66% factor for calendar year 1998 times 50% taxable portion) P50,000.00 Fringe benefit tax due thereon (34%) P17,000.00 ========= 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 P66,000 Debit: Fringe Benefit Tax Expense P17,000 Credit: Cash P83,000 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%
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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 VicePresident 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 companyowned 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. LLjur SALVADOR M. ENRIQUEZ, JR. Secretary Recommending Approval: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue
July 27, 2007 BIR RULING [DA-418-07] Sec. 32 (B) (7) (e) & RR 8-00 BIR Ruling No. 23-2002 Chinese General Hospital and Medical Center Manila Attention : Mr. Hector M. Hernandez Chief Internal Auditor Gentlemen : This refers to your letter dated January 23, 2006 requesting confirmation of your interpretation of Section 2.78.1. (A) (3) of Revenue Regulations (RR) No. 2-98 as amended by RR 8-2000, as follows: CSHEca 1) The ceilings of all "de minimis" items are independent and separate from the PhP30,000 ceiling of "other benefits"; 2) The "de minimis" benefits of employees in excess of "de minimis" ceilings could be covered by the available balance or unused portion of the PhP30,000 "other benefits" ceiling and will remain as non-taxable; and 3) The "de minimis" benefits of employees in excess of "de minimis" ceilings that could not be covered by "other benefits" ceiling (due to reasons that the PhP30,000 amount was used up for benefits such as 13th month pay or other bonus) will be subjected to income tax. SDEHIa
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In reply, please be informed that the subject provision reads as follows: "Sec. 2.78.1. Withholding of Income Tax on Compensation Income. (A) ... (1) . . . cHaCAS (3) Facilities and privileges of relatively small value. Ordinarily, facilities and privileges (such as entertainment, medical services, or so-called 'courtesy discounts' on purchases), otherwise known as 'de minimis benefits,' furnished or offered by an employer to his employees, are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities are offered or furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his employees. The following shall be considered as 'de minimis' benefits not subject to withholding tax on compensation income of both managerial and rank and file employees: (a) Monetized unused vacation leave credits or employees not exceeding ten (10) days during the year; xxx xxx xxx The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000 ceiling of 'other benefits' provided under Section 32(B)(7)(e) of the Code. However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30,000 ceiling. Provided, further, that any amount given by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer. DIETcC xxx xxx xxx" In view of the foregoing, this Office rules as follows: 1. The de minimis ceiling prescribed in the Regulations are independent and separate from the PhP30,000 "other benefits" ceiling under Section 32 (B) (7) (e) (iv) of the Tax Code of 1997. 2. The excess over the de minimis limit prescribed under the Regulations shall be considered, along with the "other benefits" under Section 32 (B) (7) (e) (iv) of the Tax Code of 1997, in determining whether or not the PhP30,000 threshold has been exceeded. SDHITE 3. The amount in excess of the PhP30,000 threshold of "other benefits," after applying the de minimis limit to the available balance or unused portion of the PhP30,000, shall become taxable to the employee receiving the benefits. Applying the pertinent laws, regulations and rulings to the example you gave, the employee shall be exempted on his 10 days monetized unused vacation leave in the amount of PhP4,934.20, 13th month pay in the amount of PhP15,000 and performance bonus in the amount of 5,000. The excess over the 10 days monetized unused vacation leave limit prescribed under the Regulations shall be considered, along with the "other benefits" under Section 32 (B) (7) (e) (iv) of the Tax Code of 1997, in determining whether or not the PhP30,000 threshold has been exceeded. Thus, the amount in excess of the PhP30,000 threshold or PhP2,335.50 shall become taxable to the employee receiving the benefits as illustrated below: De minimis benefits: 10 days monetized unused vacation leave PhP4,934.20 13th Month Pay & Other Benefits: 13th Month Pay PhP15,000.00 Performance Bonus 5,000.00 Monetized Unused Vacation Leave 10,000.00 covered by the unused portion of the PhP30,000 ceiling 30,000.00 TOTAL NON-TAXABLE BENEFITS RECEIVED PhP34,934.20 ========== Please be guided accordingly. SCHIcT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service
December 7, 2007 BIR RULING [DA-625-07] Sec. 32 (B) (6) (a) DA-527-2004 Jerson Lao Belen Attorney & Counsellor-at-Law c/o Atty. Epifanio E. Gamo, Jr. Law Office
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A. Flores St., San Pablo City, Laguna Sir: This refers to your letter dated February 10, 2005 requesting on behalf of your client, Mr. Rosalio N. Amante, for exemption from the payment of income tax and consequently from withholding tax on the retirement benefits paid to him under the PAGCOR Employees' Retirement Plan, a reasonable retirement Plan under Sec. 32 (B) (6) (a) of the Tax Code of 1997, as amended. It is represented that on February 27, 2002, the Board of Directors of PAGCOR approved the modified PAGCOR retirement/separation benefit plan which provides that personnel who are at least 55 years old with at least 15 years of service in the company shall be entitled to his basic pay multiplied by the factor as applicable based on his years of service and lump sum retirement benefit; that Mr. Rosalio N. Amante, is a former Assistant Gaming Manager of CF Pavilion Philippine Amusement and Gaming Corporation (PAGCOR); that he retired last January 15, 2004 at the age of 56 after rendering more than fifteen (15) years of service; and that his retirement benefit amounted to P1,004,803.75 was subjected to withholding tax in the amount of P278,258.08 which was remitted to the BIR as certified by Ester H. Reyes, Senior Managing Head, Accounting Department of PAGCOR. DaTICc In reply, please be informed that Section 32 (B) (6) (a) of the Tax Code of 1997 as amended. provides, viz: "(a) Retirement benefits received under R.A. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, that the retiring official or employee has 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 his retirement: . . ., shall not be included in gross income and shall be exempt from taxation." It is undisputed that the above-cited provision provides merely for the minimum requirements of 50 years of age and 10 years of service. However, the Retirement Plan can provide for more than 50 years old and 10 years of service. Inasmuch as PAGCOR Employees' Retirement Plan provides for 55 years old and at least 15 years of service, these two (2) conditions must be complied with by the official or employee of PAGCOR in order to be exempt from income tax and consequently from withholding tax. Considering that Mr. Rosalio N. Amante is 56 years old at the time of his retirement and has rendered at least 15 years of service to the company, the retirement gratuity pay he received pursuant to the aforestated retirement benefit plan is exempt from income tax and consequently, from the withholding tax prescribed in Section 79, Chapter XIII, Title II of the Tax Code of 1997, as amended. (BIR Ruling No. DA-527-2004 dated October 11, 2004). DAETcC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service
August 25, 1998 REVENUE REGULATIONS NO. 10-98 SUBJECT : Implementing the Provisions of the National Internal Revenue Code, As Amended By Republic Act No. 8424, Relative to the Imposition of Income Taxes on Income Derived Under the Foreign Currency Deposit and Offshore Banking Systems TO : All Internal Revenue Officers and Others Concerned SCOPE Pursuant to Section 244, in relation to Sections 24, 25, 27 and 28 of the National Internal Revenue Code of 1997, as amended by R.A. No. 8424, these Regulations are hereby promulgated to govern the imposition of income taxes on income derived under the Foreign Currency Deposit and Offshore Banking Systems. cdphil Sec. 2.22. Definition of Terms. (A) Foreign Currency Deposit System shall refer to the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming part of the Philippine international reserves, in accordance with the provisions of Republic Act No. 6426 entitled "An Act Instituting a Foreign Currency Deposit System in the Philippines, and For Other Purposes." (B) Foreign Currency Deposit Unit (FCDU) shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Bangko Sentral Ng Pilipinas (BSP) to engage in foreign currency-denominated transactions, pursuant to the provisions of R.A. 6426, as amended. ("Local bank" shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of the Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337, as amended). (C) Offshore Banking System shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds principally from external and internal sources and the utilization of such fund pursuant to Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended. (D) Offshore Banking Unit (OBU) shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Bangko Sentral Ng Pilipinas (BSP) to transact offshore banking business in the
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Philippines in accordance with the provisions of Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended. (E) Deposits shall mean funds in foreign currencies which are accepted and held by an Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest. (F) Resident shall mean (1) an individual citizen of the Philippines residing therein; or (2) an individual who is not a citizen of the Philippines but is permanently residing therein; or (3) a corporation or other juridical person organized under the laws of the Philippines; or (4) a branch, subsidiary, affiliate, extension office or other unit of corporations or juridical persons organized under the laws of any foreign country operating in the Philippines. (G) "Non-resident" shall mean an individual, corporation or other juridical person not included in the above definition of "resident". prcd (H) Filipino Overseas Contract Worker (OCW) means an individual citizen of the Philippines referred to under Section 23(C) of the Code. A Filipino Seaman is a citizen of the Philippines who receives compensation for services rendered abroad as a member of the complement of an ocean-going vessel engaged exclusively in international trade as referred to under Section 23(C) of the Code. Sec. 2.24. Income Tax Rate of Interest Income from Foreign Currency Deposit. (A) Individual Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System (1) Interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit shall be subject to a final withholding tax of seven and one-half percent (7.5%). The depository bank shall withhold and remit the tax pursuant to Sections 57 and 58 (withholding tax at source) of the Code. (2) If a bank account is jointly in the name of a non-resident citizen such as an overseas contract worker, or a Filipino seaman, and his spouse or dependent who is a resident in the Philippines, fifty percent (50%) of the interest income from such bank deposit shall be treated as exempt while the other fifty percent (50%) shall be subject to a final withholding tax of seven and one-half percent (7.5%). cdll (B) Compliance and Administrative Procedures for Non-Resident Citizen and Non-Resident Alien. The tax on interest income from foreign currency deposit shall be imposed unless the depositor who is a non-resident citizen or a non-resident alien can present documentary evidence that he is not a resident of the Philippines. Such evidence shall consist of the original or certified copy of any of the following: (1) an immigration visa issued by the foreign government in the country where he is a resident of; or (2) a certificate of residency which is issued by the Philippine Embassy or Consulate in the foreign country of his residence; or (3) a certificate of the contract of employment of an overseas contract worker which is duly registered with the Philippine Overseas Employment Agency (POEA); or a Seaman's Certificate, in the case of a Filipino seaman; or (4) a certification from the Bureau of Immigration of the Philippines that a non-resident alien is not a resident of the Philippines; or (5) a certification from the Department of Foreign Affairs (DFA) of the Philippines that the individual is a regular member of the diplomatic corps of a foreign government and is entitled to income tax exemption under an international agreement to which the Philippines is a signatory. (C) Name of the Foreign Currency Bank Account To be entitled to an exemption from the tax on interest income on foreign currency deposit, the Foreign Currency Bank Account shall be in the name of the non-resident individual or non-resident corporation. Otherwise, the interest income therefrom shall be considered as subject to the tax imposed herein. (D) Illustration. Mr. Juan de la Cruz, a Filipino citizen who is residing in the Philippines has a US dollar account with ABC Bank. His gross interest earnings from his bank deposit for the first quarter of 1998 (i.e. from January 1 to March 31, 1998) amounted to US$1,000.00. This gross interest earning shall be considered as constructively received by Mr. De la Cruz during the first quarter of 1998 and shall be subject to a seven and one-half percent (7.5%) final withholding tax. The 7.5% final withholding tax which is due thereon is US$75.00. Sec. 2.27 and Sec. 2.28 Corporate Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System. (A) Interest income which is actually or constructively received by a domestic corporation or a resident foreign corporation from a foreign currency bank deposit shall be subject to a final withholding tax at the rate of seven and one-half percent (7.5%) based on the gross amount of such interest income. The depository bank shall withhold and remit the tax pursuant to the provisions of Sections 57 and 58 (withholding tax at source) of the Code. (B) Compliance and Administrative Procedures for a Non-resident Corporation. The tax on interest income from foreign currency deposit shall be imposed unless the depositor, which is a non-resident corporation, can present documentary evidence that it is not a resident of the Philippines. Such evidence shall consist of the original or
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certified copy of all the following requirements: (1) Certificate of registration of the corporation abroad; and (2) Certification from the Securities and Exchange Commission (SEC) that the non-resident corporation is not licensed to do business in the Philippines. Cdpr (C) Taxation of Income of an FCDU or OBU from Foreign Currency Transactions. In general, income derived by an FCDU or an OBU from foreign currency transactions with residents of the Philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the foreign currency deposit system, shall be subject to a final withholding tax of ten percent (10%) based on gross income pursuant to Sec. 27(D)(3) and Sec. 28(A)(4) of the Code. Income from foreign currency transactions shall include interest income from lending operations, including bank charges, commissions, service fees, and net foreign exchange transaction gains. Income from foreign currency transactions with non-residents of the Philippines shall not be subject to income tax. The person making the income payment shall withhold and remit the tax withheld pursuant to the provisions of Sections 57 and 58 of the Code. Thus, in the case of interest payment by a resident of the Philippines on a foreign currency loan from an OBU or an FCDU, the withholding agent shall be the said resident. (D) Taxation of Other Incomes of an FCDU or an OBU . Income derived by an FCDU or an OBU from activities other than foreign currency transactions shall be subject to the pertinent income tax/taxes prescribed under Section 27 or Section 28 of the Code. To illustrate: Income derived by an FCDU from consultancy services and rentals shall be subject to an income tax based on net income at the tax rates prescribed under Section 27(A) of the Code. Capital gains derived from the sale, barter, exchange or disposition of shares of stocks in a domestic corporation shall be subject to tax prescribed under Section 27(D) of the Code. The aforesaid depository bank shall file its corporate income tax return for income referred to in the preceding paragraph in accordance with the provisions of Section 52 of the Code. It shall also declare thereunder all other incomes derived during the taxable period which are subject to the final withholding taxes, the fact that such final withholding taxes have been withheld therefrom by the payor notwithstanding, indicating the following information: (a) Name of the withholding agent; (b) His/its address; (c) His/its Taxpayer Identification Number (TIN); (d) Period covered; (e) Gross Income; (f) Rate of final withholding tax applied; and (g) Amount of final withholding tax withheld. The submission of the foregoing information shall not be required with respect to its interest income derived from bank deposits. LLphil Sec. 2.58. Information Requirement for Depositors/Taxpayers Exempt from Withholding Tax on Interest Income from Foreign Currency Deposits. The Depository Bank shall submit with its quarterly withholding tax remittance prescribed under Sec. 58(A) of the Code a list of all persons and corporations who were given exemption from the tax on interest income on foreign currency deposits. To avail of the exemption from the tax on interest income from foreign currency deposit, the depositor is required to execute a written permission allowing its depository bank to inform the Commissioner of Internal Revenue that as a non-resident, the depositor is exempt from the tax. A depositor who fails to comply with this requirement, which constitutes a limited waiver of the confidentiality of foreign currency deposits, shall not be entitled to the exemption privilege. EFFECTIVITY CLAUSE. These Regulations shall apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is taxable. TRANSITORY PROVISION. No penalty shall be imposed for late payment of the tax herein prescribed for the first three quarters of calendar year 1998, provided, however, that the taxpayer's corresponding tax returns for the said taxable quarters are filed and the taxes due are paid not later than October 25, 1998. cda (SGD.) EDGARDO B. ESPIRITU Secretary of Finance Recommending Approval: (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue
April 28, 2004 REPUBLIC ACT NO. 9294 AN ACT RESTORING THE TAX EXEMPTION OF OFFSHORE BANKING UNITS (OBUs) AND FOREIGN CURRENCY DEPOSIT UNITS (FCDUs), AMENDING FOR THE PURPOSE SECTION 27 (D) AND SECTION 28, PARAGRAPHS (A) (4) AND (A) (7) (b) OF THE NATIONAL INTERNAL REVENUE CODE AS AMENDED SECTION 1. Section 27, paragraph (D) (3) of the National Internal Revenue Code, as amended, is hereby
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further amended to read as follows: "Sec. 27. Rates of Income Tax on Domestic Corporations. "(D) Rates of Tax on Certain Passive Incomes. "(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, 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 shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%). SDEITC "Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax." SECTION 2. Section 28, paragraph (A)(4) and (A)(7)(b) of the same Code are hereby amended to read as follows: "Sec. 28. Rates of Income Tax on Foreign Corporations. "(A) Tax on Resident Foreign Corporations. "(1) In General. Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). StatBench "In the case of corporations adopting the fiscal-year accounting period the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. "The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. "Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%), on gross income under the same conditions, as provided in Section 27(A). "(2) Minimum Corporate Income Tax on Resident Foreign Corporations. A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. "(3) International Carrier. An International carrier doing business in the Philippines shall pay a tax of two and one-half percent (2%) on this 'Gross Philippine Billings' as defined hereunder: "(a) International Air Carrier. 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. "(b) International Shipping. 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. StatBench "(4) Offshore Banking Units. The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with nonresidents, other offshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units shall be exempt from all taxes except net income from such transactions as may be specified by the Secretary of Finance, upon recommendations of the Monetary Board which shall be subject to the regular income tax payable by banks: Provided, however, That any interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a final tax at the rate of ten percent (10%). "Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax. CDAcIT "(5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a
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tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Section 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including remuneration 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 treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. "(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. "(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. "(b) Regional operating headquarters as defined in Section 22 (EE) shall pay a tax of ten percent (10%) of their taxable income. "(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. "(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposits Substitutes, Trust Funds and Similar Arrangements and Royalties. Interest from 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 shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7%) of such interest income. "(b) Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, 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 shall be exempt from all taxes, except net income from such transactions as may be specified by the secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency loans granted by such depositors banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%). "Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. "(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000 5% Or any amount in excess of P100,000 10% "(d) Intercorporate Dividends. Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title. "(B) Tax on Nonresident Foreign Corporation. "(1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year 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 subject to tax under subparagraphs 5 (c) and (d): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). "(2) Nonresident Cinematographic Film Owner Lessor or Distributor. A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. "(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. "(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7%) of gross rentals or fees. "(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. "(a) Interest on Foreign Loans. A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1996; "(b) Intercorporate Dividends. A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation which shall be collected and paid
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as provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent 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 provided in this subparagraph; "(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed sold, or disposed of through the stock exchange; Not over P100,000 5% On any amount in excess of P10,000 10%" SECTION 3. Separability Clause. If any part or provision of this Act shall be held unconstitutional or invalid, other provisions hereof which are not affected thereby shall continue to be in full force and effect. SECTION 4. Repealing Clause. All laws, decrees, orders, rules and regulations and other issuances or parts thereof inconsistent with this Act are hereby repealed or modified accordingly. SECTION 5. Effectivity. This Act shall take effect fifteen (15) days after its publication in the Official Gazette or in two (2) newspapers of general circulation. aSTAcH Approved: April 28, 2004 Published in Malaya on May 6, 2004.
DOF ORDER 137-87, as amended by DOF ORDER 149-95, was already photocopied for page 5, Part 1 of Syllabus
November 14, 2003 REVENUE MEMORANDUM CIRCULAR NO. 76-03 SUBJECT : Tax Exemptions of Non-Stock, Non-Profit Corporations Section 30, Tax Code of 1997 and Non-stock, Non-Profit Educational Institutions under Paragraph 3, Section 4, Article XIV of the Constitution TO : All Internal Revenue Officials, Employees and other Concerned It has been observed that substantial revenue losses have been incurred due to the non-implementation of taxes due to non-stock, non-profit corporations and non-stock, non-profit educational institutions. For the information and guidance of all internal revenue officers and others concerned, please be informed as follows: AIHaCc NON-STOCK, NON-PROFIT CORPORATIONS Organizations enumerated under Section 30 of the Tax Code of 1997 are exempt from the payment of income tax on income received by them as such organization. However, they are subject to the corresponding internal revenue taxes imposed under the Tax Code of 1997 on their income derived from any of their properties, real or personal, or any activity conducted for profit regardless of the disposition thereof (i.e. rental payment from their building/premises), which income should be returned for taxation. In addition, their interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and from trust funds and similar arrangement, and royalties derived from sources within the Philippines are subject to the 20% final withholding tax: provided, however, that interest income derived by them from a depository bank under the expanded foreign currency deposit system shall be subject to 71/2% final withholding tax pursuant to Section 27(D)(1) in relation to Section 57(A), both of the Tax Code of 1997. It shall also be constituted as a withholding agent for the government if they acts as an employer and any of their employee receives compensation income subject to withholding tax under Section 79(A), Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, or if they makes income payments to individuals or corporations subject to the withholding tax provided for in Section 57 of the Tax Code of 1997, also as implemented by Revenue Regulations No. 2-98. NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS The exemption of non-stock, non-profit educational institutions refers to internal revenue taxes imposed by the National Government on all revenues and assets used actually, directly and exclusively for educational purposes (Paragraph 3, Section 4, Article XIV of the Constitution). ScEaAD Furthermore, revenues derived from assets used in the operation of cafeterias/canteens and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises. Pursuant to Section 109(m) of the Tax Code of 1997, private educational institutions shall be exempt from valueadded tax provided they are accredited as such either by the Department of Education, Culture and Sports or by the Commission on Higher Education. However, this exemption does not extend to their other activities involving sale of goods and services.
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However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposes or functions (Sec. 2, Finance Department Order No. 137-87 as amended by Finance Department Order No. 92-88) i. e. rental payment from their building/premises. Unlike non-stock, non-profit corporations, their interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their purposes as an educational institution, are exempt from the 20% final tax and 7 % tax on interest income under the expanded foreign currency deposit system imposed under Section 27(D)(1) of the Tax Code of 1997, subject to compliance with the conditions that as a tax-exempt educational institution, they shall on an annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following: (a) Certification from their depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 % tax on interest income under the expanded foreign currency deposit system imposed by Section 27(D)(1) of the Tax Code of 1997; CIaASH (b) Certification of actual utilization of the said income; and (c) Board Resolution by the school administration on proposed projects (i.e., construction and/or improvement of school buildings and facilities, acquisition of equipment, books and the like) to be funded out of the money deposited in banks or placed in money markets, on or before the 14th day of the fourth month following the end of its taxable year (Sec. 3, Finance Department Order No. 137-87). Finally, the exemption does not cover withholding taxes. As an educational institution, they are constituted as withholding agents for the government required to withhold the tax on compensation income of their employees, or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997. In both cases, in order to monitor the activities being conducted by these institutions, it is mandatory that they should maintain their respective set of books of accounts as prescribed in Section 235 of the Tax Code of 1997. Furthermore, both institutions are subject to the payment of the annual registration fee of P500.00 as prescribed in Section 236(B) of the Tax Code of 1997. They are also required under Section 6(C) in relation to Section 237 of the same Code to issue duly registered receipts or sales or commercial invoices for each sale or transfer of merchandise or for services rendered which are not directly related to the activities for which they are registered. Please be guided accordingly. IHcSCA (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner
November 10, 1986 REVENUE REGULATIONS NO. 19-86 SUBJECT : Taxation of Leases TO : All Internal Revenue Officers and Others Concerned SECTION 1. Purpose. These regulations pursuant to Section 277 of the National Internal Revenue Code, prescribe the rules to govern the tax treatment and lease agreements and provide guidelines for determining whether certain transactions purporting to be leases of tangible personal property are in reality conditional sales contracts. PART A INCOME TAX SECTION 2. Reporting of Income and Deductions by a Lessor or a Vendor. 2.01 Lessor if contract is a lease The amount paid for the use of property under an agreement which is determined under these regulations to be a lease shall be considered as rental ( and therefor includible in gross income) of the lessor. Such lessor may deduct all ordinary and necessary expenses paid or incurred during the taxable year which are attributable to the earning of the income. In addition, the lessor, with respect to properties subject to an "operating lease" as defined in subparagraph 2.01/1 of this Section, will be allowed a deduction for depreciation determined pursuant to Section 30 (f) of the National Internal Revenue Code (NIRC) and the Regulations thereunder: Provided, however, that tangible personal properties listed in Annex "A" of these Regulations which are subject to "finance lease" (as defined in subparagraph 2.01/2 of this Section) may be depreciated during the primary lease period but such period shall not be less than 60% of the depreciable life of the property as indicated in Annex "A". If, under the agreement, the lessee pays to the lessor a stipulated rental, and in addition pays certain other expenses which are properly payable by the lessor, the lessor is deemed to have received as rental income not only the stipulated rental but also the amount of such other expenses paid by the lessee to, or for the account of, the lessor. 2.01/1 Operating lease defined An "operating lease" is a contract under which the asset is not wholly amortized during the primary period of the lease, and where the lessor does not rely solely on the rentals during the primary period for his profits, but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or re-lease of the returned asset of the primary lease period. 2.01/2 Finance lease defined "Finance lease" or full payout lease is a contract involving payment over an obligatory period (also called primary or basic period) of specified rental amounts for the use of a lessor's property, sufficient in total to amortize the capital outlay of the lessor and to provide for the lessor's borrowing costs and profits.
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The obligatory period refers to the primary or basic non-cancellable period of the lease which in no case shall be less than 730 days. The lessee, not the lessor, exercises the choice of the asset and is normally responsible for maintenance, insurance and such other expenses pertinent to the use, preservation and operation of the asset. Finance leases may be extended, after the expiration of the primary period, by non-cancellable secondary or subsequent periods with the rentals significantly reduced. The residual value shall in no instance be less than five per centum (5%) of the lessor's acquisition cost of the leased asset. 2.02 "Packaged lease" not taxable as a corporation A "package lease" or "lease package" shall not be considered as a joint venture or association taxable as a corporation as defined in Section 20(b) of the National Internal Revenue Code. 2.03 "Packaged Lease" or "Lease Package" defined A lease package refers to that type of finance lease which has two or more lessors, particularly if the size of the lease facility is substantial relative to the exposure limits of a lessor. Under a lease package, the lead lessor either invites one or more lessors to participate as a co-lessor in the funding lease. Consequently, two or more lessors may have co-ownership of a single leased item, proportionate to their participation. For the purpose of this subparagraph, the lessors in a lease package shall be limited to finance and leasing companies registered under Republic Act No. 5980. 2.04 Taxation of income derived from "'package leases" The rental income derived from a packaged lease shall be taxable directly to each of the participating lessors in their individual capacity, the respective shares of which shall be determined in accordance with their sharing agreement. Any gain or loss derived by the lessor who sells the lease contracts or lease receivables to one or more buyers shall be taxed as ordinary gain or loss. To compute ordinary gain or loss, the outstanding principal value of the lease as determined in Annex "B" shall be deducted from the selling price. 2.05 Vendor, if contract is a conditional sale If the agreement is determined to be a sale, the amounts received under the contract by the vendor will be considered to be payments which are part of the sales price to the extent such amounts do not represent interest other charges. SECTION 3. Deductions Allowable to Lessee or Purchaser. 3.01 Lessee, if contract is a lease If under the criteria set forth in these Regulations, an agreement constitutes a lease, the lessee may deduct the amount of rent paid or accrued, including all expenses which under the terms of the agreement the lessee is required to pay to, or for the account of, the lessor. If the payments are so arranged as to constitute advance rentals, such payments shall be duly apportioned over the lease term. In computing the term of the lease, all options to renew, shall be taken into consideration if there is a reasonable expectation that such options will be exercised. 3.02 Vendee, if contract is a conditional sale If under the provisions of these Regulations, the agreement is to be treated as a sale, the amounts paid to the vendor will be considered as payments which are part of the purchase price to the extent such amounts do not represent interest or other charges. acd SECTION 4. General criteria for characterizing an agreement as a conditional sale. 4.01 Statutory basis for distinguishing a lease from a sale A lease is a contract whereby one of the parties (lessor) binds himself to give to another (lessee) the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite (Article 1643, Civil Code). In other words, a lease is an agreement between a lessor and a lessee giving the lessee possession and use of a specific property upon payment of rentals over a period of time. The lessor retains ownership of the asset so that it shall not become the property of the lessee or any related third party during the term of the lease. On the other hand, a sale is a contract whereby one of the contracting parties (seller or vendor) obligates himself to transfer ownership of and to deliver a determinate thing while the other party (buyer or vendee) obligates himself to pay for said thing a price certain in money or its equivalent. (Article 1458, Civil Code.) 4.02 Characterizing a transaction that does not readily fit statutory concepts In cases where the true character of the transaction cannot be definitely determined from the terms and conditions of the agreement, the Commissioner shall make the determination on the basis of all relevant facts and circumstances of each transaction, among which are (but not limited) those indicated in the following subparagraphs. 4.03 Factors to be considered. 4.03/1 In general. Whether an agreement, which in form is a lease, is in substance a conditional sales contract depends upon the intent of the parties as evidenced by the provisions of the agreement, read in the light of the facts and circumstances existing at the time the agreement was executed. In ascertaining such intent no single test or any special combination of tests is absolutely determinative. No general rule, applicable to all cases can be laid down. 4.03/2 Compelling persuasive factors. A contract or agreement purported to be a lease shall be treated as conditional sales contract if one or more of the following compelling persuasive factors are present: (A) The lessee is given the option to purchase the asset at anytime during the obligatory period of the lease, notwithstanding that the option price is equivalent to or higher than the current fair market value of the asset; (B) The lessee acquires automatic ownership of the asset upon payment of the stated amount of "rentals" which under the contract he is required to make; (C) Portions of the periodic rental payments are credited to the purchase price of the asset; cdtai (D) The receipts of payment indicate that the payment made were partial or full payments of the asset. 4.03/3 Absence of compelling persuasive factors. In the absence of the above compelling persuasive factors or
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contrary implication, an intent warranting treatment of a transaction for tax purposes as a purchase and sale rather than as a lease or rental agreement, may in general be said to exist if, for example, one or more of the following conditions are present: (a) Portions of the periodic payments are made specifically applicable to an equity to be acquired by the lessee. (b) The property may be acquired under a purchase option, at a price which is nominal in relation to the value of the property at the time when the option may be exercised, as determined at the time entering into the original agreement, or which is a relatively small amount when compared with the total payments which are required to be made. SECTION 5. Advance Ruling Required to Recognize Existence of a lease. The parties to a lease agreement may secure from the Commissioner an advance ruling recognizing the fact that an agreement actually constitutes a lease for tax purposes. In cases where a lessor is engaged in the leasing business and frequently enters into a contract with various lessees under the same or essentially similar terms and conditions, the lessor may submit a model lease agreement on which to base an advance ruling. Thereafter, any specific lease agreement entered into by the lessor and a lessee which does not substantially deviate from the terms and conditions of the model contract on the basis which the advance ruling had been secured, need not be submitted for advance ruling. casia PART B GROSS RECEIPTS TAX SECTION 6. Basis of the Gross Receipts Tax 6.01 The rental amounts received by a lessor from a lessee under an agreement qualifying as a finance lease as defined in Section 2.01/2 of these Regulations shall be divided into two components, namely principal and interest to be arrived at using either the Annuity or the Sum-of-the-Years-Digits method of accounting. The amount representing interest shall be determined in accordance with the formulae prescribed in Annex "B". 6.02 The amount of interest, if the same is derived by a finance and leasing company registered under R.A. 5980 shall be subject to the gross receipts tax prescribed in Sections 260 and 261 (as amended by PD 1739) of the National Internal Revenue Code based on the remaining maturity of the lease. Amounts which the lessee, under the agreement, pays to the lessor (in addition to a stipulated rental) for certain other expenses properly payable by the lessor (as described in Section 2.01) shall be excluded for purposes of the gross receipts tax determined under this subparagraph. 6.03 If the lessor is a person other than a finance and leasing company registered under R.A. 5980, then the rentals resulting from the lease agreement shall be subjected too the 4% contractor's tax imposed under Section 205 of the National Internal Revenue Code. 6.04 If the lessor is a finance and leasing company registered under R.A. 5980 and sells its lease contract or merely sells its receivables (and therefore retains title to the equipment), the rental amount received by the buyer shall be subjected to the pertinent provisions governing corporate taxation under the NIRC without prejudice to the exemptions and benefits allowed by special laws. casia SECTION 7. Effectivity. These regulations shall take effect on January 1, 1987 and shall be applicable to all leases written on or after the said date." (As amended by Revenue Regulations No. 22-86 dated December 16, 1986.) (SGD.) JAIME V. ONGPIN Minister of Finance Recommending Approval: (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue ANNEX "A" SCHEDULE OF DEPRECIATION Asset classification Depreciable Life 1. Land Transportation Equipment 4 years 2. Water Transport Equipment 8 years 3. Air Transport Equipment 8 years 4. Industrial Equipment 5 years 5. Agricultural Equipment 4 years 6. Construction Equipment 5 years 7. Telecommunication Equipment 5 years 8. Office Machines 3 years 9. Main Frame Computer 5 years 10. Materials Handling Equipment 5 years 11. Auxiliary Equipment 5 years (Please refer to subsequent pages for details of various asset classification) 1. LAND TRANSPORT EQUIPMENT 1.1 Automotive Vehicles 1.2 Passenger Bus AEIHaS 1.3 Tourist Bus
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1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 2. 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3. 3.1 3.2 3.3 3.4 3.5 4. 4.1 4.2 4.3 4.3 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 5. 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 6. 6.1
Asian Utility Vehicles Light-Duty Trucks (Such as Pick-ups) Medium-Duty Trucks (Such as Dump Trucks) Heavy-Duty Trucks (Prime Mover) Locomotives Trailers (Flatbed & Skeletal) Tankers (Bulk Carriers) Motorcycles And such other similar or related equipment, as may be mutually agreed upon from time to time. WATER TRANSPORT EQUIPMENT Tugboats Barges Tankers Purse Seiner Reefer Vessels Container Vessels Passenger Vessels And such other similar or related equipment, as may be mutually agreed upon from time to time. AIR TRANSPORT EQUIPMENT Helicopters Prop Aircraft Turbo-Prop Aircraft Jet Aircraft And such other similar or related equipment, as may be mutually agreed upon from time to time. INDUSTRIAL EQUIPMENT Injection Moulding Machines Extruding Machines Foundry Equipment Metal Fabrication Equipment Welding Equipment Logging Equipment Sawmill Equipment Woodworking Equipment Kiln Drying Equipment Refrigerating Equipment Mining and Quarrying Equipment Printing Equipment Textile Machines Refractory Equipment Boilers Industrial Pumps Industrial Gas Manufacturing Equipment Distilling Equipment Laboratory Testing Equipment AaCTID Medical Equipment Drilling Equipment And such other similar or related equipment, as may be mutually agreed upon from time to time. AGRICULTURAL EQUIPMENT Threshers Palay Drilers Rice Mills Corn Mills Feed Mills 4-Wheel Tractors with farm implements 2-Wheel Tractors with farm implements Track type agricultural tractors with farm implement Hard Tractors with prime mover and farm implements Irrigation Pumps/Aerators Diesel Engines And such other similar or related equipment, as may be mutually agreed upon from time to time. CONSTRUCTION EQUIPMENT Bulldozers (Track type or wheel)
TaCIDS
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6.2 Loaders (Track type of Wheel) 6.3 Compactors 6.4 Motor Graders 6.5 Tractor-Scrapers 6.6 Off-Highway Trucks 6.7 Excavators (Track Type or Wheel) 6.8 Crushing Plant 6.9 Concrete Batching Plant 6.10 Asphalt Mixing Plant 6.11 Pipelayers 6.12 Asphalt Laying Machines 6.13 Hydraulic Breakers 6.14 And such other similar or related equipment, as may be mutually agreed upon from time to time. 7. TELECOMMUNICATIONS EQUIPMENT 7.1 PABX Systems 7.2 Telex Machines HaTDAE 7.3 VFT Equipment 7.4 Teleprinters 7.5 Broadcasting Equipment 7.6 Transmitting Equipment 7.7 And such other similar or related equipment, as may be mutually agreed upon from time to time. 8. OFFICE MACHINES 8.1 Adding Machines 8.2 Copiers 8.3 Calculators 8.4 Typewriters 8.5 Mini-Computers 8.6 Micro-Computers 8.7 Stencil Machines 8.8 Mimeographing Machines 8.9 Posting Machines 8.10 Cash Registers 8.11 And such other similar or related equipment, as may be mutually agreed upon from time to time. 9. MAINFRAME COMPUTERS 10 MATERIALS HANDING EQUIPMENT 10.1 Forklifts 10.2 Container Vans 10.3 Conveyor Systems 10.4 Box Cars AEaSTC 10.5 Cranes (mounted or overhead) 10.6 Loaders with tines 10.7 Cement Mixers 10.8 And such other similar or related equipment, as may be mutually agreed upon from time to time. 11 AUXILIARY EQUIPMENT 11.1 Air-conditioning Systems 11.2 Generators and Accessories 11.3 Elevators 11.4 Escalators 11.5 Water Tanks 11.6 Water Heating Systems 11.7 Air Compressors 11.8 Cooling Tanks 11.9 Anti-Pollution Equipment 11.10 Audio-Visual Equipment 11.11 And such other similar or related equipment, as may be mutually agreed upon from time to time. aTcIAS ANNEX "B" GUIDELINES IN THE DETERMINATION OF THE PRINCIPAL AND LEASE INCOME COMPONENT OF FINANCIAL LEASE RENTAL Lease rentals received by financial lessor shall be broken down into a principal and lease income component, the latter being subjected to the gross receipt tax under Sections 260 and 261 of NIRC, as amended by Section 15 of P.D. 1739. Recognition of lease income shall be based either on the annuity methods or the sum-of-the years'-digits (SYD) method.
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PART A: ANNUITY METHOD Lease income under the annuity method is derived by computing the lease rate on the diminishing outstanding principal of the net lease facility. Explanation follows. SECTION 1. Determination of Lease Rate The lease rate is a function of the basic parameters that normally comprise a lease transactions, namely: the lease amount, guarantee deposit, lease rental, periodic payment, the term of the lease and the residual value. The lease rate is defined as the internal rate of return of a specific lease transaction such that: Where Ct = cash flow or period t, whether it be a net cash inflow of outflow r = the lease rate for a period t t = the periodic time involved in the lease transaction which may be monthly, quarterly, semi-annually or yearly. = the summation of the series of cash flow over a period of time n = the last period in which a cash flow is expected For purposes of computing the lease rate factor, the cash flows accruing for a period, whether paid in advance is immaterial and shall be treated as any other in arrears payments. DTIcSH (Please refer to Exhibit I for computational examples in the determination of the lease rate factor.) SECTION 2. Determination of Lease Income Lease income component of lease rentals shall be determined by the following formula: Outstanding principal Lease Lease income balance of lease X rate = for a specific facility factor period t (Please refer to Exhibit 2A for computational examples in the determination of the lease income component.) PART B: SUM-OF-THE-YEARS'-DIGITS (SYD) METHOD Lease income under the SYD method is derived by computing the SYD factor (number of remaining periodic payments divided by the sum-of-the-years'-digits) on the total lease income. Explanation follows: SECTION 1. Determination of SYD The SYD is computed by a) using the following algebraic equation SYD = N (N+1) 2 where N represents the number of periodic payments; b) or, simply adding all the digits representing the periodic payments. Thus, for a transaction involving twelve (12) periodic payments, SYD may be computed as follows: 1) SYD = 12 (12+1) 2 = 78 2) SYD = 1+2+3+4+5+6+7+8+9+10+11+12 = 78 SECTION 2. Determination of the Total Lease Income The total lease income is derived by deducting the net lease facility (lease facility minus residual value) from the total lease receivables (lease rentals.) HcaDIA SECTION 3. Determination of Lease Income Lease income component of lease rentals shall be determined by the following formula: Lease Total income No. of remaining periodic payments (NRP) X Lease = for a Income specific SYD period (Please refer to Exhibit 28 for computational examples in the determination of the lease income component.) Exhibit 1 Computational Examples in the Determination of the Lease Factor Example 1. Lease Facility : P1,000,000 Guarantee Deposit : 0 Residual Value : P100,000 Period : 3 years in 12 quarterly installments Lease Rentals : P93,415.88 payable quarterly in arrears Based on the above parameters, the resulting cash flows for the lessor and correspondingly lease rate factor, using
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the formula Where r = lease rate are as follows: Present Value Discount Period Net Net Factor at (in Lease Lease Residual Cash 3% lease Present qtr) Facility Rental Value Inflow Rate 1 Value 2 0 1,000,000 (1,000,000) 1.00000 (1,000,000) 1 93,415.88 93,415.88 .97087 90,694.68 2 93,415.88 93,415.88 .94260 88,053.81 3 93,415.88 93,415.88 .91514 85,488.61 4 93,415.88 93,415.88 .88849 82,999.08 5 93,415.88 93,415.88 .86261 80,581.47 6 93,415.88 93,415.88 .83748 78,233.93 7 93,415.88 93,415.88 .81309 75,955.52 8 93,415.88 93,415.88 .78941 73,743.43 9 93,415.88 93,415.88 .76642 71,595.80 10 93,415.88 93,415.88 .74409 69,509.82 11 93,415.88 93,415.88 .72242 67,485.50 12 93,415.88 100,000 193,415.88 .70138 135,658.03 Total cumulative present value 0 1. Discount factor at a certain rate need not be computed since this could be acquired from present value tables. 2. Figures not exact due to rounding off. The above example has shown that the lease rate factor for this specific lease transaction with the given parameters above is 3% per quarter or 12% per annum. Normally, finding the lease rate factor is a tedious process of trial and error, which would necessitate at times, the process of interpolation. This however could be determined with greater ease with the use of a financial calculator with the capability of imputing the internal rate of return. TDcCIS Example 2. Same parameters as Example 1 except that lease rental payments are in advance. For purposes of determining the lease rate factor to be used for computing the lease income component of a lease rental, timing differences of whether a periodic lease rental payment is payable in advance or in arrears, is immaterial. Consequently, example 2 would have the same cash flows as example 1 and thus, the lease rate factor in determining lease income is also .03. Example 3 Lease Facility : P1,000,000 Guaranty Deposit : P100,000 Residual Value : P100,000 Period : 3 years in 12 quarterly installments Lease Rental : P90,415.88 payable quarterly in arrears Given the parameters of this lease transaction, the cash flows and the resultant lease rate factor, are as follows: Present Value Discount Period Net Net Factor at (in Lease Lease Residual Cash 3% lease Present qtr) Facility Rental Value Inflow Rate 1 Value 3 0 900,000 1 (900,000) 1.00000 (900,000) 1 90,415.88 90,415.88 .97087 85,782.06 2 90,415.88 90,415.88 .94260 85,226.01 3 90,415.88 90,415.88 .91514 82,743.19 4 90,415.88 90,415.88 .88849 80,333.61 5 90,415.88 90,415.88 .86261 77,993.64 6 90,415.88 90,415.88 .83748 75,721.49 7 90,415.88 90,415.88 .81309 73,516.25 8 90,415.88 90,415.88 .78941 71,375.20 9 90,415.88 90,415.88 .76642 69,296.54 10 90,415.88 90,415.88 .74409 67,277.55 11 90,415.88 90,415.88 .72242 65,318.24 12 93,415.88 02 90,415.88 .70138 63,415.89
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Total cumulative present value 0 Example 4. Same parameters as Example 3 except that lease rental payments are in advance. The resulting cash flows for this transaction are the same as in Example 3 due to reasons explained in example 2. Thus, lease rate factor is also 3% per quarter. TIHCcA Example 5. Lease Facility : P1,000,000 Guaranty Deposit : P100,000 Residual Value : P200,000 Period : 3 years in 12 quarterly installments Lease Rental : P83,369.67 payable quarterly in arrears The lease rate factor for this transaction is 3% per quarter or 12% per annum as shown by the following table: 1 Lease facility minus guarantee deposit is the net cash outflow of the lessor. 2 The residual value for this transaction, cashflow wise, is 0, since the guarantee deposit, which is in the amount of P100,000, is given back at the end of the lease term and is netted out with the residual value, which in this example, is also P100,000. 3 Figures not exact due to rounding off. Present Value Discount Period Net Net Factor at (in Lease Lease Residual Cash 3% lease Present qtr) Facility Rental Value Inflow Rate 1 Value 3 0 900,000 1 (900,000) 1.00000 (900,000) 1 83,369.67 83,369.67 .97087 80,941.11 2 83,369.67 83,369.67 .94260 78,584.25 3 83,369.67 83,369.67 .91514 76,294.92 4 83,369.67 83,369.67 .88849 74,073.12 5 83,369.67 83,369.67 .86261 71,915.51 6 83,369.67 83,369.67 .83748 69,820.43 7 83,369.67 83,369.67 .81309 67,787.04 8 83,369.67 83,369.67 .78941 65,812.85 9 83,369.67 83,369.67 .76642 63,896.18 10 83,369.67 83,369.67 .74409 62,034.54 11 83,369.67 83,369.67 .72242 60,227.92 12 83,369.67 100,000 2 183,369.67 .70138 128,611.82 Total cumulative present value 0 Example 6. Same parameters as Example 5 except that lease rental payments are in advance. STaCIA Lease rate factor is also 3% per quarter or 12% per annum as Example 5. 1 Net cash outflow is lease facility minus guarantee deposit. 2 Guarantee deposit in the amount of P100,000 is netted out at the end of the lease term from the P200,000 residual value. Thus, cashflow-wise, residual value is only P100,000. 3 Figures not exact due to rounding off. Exhibit 2A Computational Examples in the Determination of the Lease Income Component of Lease Rental under the Annuity Method Example 1. Lease Facility : P1,000,000 Guarantee Deposit : 0 Period : 3 years in 12 quarterly installments Lease Rental : P93,415.88 payable quarterly in arrears Based on Exhibit 1, example 1, the lease rate quarterly factor is .03. Thus, using the basic formula: Ending Outstanding Principal Lease Rate Lease Income for the Balance of the Lease Facility X Factor = Subsequent period of the Previous Period (t = n) (t = n+1) we arrive at the following table: (A) (B) (C) (D) (E) Ending Payment of (E-D-C) Outstanding Residual Principal Lease Income Period Balance Value Repayment (A) x .03) Lease Rental 0 1,000,000.00 93,415.88 1 936,584.12 63,415.88 30,000.00 93,415.88 2 871,265.76 65,318.36 28,097.52 93,415.88
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3 803,987.85 67,277.91 26,137.97 93,415.88 4 734,691.61 69,296.24 24,119.64 93,415.88 5 663,316.48 71,375.13 22,040.75 93,415.88 6 589,800.09 73,516.39 19,899.49 93,415.88 7 514,078.21 75,721.88 17,694.00 93,415.88 8 436,084.68 77,993.53 15,422.35 93,415.88 9 355,751.34 80,333.34 13,082.54 93,415.88 10 273,088.00 82,743.34 10,672.54 93,415.88 11 187,782.36 85,225.64 8,190.24 93,415.88 12 100,000.00 87,782.36 5,663.52 1 93,415.88 1 Figures not exact due to rounding off. Example 2. Same parameters as Example 1 except that lease rental payments are in advance, thus, lease rate quarterly factor is also .03. caTESD Ending Payment of Outstanding Residual Principal Lease Lease Period Balance Value Repayment Income Rental 0 936,584.12 63,415.88 30,000.00 93,415.88 1 871,265.76 65,318.36 28,097.52 93,415.88 2 803,987.85 67,277.91 26,137.97 93,415.88 3 734,691.61 69,296.24 24,179.64 93,415.88 4 663,316.48 71,375.13 22,040.75 93,415.88 5 589,800.09 73,516.39 19,899.49 93,415.88 6 514,078.21 75,721.88 17,694.00 93,415.88 7 436,084.68 77,993.53 15,422.35 93,415.88 8 355,751.34 80,333.34 13,082.54 93,415.88 9 273,088.00 82,743.34 10,672.54 93,415.88 10 187,782.36 85,225.64 8,190.24 93,415.88 11 100,000.00 87,782.36 5,663.52 1 93,415.88 12 100,000.00 Example 3. Lease Facility : P1,000.000 Guaranty Deposit : P100,000 Residual Value : P100,000 Period : 3 years in 12 quarterly installments Lease Rental : P90,415.88 payable quarterly in arrears 1 Figures not exact due to rounding off. Based on Exhibit A, example 3, lease rate quarterly factor is .03. Thus, Ending Payment of Outstanding Residual Principal Lease Lease Period Balance Value Repayment Income Rental 0 900,000.00 1 836,584.12 63,415.88 27,000.00 90,415.88 2 771,265.76 65,318.36 25,097.52 90,415.88 3 703,987.85 67,277.91 23,137.97 90,415.88 4 634,691.61 69,296.24 21,119.64 90,415.88 5 563,316.48 71,375.13 19,040.75 90,415.88 6 489,800.09 73,516.39 16,899.49 90,415.88 7 414,078.21 75,821.88 14,694.00 90,415.88 8 336,084.68 77,993.53 12,422.35 90,415.88 9 255,751.34 80,333.34 10,082.54 90,415.88 10 173,008.00 82,743.34 7,672.54 90,415.88 11 87,782.36 85,225.64 5,190.24 90,415.88 12 01 87,782.36 2,633.52 2 90,415.88 Example 4. Same parameters as Example 3 except that lease rental payments are in advance, thus, lease rate quarterly factor is also .03. ETIDaH Ending Payment of Outstanding Residual Principal Lease Lease Period Balance Value Repayment Income Rental 0 836,584.12 63,415.88 27,000.00 90,415.88 1 771,265.76 65,318.36 25,097.52 90,415.88 2 703,987.85 67,277.91 23,137.97 90,415.88 3 634,691.61 69,296.24 21,119.64 90,415.88
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4 563,316.48 71,375.13 19,040.75 90,415.88 5 489,800.09 73,516.39 16,899.49 90,415.88 6 414,078.21 75,721.88 14,694.00 90,415.88 7 336,084.68 77,993.53 12,422.35 90,415.88 8 255,751.34 80,333.34 10,082.54 90,415.88 9 173,008.00 82,743.34 7,672.54 90,415.88 10 87,782.36 85,225.64 5,190.24 90,415.88 11 87,782.36 2,633.52 2 90,415.88 12 01 1 Cashflow-wise, residual value is 0 since guarantee deposit, in the amount of P100,000, is given back at the end of the lease term and is netted out with the residual value, which in this example, is also P100,000. 2 Figures not exact due to rounding off. Example 5. Lease Facility : P1,000.000 Guaranty Deposit : P100,000 Residual Value : P200,000 Period : 3 years in 12 quarterly installments Lease Rental : P83,369.67 payable quarterly in arrears Based on Exhibit A, example 3, lease rate quarterly factor is .03. Thus, Ending Payment of Outstanding Residual Principal Lease Lease Period Balance Value Repayment Income Rental 0 900,000.00 1 843,630.33 56,369.67 27,000.00 83,369.67 2 785,569.57 58,060.76 25,308.91 83,369.67 3 725,766.99 59,802.58 23,567.09 83,369.67 4 664,170.33 61,596.66 21,773.01 83,369.67 5 600,725.77 63,444.56 19,925.11 83,369.67 6 535,377.87 65,347.90 18,021.77 83,369.67 7 468,069.54 67,308.33 16,061.34 83,369.67 8 398,741.96 69,327.58 14,042.09 83,369.67 9 327,334.55 71,407.41 11,962.26 83,369.67 10 253,784.92 73,549.63 9,820.04 83,369.67 11 178,028.80 75,756.12 7,613.55 83,369.67 12 100,000.00 1 78,028.80 5,340.87 2 83,369.67 1 Cashflow-wise, residual value is P100,000, since guarantee deposit which is also in the amount of P100,000, is netted out at the end of lease term from the P200,000 residual value. 2 Figures not exact due to rounding off. Example 6. Same parameters as Example 5, except that lease rental payments are in advance; thus, lease rate quarterly factor is also .03. AcHCED Ending Payment of Outstanding Residual Principal Lease Lease Period Balance Value Repayment Income Rental 0 843,630.33 56,369.67 27,000.00 83,369.67 1 785,569.57 58,060.76 25,308.91 83,369.67 2 725,766.99 59,802.58 23,567.09 83,369.67 3 664,170.33 61,596.66 21,773.01 83,369.67 4 600,725.77 63,444.56 19,925.11 83,369.67 5 535,377.87 65,347.90 18,021.77 83,369.67 6 468,069.54 67,308.33 16,061.34 83,369.67 7 398,741.96 69,327.58 14,042.09 83,369.67 8 327,334.55 71,407.41 11,962.26 83,369.67 9 253,784.92 73,549.63 9,820.04 83,369.67 10 178,028.80 75,756.12 7,613.55 83,369.67 11 100,000.00 78,028.80 5,340.87 2 83,369.67 12 100,000.00 1 1 Cashflow-wise, residual value is P100,000, since guarantee deposit which is also in the amount of P100,000, is netted out at the end of lease term from the P200,000 residual value. 2 Figures not exact due to rounding off. Exhibit 2B Computational Examples in the Determination of the Lease Income Component of Lease Rentals under the SYD Method
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Example 1. Lease Facility : P1,000,000 Guaranty Deposit : 0 Residual Value : P100,000 Period : 3 years in 12 quarterly installments Lease Rental : P93,415.88 payable quarterly in arrears Based on the above parameters, the total lease income is P220,990.56 [(93,415.88 x 12) - (P1,000,000-P100,000)], while the SYD is equal to 78. Thus, using the formula: No. of remaining periodic Total Lease Lease income for a payments (NRP) X Income = specific period SYD the lease income for periods 1 to 12 are computed as follows: Total Lease Lease Income Period NRP/STD x Income = for the period 1 12/78 P220,990.56 P33,998.55 2 11/78 220,990.56 31,165.34 3 10/78 220,990.56 28,332.12 4 9/78 220,990.56 25,498.91 5 8/78 220,990.56 22,665.70 6 7/78 220,990.56 19,832.49 7 6/78 220,990.56 16,999.27 8 5/78 220,990.56 14,166.06 9 4/78 220,990.56 11,332.85 10 3/78 220,990.56 8,499.64 11 2/78 220,990.56 5,666.42 12 1/78 220,990.56 2,833.21 P220,990.56 =========== Using the figures above, we arrive at the following table: (A) (B) (C) (D) (E) Payment of Principal Outstanding Residual Lease Lease Repayment Period Balance Value Rental Income (C-D-E) 0 1,000,000.00 1 940,582.67 93,415.88 33,998.55 59,417.33 2 878,332.13 93,415.88 31,165.34 62,250.54 3 813,248.37 93,415.88 28,332.12 65,083.76 4 745,331.40 93,415.88 25,498.91 67,916.97 5 674,581.22 93,415.88 22,665.70 70,750.18 6 600,997.83 93,415.88 19,832.49 73,583.39 7 524,581.22 93,415.88 16,999.27 76,416.61 8 445,331.40 93,415.88 14,166.06 79,249.82 9 363,248.37 93,415.88 11,332.85 82,083.03 10 278,332.13 93,415.88 8,499.64 84,916.24 11 190,582.67 93,415.88 5,666.42 87,749.46 12 100,000.00 93,415.88 2,833.21 90,582.67 Example 2. Same parameters as Example 1 except that lease rental payments are in advance, thus, the computation for the lease income is also the same. DTIACH (A) (B) (C) (D) (E) Payment of Outstanding Residual Lease Lease Principal Period Balance Value Rental Income Repayment 0 940,582.67 93,415.88 33,998.55 59,417.33 1 878,332.13 93,415.88 31,165.34 62,250.54 2 813,248.37 93,415.88 28,332.12 65,083.76 3 745,331.40 93,415.88 25,498.91 67,916.97 4 674,581.22 93,415.88 22,665.70 70,750.18 5 600,997.83 93,415.88 19,832.49 73,583.39 6 524,581.22 93,415.88 16,999.27 76,416.61 7 445,331.40 93,415.88 14,166.06 79,249.82
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8 363,248.37 93,415.88 11,332.85 82,083.03 9 278,332.13 93,415.88 8,499.64 84,916.24 10 190,582.67 93,415.88 5,666.42 87,749.46 11 100,000.00 93,415.88 2,833.21 90,582.67 12 100,000.00 Example 3. Lease Facility : P1,000,000 Guaranty Deposit : P100,000 Residual Value : P100,000 Period : 3 years payable in 12 quarterly installments Lease Rental : P93,415.88 payable quarterly in arrears Based on the given parameters, the total lease income is P184,990.56 [(P90,415.88 x 12) - (P1,000,000-P100,000)], and the SYD is also 78. Thus, Total Lease Lease Income Period NRP/STD x Income = for the period 1 12/78 P184,990.56 P28,460.09 2 11/78 184,990.56 26,088.41 3 10/78 184,990.56 23,716.74 4 9/78 184,990.56 21,345.06 5 8/78 184,990.56 18,973.39 6 7/78 184,990.56 16,601.72 7 6/78 184,990.56 14,230.04 8 5/78 184,990.56 11,858.37 9 4/78 184,990.56 9,486.70 10 3/78 184,990.56 7,115.02 11 2/78 184,990.56 4,743.35 12 1/78 184,990.56 2,371.67 P184,990.56 =========== (A) (B) (C) (D) (E) Payment of Outstanding Residual Lease Lease Principal Period Balance Value Rental Income Repayment 0 900,00.00 1 838,044.21 90,415.88 28,460.09 61,955.79 2 773,716.74 90,415.88 26,088.41 64,327.47 3 707,017.60 90,415.88 23,716.74 66,699.14 4 637,946.78 90,415.88 21,345.06 69,070.82 5 566,504.29 90,415.88 18,973.39 71,442.49 6 492,690.13 90,415.88 16,601.72 73,814.16 7 416,504.29 90,415.88 14,230.04 76,185.84 8 337,946.78 90,415.88 11,858.37 78,557.51 9 257,017.60 90,415.88 9,486.70 80,929.18 10 173,716.74 90,415.88 7,115.02 83,300.86 11 88,044.21 90,415.88 4,743.35 85,672.53 12 01 90,415.88 2,371.67 88,044.21 1 Cashflow-wise, residual value is 0 since guaranty deposit, in the amount of P100,000, is given back at the end of the lease term and is netted out with the residual value, which in this example, is also P100,000. Example 4. Same parameters as Example 3 except that lease rental payments are in advance, thus, the computation for the lease income is also the same. SDHAEC (A) (B) (C) (D) (E) Payment of Outstanding Residual Lease Lease Principal Period Balance Value Rental Income Repayment 0 838,044.21 90,415.88 P28,460.09 61,955.79 1 773,716.74 90,415.88 26,088.41 64,327.47 2 707,017.60 90,415.88 23,716.74 66,699.14 3 637,946.78 90,415.88 21,345.06 69,070.82 4 566,504.29 90,415.88 18,973.39 71,442.49 5 492,690.13 90,415.88 16,601.72 73,814.16
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6 416,504.29 90,415.88 14,230.04 76,185.84 7 337,946.78 90,415.88 11,858.37 78,557.51 8 257,017.60 90,415.88 9,486.70 80,929.18 9 173,716.74 90,415.88 7,115.02 83,300.86 10 88,044.21 90,415.88 4,743.35 85,672.53 11 90,415.88 2,371.67 88,044.21 12 01 Example 5. Lease Facility : P1,000,000 Guaranty Deposit : P100,000 Residual Value : P200,000 Period : 3 years, 12 quarterly installments Lease Rental : P83,369.67 payable quarterly in arrears The total lease income in this example is P200,436.04 [(P83,369.67 x 12) - (P1,000,000.00-P200,000)], while the SYD is also 78. Total Lease Lease Income Period NRP/STD x Income = for the period 1 12/78 P200,436.04 P30,836.31 2 11/78 200,436.04 28,266.62 3 10/78 200,436.04 25,696.93 4 9/78 200,436.04 23,127.24 5 8/78 200,436.04 20,557.54 6 7/78 200,436.04 17,987.85 7 6/78 200,436.04 15,418.16 8 5/78 200,436.04 12,848.46 9 4/78 200,436.04 10,278.77 10 3/78 200,436.04 7,709.08 11 2/78 200,436.04 5,139.39 12 1/78 200,436.04 2,569.69 1 Cashflow-wise, residual value is 0 since guaranty deposit, in the amount of P100,000, is given back at the end of the lease term and is netted out with the residual value, which in this example, is also P100,000. (A) (B) (C) (D) (E) Payment of Outstanding Residual Lease Lease Principal Period Balance Value Rental Income Repayment 0 900,00.00 1 847,466.64 83,369.67 30,836.31 52,533.36 2 792,363.59 83,369.67 28,266.62 55,103.05 3 734,690.85 83,369.67 25,696.93 57,672.74 4 674,448.42 83,369.67 23,127.24 50,242.43 5 611,636.29 83,369.67 20,557.54 62,812.13 6 546,254.47 83,369.67 17,987.85 65,381.82 7 478,302.96 83,369.67 15,418.16 67,951.51 8 407,781.75 83,369.67 12,848.46 70,521.21 9 334,690.85 83,369.67 10,278.77 73,090.90 10 259,030.26 83,369.67 7,709.08 75,660.59 11 180,799.98 83,369.67 5,139.39 78,230.28 12 100,000.00 1 83,369.67 2,569.69 80,799.98 Example 6. Same parameters as Example 5, except that lease rental payments are in advance, thus, the computation for the lease income is also the same. CDESIA (A) (B) (C) (D) (E) Payment of Outstanding Residual Lease Lease Principal Period Balance Value Rental Income Repayment 0 847,466.64 83,369.67 30,836.31 52,533.36 1 792,363.59 83,369.67 28,266.62 55,103.05 2 734,690.85 83,369.67 25,696.93 57,672.74 3 674,448.42 83,369.67 23,127.24 50,242.43 4 611,636.29 83,369.67 20,557.54 62,812.13 5 546,254.47 83,369.67 17,987.85 65,381.82 6 478,302.96 83,369.67 15,418.16 67,951.51 7 407,781.75 83,369.67 12,848.46 70,521.21
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8 334,690.85 83,369.67 10,278.77 73,090.90 9 259,030.26 83,369.67 7,709.08 75,660.59 10 180,799.98 83,369.67 5,139.39 78,230.28 11 100,000.00 83,369.67 2,569.69 70,799.98 12 100,000.00 1 Cashflow-wise, residual value is 100,000 since guaranty deposit, in the amount of P100,000, is given back at the end of the lease term from the P200,000 residual value.
February 1, 1993 REVENUE MEMORANDUM ORDER NO. 12-93 Subject : Guidelines in the Filing of Confidential Information For Violations of the National Internal Revenue Code (NIRC) and Investigation By Authorized Revenue Officer. To : All Internal Revenue Officers and Others Concerned. I. Objectives: A. To provide the guidelines, rules and procedures in the filing of confidential information for violations of the NIRC in relation to Finance Regulations No. 1 implementing Republic Act No. 2339, as amended (now Section 281 of the NIRC); aisa dc B. To facilitate the investigation of persons covered by the information; and C. To delineate the responsibilities of the different offices and units in the BIR involved in the filing, investigation and disposition of confidential information. II. Filing of Information: Pursuant to Section 5 of Finance Regulations No. 1, in relation to Section 281 of the NIRC, duly sworn confidential information on frauds upon or violations of any of the provisions of the NIRC, shall be filed with the Legislative, Ruling and Research Division (LRRD) for scrutiny and verification to determine if the information given is in accordance with the Regulations. The information must be accompanied with a sworn statement and the informer shall appear in person and execute under oath the statement, specifying the particular violation by the denounced person and the kind of tax or taxes allegedly not paid. III. Transmittal of the Information and Documents: Having taken cognizance of the Confidential Information, the same shall be transmitted by the LRRD to the Records Division, BIR, National Office, for numbering and recording in the Confidential Entry Book provided for the purpose. aisa dc The individual entries to be made by the Records Division shall indicate the day and time the information is received, the name and address of the informer, name and address of the person denounced, names and addresses of the witnesses, if any, the subject matter of the information and the list of records, documents and books submitted, if any. The informer shall retain a duly stamped received and initialed copy of his sworn information which shall serve as his identification or evidence that he is the true informer. The Original Copy of the information/sworn statement, together with the documents submitted, if any, shall be returned to the LRRD where it shall be filed and kept strictly confidential. Only the copies thereof shall be referred to the Intelligence and Investigation Office (IIO) or the Special Investigation Branch (SIB) of the Regional Office for investigation and assessment of the tax/taxes. In no case shall an information filed with other units of the Bureau be the subject of an action or investigation without the same having been verified in accordance with Rule II of this Order. IV. Surveillance and Investigation: Information given in accordance with the Regulations shall immediately be the subject of discreet investigation or surveillance. A complete report on the findings thereon, and recommendation shall be submitted to the Commissioner of Internal Revenue or the Regional Director by the investigating units concerned, thru proper channels for approval. V. Kinds of Information entitled to record: In order to entitle an informer to a reward, his information must not yet be in the possession of the Bureau of Internal Revenue nor shall it refer to a case of fraud or violation already pending or previously investigated or examined by the Commissioner of Internal Revenue or any of his deputies, agents or examiners, as the case may be, or by the Secretary of Finance or any of his deputies or agents. (Section 1, Republic Act 2338). cdasia In case the information given is not entitled to reward, the informer shall be advised immediately of such fact. VI. Result of the information which deserves reward: In order to entitle an informer to a reward, the information given by him must lead to or be instrumental in the discovery of the fraud upon or violation of any of the provisions of the Internal Revenue Code or special laws being administered by the BIR and results in the actual recovery or collection of revenues, surcharges and fees and/or the conviction of the guilty party and/or the imposition of any fine or penalty or the actual collection of compromise in case of amicable settlement. (Section 1, Republic Act 2338). VII. Basis of Reward to be given the informer: The taxes assessed and paid as a result of the valid information given shall be the basis of the reward of 15% (of the
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tax, surcharge and fees paid) pursuant to Section 231 of the Tax Code, the claim for which shall be processed by the Legislative, Ruling and Research Division. The Commissioner of Internal Revenue shall recommend the payment of reward to the informer, based on the actual amount collected, subject to approval by the Secretary of Finance. Otherwise, the claim shall be denied. VIII. Taxes assessed pursuant to a valid information given for fraud, clearly established as committed by the denounced person, shall not be the subject of compromise pursuant to Section 204 of the Tax Code, as amended. acd This Revenue Memorandum Order shall take effect immediately. (Sgd.) JOSE U. ONG Commissioner of Internal Revenue
January 12, 2004 BIR RULING [DA-013-04] Hon. Juanita T. Amatong OIC Secretary of Finance Manila Madam: We are forwarding herewith for your approval the herein claim for informer's reward of Mr. Carlos R. Isidro of No. 188 Mambog St., Malolos, Bulacan under Section 281(1) of the Tax Code, as amended, including the entire docket relative to the internal revenue tax case of Premiere Center for Fashion & Design, Inc. for the taxable years 1994 to 1996. aEHAIS The records show that on May 13, 1996, the informer submitted an Affidavit denouncing Premiere Center for Fashion & Design for non-remittance of the latter's withholding taxes for taxable years 1994 to 1996. The denunciation made by the informer, although in writing, was not in the form of a sworn statement as required under Revenue Memorandum Order (RMO) No. 12-93. When informed, the informer explained by way of affidavit that he was not aware of the procedures in the filing of confidential information as required under RMO 12-93. Considering that herein informer appears to be uneducated and not aware of the procedures required under RMO 12-93, this Office believes that his non-compliance with the rules implementing the informer's reward law may be dispensed with. Statutes offering rewards must be liberally construed in favor of informers and with mere technicality yielding to the substantive purpose of the law. (Penid, et. al. vs. Hon. Cesar Virata, et al., G.R. No. L-44004). On the basis of said Affidavit and documents submitted by the informer, Letter of Authority No. 237596 dated September 26, 1997 was issued by this Office to a group of Revenue Officers of the Special Investigation Division, Revenue Region No. 8, Makati City to investigate Premiere Center for Fashion & Design for withholding tax liabilities for the years 1994, 1995 and 1996. It was ascertained in the investigation that Premiere Center for Fashion & Design, Inc. had, indeed, committed the violations as averred by the informer. Accordingly, and on the basis of the recommendation of the investigating examiners contained in their Memorandum-report dated February 23, 2000, there were found withholding taxes due from Premiere Center for Fashion & Design, Inc. the total amount of P94,839.31 representing deficiency withholding and miscellaneous taxes, for the years 1994 to 1996, which was certified by the Chief, Revenue Accounting Division that the collections were verified and found included in the Makati RDC data file as representing payment of taxes as remitted per CRDC and Central Bank Credit Advice. The records further show that the information furnished by the informer was not yet in the possession of the Bureau of Internal Revenue nor is the aforesaid tax liability pending or previously investigated by any official or employee of this Bureau or by the Department of Finance; and that the informer is, as represented, not related to any internal revenue official or employee or to any public officer within the sixth degree of consanguinity. It appearing that the information furnished by Mr. Carlos R. Isidro was instrumental in the discovery of a violation of the internal revenue laws and in the recovery of taxes which otherwise would not have been effected, it is respectfully recommended that he be paid the amount equivalent to 15% of P94,839.31 or the amount of P14,225.89 as informer's reward pursuant to Section 282(A) of the 1997 Tax Code, the law applicable herein. HCTAEc Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
November 14, 1980 REVENUE REGULATIONS NO. 14-80 SUBJECT : Taxation of Net Capital Gains Derived from Stock Transaction. TO : All Internal Revenue Officers and Others Concerned: SECTION 1. Scope. Pursuant to the provisions of Section 8 of Presidential Decree No. 1739 and Section 326, in relation to Section 4 of the National Internal Revenue Code, as amended, these regulations are hereby
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promulgated to define the manner of taxation of net capital gains derived from stock transaction as provided for by Presidential Decree No. 1739. SECTION 2. Definition of Terms. For the purpose of these regulations, unless the context otherwise indicates, the following definitions of terms are hereby adopted: aisa dc (a) "Closed corporation" is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by Title XII of the Corporation Code of the Philippines; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. (b) "Stock classified as capital assets" shall mean all stocks and securities held by taxpayers other than dealers in securities. (c) "Dealers in securities" includes all persons who for their own account are engaged in the sale of stock, bonds, exchange, bullion coined money, bank notes, promissory notes, or other securities as licensed by the Securities and Exchange Commission. Notwithstanding the foregoing, nothing in these regulations shall preclude the Commissioner of Internal Revenue from treating other taxpayer engaged in similar activities not licensed by the Securities and Exchange Commission as a dealer in securities. SECTION 3. Persons Liable to the Final Capital Gains Tax. The following persons are subject to the final tax on capital gains derived from stock transactions as provided for in Section 4 of these regulations: (1) Any individual taxpayer, citizen or alien; (2) Any corporate taxpayer, domestic or foreign; (3) All other taxpayers not falling under (1) or (2) above, such as trust, estate, trust funds, pension funds, etc. SECTION 4. Imposition of the Tax. In general there shall be imposed on the net capital gains derived during the taxable year from sales, exchanges, transfer or similar transactions intended to convey ownership of, or title to, any share or shares of stocks classified as capital assets, tax of ten per centum (10%) on the net capital gains derived during the taxable year. However, if the net capital gains are realized from the sale of shares of stocks of a closed corporation, the rates of tax to be imposed shall be Net Capital Gains Rates On the 1st P50,000 or less 10% On any amount over P50,000 20% The tax above prescribed shall be due and payable only as regards sales, transfer or exchange of stocks classified as capital assets beginning after fifteen (15) days after publication of these regulations in a newspaper of general circulation or in the Official Gazette. Accordingly, any stock transaction effected prior to said date, shall remain to be subjected to the old rules as follows: cd (a) The sale or exchange of stocks acquired after November 5, 1970 shall be subject to the payment of 1/4 of 1% tax as provided under R.A. No. 6141, as amended by Presidential Decree No. 10; or (b) The sale or exchange of stocks acquired before November 5, 1970 shall be subjected to the ordinary income tax rates provided for by the National Internal Revenue Code. SECTION 5. Exemption from the Final Capital Gains Tax on Stock Transactions. The tax herein imposed shall not apply to (1) the gains derived by dealers in securities which gains shall remain to be taxed as ordinary gain includible in the gross income of dealers in securities; and (2) the gains from sales of stock to the extent invested in new issues of shares of stocks in banks, non-bank financial intermediaries and corporations organized primarily to hold equities in banks, in accordance with Section 1 of Presidential Decree No. 1739 and the implementing regulations promulgated by the Ministry of Finance. SECTION 6. Manner of Computation of Tax Base. For purposes of Section 4 above, the tax base shall be computed in the following manner: (a) The term "net capital gain" shall mean (1) In the case of net capital gains arising from the disposition of shares of stocks of closed corporation, the amount equal to the excess of the capital gain realized over that of capital losses sustained in the disposition of shares of stocks of any corporation during the taxable year. (2) In the case of net capital gains arising from the disposition of shares of stocks of corporations not qualifying as a closed corporation, the amount equal to the excess of capital gains realized over that of capital losses sustained in the disposition of shares of stocks of another or the same corporations not qualifying as a closed corporation during the taxable year. SECTION 7. Determination of Capital Gains. In determining capital gains or capital losses, the following rules shall apply: aisa dc (a) Determination of selling price. (i) The selling price of the shares of stocks shall be the fair market value of the shares of stocks transferred or exchanged and not the fair market value of the property received in exchanged. If the total consideration of the sale
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or disposition are partly in cash or money plus other properties, the rule in determining the selling price, shall nonetheless be, the selling price is equal to the fair market value of the shares disposed. (ii) In the case of shares traded through the stock exchange, "fair market value" shall consist of the actual selling price as shown in the sales confirmation issued by the stock broker of a stock exchange where the sale was effected. (iii) In the case of sales not traded through the stock exchange, but listed in one or more stock exchanges, the highest closing price on the day when the shares are sold, transferred or exchanged, shall be the "fair market value." When no sale is made in any stock exchange, the highest closing price on the day nearest to the day of sale, transfer or exchange of the shares shall be the fair market value. (iv) In the case of sale, transfer or exchange of shares not listed in the stock exchange, the fair market value shall be determined by considering the nature and history of the business, book value of the stock earning and dividend paying capacity of the company, goodwill, and shares of both the stock to be valued and that of companies similarly situated. (b) Determination of cost. The cost basis for determining the capital gains or losses shall be the basis as determined in accordance with the provisions of Section 35 of the Tax Code and its implementing regulations applied in the following manner: (i) If the stocks can be identified, then the cost shall be the actual purchase price plus all costs of acquisition such as commission, documentary tax, transfer fees, etc. (ii) If the stocks cannot be properly identified, then the cost to be assigned shall be computed on the basis of the first-in first-out (FIFO) method. However (iii) If books of accounts are maintained by the seller where every transaction of a particular stocks are recorded, then the moving average method shall be applied rather than the first-in, first-out (FIFO) method. cdt (iv) In all cases, stock dividends received must be assigned a corresponding cost by allocating the original cost of acquisition to the total number of shares composed of the original shareholdings plus the number of shares of stock received as stock dividend. (c) In determining the deductibility of capital losses, the following rules shall apply: (i) the provisions of Section 33 of the Tax Code and its implementing regulations on the non-deductibility of losses on cash sales; (ii) the deductibility of capital loss arising from the sale or disposition of shares of stocks of closed corporations against capital gains derived from any stock transactions. (iii) the deductibility of capital losses sustained in a stock transaction of any corporation failing to qualify as a closed corporation shall be allowed only as a deduction against capital gains arising from the sale or disposition of shares of stocks of another similar corporation failing to qualify as a closed corporation. (iv) the net capital losses sustained during the quarter shall be allowed as a capital loss deductible in any quarter of the same taxable year only. (d) The entire amount of capital gains and capital loss shall be considered without taking into account the period or duration during which the stocks were held by the seller up to disposition for purposes of computing net capital gains. (e) In cases of gains arising from installment sales of shares of stocks, the provisions of Section 43 of the Tax Code and its implementing regulations shall apply. SECTION 7-A. Limitation on Substantiation Requirements; Penalty for Violation Thereof . For purposes of imposing the capital gains tax realized from stock transactions, only the selling price, acquisition cost and the allowable deductible expenses may be looked into in the verification of tax returns. In no case shall the inquiry be made as to the sourcing of funds used in the stock exchanged. Any officer or employee in the Bureau of Internal Revenue who violates this prohibition shall be subject to removal or suspension from office." (As amended by Section 1, Revenue Regulations No. 3-81 dated May 29, 1981.) aisa dc SECTION 8. Manner of Filing Returns and Payments of Taxes. The final capital gains tax herein imposed shall be paid upon filing of return, in duplicate, with the Revenue District Officer, or the Collection Agent concerned or duly authorized Treasurer of the Municipality where the taxpayer's principal office is located and where its books of accounts are kept on or before the fifteenth day of the fourth month following the close of the taxable year. The return (B.I.R. Form No. ___) shall cover all transactions of stock classified as capital assets effected during the taxable year and shall be filed whether the taxpayer realized capital gains or sustained losses during the year for which a return is filed. If a taxpayer elects and is qualified to pay the capital gains tax on stock transaction on installments, the amount of the tax due on its installment payment shall be determined as follows: The final capital gains tax shall be computed on the basis of the entire amount of gain realized from the sale or disposition of share of stock and the tax so computed may be paid in installments. The amount of the tax on each installment shall be the proportion of the tax so determined which bears to the total installment payment received over the total selling price or, to the total contract price in case of sale of mortgaged shares of stock or where the mortgage on such shares is assumed by the purchaser. For this purpose, installment received shall mean (a) On the date of sale or disposition
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First payment received, including the excess of the mortgage, if any, assumed by the purchaser over the basis of the property sold. (b) Succeeding installments Installment payments actually received by the seller. Illustration: Assume that on October 29, 1980, taxpayer A sold shares of stock which he acquired for P50,000 for P100,000, payable under the following terms: P20,000 down, balance payable in four annual installments beginning 1981. If Mr. A elects to pay in installments being qualified to do so in the above example, the periodic payment of the tax, assuming that no other stock transactions were effected, shall be computed as follows: Selling price P100,000 Less: Cost 50,000 Capital gain P 50,000 Tax due P 5,000 The tax payable upon sale is computed as follows: First payment Portion of x Tax due tax payable Selling price OR P 20,000 x 5,000 P1,000 P100,000 The same formula shall apply to subsequent installments. (As amended by Section 1, Revenue Regulations No. 4-81 dated January 24, 1981). SECTION 9. Nature and Treatment of Net Capital Gains and Taxes Imposed. The net capital gains realized on stock transaction, shall not be included in the gross income of the seller in computing his income tax liability. casia The tax on capital gains on stock transactions shall be considered as a final tax which shall, in no case, be allowed as a deduction against income or credit against income tax or any other taxes. "Sec. 19. Penalties. In addition to civil and criminal penalties for violations of the Income Tax Laws as provided for under Sections 73, 74 and 337 of the Tax Code of 1977, the following administrative penalties incident to delinquency or deficiency prescribed in Sections 51 and 72 of the Tax Code of 1977 shall be imposed. These penalties shall be collected at the same time, in the same manner and as part of the tax. " (a) Surcharges. In case of any failure to make and file a return within the time prescribe by law, not due to willful neglect, there shall be added to the tax twenty-five (25%) per centum of its amount, except that when a return is voluntarily and without notice from the Commissioner or any other revenue officer filed after such time, and it is shown that the failure to file it was due to a reasonable cause, no such addition shall be made to the tax. In case of failure to make and file a return due to willful neglect or in case a fraudulent return is willfully made, there shall be added to the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty (50) per centum of the amount of such tax or deficiency tax. (b) Interest on deficiency tax. Where a deficiency tax is determined to exist, there shall be collected as part of the tax, deficiency interest at the rate of twenty (20%) per centum per annum from the date prescribe for the payment of the tax to the date the deficiency is assessed: Provided, That the maximum amount of interest that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three (3) years. (c) Additions to tax in case of non-payment. (1) Tax shown on the return. Where the amount determined by the taxpayer as the final capital gains tax is not paid on or before the date prescribed for its payment, there shall be collected as part of the tax, interest upon such unpaid amount at the rate of twenty (20%) per centum per annum from the date prescribed for its payment until it is paid: Provided, That the amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three (3) years. casia (2) Deficiency. Where a deficiency, or any interest assessed in connection therewith, or any addition to the final capital gains tax provided herein is not paid in full within thirty days from the date of notice and demand from the Commissioner of Internal Revenue, there shall be collected upon the unpaid amount, as part of the tax, interest at the rate of twenty (20%) per centum per annum from the date of such notice and demand until it is paid: Provided, That the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years. (3) Surcharge. If any amount of the final capital gains tax included in the notice and demand from the Commissioner of Internal Revenue is not paid in full within thirty days after notice and demand, there shall be collected in addition to the interest prescribed herein and in paragraph (b) above and as part of the tax a surcharge of ten (10%) per centum of the amount of tax unpaid. SECTION 11. Records to be Kept. Every taxpayer required to file a return pursuant to these regulations shall maintain records as well as all the supporting data used in preparing the returns required to be filed which must be made readily available at its principal place of business.
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All stock brokers, or transfer agents, or secretary of any corporation, shall maintain records of transactions of all shareowners which must be made readily available at its principal place of business upon specific request of the Commissioner of Internal Revenue or his duly authorized representative. SECTION 12. Abolition of Transactions Tax. The 1/4 of 1% transaction tax imposed under the provisions of Republic Act No. 6141, as amended by Presidential Decree No. 10 is hereby deemed abolished upon the effectivity of these regulations. SECTION 13. Repealing Clause. All regulations, rules, orders or portions thereof which are inconsistent with the provisions of these regulations are hereby revoked or amended accordingly. cdt SECTION 14. Effectivity. These regulations shall take effect and the rates provided in Presidential Decree No. 1739 shall be imposed fifteen (15) days after the publication of these regulations in any newspaper of general circulation in the Philippines or in the Official Gazette. (SGD.) CESAR A. VIRATA Secretary (now Minister) of Finance Recommended by: (SGD.) MISAEL P. VERA Commissioner of Internal Revenue
December 27, 2002 REVENUE REGULATIONS NO. 07-03 SUBJECT : Providing the Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the Ordinary Income Tax under Sections 24(A), 25(A) & (B), 27(A), 28(A)(1) and 28(B)(1), or the Minimum Corporate Income Tax (MCIT) under Sections 27(E) and 28(A)(2) of the same Code TO : All Internal Revenue Officials and Others Concerned SECTION 1. Scope. Pursuant to Section 244 of the National Internal Revenue Code of 1997 (Code), these Regulations are hereby promulgated to implement Sec. 39(A)(1), in relation to Secs. 24(D), 25(A)(3), 25(B) and 27(D) (5), and Secs. 24(A), 25(A) & (B), 27(A) or 27(E), 28(A)(1) or 28(A)(2), and 28(B)(1), all of the said Code, providing for the purpose the guidelines in determining whether a particular real property is a capital asset or an ordinary asset. EIaDHS SECTION 2. Definition Of Terms. For purposes of these Regulations, the following terms shall be defined as follows: a. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets under Sec. 39(A)(1) of the Code. b. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely: 1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or 2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or 4. Real property used in trade or business of the taxpayer. Real properties acquired by banks through foreclosure sales are considered as their ordinary assets. However, banks shall not be considered as habitually engaged in the real estate business for purposes of determining the applicable rate of withholding tax imposed under Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as amended. c. Real property shall have the same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the "Civil Code of the Philippines." d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent. g. Taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayers not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to
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engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations. SECTION 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset. a. Taxpayers engaged in the real estate business. Real property shall be classified with respect to taxpayers engaged in the real estate business as follows: 1. Real Estate Dealer. All real properties acquired by the real estate dealer shall be considered as ordinary assets. 2. Real estate Developer. All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties which are field by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets. 3. Real Estate Lessor. All real properties of the real estate lessor, whether land and/or improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets. 4. Taxpayers habitually engaged in the real estate business. All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year of at least six (6) taxable real estate sale transactions, regardless of amount; registration as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal Revenue, etc.). A property purchased for future use in the business, even though this purpose is later thwarted by circumstances beyond the taxpayer's control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of the property change its character previously established as a business property. b. Taxpayer not engaged in the real estate business. In the case of a taxpayer not engaged in the real estate business, real properties, whether land, building, or other improvements, which are used or being used or have been previously used in the trade or business of the taxpayer shall be considered as ordinary assets. These include buildings and/or improvements subject to depreciation and lands used in the trade or business of the taxpayer. A depreciable asset does not lose its character as an ordinary asset, for purposes of the instant provision, even if it becomes fully depreciated, or there is failure to take depreciation during the period of ownership. Monetary consideration or the presence or absence of profit in the operation of the property is not significant in the characterization of the property. So long as the property is or has been used for business purposes, whether for the benefit of the owner or any of its members or stockholders, it shall still be considered as an ordinary asset. Real property used by an exempt corporation in its exempt operations, such as a corporation included in the enumeration of Section 30 of the Code, shall not be considered used for business purposes, and therefore, considered as capital asset under these Regulations. IHCDAS Real property, whether single detached; townhouse; or condominium unit, not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration, in case of condominium unit, townhouse or apartment, and as validated from the existing available records of the Bureau of Internal Revenue, owned by an individual engaged in business, shall be treated as capital asset. c. Taxpayers changing business from real estate business to non-real estate business. In the case of a taxpayer who changed its real estate business to a non-real estate business, or who amended its Articles of Incorporation from a real estate business to a non-real estate business, such as a holding company, manufacturing company, trading company, etc., the change of business or amendment of the primary purpose of the business shall not result in the re-classification of real property held by it from ordinary asset to capital asset. For purposes of issuing the certificate authorizing registration (CAR) or tax clearance certificate (TCL), as the case may be, the appropriate officer of the BIR shall at all times determine whether a corporation purporting to be not engaged in the real estate business has at any time amended its primary purpose from a real estate business to a non-real estate business. d. Taxpayers originally registered to be engaged in the real estate business but failed to subsequently operate. In the case of subsequent non-operation by taxpayers originally registered to be engaged in the real estate business, all real properties originally acquired by it shall continue to be treated as ordinary assets. e. Treatment of abandoned and idle real properties. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2(g) hereof are automatically converted into capital
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assets upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties. f. Treatment of real properties that have been transferred to a buyer/transferee, whether the transfer is through sale, barter or exchange, inheritance, donation or declaration of property dividends. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: 1. Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee. 2. Real property received as dividend by the stockholders who are not engaged in the real estate business and who do not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipients even if the corporation which declared the real property dividend is engaged in real estate business. DaIACS 3. The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property received in the exchange. g. Treatment of real property subject of involuntary transfer. In the case of involuntary transfers of real properties, including expropriation or foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such real property in the hands of the involuntary seller, either as capital asset or ordinary asset, as the case may be. For example, real properties forming part of the inventory of a real estate dealer, which are foreclosed, shall, for purposes of determining the applicable tax on such foreclosure sale, be treated as ordinary assets. On the other hand, the nature of such real property in the hands of the foreclosure buyer shall be determined in accordance with the rules stated in sub-paragraph (f) hereof. SECTION 4. Applicable Taxes on Sale, Exchange or Other Disposition of Real Property. Gains/Income derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets. a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines. (i) 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, shall be subject to the six percent (6%) capital gains tax imposed under Sec. 24(D)(1) or 25(A)(3) of the Code, as the case may be, based on the gross selling price or current fair market value as determined in accordance with Sec. 6(E) of the Code, whichever is higher, provided, that if the buyer is the Government or any of its political subdivisions or agencies or a government-owned-or-controlled corporation, the tax liability shall, at the option of the individual seller (including estate or trust), be computed on the basis of either the six percent (6%) capital gains tax under Sec. 24(D)(1)/25(A)(3) or the graduated tax rates under Sec. 24(A)(1)(c) or 25(A)(1), all of the Code. (ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended, based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income. b. In the case of non-resident aliens not engaged in trade or business in the Philippines. Capital gains presumed to have been realized by non-resident aliens not engaged in trade or business in the Philippines on the sale of real property located in the Philippines shall be subject to the six percent (6%) capital gains tax imposed under Sec. 25(B), in relation to Sec. 24(D)(1), of the Code, based on the gross selling price or current fair market value as determined in accordance with Sec. 6(E) of the Code, whichever is higher. c. In the case of domestic corporations. (i) Capital gains presumed to have been realized from the sale, exchange or disposition of lands and/or buildings located in the Philippines, which are classified as capital assets, shall be subject to a capital gains tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Sec. 6(E) of the Code, whichever is higher, of such land and/or buildings pursuant to Sec. 27(D)(5) of the Code. (ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to the minimum corporate income tax (MCIT) under Sec. 27(E) of the Code, whichever is applicable. TaCDcE d. In the case of resident foreign corporations. Real property located in the Philippines, regardless of
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classification, sold by a resident foreign corporation shall be subject to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended, and consequently, to the ordinary income tax under Sec. 28(A)(1) or to the MCIT under Sec. 28(A)(2), both of the Code, whichever is applicable. e. In the case of non-resident foreign corporations. The gain from the sale of real property located in the Philippines by a non-resident foreign corporation shall be subject to the final withholding tax at the rate of thirty-two percent (32%) imposed under Sec. 2.57.1(I) of Rev. Regs. No. 2-98, as amended, in relation to Sec. 28(B)(1) of the Code. f. Income on sale of real property not located in the Philippines. Gain realized from the sale, exchange, or other disposition of real property not located in the Philippines, regardless of classification, by resident citizens or domestic corporations shall be subject to the income tax imposed in Sec. 24(A)(1), or Sec. 27(A) or (E) of the Code, as the case may be. Such income/gain shall be exempt pursuant to Sec. 23(B), (D) and (F) of the Code, as the case may be, in the case of non-resident citizens, alien individuals and foreign corporations, SECTION 5. Repealing Clause. All existing BIR rulings, revenue rules, regulations and other issuances or portions thereof inconsistent with the provisions of these regulations are hereby modified, repealed or revoked accordingly. SECTION 6. Effectivity. These Regulations shall take effect after fifteen (15) days following publication in the Official Gazette or in any newspaper of general circulation. SDECAI (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance Recommending Approval: (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
REVENUE REGULATIONS NO. 6-2008 HAS A SEPARATE COPY / PDF FILE, as your preference may be.
November 13, 2001 REVENUE REGULATIONS NO. 18-01 SUBJECT : Guidelines on the Monitoring of the Basis of Property Transferred and Shares Received, Pursuant to a Tax-Free Exchange of Property for Shares under Section 40(C)(2) of the National Internal Revenue Code of 1997, Prescribing the Penalties for Failure to Comply with such Guidelines, and Authorizing the Imposition of Fees for the Monitoring Thereof. TO : All Internal Revenue Officers and Others Concerned. SECTION 1. Scope. Pursuant to Section 244, in relation to Sections 40(C)(2), 58(E), 269, and 275 of the National Internal Revenue Code of 1997 (Tax Code of 1997), these Regulations are hereby promulgated for the purpose of providing the guidelines in the proper monitoring of the basis of properties transferred, and shares received, pursuant to a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997, and to establish the policies governing the imposition of fees for the monitoring thereof. SECTION 2. Basis. A. Substituted Basis of Stock or Securities Received by the Transferor. The substituted basis of the stock or securities received by the transferor on a tax-free exchange shall be as follows: 1. The original basis of the property, stock or securities to be transferred; 2. Less: (a) money received, if any, and (b) the fair market value of the other property received, if any; 3. Plus: (a) the amount treated as dividend of the shareholder, if any, and (b) the amount of any gain that was recognized on the exchange, if any. However, the property received as 'boot' shall have as basis its fair market value. The term "boot" refers to the money received and other property received in excess of the stock or securities received by the transferor on a tax-free exchange. cSTDIC If the transferee of property assumes, as part of the consideration to the transferor, a liability of the transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of computing the substituted basis, be treated as money received by the transferor on the exchange. Finally, if the transferor receives several kinds of stock or securities, the Commissioner is authorized to allocate the basis among the several classes of stocks or securities. B. Substituted Basis of the Transferred Property in the Hands of the Transferee. The substituted basis of the property transferred in the hands of the transferee shall be as follows: (a) the original basis in the hands of the transferor; (b) Plus: the amount of the gain recognized to the transferor on the transfer. C. The Original Basis of Property to be Transferred. The original basis of the property to be transferred shall be the following, as may be appropriate: (a) The cost of the property, if acquired by purchase on or after March 1, 1913;
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(b) The fair market price or value as of the moment of death of the decedent, if acquired by inheritance; (c) The basis in the hands of the donor or the last preceding owner by whom the property was not acquired by gift, if the property was acquired by donation. If the basis, however, is greater than the fair market value of the property at the time of donation, then, for purposes of determining loss, the basis shall be such fair market value; or, (d) The amount paid by the transferee for the property, if the property was acquired for less than an adequate consideration in money or money's worth. (e) The adjusted basis of (a) to (d) above, if the acquisition cost of the property is increased by the amount of improvements that materially add to the value of the property or appreciably prolong its life less accumulated depreciation. (f) The substituted basis, if the property was acquired in a previous tax-free exchange under Section 40(C)(2) of the Tax Code of 1997. D. Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of Property Subject of the Tax-free Exchange. The substituted basis as defined in Section 40(C)(5) of the Tax Code of 1997, and implemented in Section 2.A and 2.B above, shall be the basis for determining gain or loss on a subsequent sale or disposition of property subject of the tax-free exchange. HDIATS SECTION 3. Submission of Information on the Basis of Properties. The parties to a tax-free exchange of property for shares under Section 40(C)(2) of the Tax Code of 1997 who are applying for confirmation that the transaction is indeed a tax-free exchange shall, together with such information as the Commissioner of Internal Revenue may require, submit the following: (a) A sworn certification on the basis of the property to be transferred pursuant to such exchange. The basis of each real property/share of stock or other property transferred must be itemized in the certification in order to enable the BIR to determine the basis for subsequent disposition and to make it possible for the Register of Deeds or the corporate secretary, as the case may be, to annotate the information on such basis for each property/share of stock on the reverse side of the Transfer Certificate of Title/Condominium Certificate of Title of the real property involved, or of Certificate of Stock. The sworn declaration must be executed by the transferor himself, or in case the transferor is a juridical entity, by an official with rank of no less than the Chief Financial Officer or his equivalent. The Commissioner of Internal Revenue is authorized to prescribe the form in which such sworn declaration shall appear. (b) Certified true copies of the Transfer Certificates of Title and/or Condominium Certificates of Title of the real properties to be transferred; (c) Certified true copies of the corresponding latest Tax Declaration of the real properties to be transferred. It is understood that any improvement is separately declared and therefore, covered by a Tax Declaration distinct from the Tax Declaration on the land. Further, if the tax declaration was issued three (3) or more years prior to the exchange transaction, the Transferor shall include in the certification by the local government unit's Assessor that such tax declaration is the latest tax declaration covering the real property; (d) Certified true copies of the certificates of stocks evidencing shares of stock to be transferred; and (e) Certified true copy of the inventory of other property/ies to be transferred. No certification/ruling will be issued by the Bureau of Internal Revenue unless the foregoing requirements, in addition to such other documents that the Commissioner of Internal Revenue may require, are submitted. SECTION 4. Information to be Contained in Certification/Ruling by the Bureau of Internal Revenue. All certifications or rulings issued by the Bureau of Internal Revenue confirming that an exchange of property for shares complies with the provisions of Section 40(C)(2) of the Tax Code of 1997 shall include a statement on the substituted basis of the property transferred. SECTION 5. Conditions for the Issuance of Certificate Authorizing Registration (CAR) or Tax Clearance (TCL). The CAR/TCL for the real property or share of stock/unit of participation/interest involved in the exchange shall be issued by the Revenue District Officer/Authorized Internal Revenue Officer on the basis of the certification or ruling to be issued in triplicate by the Commissioner or his duly authorized representative to the effect that the transaction qualifies as a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997. ScaATD The CAR/TCL to be issued shall specify, among others, that the transaction involved is a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997; the date of exchange; and the substituted basis of the properties as stated in the certification or ruling issued by the Bureau of Internal Revenue. SECTION 6. Information to be annotated in the Transfer Certificate of Title or Condominium Certificate of Title issued by the Register of Deeds, and on the Certificate of Stock/Units of Participation issued by the Corporate Secretary. In cases of transfers or exchanges falling under Section 40(C)(2) of the Tax Code of 1997, the following information shall be annotated on the reverse side of the Transfer Certificate of Title or Condominium Certificate of Title or certificate of stock that is transferred or issued pursuant to such transfer or exchange: "The acquisition of the property described in this title/certificate is by virtue of a tax-free exchange pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997 per Deed of Exchange/Assignment dated __________. The substituted basis pursuant to Section 40(C)(5) of the National Internal Revenue Code of 1997 is in the amount of ________________." The following persons shall be responsible for making the above annotation:
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(a) The Registrar of Deeds, with respect to the Transfer Certificate of Title or Condominium Certificate of Title of real property that is transferred; (b) The Corporate Secretary or equivalent officer of the investee corporation/partnership whose shares/units are transferred by the Transferor to the transferee/surviving/consolidated corporation; (c) The Corporate Secretary of transferee/surviving/consolidated corporation, upon the issuance of the certificates of stock evidencing the original shares issued pursuant to the transfer or exchange. The annotation shall be made on the reverse side of the Transfer Certificate of Title or Condominium Certificate of Title, or certificate of stock/unit of participation, as the case may be. In addition to the foregoing, each Deed of Exchange/Assignment transferring such property must state that the parties thereto shall undertake to comply with the provisions of these Regulations. SECTION 7. Submission of Proof of Annotation of Substituted Basis. No certification/ruling issued by the Bureau of Internal Revenue shall be valid unless the parties to the exchange submit to the Bureau copies of the new Transfer Certificates of Title, Condominium Certificates of Title, or certificates of stock/units of participation, duly certified by the Register of Deeds or the Corporate Secretary, as the case may be, containing the information required in Section 6 of these Regulations, within ninety (90) days from receipt by any of the parties to the exchange transaction of the certification-ruling by the Bureau confirming that the transaction complies with Section 40(C)(2) of the Tax Code of 1997. SECTION 8. Information to be Included in the Final Adjustment Return and in the Audited Financial Statements Accompanying the final Adjustment Return; Records to be Maintained by Parties. (a) The transferor and the transferee or the surviving/consolidated corporation, as the case may be, as well as the shareholders of such surviving/consolidated corporation (in case of a merger or consolidation) shall enclose with their respective income tax returns for the taxable year in which the tax-free exchange occurred, a copy of the request for ruling filed with, and the corresponding certification/ruling issued by, the Bureau of Internal Revenue, both duly stamped received by the appropriate office of the Bureau of Internal Revenue. (b) Such persons shall likewise include as a note to their respective audited financial statements for the taxable year in which such exchange occurred a statement to the effect that they hold such assets/shares acquired in a taxfree exchange and the year in which such exchange occurred, and in the succeeding taxable years until the subject property/ies is/are subsequently transferred to another transferee. (c) In addition to the foregoing, the parties to the transaction shall maintain permanent records of the transaction, consisting of, among others, the request for ruling, certification or ruling issued by the Bureau of Internal Revenue, the Deed of Assignment/Exchange, or the Articles of Merger, as the case may be, and such other documents as may be required to facilitate the determination of gain or loss from a subsequent disposition of the stocks/unit of participation/interest/properties received or transferred in the exchange. SECTION 9. Fees to be Paid by the Applicant/Taxpayer. Every applicant/taxpayer who wants to avail of the tax-free exchange in accordance with Section 40(C)(2) and 6(b) and (c) of the Tax Code of 1997 shall secure a form that the Bureau shall provide for such purpose and shall pay in advance a processing and certification fee of Five Thousand Pesos (P5,000.00) for each application not involving more than ten (10) real properties and/or Certificates of Stock. An additional fee of One Hundred Pesos (P100.00) shall be paid for every Transfer Certificate of Title/Condominium Certificate of Title/Certificate of Stock in excess of ten (10). SECTION 10. Penalties. Every official, agent, or employee of the Registry of Deeds who is guilty of failing to annotate the information stated in Section 5 hereof shall, upon conviction for each omission, be punished by a fine of not less than Fifty Thousand Pesos (P50,000.00) but not more than One Hundred Thousand Pesos (P100,000.00) and suffer imprisonment of not less than ten (10) years but not more than fifteen (15) years and shall likewise suffer an additional penalty of perpetual disqualification to hold public office, to vote, and to participate in any public election pursuant to Section 58(E) in relation to Section 269 of the Tax Code of 1997. Every Corporate Secretary or the duly authorized officer of the corporation who is guilty of failing to annotate the information stated above shall, upon conviction for each omission, be punished by a fine of not more than One Thousand Pesos (P1,000.00), or suffer imprisonment of not more than six (6) months, or both pursuant to Section 275 of the Tax Code of 1997. Any other violation of the provisions of these Regulations by any of the parties to the exchange transaction or by any responsible public officer, shall be subject to the appropriate penalties provided under the Tax Code of 1997, and/or the Revised Penal Code. SECTION 11. Repealing Clause. Any Revenue Regulations or Revenue Memorandum Order, or provisions of any revenue issuance, inconsistent with these Regulations are hereby repealed accordingly. cISAHT SECTION 12. Effectivity Clause. These Regulations shall take effect fifteen (15) days after publication in any newspaper of general circulation. ISCaDH (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance Recommending Approval: (SGD.) RENE G. BAEZ Commissioner of Internal Revenue
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November 28, 2001 REVENUE MEMORANDUM ORDER NO. 32-01 SUBJECT : Guidelines Implementing Revenue Regulations No. 18-2001 on the Monitoring of the Basis of the Property Transferred and Shares of Stock Received Pursuant to Section 40(C)(2) of the Tax Code of 1997, Revising and Updating the Requirements and Conditions Precedent to the Non-Recognition of Gain or Loss in Transactions Falling Thereunder, and Prescribing the Forms Therefor. TO : All Internal Revenue Officers and Others Concerned. In order to facilitate the monitoring of the basis of properties transferred and shares received in an exchange transaction, and in the determination of whether a transaction involving the transfer of properties by individual/s or corporation/s in exchange for shares of stock of another corporation or unit of participation in a partnership, as well as a transaction involving a merger or consolidation, is a tax-free exchange that falls under Section 40(C)(2), in relation to Section 40(6)(b) and (c) of the Tax Code of 1997, the requirements hereunder stated must be complied with by both .transferor(s)/absorbed corporation and transferee/surviving/consolidated corporation. HSacEI The procedures outlined hereunder implement and complement Revenue Regulations No. 18-2001 dated November 13, 2001, and shall be observed in the monitoring and investigation of the basis of such properties transferred pursuant to a tax-free exchange, to ascertain compliance with the conditions set forth in the Certification/Ruling issued by this Office, and in the consequent assessment of tax liabilities if any, due upon subsequent disposition of the properties involved in the exchange. I. DOCUMENTATION REQUIREMENTS A. BIR Certification/Ruling Any application to be filed with the Law Division for a BIR Certification/Ruling on the tax consequence of the exchange of properties described hereunder shall be made in a form which the BIR will provide for the purpose under the cover of a transmittal letter providing a brief overview of the transaction that contains all the material facts of the exchange transaction, and shall be accompanied by three (3) copies of each of the following documents: (1) In the case of transfer of property to a controlled corporation/partnership (a) Deed of Transfer/Assignment/Exchange; (b) Duly registered Articles of Incorporation or Partnership with SEC of the transferor corporation and transferee corporation/partnership, and By-Laws; (c) Copies of the Transfer Certificates of Title/Condominium Certificates of Title/Certificates of Stock to the properties to be transferred pursuant to the tax-free exchange, as certified by the appropriate Registrar of Deeds or Corporate Secretary, as the case may be; (d) Copies of the latest Tax Declaration of the properties to be transferred pursuant to the tax-free exchange, as certified by the appropriate local government unit's Assessor. It is understood that any improvement is separately declared and therefore, covered by a Tax Declaration distinct from the Tax Declaration on the land. Further, if the tax declaration was issued three (3) or more years prior to the exchange transaction, the Transferor shall include in the certification by the local government unit's Assessor that such declaration is the latest tax declaration covering the real property; (e) Certification of the fair market value or zonal value of the real property involved in the exchange. The zonal value shall be certified, as a general rule, by the Chief, Asset Valuation Division at the 10th Floor, BIR National Office. However, the Revenue District Officer or the Revenue Regional Director can also issue the certification whenever access to the latest schedule of zonal values is electronically available to them. (f) Sworn certification by the individual transferor or in the case of a juridical person, by the Chief Financial Officer or his equivalent as to the basis of the property to be transferred. The original or adjusted basis, as the case may be, of each real property/share of stock/or other property transferred must be itemized in the certification, instead of a single lump sum in order to enable the Registrar of Deeds or the corporate secretary, as the case may be, to annotate the substituted basis on the reverse side of the Transfer/Condominium Certificate of Title to the real property involved or of the Certificate of Stock, and in order to facilitate the determination of gain or loss from a subsequent disposition of real properties/shares of stock and other properties received in the exchange. (g) Sworn statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the properties acquired in the exchange is subject. The proper officer to issue the statement shall be the Chief Financial Officer or his equivalent and confirmed by the President or the Chief Executive Officer or Country Chairman or their equivalent; (h) Audited Financial Statements of Transferor-corporation, as of the transaction date. (2) In the case of Merger or Consolidation (a) The documents stated in (1) above; (b) Plan of Corporate Merger or Consolidation; (c) Statement of the amount and nature of the assets to be transferred by the absorbed corporation to the surviving/consolidated corporation. (d) Articles of Incorporation duly registered with SEC of the merged or consolidated corporation; and (e) Audited Financial Statements duly submitted or to be submitted to the SEC in connection with the
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application for merger or consolidation. The material facts in the submitted documents, including an analysis of their bearing on the issues and a specification of the applicable provisions thereof, must be stated also in the covering letter. B. No Application/Request for Certification-Ruling will be processed unless the foregoing requirements are complied with in all respects. C. In the case of executed and/or completed transactions, either original executed and notarized copies or certified true copies of the above-mentioned documents must be submitted, together with proof of payment of the applicable documentary stamp taxes on the transactions. In the case of issuance of shares/unit of participation by the transferee, the due dates for the payment of the corresponding documentary stamp tax prescribed under Revenue Memorandum Order No. 8-98 dated February 10, 1998, as amended by Revenue Regulations No. 6-2001 and 122001 dated July 31, 2001 and September 7, 2001, respectively, shall apply. D. Records to be kept and information to be filed. The parties to the transaction shall comply with the pertinent provisions of Revenue Regulations No. 18-2001 dated November 13, 2001, regarding the records to be kept and information to be filed in connection with the tax-free exchange, provided that, any violation thereof, including the failure of the parties to present proof of annotation of the substituted basis within the period provided in Section 7 of such Regulations shall be referred to the Prosecution Division for appropriate action. DSHcTC II. FORM OF REQUEST FOR RULING AND CERTIFICATION To the extent applicable, the request for certification-ruling shall be prepared and submitted in the form provided in Annex "A" hereof under the heading "Application and Joint Certification". For this purpose, soft copies of the Form shall be available either from the Taxpayers' Information and Education Division at the Ground Floor, BIR National Office Building or from the Law Division at the 7th Floor of the same building. The same may also be downloaded from the BIR website at www.bir.gov.ph. If the application is to be signed and submitted not by the taxpayer himself, but only by his authorized representative, the appropriate special power of attorney shall be submitted with the application for a certification-ruling. Otherwise, the request shall not be accepted by the BIR. In the case of a juridical person, the corporate secretary shall issue a sworn statement that the signing officer (i.e., at the very least, the Chief Financial Officer) has been authorized by the Board of Directors to represent the company and has personal knowledge of the facts of the exchange transaction. III. PROCESSING AND CERTIFICATION FEE The taxpayer/applicant shall pay the applicable processing and certification fee as provided in Revenue Regulations No. 18-2001 dated November 13, 2001, before filing of the request for certification-ruling. The applicant must submit proof of payment of the processing and certification fee, with the original presented, upon filing of the application for certification-ruling with the Law Division. Otherwise, the application shall not be accepted for processing. The processing and certification fee shall accordingly be adjusted if additional transfer certificates of title/condominium certificates of title/certificates of stock are submitted for processing. IV. DECLARATION UNDER OATH Declarations in the application and joint certification form, the documents to be submitted, and the facts represented in support of the requested certification-ruling, including the covering letter, shall be sworn under oath, under penalties of perjury, by the taxpayer himself, or, in the case of a juridical person, by the Chief Financial Officer or his equivalent who has personal knowledge of the facts to be true, correct and complete. Actual submission of the application/request and follow-up thereof may be done by an authorized representative, clothed with a special power of attorney, and subject to the provisions of Revenue Regulations No. 15-99 dated July 16, 1999 on accreditation of tax agents V. ISSUANCE OF CERTIFICATE AUTHORIZING REGISTRATION (CAR)/TAX CLEARANCE (TCL) The CAR/TCL for the real property or share of stock/unit of participation/interest involved in the exchange shall be issued by the Revenue District Officer (RDO) or by the Authorized Internal Revenue Officer (AIRO), on the basis of the certification-ruling issued by the Commissioner or his duly authorized representative to the effect that the transaction qualifies as a tax-free exchange or corporate reorganization under Section 40(C)(2) of the Tax Code of 1997. The necessary proof of payment of appropriate documentary stamp taxes must also be presented. The CAR/TCL to be issued shall specify, among others, that the transaction involved is a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997; the date of exchange; the original or adjusted basis as represented by the taxpayer, and substituted basis of the properties as stated in the certification or ruling issued by the Bureau of Internal Revenue. VI. REPEALING CLAUSE. The provisions of Revenue Memorandum Order No. 26-92 dated May 28, 1992, and all other rules, orders or portions thereof that are contrary to or inconsistent with the provisions of this Order are hereby modified and/or repealed accordingly. VII. EFFECTIVITY. This Order shall take effect immediately. (SGD.) RENE G. BAEZ Commissioner of Internal Revenue
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November 29, 2001 REVENUE MEMORANDUM RULING NO. 01-01 SUBJECT : Tax Consequences of Tax-Free Exchange of Property for Shares of Stock of a Controlled Corporation Pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997 TO : All Internal Revenue Officers and Others Concerned Pursuant to Section 4, in relation to Sections 40(C)(2), (4), (5), (6), 175, 176, and 196, and pertinent provisions of Titles II, IV and VII of the National Internal Revenue Code of 1997 (Tax Code of 1997), this Revenue Memorandum Ruling is issued to consolidate, provide, clarify and harmonize the existing guidelines on the tax consequences of a non-recognition transaction consisting of a tax-free exchange of property for shares of stock under Section 40(C)(2) of the Tax Code of 1997. This Revenue Memorandum Ruling shall apply solely and exclusively to, and may be relied upon only in situations in which the facts are substantially similar to the facts stated below, but subject to the principles of substance over form. ADHCSE I. FACTS 1. A domestic corporation (the "Transferor") owns certain property, consisting, for example, of the following: 1.1 Land encumbered by a real estate mortgage (REM); 1.2 Buildings; 1.3 100 shares of stock in G Corporation with a par value of P10 per share; 1.4 50 shares of stock in D Corporation without par value; 1.5 Unsecured receivables; 1.6 Loans to Q ("Borrower/Mortgagor"), secured by a real estate mortgage; 1.7 Cash. 2. X Corporation (the "Transferee") is a domestic corporation. 3. The Transferor transfers the property to the Transferee. In exchange, the Transferee issues shares to the Transferor out of the unissued portion of its existing authorized capital stock, or, if such existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's authorized capital stock. The Transferor does not receive any money or property other than the aforementioned shares of the transferee. 4. The property transferred by the Transferor-corporation constitutes less than 80% of the Transferor's assets, including cash. 5. In addition to the transfer of the property, the Transferee assumes liabilities of the Transferor. However, the sum total of the amount of liabilities assumed, plus the amount of the encumbrance or REM on the Land (as stated in Section 40(C)(4) of the Tax Code of 1997 "liabilities to which the property is subject") do not exceed the basis of the property transferred. 6. The shares are neither issued in payment for services, nor for settlement of an outstanding liability that arises from the performance of services rendered by the Transferor to the Transferee. 7. As a result of the above-mentioned transfer, the Transferor acquires at least 51% of the total outstanding capital stock of the Transferee entitled to vote. HTAEIS II TAX CONSEQUENCES 1. Income tax. The Transferor shall not recognize any gain or loss on the transfer of the property to the Transferee. Consequently, the Transferor will not be subject to capital gains tax, income tax, or to creditable withholding tax on the transfer of such property to the Transferee. Neither may the transferor recognize a loss, if any, incurred on the transfer. The last paragraph of Section 40(C)(2) and (6)(c) of the Tax Code of 1997 state: "No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property." "(c) The term "control", when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote." In addition, the assumption of liabilities or the transfer of property that is subject to a liability does not affect the nonrecognition of gain or loss under Section 40(C)(2) of the Tax Code of 1997, since in this case, the total amount of such liabilities does not exceed the basis of the property transferred. Section 40(C)(4) of the Tax Code of 1997 states: "(4) Assumption of liability. (a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as a part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property, subject to a liability, then such assumption or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange from being within the exceptions. (b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total amount of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be." HESIcT
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In addition, the Transferee is not subject to income tax on its receipt of the property as contribution to its capital, even if the value of such property exceeds the par value or stated value of the shares issued to the Transferor. Section 55 of Revenue Regulations No. 2 ("Income Tax Regulations") states: "Section 55. Acquisition or disposition by a corporation of its own capital stock. . . . . The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than the par or stated value of such stock. aCASEH xxx xxx xxx" However, stocks shall not be issued for a consideration less than par or issued price thereof. (Section 62, Corporation Code of the Philippines) 2. Donor's tax. The Transferor is not subject to donor's tax, regardless of whether the value of the property transferred exceeds the par/stated value of the Transferee shares issued to the Transferor, there being no intent to donate on the part of the Transferor. 3. Value added tax. The Transferor is not subject to value-added tax ("VAT") on the transfer of the property if it is not engaged in a business that is subject to the VAT under Title IV of the Tax Code of 1997. Even if the Transferor is engaged in an activity that is subject to VAT, it is nonetheless not subject to VAT on the transfer of the property to the Transferee, since the Transferor gains control of the Transferee. Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as amended states: "(b) Not subject to output tax. The VAT shall not apply to goods or properties existing as of the occurrence of the following: 1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders, Example: transfer of property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code [now 40(C)(2) and (6)(c) of the Tax Code of 1997]. 4. Documentary stamp tax. The documentary stamp tax consequences of the transfer are as follows: 4.1 Either the Transferor or the Transferee is subject to documentary stamp tax as follows: 4.1.1 On the transfer of real property (Section 196, Tax Code of 1997) P15 on each P1,000 or fractional part thereof, based on the higher of: (i) the consideration contracted to be paid for such real property, and (ii) the fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997. HScDIC 4.1.1.1 The "consideration contracted to be paid for such real property" shall be computed in accordance with the following rules. "Stock in a corporation is a valuable consideration for the transfer of real property." (Section 177, Revenue Regulations No. 26) Therefore, the consideration for the real property shall be computed as the par/stated value of the Transferee shares issued to the Transferor in exchange for such property plus the value of such property in excess of such par/stated value recognized in the books of the Transferee as premium, additional capital contribution, or donated surplus, or the like. For instance, if the value of the property is P1,000,000, but only shares with an aggregate par value of P250,000 are issued, there being a premium above par of P750,000, which the Transferee records as additional capital contribution, donated surplus, or the like, the consideration is P1,000,000 (that is, par value of P250,000 + premium of P750,000). 4.1.1.2 On the other hand, the fair market value of the property as determined in accordance with Section 6(E) of the Tax Code of 1997 whichever is higher between (1) the fair market value as determined by the Commissioner (that is, zonal value), and (2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. 4.1.1.3 The value of the improvements thereon shall be based on the formula provided under Revenue Audit Memorandum Order (RAMO) No. 1-2001 but shall not be lower than the fair market value in the Tax Declaration in the year of exchange. According to the said RAMO, the value of the improvement shall be determined by deducting the zonal value of the land from the total selling price/consideration per Deed of Exchange. Thus, if the total selling price/consideration per Deed of Exchange is P1,000,000.00 and the zonal value of the land is P600,000.00, then the value of the improvement is P400,000.00. SIacTE The fair market value of the improvement shall be determined per latest tax declaration at the time of its sale or disposition (in this particular case, the exchange of such property). If the tax declaration was issued three (3) or more years prior to the date of sale or disposition, the Transferor shall be required to submit a certification from the city/municipal assessor as to the fact that such tax declaration is the latest tax declaration covering the real property. Absent such certification, the Transferor must secure a copy of the latest tax declaration duly certified by the assessor. 4.1.2 On the transfer of shares of stock held by the Transferor (Section 176, Tax Code of 1997) 4.1.2.1 The transfer of the shares of G Corporation, which have a par value, is subject to documentary stamp tax of P1.50 on each P200 or fractional part thereof of the par value of such shares. 4.1.2.2 The transfer of the shares of D Corporation, which are without par value, is subject to the documentary stamp tax of 25% of the documentary stamp tax that was paid when those shares were originally issued. 4.1.3 Transfer of mortgage (Section 198, in relation to Section 195, Tax Code of 1997) The transfer of the real estate mortgage, as a consequence of the transfer of the loan to Q ("Borrower/Mortgagor"), is subject to documentary stamp tax at the following rate:
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(a) When the amount secured does not exceed five thousand pesos (P5,000) twenty pesos (P20); (b) On each five thousand pesos (P5,000), or fractional part thereof in excess of five thousand pesos (P5,000), an additional tax of ten pesos (P10). 4.2 The Transferee is subject to documentary stamp tax on the original issuance of its shares (Section 175, Tax Code of 1997), at the following rate, depending on whether such shares are par or no-par shares: 4.2.1 If the Transferee's shares are with par value, the documentary stamp tax is imposed at the rate of P2 on each P200 or fractional part thereof of the par value of such shares, regardless of whether the shares are issued at par value or for a premium (that is, for a consideration in excess of par value). 4.2.2 If the Transferee's shares are without par value, the documentary stamp tax is imposed at the rate of P2 on each P200 or fractional part thereof of the actual consideration paid for such shares. 5. Time of Payment of Taxes. The time for the payment of the documentary stamp tax liabilities, whether the taxpayer is an e-filer or not, shall be as follows: 5.1 With respect to the transfer of property mentioned in 4.1, above, the documentary stamp tax shall be paid on or before the fifth (5th) day after the close of the month when the deed of assignment/transfer transferring such property was executed, made, signed, accepted, or transferred (Section 5, Revenue Regulations No. 6-2001). AHCETa 5.2 With respect to the original issuance of shares mentioned in 4.2, above, the documentary stamp tax shall be paid on or before the fifth (5th) day after the close of the month of 5.2.1 Approval of SEC registration, in case of original incorporation; 5.2.2 Approval of the increase in authorized capital stock, in case the shares issued to the Transferee come from the increase in authorized capital stock of the Transferee; or 5.2.3 Execution of the deed of assignment/transfer of the property for which the Transferee's shares are issued, in case the shares issued to the Transferor come from the unissued portion of the Transferee's existing authorized capital stock. III ADDITIONAL FACTS AND VARIATIONS NOT AFFECTING TAX CONSEQUENCES The following additional facts or variations will not affect the tax consequences of the transaction, as described above: 1. In no. 1 of "I. Facts" stated above, if the total number of Transferors does not exceed five persons, whether such persons are natural persons or juridical persons. 2. In no. 7 of "I. Facts" stated above, the tax consequences are not affected by whether the Transferor is/was a shareholder prior to the transaction, or that, prior to the transaction, the Transferor already possessed control of the Transferee by owning 51% or more of the total outstanding capital stock of the Transferee entitled to vote. In such a case, the Transferor is deemed to have acquired "further control" of the Transferee, which places the transaction within the purview of Section 40(C)(2) of the Tax Code of 1997. However, a Transferor who, prior to the transaction was an existing shareholder of the Transferee, but who owned less than 51% of the voting stocks of the Transferee (even if it, together with not more than four (4) persons, owned more than 51% of all classes of stocks entitled to vote of the Transferee) cannot be deemed to have gained control or further control of the Transferee if, after a transaction in which it is the sole transferor, it still owned by itself less than 51% of the voting stocks of the Transferee. For instance, assume in the above facts that, prior to the transfer, the Transferor, together with Stockholders E, B, M and R, owned 100% of the voting stocks of the Transferee. However, by itself the Transferor owned only 32% of the voting stocks of the Transferee (the balance of the 68% voting stocks being owned by Stockholders E, B, M and R). The Transferor transfers property to the Transferee in exchange for shares of stock. After this exchange, the Transferor owned, including the initial 32%, a total of 49% or less than 51% of the voting stocks of the Transferee. In this situation, the Transferor is not deemed to have gained control or further control of the Transferee. CASTDI IV FURTHER CLARIFICATION OF FACTS AND TAX CONSEQUENCES 1. No. 1 of "I. Facts" mentions "property". For purposes of Section 40(C)(2) of the Tax Code of 1997, this term excludes services, accounts receivable for services rendered by the Transferor for the Transferee, cash and the conversion of debt into equity. 2. No. 3 of "I. Facts" mentions the issuance of the Transferee's shares from the "unissued portion of its existing authorized capital stock, or, if such existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's authorized capital stock". This statement of fact excludes the following, which if present, would give rise to a different tax consequence treated elsewhere other than in this Revenue Memorandum Ruling 2.1 The issuance of treasury shares, which have previously been issued but were subsequently re-acquired by the Transferee and have not been retired. 2.2 Settlement of subscription receivables Therefore, the tax consequences described above shall not apply to the extent that the property is transferred in payment for the unpaid balance of the subscription to shares. 3. No. 4 of "I. Facts" mentions the property transferred constituting "less than 80% of the Transferor's assets, Including cash". This requirement is necessary to distinguish this transaction from a de facto merger as described in Section 40(C)(6)(b) of the Tax Code of 1997 in relation to BIR Circular No. V-253 dated July 16, 1957, the tax consequences of which will be discussed in a different Revenue Memorandum Ruling. 4. No. 5 of "I. Facts" mentions the term "adjusted basis of the property", as well as the fact that such liabilities
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assumed and to which the property is subject "do(es) not exceed the adjusted basis of the property transferred". These terms are clarified as follows: 4.1 The basis or "original basis" of the property is its "historical cost". "Historical cost" is the value of the property as determined pursuant to Section 40(B) of the Tax Code of 1997. The term "adjusted basis" is the value of the property as determined pursuant to the said Section, modified by adjustments to the historical cost. For example, the "adjusted basis" of a property acquired by purchase is the historical cost (acquisition cost) of such property increased by, among others, the amount of improvements that materially add to the value of the property or appreciably prolong its life and decreased by accumulated depreciation. "Adjusted basis" excludes re-appraisal surplus, whether or not recorded in the books of the Transferor. 4.2 "Property" does not include services or accounts receivable for services rendered by the Transferor to the Transferee, cash, or the conversion of debt into equity. Therefore, in determining whether liabilities assumed and to which the property is subject "do(es) not exceed the adjusted basis of the property transferred", the value of services rendered, cash and the conversion of debt into equity will be excluded from the computation of "adjusted basis of the property transferred". HAISEa 5. The term "adjusted basis" should be distinguished from the term "substituted basis", since they are not necessarily synonymous. The terms "original basis" and "adjusted basis" are used in reference to the value of the property before it was transferred by the Transferor; whereas, the term "substituted basis" is used in reference to both the value of the property in the hands of the Transferee after its transfer and the shares received by the Transferor from the Transferee. The term "substituted basis" is significant in determining the tax basis of the aforementioned property or shares for purposes of computing the gain or loss on the subsequent disposition of such property or shares. The following rules will apply in determining substituted basis: 5.1 In general, the substituted basis of the Transferee's shares received by the Transferor for purposes of computing gain or loss on the subsequent disposition of such shares by the Transferor is equal to the Transferor's basis in the property at the time of the transfer (that is, "historical cost/original basis" or "adjusted basis", as the case may be) decreased by (1) the money received by the Transferor, and (2) the fair market value of the other property received by the Transferor, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange. If, as in this case, the Transferee assumed liabilities of the Transferor and/or acquired property of the Transferor that is subject to liabilities, the amount of liabilities shall be treated as money for purposes of determining the substituted basis. In the particular facts covered by this Revenue Memorandum Ruling, the substituted basis of the Transferee's shares acquired by the Transferor is the historical cost/original basis or adjusted basis of the properties mentioned in no. 1 of "I. Facts" (excluding cash), less the total of (a) the amount of liabilities assumed by the Transferee and (b) the amount of real estate mortgage on the Land. Section 40(C)(5)(a) of the Tax Code of 1997 states: "(5) Basis. (a) The basis of the stock or securities received by the transferor upon the exchange specified in the above exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property received, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange; Provided, That the property received as "boot" shall have as basis its fair market value; provided, further, that if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange; provided, finally, that if the transferor receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis among the several classes of stocks or securities." ICcDaA 5.2 On the other hand, the substituted basis of the property in the hands of the Transferee for purposes of computing gain or loss on the subsequent disposition of such property by the Transferee is the Transferor's original or adjusted basis in such property at the time of transfer plus the gain recognized to the transferor on the exchange. Section 40(C)(5)(b) of the Tax Code of 1997 states: "The basis of the property transferred in the hands of the transferee shall be same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer." In the particular facts of this Revenue Memorandum Ruling, there are no circumstances under which the Transferor recognizes gain. Thus, in this case, the substituted basis of the property in the hands of the Transferee is equal to the Transferor's original or adjusted basis in such property at the time of the transfer. 6. No. 7 of "I. Facts" mentions that the Transferor acquires "at least 51% of the total outstanding capital stock of the Transferee entitled to vote". Shares of stock "entitled to vote" excludes those shares that have been denied voting rights in the Transferee's Articles of Incorporation, in accordance with the provisions of Batas Pambansa Blg. 68 ("The Corporation Code of the Philippines" or the "Corporation Code") (although the Corporation Code may retain the right of holders of preferred shares to vote in certain instances specified in the Code). For instance, assume in the above Facts, that the Transferee has an authorized capital stock of P32,550,000.00 divided into 265,000 common shares and 2,990,000 preferred non-voting shares with a par value of P10.00 per share. Only common shares have voting rights. The stockholders of the Transferee before the transfer are the following: aHIEcS
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Stockholders Common Preferred Transferor 135,490 9 B 10 8 C 64,000 651,244 D 64,000 651,246 E 1,497 530,340 F 1 1 G 1 1 H 1 1 TOTAL 265,000 1,832,850 ======== ======== The Transferee increases its authorized capital stock by increasing only the number of its common shares. Out of this increase, the Transferor subscribes to 298,450 common shares for a total subscription price of P2,984,500.00, which subscription is paid in property. IHEaAc As a result of the subscription the Transferor gains control of the Transferee by owning 77.01% (433,940/563,450 common shares) of the latter's outstanding shares of stock that are entitled to vote, to wit: Stockholders Common Preferred Transferor 433,940 9 B 10 8 C 64,000 651,244 D 64,000 651,246 E 1,497 530,340 F 1 1 G 1 1 H 1 1 TOTAL 563,450 1,832,850 ======== ======= 7. If the Transferor is a Philippine branch of a foreign corporation, and the branch is incorporated into the Transferee corporation (such that the branch will no longer exist after the incorporation of the Transferee) directly owned by the head office, in addition to the tax consequences described above, the branch will be subject to the 15% branch profits remittance tax to the extent that there are unremitted branch profits at the time of transfer (Section 28(A)(5), Tax Code of 1997), since the transaction will be considered a constructive remittance of branch profits to the head office which is converted into equity of the Transferee corporation. The 15% rate may be reduced under applicable provisions of the various tax treaties to which the Philippines is a signatory. V COMPLIANCE In addition to the foregoing, the Transferor/s and Transferee should comply with their obligations as provided in Revenue Regulations No. 18-2001 dated November 13, 2001 and Revenue Memorandum Order No. ____ dated November ____, 2001. VI REPEALING CLAUSE All Rulings that are inconsistent with this Revenue Memorandum Ruling are hereby repealed accordingly. VII EFFECTIVITY Subject to the provisions of Section 246 of the Tax Code of 1997, this Revenue Memorandum Ruling shall take effect immediately. AEcTCD (SGD.) RENE G. BAEZ Commissioner of Internal Revenue
April 25, 2002 REVENUE MEMORANDUM RULING NO. 01-02 SUBJECT : Tax Consequences of De Facto Merger Pursuant to Section 40(C)(2) and (6)(b) of the National Internal Revenue Code of 1997 TO : All Internal Revenue Officers and Others Concerned Pursuant to Section 4, in relation to Sections 40(C)(2), (4), (5), (6), 175, 176, and 196, and pertinent provisions of Titles II, IV and VII of the National Internal Revenue Code of 1997 (Tax Code of 1997), this Revenue Memorandum Ruling is issued to consolidate, provide, clarify and harmonize the existing guidelines on the tax consequences of a de facto merger under Section 40(C)(2) and (6)(b) of the Tax Code of 1997. This Revenue Memorandum Ruling shall apply solely and exclusively to, and may be relied upon only in, situations in which the facts are substantially similar to the facts stated below, but subject to the principle that for such transaction to be considered a de facto merger within the purview of Section 40(C)(2) in relation to 40(6)(b) of the Tax Code of 1997, the same must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. cSEaDA
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I Facts 1. A domestic corporation (the "Transferor") owns certain property, consisting, for example, of the following: 1.1 Land encumbered by a real estate mortgage (REM); 1.2 Buildings; 1.3 100 shares of stock in G Corporation with a par value of P10 per share; 1.4 50 shares of stock in D Corporation without par value; 1.5 Unsecured receivables; 1.6 Loans to Q ("Borrower/Mortgagor"), secured by a real estate mortgage; 1.7 Cash. 2. The property transferred by the Transferor constitutes at least 80% of the Transferor's assets, including cash. 3. The Transferor transfers the property to the Transferee. In exchange, the Transferee issues shares to the Transferor out of the unissued portion of its existing authorized capital stock, or, if such existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's authorized capital stock. The Transferor does not receive any money or property other than the aforementioned shares of the transferee. 4. In addition to the transfer of the property, the Transferee assumes liabilities of the Transferor. However, the sum total of the amount of liabilities assumed, plus the amount of the encumbrance or REM on the Land (as stated in Section 40(C)(4) of the Tax Code of 1997 "liabilities to which the property is subject") do not exceed the basis of the property transferred. II. GENERAL PRINCIPLES 1. A de facto merger involves the acquisition by one corporation of all or substantially all the properties of another solely for stock. Section 40(C)(6)(b) of the Tax Code of 1997 states: "The term "merger" or "consolidation," when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation; or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: Provided, finally, That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term "property" shall be taken to include the cash assets of the transferor." (Emphasis supplied) The phrase "substantially all the properties of another corporation" is defined in BIR General Circular No V-253 dated July 16, 1957 to mean "the acquisition by one corporation of at least 80% of the assets, including cash, of another corporation," which 'has the element of permanence and not merely momentary holding'. To constitute a de facto merger, the following elements must concur: (1) there must be a transfer of all or substantially all of the properties of the transferor corporation solely for stock, and (2) it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. One basic difference between a de facto merger and a statutory merger is that the Transferor is not automatically dissolved in the case of the former. Likewise, there is no automatic transfer to the Transferee of all the rights, privileges, and liabilities of the Transferor. It is, in fact, in procedure, similar to a transfer to a controlled corporation under the same Section 40(C)(2) of the Tax Code of 1997, except that at least 80% of the Transferor's assets, including cash, are transferred to the Transferee, with the element of permanence and not merely momentary holding. However, a de facto merger and a transfer to a controlled corporation are different in that, (1) the Transferor in a de facto merger is a corporation, while in a transfer to a controlled corporation, the Transferors may either be a corporation or an individual, and (2) in a de facto merger, there is no requirement that the transferor gains control (that is, 51% of the total voting powers of all classes of stocks of the Transferee entitled to vote) of the Transferee as a prerequisite to enjoying the benefit of non-recognition of gain or loss. What is essential in a de facto merger is that the Transferee acquires all or substantially all of the properties of the Transferor. DcCIAa III TAX CONSEQUENCES 1. Income tax. The Transferor shall not recognize any gain or loss on the transfer of the property to the Transferee. Consequently, the Transferor will not be subject to capital gains tax, income tax, nor to creditable withholding tax on the transfer of such property to the Transferee. Neither may the Transferor recognize a loss, if any, incurred on the transfer. In addition, the assumption of liabilities or the transfer of property that is subject to a liability does not affect the nonrecognition of gain or loss under Section 40(C)(2) of the Tax Code of 1997, since in this case, the total amount of such liabilities does not exceed the basis of the property transferred. Section 40(C)(4) of the Tax Code of 1997 states: "(4) Assumption of liability. (a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as a part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property, subject to a liability, then such assumption or acquisition shall not be treated as money and/or
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other property, and shall not prevent the exchange from being within the exceptions. CIETDc (b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total amount of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be." Moreover, the Transferee is not subject to income tax on its receipt of the property as contribution to its capital, even if the value of such property exceeds the par value or stated value of the shares issued to the Transferor: Section 55 of Revenue Regulations No. 2 ("Income Tax Regulations") states: "Section 55. Acquisition or disposition by a corporation of its own capital stock. . . . The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than the par or stated value of such stock. xxx xxx xxx" However, stocks shall not be issued for a consideration less than par or issued price thereof. (Section 62, Corporation Code of the Philippines) 2. Donor's tax. The Transferor is not subject to donor's tax, regardless of whether the value of the property transferred exceeds the par/stated value of the Transferee shares issued to the Transferor, there being no intent to donate on the part of the Transferor. 3. Value-added tax. The Transferor is not subject to value-added tax ("VAT") on the transfer of the property if it is not engaged in a business that is subject to the VAT under Title IV of the Tax Code of 1997. Even if the Transferor is engaged in an activity that is subject to VAT, it is nonetheless not subject to VAT on the transfer of the property to the Transferee. Section 4.100-5(b)(1) & (3) of Revenue Regulations No. 7-95, as amended states: "(b) Not subject to output tax. The VAT shall not apply to goods or properties existing as of the occurrence of the following: 1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders, Example: transfer of property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code [now 40(C)(2) and (6)(c) of the Tax Code of 1997]. xxx xxx xxx 3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation as of the date of merger or consolidation shall be absorbed by the surviving or new corporation." Thus, since a de facto merger is considered within the definition of a merger under Section 40(C)(6) of the Tax Code of 1997, the transfer of the property by the Transferor to the Transferee shall not be subject to VAT. However, the second sentence of Section 4.100-5(b)(3), supra, is inapplicable in de facto mergers, and therefore, the Transferor's unused input tax cannot be absorbed by or transferred to the Transferee. The above sentence contemplates only a statutory merger or consolidation that, by operation of law, results in a "dissolved corporation" and a "surviving or new corporation". Furthermore, pursuant to Section 80 of the Corporation Code of the Philippines, the unused input tax, being an asset, is transferred in statutory merger by operation of law. 4. Documentary stamp tax. The documentary stamp tax consequences of the transfer are as follows: 4.1 Either the Transferor or the Transferee is subject to documentary stamp tax as follows: 4.1.1 On the transfer of real property (Section 196, Tax Code of 1997) P15 on each P1,000 or fractional part thereof, based on the higher of: (i) the consideration contracted to be paid for such real property, and (ii) the fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997. 4.1.1.1 The "consideration contracted to be paid for such real property" shall be computed in accordance with the following rules. "Stock in a corporation is a valuable consideration for the transfer of real property." (Section 177, Revenue Regulations No. 26) Therefore, the consideration for the real property shall be computed as the par/stated value of the Transferee shares issued to the Transferor in exchange for such property plus the value of such property in excess of such par/stated value recognized in the books of the Transferee as premium, additional capital contribution, or donated surplus, or the like. For instance, if the value of the property is P1,000,000, but only shares with an aggregate par value of P250,000 are issued, there being a premium above par of P750,000, which the Transferee records as additional capital contribution, donated surplus, or the like, the consideration is P1,000,000 (that is, par value of P250,000 + premium of P750,000). 4.1.1.2 On the other hand, the fair market value of the property as determined in accordance with Section 6(E) of the Tax Code of 1997 whichever is higher between (1) the fair market value as determined by the Commissioner (that is, zonal value), and (2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. 4.1.1.3 The value of the improvements thereon shall be based on the formula provided under Revenue Audit Memorandum Order (RAMO) No. 1-2001 but shall not be lower than the fair market value in the Tax Declaration in the year of exchange. According to the said RAMO, the value of the improvement shall be determined by deducting the zonal value of the land from the total selling price/consideration per Deed of Exchange. Thus, if the total selling price/consideration per Deed of Exchange is P1,000,000.00 and the zonal value of the land is P600,000.00, then the value of the improvement is P400,000.00. HcSaAD
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The fair market value of the improvement shall be determined per latest tax declaration at the time of its sale or disposition (in this particular case, the exchange of such property). If the tax declaration was issued three (3) or more years prior to the date of sale or disposition, the Transferor shall be required to submit a certification from the city/municipal assessor as to the fact that such tax declaration is the latest tax declaration covering the real property. Absent such certification; the Transferor must secure a copy of the latest tax declaration duly certified by the assessor. 4.1.2 On the transfer of shares of stock held by the Transferor (Section 176, Tax Code of 1997) 4.1.2.1 The transfer of the shares of G Corporation, which have a par value, is subject to documentary stamp tax of P1.50 on each P200 or fractional part thereof of the par value of such shares. 4.1.2.2 The transfer of the shares of D Corporation, which are without par value, is subject to the documentary stamp tax of 25% of the documentary stamp tax that was paid when those shares were originally issued. 4.1.3 Transferee is subject to documentary stamp tax on the original issuance of its shares (Section 175, Tax Code of 1997), at the following rate, depending on whether such shares are par or no-par shares: 4.1.4 If the Transferee's shares are with par value, the documentary stamp tax is imposed at the rate of P2 on each P200 or fractional part thereof of the par value of such shares, regardless of whether the shares are issued at par value or for a premium (that is, for a consideration in excess of par value). 4.1.5 If the Transferee's shares are without par value, the documentary stamp tax is imposed at the rate of P2 on each P200 or fractional part thereof of the actual consideration paid for such shares. 5. Time of payment of Documentary Stamp Taxes. The time for the payment of the documentary stamp tax liabilities, whether the taxpayer is an e-filer or not, shall be as follows: 5.1 With respect to the transfer of property mentioned in 4.1 above, the documentary stamp tax shall be paid on or before the fifth (5th) day after the close of the month when the deed of assignment/transfer transferring such property was executed; made, signed, accepted, or transferred (Section 5, Revenue Regulations No. 6-2001). 5.2 With respect to the original issuance of shares mentioned in 4.2, above, the documentary stamp tax shall be paid on or before the fifth (5th) day after the close of the month of 5.2.1 Approval of SEC registration, in case of original incorporation; 5.2.2 Approval of the increase in authorized capital stock, in case the shares issued to the Transferor come from the increase in authorized capital stock of the Transferee; or 5.2.3 Execution of the deed of assignment/transfer of the property for which the Transferee's shares are issued, in case the shares issued to the Transferor come from the unissued portion of the Transferee's existing authorized capital stock. IV ADDITIONAL FACTS AND VARIATIONS NOT AFFECTING TAX CONSEQUENCES The following additional facts or variations will not affect the tax consequences of the transaction, as described above: 1. In no. 1 of "I. Facts" stated above, the total number of Transferors in a de facto merger is not relevant in determining whether it qualifies for non-recognition of gain or loss. However, non-recognition of gain or loss will apply to the Transferors that meet the requirements for a de facto merger described in "II. General Principles". 2. In no. 3 of "I. Facts" stated above, the shares issued by the Transferee may either be voting or non-voting stocks since the voting requirement applies only to a transfer to a controlled corporation, pursuant to Section 40(C)(2) in relation to 40(C)(6)(c) of the Tax Code of 1997. 3. The tax consequences are not affected by whether the Transferor is/was a shareholder prior to the transaction. 4. Paragraph IV(4) & (5) of Revenue Memorandum Ruling 1-2001 dated November 29, 2001, which discuss the tax basis of property and shares involved in a merger, consolidation or transfer to a controlled corporation, are hereby reproduced and adopted by reference in this Revenue Memorandum Ruling. EaCSTc V. FURTHER CLARIFICATION OF FACTS AND TAX CONSEQUENCES 1. No. 1 of "I. Facts" mentions "property". For purposes of Section 40(C)(2) of the Tax Code of 1997, this term excludes services, accounts receivable for services rendered by the Transferor for the Transferee, cash and the conversion of debt into equity. 2. No. 2 of "I. Facts" mentions the property transferred constituting "at least 80% of the Transferor's assets, including cash". This distinguishes this transaction from a transfer to a controlled corporation as described in Section 40(C)(2) of the Tax Code of 1997 and Revenue Memorandum Ruling No. 1-2001 dated November 29, 2001. 3. No. 3 of "I. Facts" mentions the issuance of the Transferee's shares from the "unissued portion of its existing authorized capital stock, or, if such existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's authorized capital stock". This statement of fact excludes the following, which if present, would give rise to a different tax consequence treated elsewhere other than in this Revenue Memorandum Ruling 3.1 The issuance of treasury shares, which have previously been issued but were subsequently re-acquired by the Transferee and have not been retired. 3.2 Settlement of subscription receivables. Therefore, the tax consequences described above shall not apply to the extent that the property is transferred in payment for the unpaid balance of the subscription to shares. VI. Compliance In addition to the foregoing, the Transferor/s and Transferee should comply with their obligations as provided in
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Revenue Regulations No. 18-2001 dated November 18, 2001 and Revenue Memorandum Order No. 32-2001 dated November 28, 2001. VII Repealing Clause All rulings that are inconsistent with this Revenue Memorandum Ruling are hereby repealed accordingly. VI Effectivity Subject to the provisions of Section 246 of the Tax Code of 1997, this Revenue Memorandum Ruling shall take effect immediately. aDSHCc (SGD.) REN G. BAEZ Commissioner of Internal Revenue
December 5, 2007 BIR RULING [DA-611-07] Sec. 40 (C) (2); 175; RR 16-2005; RR 13-2004 DA-459-2006 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. E. C. Alcantara Tax Division Gentlemen : This refers to your letter dated November 23, 2007 requesting for confirmation of your opinion on the following: 1. No gain or loss shall be recognized on the transfer of the shares of stock of San Roque Power Corporation registered in the name of Marubeni Corporation (MC) to Axia Power Holdings B.V. (AXIA) in exchange for shares of stock in AXIA whereby as a result of the exchange, MC shall gain further control of AXIA, pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code, as amended; 2. The transfer by MC of the shares of stock in San Roque Power Corporation in exchange for shares of stock in AXIA shall not be subject to Value-Added Tax (VAT) pursuant to Section 4.106-8 of RR No. 16-2005; 3. The cost basis of the shares of stock in San Roque Power Corporation in the hands of MC shall be the same as the basis of the property transferred; 4. The cost basis of the shares of stock in San Roque Power Corporation in the hands of AXIA shall be the same basis as it would be in the hands of the transferor, MC; 5. The transfer by MC of its shares of stock in San Roque Power Corporation in exchange for shares of stock in AXIA will not be considered as a transfer of property for insufficient consideration subject to donor's tax, since there is no intention to donate on the part of any of the parties and the transaction is effected purely for business reasons; 6. The transfer of the shares of stock in San Roque Power Corporation is not subject to documentary stamp tax (DST) imposed under Section 175 of the Tax Code, as amended, pursuant to Section 199 (m) of the Tax Code as amended by Republic Act No. 9243; 7. Upon presentation of the BIR Ruling, the Corporate Secretary of San Roque Power Corporation can record the transfer of the San Roque Power Corporation shares from MC to AXIA in the Stock and Transfer Books of San Roque Power Corporation, and after cancellation of the stock certificates issued in the name of MC, issue new stock certificates in the name of AXIA as transferee. DTCSHA The facts, as represented, are as follows: MC is a corporation duly organized and existing under the laws of Japan with its principal office address at 4-2 Ohtemachi I-Chome, Chiyoda-ku, Tokyo, Japan. It is the registered owner of 827 common shares of stock (including beneficial ownership of two common shares issued to its nominee directors) and 841,496 preferred shares in San Roque Power Corporation, a corporation organized and existing under and by virtue of the laws of the Republic of the Philippines. MC's total acquisition cost of these shares is P2,969,190,036.00. On the other hand, AXIA is a corporation duly organized and existing under the laws of the Netherlands with office address at Strawinskylaan 1025, 1077 XX Amsterdam. It is wholly owned by MC. MC is restructuring its business operations worldwide. As part of this restructuring plan, MC will transfer its shares of stock in San Roque Power Corporation to AXIA in exchange for the latter's shares of stock at a transfer value equal to the acquisition cost of these shares. As a result of the exchange, MC will continue to own the entire and outstanding subscribed and voting capital stock of AXIA, pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code, as amended. aDSAEI We reply, as follows: 1. Pertinent portions of Section 40 (C) (2) of the Tax Code, as amended, state: "No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, that stocks issued for services shall not be considered as issued in return for property." xxx xxx xxx (c) The term 'control' when used in this Section, shall mean ownership of stocks in a corporation possessing at
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least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote." In BIR Ruling No. 149-94 dated September 29, 1994, this Office affirmed that the tax-free exchange provision of Section 40 (C) (2) is applicable to transfers of Philippine domestic company shares by transferors who are organized and registered under foreign laws to a transferee likewise registered and incorporated under foreign laws. Applying the foregoing, the transferor, MC, therefore, will not recognize gain or loss on the transfer of 827 common shares of stock (including beneficial ownership of two common shares issued to its nominee directors) and 841,496 preferred shares in San Roque Power Corporation to AXIA in exchange for the latter's shares of stock resulting in MC continuing to own the entire and outstanding subscribed and voting capital stock of AXIA since this qualifies as a taxfree exchange pursuant to Section 40 (C) (2) and (6) (c) of the Tax Code, as amended. (BIR Ruling [DA-459-06] dated July 27, 2006) cIACaT It should be emphasized, however, that Section 40 (C) (2) and (6) (c) of the Tax Code merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock it acquired in the exchange, it shall be subject to income tax on gains derived from such sale or exchange, taking into consideration that the cost basis of the shares shall be the same as the original acquisition cost or adjusted cost basis to the transferor of the property exchanged therefor; and that the cost basis to the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferor. (Section 40 (C) (5), Tax Code, as amended) 2. Section 106 of the Tax Code, as amended, states: "Sec. 106. Value-added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) . . ." ICcaST Moreover, pertinent portion of Section 4.106-8 of Revenue Regulations (RR) No. 16-2005, provides: "(a) Subject to output tax The VAT provided for in Sec. 106 of the Tax Code shall apply to goods or properties originally intended for sale or use in business, and capital goods which are existing as of the occurrence of the following . . . xxx xxx xxx (b) Not subject to output tax The VAT shall not apply to goods or properties existing as of the occurrence of the following: (1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders. The goods or properties used in business or those comprising the stock-in-trade of the corporation, having a change in corporate control, will not be considered sold, bartered or exchanged despite the change in the ownership interest in the said corporation." HCISED Based on the foregoing, the transfer by MC of the San Roque Power Corporation shares of stock in exchange for AXIA shares is not subject to 12% VAT under Section 106 of the Tax Code, as amended by Republic Act No. 9337 and as implemented by RR No. 16-2005 since the San Roque Power Corporation shares are not held by MC primarily for sale, barter or exchange in the ordinary course of its trade or business. 3. The cost basis of the shares of stock in San Roque Power Corporation to be received by AXIA shall be the same as would be in the hands of MC; and that the cost basis of the shares of stock to AXIA shall be the same as it would be in the hands of MC. [Sec. 40 (C) (5) (a) and (b) of the Tax Code of 1997] 4. The transfer by MC of its San Roque Power Corporation shares of stock to AXIA in exchange for the latter's shares of stock is exempt from DST pursuant to Section 199 (m) of the Tax Code, as amended by R.A. No. 9243 and as implemented by RR No. 13-2004, which states as follows: "Sec. 199. Documents and Papers Not Subject to Stamp Tax. The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the documentary stamp tax: xxx xxx xxx (m) Transfer of property pursuant to Section 40(c)(2) of the National Internal Revenue Code of 1997, as amended." Thus, for DST purposes, a transfer of shares pursuant to a tax-free exchange under Section 40 (C) (2) of the Tax Code, as amended, is an exempt transaction under Section 199 (m) of the Tax Code, as amended. TSEAaD 5. Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor; (2) the increase in the patrimony of the donee; and, (3) the intent to do an act of liberality (animus donandi). (BIR Ruling No. S-40-023-05) Clearly there is no intention on the part of MC to donate its shares of stock in San Roque Power Corporation to AXIA since the transaction is being undertaken for purely business purposes. Hence, the transfer of by MC of its shares of stock in San Roque Power Corporation in exchange for shares of stock in AXIA shall not be subject to donor's tax. 6. On the basis of the foregoing representations, the Corporate Secretary of San Roque Power Corporation can register the transfer of San Roque Power Corporation shares from MC to AXIA in its stock and transfer book and cancel and issue new stock certificates in the name of the transferee.
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This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be ascertained that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. acHCSD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service
September 13, 2004 BIR RULING NO. 012-04 RR 12-01 00-000 Kuok Philippine Properties, Inc. Level 5, Shangri-La Plaza Mall EDSA corner Shaw Boulevard Mandaluyong City Attention: Atty. Federico G. Noel, Jr. Corporate Legal Counsel Gentlemen : This refers to your letter dated October 15, 2003 requesting a ruling on the various issues relative to the amendment of the loan agreement and the deferment of the interest payment until the maturity of the loan. EHASaD It is represented that Kuok Philippine Properties, Inc. (KPPI), is a publicly listed company incorporated in the Philippines. On the other hand, Rhinestone Limited (Rhinestone) is a company incorporated in Malaysia. Sometime in 1999, KPPI issued Certificates of Bonds (unsecured) with a total face value of US$50 million to Rhinestone which matured on January 29, 2002. KPPI prepaid US$12.5 million, leaving a balance of US$37.5 million. In the year 2002, KPPI and Rhinestone converted the bond into a secured long-term loan, with the total principal in the amount of US$62.5 million. The interest rate on the loan is seven percent (7%) per annum payable quarterly as provided under the Loan Agreement ("Agreement"). Unfortunately, KPPI's financial condition has not been favorable. Consequently, KPPI intends to request Rhinestone to amend the loan agreement and ask for the deferment of the interest payment until the maturity date of the loan. If Rhinestone agrees to this proposal, KPPI will record the interest expense in its books for financial accounting purposes but will not claim the expense as deduction for income tax purposes in the year recorded in the books. On the contrary, if Rhinestone will not be agreeable to the above arrangement, KPPI intends to ask Rhinestone for an alternative option involving the waiver of the interest for the first three (3) years of the loan. The charging of the interest will resume on the 4th and 5th year. DTCSHA Based on these representations, you now request a ruling on the following: 1. If the loan agreement, as amended, provides that the interest on the loan will be due upon the maturity date of the loan, will KPPI be subject to Final Withholding Tax (FWT) before the date of maturity even if the interest are accrued for financial accounting purposes on a quarterly basis? If not, when would KPPI be liable to the FWT?; 2. If Rhinestone agrees to the alternative option, i.e., waiving the interest in the first three (3) years, when would KPPI be required to withhold FWT?; and 3. Since the interest on the loan will be paid within the 4th and 5th year, respectively, can KPPI be allowed to claim the interest paid during these years as deduction against the taxable income? In reply thereto, please be informed that Section 2.57.4 of Revenue Regulations 12-01 provides that the obligation of the payor to deduct and withhold the tax arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense in the payor's books whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. Where the income is not yet paid or payable but the same has been recorded as an expense in the payor's book, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes. In short then, the obligation to withhold arises at the time the expense is paid, becomes due or is accrued in the books as an expense, whichever comes first. SHEIDC On the other hand, Section 34(B)(1) of the Tax Code of 1997 provides that the amount of interest paid or incurred within the taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income, provided, however, that the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to 38% of interest income subject to final tax. As to when an expense is considered incurred for tax purposes, the U.S. Rules which have persuasive effect on Philippine Law, as specifically provided under paragraph 3 of Section 12A:51 of MERTENS' Law of Federal Income Taxation states as follows: "For a taxpayer on the accrual method, the question becomes when do the facts present themselves in such a manner that the taxpayer must recognize income or expenses. The accrual of income or expenses is permitted when
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the all-events test has been met. The all-events test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonably accurate determination of such income or liability." The first element requires that a taxpayer's right to receive amounts in income be fixed by looking initially to the nature of the taxpayer's right to income. Generally, the taxpayer's right to receive amounts of income cannot be fixed before the time another becomes obligated to pay the income. It further requires that income accrues to the taxpayer when there arises a fixed and unconditional right to the receipt of a sum certain, even though actual payment is to be deferred. AaHcIT Anent the second element, the same requires that the amount of the income or liability be determined with reasonable accuracy. However, the all-events test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal, the information necessary to compute the amount with reasonable accuracy. It would also suffice where the computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown within the taxable year. The principle of all-events test has been applied by the Courts in determining when an expense may be accrued for tax purposes. In CTA Case No. 4844 dated June 7, 1996 (Paramount Insurance Corporation vs. Commissioner of Internal Revenue), the CTA ruled that under the accrual method of accounting, business expenses are deductible when the taxpayer becomes liable for them, whether or not they are paid in the same year. All the events that set the amount of the liability must have happened (including, when appropriate, economic performance), and the taxpayer must be able to figure the amount of expenses with reasonable accuracy. (Mertens, Law of Federal Income Taxation, Vol. 6, 25.20). The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably expected to have known, at the closing of its books for the taxable year. cACTaI Thus, the CTA ruled that the miscellaneous expenses incurred by the officers of the petitioner are deductible when the latter becomes liable for them. The petitioner is liable only when a particular officer asked for reimbursement since it is only then that such an expense can be accrued and eventually can be taken into petitioner's account. It is impossible for a taxpayer to recognize an expense without knowing its occurrence. Hence, although the receipts pertain to 1985, the same only accrue in 1986, the time when the petitioner acquire knowledge of its liability to pay for expenses not reimbursed by its officers towards the end of 1985. IHaSED Moreover, in Sime Darby Pilipinas, Inc. (formerly Sime Darby International Tire Co., Inc.) vs. CIR, CTA Case No. 4448 dated August 8, 1994, the Court explained that if the taxpayer is on the accrual basis, for the purposes of determining deductions, it is necessary that there be a definite fixed liability (Law of Federal Income Taxation, Mertens, Vol. 4A, par. 25.10). In order to be accruable in the taxpayer year, a valid obligation upon which the profit (or loss in the case of the deduction) is to be determined must have existed in the year in which the obligation became binding or enforceable. As the CTA ruled, the petitioner cannot accrue its long distance calls at the time they were actually made. It would be impractical for the petitioner to claim as deductible expense the mere estimate of the costs of the long distance calls it has made. Hence the obligation on the part of the petitioner to pay or expend money which constitutes a deductible loss did not occur until it received from the telephone company the demand to pay a definite fixed amount representing the costs of the long distance phone calls made. With these representations, it is clear that an expense will only be considered accruable for tax purposes if there is a definite fixed liability and a reasonable estimate of the said liability. In the case at hand, it is worthy to note that the interest will be due and demandable from KPPI only at the date of the maturity or at the 4th and 5th year. Although, the liability attributable to the earlier years of the loan may be reasonably estimated, the all-events test requires that there be a determination of pay in order to warrant an accrual for tax purposes. ATcEDS In view of all the foregoing, this Office believes that the interest expense of KPPI on its loan from Rhinestone should be accrued for tax purposes only when the liability to pay such interest is fixed, that is, at the maturity date or at the 4th and 5th year. Consequently, it is also within this period that such expense will be allowed as deduction in the books of KPPI assuming the said expense is subjected to FWT pursuant to the requirement of Section 2.58.5 of Revenue Regulations No. 2-98, to wit. cIADaC "Any income payment which is otherwise deductible under the Code shall be allowed as 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 Section 57 and 58 of the Code." On the other hand, based on the same principles, should the loan agreement be amended such that interest will be due upon the maturity date of the loan, then KPPI will be liable for the FWT at that time. ADEaHT This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. aSCHcA Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
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TAXATION I PART II COMPILATION OF CITED BIR ISSUANCES, ETC. October 1, 1982 REVENUE REGULATIONS NO. 6-82 SUBJECT : Collection at Source of Income Tax on Compensation Income of Employed Resident Citizens and Aliens, Non-Resident Citizens and Non-Resident Aliens engaged in trade or business in the Philippines. TO : All Internal Revenue Officers and Others Concerned: SECTION 1. Scope. Recommending Approval Pursuant to the provisions of Section 328 of the National Internal Revenue Code and Section 91 of the same code the following regulations are promulgated relative to the collection at source of income tax on compensation income paid on or after January 1, 1982. The withholding of tax on compensation income (commonly referred to as pay-as-you-go or pay-as-you-earn) is a method of collecting income tax currently upon receipt of the income. It applies to all employed individuals deriving income from compensation, whether resident citizens and aliens or non-resident citizens or non-resident aliens engaged in trade or business in the Philippines. The employer is constituted as the withholding agent. (The pertinent provisions of applicable sections of the National Internal Revenue Code as amended by Batas Pambansa Blg. 135 are reproduced for reference.) "Sec. 28. Taxable compensation income. "(a) ... "(b) Gross compensation income defined. Gross compensation income includes all income payments received as a result of an employer-employee relationship such as salaries, wages, honoraria, bonuses, pensions, allowances for transportation, representation, entertainment, fees (including director's fees) and other income of similar nature, including compensation paid in kind: Provided, however, that payments made by a general professional partnership to a partner for services rendered shall not be considered as gross compensation income but as a partner's distributive share of ordinary business income. "(c) Exclusion from gross compensation income. The following are excluded from the computation of gross compensation income: "(1) Actual, moral, exemplary and nominal damages received by the employee or his heirs pursuant to a final judgment or compromise agreement arising out of or related to an employer-employee relationship. "(2) All items excluded under paragraphs (c) (1) to (c) (8), inclusive, of Section 29." "Sec. 29. Taxable Net Income. "(c) Exclusions from gross income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: "(5) 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. "(6) Income exempt under treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. "(7) Retirement benefits, pensions, gratuities, etc. "(A) Retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this subsection, the term "reasonable private benefit plan" means a pension, gratuity, stock, bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer or officials and employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. "(B) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee. "(C) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizen of 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 laws of the United States Veterans Administration. "(E) Payments of benefits made under the Social Security Act of 1954, as amended. "(F) Benefits received from the GSIS and the retirement gratuity received by government officials and employees." "Sec. 90. Definitions. As used in this Chapter. (a) Wages. The term "wages" means all remuneration
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(other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid (1) for agricultural labor paid entirely in products of the farm where the labor is performed, or (2) for domestic service in a private home, or (3) for casual labor not in the course of the employer's trade or business, or (4) for services by a citizen or resident of the Philippines for a foreign government or an international organization. "If the remuneration paid by an employer to an employee for services performed during one-half or more of any payroll period of not more than thirty-one consecutive days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an employer to an employee for services performed during more than one-half of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages". "Sec. 21. Rates of tax on citizens or residents. "(a), (b), (c), (d), and (e) . . . "(f) On adjusted gross income. - A tax is hereby imposed upon the adjusted gross income derived by a nonresident citizen from all sources without the Philippines during each taxable year computed in accordance with the following schedule: "If the amount subject to tax is: Not over U.S. $6,000.00 1% Over U.S. $6,000.00 but not over U.S. $20,000.00 plus 2% of excess over US $6,000.00 Over U.S. $20,000.00 U.S. $340 plus 3% of excess over U.S. $20,000.00 "For purposes of this paragraph, "adjusted gross income" means the gross income from all sources without the Philippines less the following: "(1) An allowance for personal exemption in the amount of Two thousand dollars (U.S.$2,000), if the person making the return is a single or a married person legally separated from his/her spouse; or Four thousand dollars (U.S.$4,000), if the person making the return is married or head of the family, as defined in Section 23 of this Code; and "(2) The total amount of the national income tax actually paid to the government of the foreign country of his residence. Every non-resident citizen availing of the special rates provided herein is required to support his declaration of gross income, exemption and deductions claimed by attaching to his Philippines income tax return a copy of the income tax return he has filed with the government of the foreign country of his residence." "Sec. 22. Tax on non-resident alien individuals. (a) Non-resident aliens engaged in trade or business within the Philippines. (1) In general. - Non-resident aliens engaged in trade or business in the Philippines shall be subject to tax in the same manner as resident citizens and aliens on taxable compensation income and/or other taxable net income received from all sources within the Philippines, except capital gains realized from buying and/or selling shares of stock of Philippine corporations listed in the dollar or any foreign currency board of stock exchange: SECTION 2. Compensation. (a) In general. For purposes of withholding tax the term "compensation" means all remuneration for services performed by an employee for his employer unless specifically excepted under Sections 28, 29 and 90 of the National Internal Revenue Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, bonuses, allowances (such as transportation, representation, entertainment and the like), fringe benefits (monetary and non-monetary), fees, including director's fees, 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. cdtai 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 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 of the transfer. If a person receives as remuneration for services rendered by the employee, the amount of such remuneration is the fair market value of the stock at the time of the transfer. If a person receives as remuneration for U.S. $60
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services rendered a salary and in addition thereto living quarters or meals, the value to such person of the quarters and meals so furnished shall be added to the remuneration otherwise paid for the purpose of determining the amount of compensation subject to withholding. If, however, living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as compensation subject to withholding. Ordinarily, facilities or 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 of Internal Revenue. Tips or gratuities paid directly to an employee by a customer of an employer, and not accounted for by the employee to the employer, are not subject to withholding. Remuneration for services, unless such remuneration is specifically excepted by the statute, constitutes compensation even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services are performed and the individual who performed them. cdtai (b) Pensions, retirement and separation pay. - Pensions, retirement and separation pay constitute compensation subject to withholding, except the following: (1) Retirement benefits received by officials and employees of private firms under a reasonable private benefit plan maintained by the employer, if the following requirements are met: (i) The benefit plan must be approved by the Bureau of Internal Revenue; (ii) 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 (iii) The retiring official or employee shall not have previously availed of the privilege under the retirement benefit plan of the same or another employer. (2) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of 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 and redundancy and secession 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 competent evidence by the employer which should be attached by him in the quarterly return for the period in which the amount paid due to the involuntary separation was made. Any payment made by an employer to an employee on account of dismissal, that is, for causes other than those mentioned in paragraph (b) (2) hereof, constitutes compensation regardless of whether the employer is legally bound by contract, statute, or otherwise to make such payment. (3) The provision of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizens of the Philippine or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (4) 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. (5) Payments of benefits made under the Social Security System Act of 1954, as amended. cdtai (6) Benefits received from the GSIS and the retirement gratuity received by government officials and employees. (c) 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. "1) It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade or business of the employer. "2) The employee is required to, and does, make an accounting/ liquidation for such expense in accordance with the specific requirements of substantiation for each category of expense. However, if the reimbursements or advances exceed the actual expenses, the excess if not returned to employer constitutes taxable compensation. "Ordinary and necessary expenses. The term "ordinary" does not imply that the employee must incur a certain type of expense. Rather, it means normal, usual, or customary (in size and character) for the employer's trade or business. The main point is that it must be normal type of expenditure for the type of business involved. "An expenditure is "necessary" if it is appropriate and helps develop and maintain the employer's business. It must be reasonable to expect business benefits to result from the expense.
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"Inherent in the phrase "ordinary and necessary" is the element of reasonableness, which is related to the amount of expense. An expense is reasonable if it is not lavish, extravagant or excessive under the circumstances. "To account/liquidate means to submit to his employer an expense account/report or other required written statement to the employer showing the business nature and the amount of all the employee's expenses (including those charged directly or indirectly to the employer through credit cards or otherwise) broken down into such broad categories as travel, transportation, meals and lodging, representation or entertainment expenses, and to support by sufficient documentary evidence each element of expenditure. cd i "Documentary evidence is a receipt, paid bill, or similar evidence to support an expenditure. Sufficient or adequate documentary evidence will ordinarily disclose the amount, date, place and the essential character of the expenditure. "Invoices or "tapes" issued by cash register machines duly registered with the Bureau, as well as "expense vouchers" provided by employers for the use of employees to support small amounts of expenses for services, the suppliers of which cannot issue regular invoices, are deemed adequate documentary evidences, provided that, in the latter case, the said "expense voucher" is signed by the supplier of the services. "Reasonable amounts of reimbursement/advances for travelling and entertainment expenses which are precomputed on daily basis, paid to an employee while on special assignment or duty need not be subject to this requirement. "A. Travelling Expenses "1) Meaning of travelling expenses. It refers to the ordinary and necessary expenses of foreign or domestic travel away from home in pursuit of the trade or business of the employer. In general, it may include meals and lodging en route and at one's destination; baggage services; air, rail, and bus fare; cost of transporting sample cases or display materials; laundry expenses; telephone and telegram expenses; cost of getting to or from airports, stations, or hotels or from one customer or place of work to another or from restaurant and hotels to work; automobile and other similar expenses incident to travel. "In addition to the substantiation requirements, the following conditions must be satisfied: "(i) The expense must be reasonable and necessary travelling expense, as that term is generally understood. This includes such item as transportation fares and food and lodging expenses incurred while travelling. "(ii) The expenses must be incurred while away from home, except automobile expenses, jeepney, bus or taxi fares to and from family residence to office or place of work, while in the pursuit of the business of the employer. "(iii) The expenses must be incurred in pursuit of business. This means that there must be a direct connection between the expenditure and the carrying on of the trade or business of the employer. Moreover, such expenditure must be necessary or appropriate to the development and pursuit of the business or trade. "Tax home for travelling expenses purposes, is the place of employment, station, or post of duty. The term "away from home" is limited to travel from post or station or place of employment to points where business transactions are made. cdt "Common automobile expenses include cost of gasoline, oil, repairs, batteries, insurance, depreciation, interest to purchase the car, taxes, registration fees, car washes, garage, rent, parking fees and toll fees. "If the reimbursement/advance payment satisfies the conditions prescribed herein, the employee may choose, in lieu of complying with the substantiation requirements, to claim the percentage of business use of an automobile, which is seventy per cent (70%) of the reimbursement/advance in the case of salesmen or field personnel (see Labor Code) and thirty per cent (30%) in case of other employees required to travel. "The rule shall apply irrespective of whether the vehicle is owned by the employee or provided for by the employer under any arrangement, except that in the latter case, the total amount of the automobile expenses to the employer shall be the basis of the limitation. "2) Substantiation requirements. Reimbursements or advances for travel expenses shall be considered part of compensation income unless the employee proves and substantiates the following: "(a) the amount of each separate expenditure such as the cost of transportation or lodging. The daily cost of taxpayer's meals and other incidental elements may be totalled, if they are grouped in reasonable categories such as meals and tax fares; "(b) the dates of departure and return home for each trip and the number of days spent on business; "(c) the destination or locality of travel described by the name of city or town, or other similar designation; "Each element of expenditure must be supported by sufficient documentary evidence. Approximations will not suffice." "B. Representation or Entertainment Expenses "1) Meaning of representation and entertainment expenses. Representation and entertainment are synonymous terms. They mean activities which are of the type generally considered to constitutes entertainment, amusement or recreation. cdt "With respect to an activity, the item must be directly related to, or, in the case of an item directly preceding or following a substantial and bonafide business discussion (including business meeting at a convention or otherwise), that such item was associated with the active conduct of the employer's trade, profession or business. "With respect to a facility used in connection with an activity, the facility was used primarily for the furtherance of the employer's trade or business, and that the item was directly related to the active conduct of such trade or business. An expenditure for entertainment is considered directly related to the active conduct of the employer's trade or
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business if it is established that the expenditure meets all of the three following requirement: "(a) there must be an expectation of some business benefit; "(b) the principal character of the combined business and entertainment must be for the active conduct of trade or business; "(c) the item of entertainment, amusement of recreation is not contrary to law or public morals. "Another expenditure which may be considered as directly related to entertainment is one occurring in a clear business setting directly in the furtherance of employer's trade or business. It will not be considered in a clear business setting unless the employee establishes that the recipient of the entertainment would have reasonably known that the employee have no significant motive in or business of his employer. Examples: (a) "hospitality room" at a convention at which goodwill is created through discussion or display of employer's products; (b) entertainment of business representative at the introduction of new consumer or industrial products or theatrical presentation. "As a general rule, entertainment which did not occur on the same day of business discussion will not be considered to have met the "directly preceding or following" requirement. However, all the relevant facts and circumstances must be considered as when entertainment of business associates from out of town on the evening prior to or following the day of the discussion. "Whether any meeting, negotiation or discussion constitutes a "substantial and bonafide business discussion", it must be shown that the employee attended a business meeting, negotiation, discussion to other bonafide transaction, other than entertainment, for the purpose of obtaining income or other specific trade or business benefit for the employer. "Reimbursements from expenses relating to entertainment facilities may be excluded from compensation income if (i) facility is used primarily for the furtherance of employer's trade or business and (ii) only to the extent allowable to the use of the facility which is directly related to the active conduct of the employer's trade of business. "Facilities in general also apply to dues or fees paid to any social, athletic, or sporting club or organization. It does not include, however, purchase of proprietary shares and playing rights. "(2) Requirements Reimbursements or advances for representation and entertainment expenses shall not form part of compensation income if "(a) the employer requires the employee to make the expenditure for its benefits; cd i "(b) the expenses are ordinary and necessary; and "(c) that each of the following elements of expenditure are adequately substantiated: "(i) the amount of such expense; "(ii) the date and place of entertainment, amusement or recreation; "(iii) the profession or business purpose of the expense; and (iv) the business relationship to the person entertained." (As amended by section 2 of Revenue Regulations No. 9-83 dated October 24, 1983.) (d) Vacation and sick leave allowances. Amounts of so-called "vacation allowances" or "sick leave credits" paid to an employee constitute compensation. Thus, the salary of an employee on vacation, or on sick leave, paid notwithstanding his absence from work, constitutes compensation. (e) Deductions 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 to be part of the employee's compensation and is deemed to be paid to the employee as compensation at the time the deduction is made. (f) Remuneration for services as employee of non-resident alien individual or foreign entity. The term "compensation" includes remuneration for services performed by a citizen or resident of the Philippines, as an employee of a non-resident 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 not engaged in trade or business within the Philippines is subject to all provisions of law and regulations applicable to an employer. (g) Compensation for services performed outside the Philippines. Remuneration for services performed outside the Philippines by a citizen for domestic or resident foreign corporation or partnership, or for non-resident foreign corporation or partnership, or for non-resident individual not engaged in trade or business in the Philippines, the payment of which is made in the Philippines, is subject to withholding under Section 7 (B) hereof. SECTION 3. Exceptions from withholding. The following income payments are excepted from the requirement of withholding: (a) Fees paid to a public official. Authorized fees paid to the public officials such as notaries public, clerks of courts, sheriffs, etc. for services rendered in the performance of their official duties are excepted from the definition of the term "compensation" and hence are not subject to withholding. However, salaries paid such officials by the Government or government agency or instrumentality, are subject to withholding. aisa dc (b) Remuneration paid for agricultural labor. (1) In general, remuneration for services which constitutes 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. (2) Services constituting agricultural labor. Remuneration paid entirely in products of the farm where the
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labor is performed for services performed on a farm 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 the 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, fruit, and truck farms, plantations, ranches, nurseries, ranges, orchards, and such greenhouses and other similar structures as are used primarily for the raising of agricultural or horticultural commodities. (3) 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 excepted 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 equipment; or (ii) Services performed in salvaging timber, or clearing land of 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, distinguished from any other enterprise in which such person may be engaged. Since the services described in this 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. (4) Remuneration paid entirely in products of the farm where labor is performed for services performed by an employee in the employ of any person in connection with any of the following operations is excepted as remuneration for agricultural labor without regard to the place where such services are performed: aisa dc (i) The making of copra, stripping of abaca, etc.; (ii) The hatching of poultry; (iii) 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; (v) The production or harvesting of crude gum from a living tree or the processing of such crude gum into gum spirits of turpentine and gum resin, provided such processing is carried on by the original producer of such crude gum. (5) Remuneration paid entirely in products of the farm where labor is performed for services performed by an employee in the employ of a farmer or a farmers' cooperative organization or group in the handling, planting, drying, packing, packaging, processing, freezing, grading, storing or delivering to storage or to market or to a 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 farmers' organization or group in the handling, planting, drying, or packing, 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 farmers' organization or group are not performed "as an incident to ordinary farming operations." 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. c. 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. 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 the remuneration paid for services performed therein is not excepted. casia 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 is not within the exception if performed in or about rooming or lodging houses, boardinghouses, clubs, hotels, hospitals, or commercial offices or establishment. Remuneration paid for services performed as a private secretary, even though performed in the employer's home, in not within the exception. d. Remuneration for casual labor not in the course of employer's trade or business. The term "casual labor" includes labor which is occasional, incidental or irregular. 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, remuneration paid for labor which is occasional, incidental or irregular, and does not promote or advance the employer's trade or business, is excepted. Example : A's business is that of operating a sawmill. He employs B, a carpenter, at an hourly wage to repair his
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home. B works irregularly and 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 trade or business, the remuneration paid for such services is excepted. The remuneration paid for casual labor, that is, labor which is occasional, incidental, or irregular, but which is in the course of the employer's trade or business, does not come within the above exception. Example: (1). C's business is that of operating a sawmill. He employs D for two hours, at an hourly compensation, to remove sawdust from his mill. D's labor is casual since it is occasional, incidental or irregular, but it is in the course of C's trade or business and the remuneration paid for such labor in not excepted. Example: (2). E is engaged in the business of operating a department store. He employs additional clerks for short periods. While the services of the clerks may be casual, they are in the course of the employer's trade or business and, therefore, the remuneration paid for such services is not excepted. Remuneration paid for casual labor performed for a corporation does not come within this exception. e. 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 for an international organization is excepted. The exception includes not only remuneration paid for services performed by ambassadors, ministers, and other diplomatic officers or 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. Compensation paid for services in the United States government offices, military establishments and naval bases which under our Income Tax Law are not subject to income tax are also excepted from the withholding provisions. cdt However, the said employee is required to file his income tax return in compliance with Section 45 of the Tax Code. f. Damages. Actual, moral, exemplary and nominal damages received by the employee or his heirs pursuant to a final judgment or compromise agreement arising out of or related to an employer-employee relationship. g. 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, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. h. Amount received by 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. i. 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. j. Income exempt under treaty. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. k. Payments made by a general professional partnership to a partner for services rendered [ (not considered as gross compensation income but as a partner's distributive share of ordinary business income, Section 28 (b)] "Sec. 90. (b) Payroll period. The term "payroll period" means a period for which a payment of wages is ordinarily made to the employee by his employer, and the term "miscellaneous payroll period" means a payroll period other than a daily, weekly, bi-weekly, semi-monthly, monthly, quarterly, semi-annual or annual period." acd SECTION 4. Payroll Period. The term "payroll period" means the period of service 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. For example, if an employer ordinarily pays a particular employee for each calendar week at the end of the week, but if for some reason the employee in a given week receives a payment in the middle of the week for the portion of the week already elapsed and receives the remainder at the end of the week, the payroll period is still the calendar week; or if, instead, that employee is sent on a 3-week trip by his employer and receives at the end of the trip a single compensation payment for 3 weeks services, the payroll period is still the calendar week, and the compensation payment shall be treated as though it were 3 separate weekly compensation payments. For the purpose of determination of the tax, an employee can have but one payroll period with respect to compensation paid by any one employer. Thus, if an employee is paid a regular compensation for a weekly payroll and in addition thereto is paid supplemental compensation (for example, bonuses) determined with respect to a different period, the payroll period is the weekly payroll period. "Sec. 91. (c) Employee. The term "employee" refers to any individual who is the recipient of wages and includes an officer, employee, or elected official of the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term "employee" also includes an officer of a corporation." SECTION 5. Employee. The term "employee" includes every individual performing services if the relationship between him and the person for whom he performs such services is the legal relationship of employer and employee. The term specifically includes officers and employees, whether elected or appointed, of the Government of the Philippines, or any political subdivision thereof or any agency or instrumentality of any one or more of the foregoing. Generally the relationship of employer and employee exists when the person for whom services are 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 that result is accomplished. That is, 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
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not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristics of an employer, but not 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, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is not an employee. Generally, physicians, lawyers, dentists, veterinarians, sub-contractors, public stenographers, auctioneers, and others who follow an independent trade, business, or profession, in which they offer their services to the public, are not employees. Whether the relationship of employer and employee exists will in doubtful cases be determined upon an examination of the particular facts of each case. If the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial. Thus if such relationship exists, it is of no consequence that the employee is designated as a partner, co-adventurer, agent, or independent contractor. The measurement, method or designation of compensation is also immaterial, if the relationship of employer and employee in fact exists. cd No distinction is made between classes or grades of employees. Thus, superintendents, managers, and other superior employees are employees. An officer of a corporation is an employee of the corporation. An individual, performing services for a corporation, whether as an officer and director, or merely as a director whose duties are confined to attendance at and participation in meetings of the Board of Directors, is an employee. "Sec. 90 (d) Employer. The term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that "(1) If the person for whom the individual performs or performed any services does not have control of the payment of the wages for such services, the term "employer" [except for the purposes of sub-section (a)] means the person having control of the payment of such wages; and "(2) In the case of a person wages on behalf of a non-resident alien individual, foreign partnership or foreign corporation, not engaged in trade or business within the Philippines, the term "employer" [except for the purposes of sub-article (a)] means such person." SECTION 6. Employer. The term employer means any person for whom an individual performs or performed any service, of whatever nature, as the employee of such person. It is not necessary that the services be continuing at the time the wages are paid in order that the status of employer may exists. Thus, for purposes of withholding, a person for whom an individual has performed past services for which he is still receiving compensation from such person is an "employer." If the person for whom the services are or were performed does not have legal control of the payment of the compensation for such services, the term "employer" means the person having such control. For examples, 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 legal control over the payment of such compensation, the trust is the "employer." The term "employer" also means any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation, not engaged in trade or business within the Philippines. It is the basic purpose to centralize in the employer the responsibility for withholding, returning, and paying the tax and furnishing the statements required under this Title. The foregoing two special definitions of the term "employer" are designed solely to meet unusual situations. They are not intended as a departure from the basic purpose. As a matter of business administration, certain of the mechanical details of the withholding process may be handled by representatives of the employer. Thus, in the case of a corporate employer having 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. acd 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 individuals and organizations engaged in trade or business, but organizations exempt from income tax, such as charitable and religious organizations, clubs, social organizations and societies, as well as the Government of the Philippines, including its agencies, instrumentalities, and political subdivisions. "Sec. 91. Income tax collected at source. (a) Requirement of withholding. - Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with regulations to be prepared by the Minister of Finance. . . . ." SECTION 7. Requirement of withholding. Every employer or any person who pays or controls the payment of compensation to an employee, whether resident citizen or alien, non-resident citizen, or non-resident alien engaged in trade or business in the Philippines, must withhold from such compensation paid, an amount computed in accordance with these regulations. I. Withholding of tax on compensation paid to resident employees. (a) In general, an employer making
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payment of compensation shall deduct and withhold upon such compensation a tax determined in accordance with the prescribed tables. Legend of status and amount of exemptions 1) Zero (0.0) exemption for working wife with employed husband, employee with multiple employers which refers to second, third, etc. employers; employee who fails to file an exemption certificate; and non-resident alien employee whose country does not allow exemption, to a citizen of the Philippines. 2) S (3.0) for single or married but legally separated individual. 3) H/F (4.5) single with qualified dependent parent, sister or brother, legitimate, recognized natural, or legally adopted child. 4) H/F1 (6.5) H/F2 (8.5), H/F3 (10.5), H/F4 (12.5), H/F5 (13.5), H/F6 (14.5), H/F7 (15.5) The numerals affixed to the status symbol HF represent the number of qualified legitimate, recognized natural or adopted children. 5) M (6.0) married and not legally separated. 6) M1 (8.0), M2 (10.0), M3 (12.0), M4 (14.0), M5 (15.0), M6 (16.0), & M7 (17.0) The numerals affixed to the status symbol M represent the number of qualified legitimate, recognized natural adopted children. Computation of withholding tax (b) When remuneration consists of regular and supplementary compensation. 1) Use the appropriate table for the payroll period monthly, semi-monthly, weekly or daily as the case may be. 2) Ascertain the status and total exemption of the employee to determine the line column to be used. 3) Determine the total monetary and non-monetary (cash value) compensation paid to an employee. casia 4) Segregate the regular compensation from the supplementary compensation except when withholding under the cumulative average wage. Regular compensation includes basic salary, fixed allowances for representation, transportation, housing, cost of living and other allowances or benefits (monetary and non-monetary) 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, vacation and sick leave pay, profit-sharing, bonus, 13th month pay, etc. with or without regard to a payroll period. 5) Fix the compensation level. In fixing the compensation level, use only the total amount of the regular compensation. The compensation level is the amount indicated in the line and column corresponding to the status and exemption of the employee. The regular compensation must be over the amount of the compensation level but not to exceed the amount indicated in the next columns. 6) Add the tax predetermined on the compensation level indicated at the top of the column to the product, which is computed by multiplying by the rate also indicated in the same column, the excess of the regular and supplementary compensation over the compensation level. Example 1. An employee who is married with three (3) qualified dependent children entitled to total personal and additional exemptions of P12,000.00, receives regular monthly compensation of P1,500.00. Computation: Using the monthly withholding tax table, the monthly withholding tax is computed by referring to line of 10 of column 3 which shows a tax of P2.08 on P1.416 plus three percent of the excess (P1,500 + P1,416 = P84). Total compensation P1,500.00 Compensation level (line 10, col. 3) 1,416.00 Excess P84.00 Tax on P1,416 P2.08 Tax on excess(P84 x 3%) 2.52 Monthly withholding tax P4.60 Example 2. An employee who is married with two (2) qualified dependent children receives a total of P5,000.00 as regular salary and commission on the same date, broken down as follows: Regular monthly salary P3,000.00 Commissions 2,000.00 Total P5,000.00 Computation: 1. Using the monthly withholding tax tables, the withholding tax on the monthly regular wage (P3,000.00) is computed by referring to line 8 of column 5, which show a tax of P72.92 on P2,500 plus 11% of the excess. 2. Aggregate the monthly salary (P3,000.00) and commissions (P2,000.00) and determine the amount of compensation in excess of P2,500.00 (see No. 1). cdt Monthly salary Commissions P3,000.00 2,000.00
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======= Total compensation P5,000.00 ======= Less: Compensation level (Col. 5, line 8) _________ Excess P2,500.00 _________ 3.
2,500.00
Tax on P2,500.00P72.92 Tax on excess (P2,500.00 x 11%) 275.00 ________ Withholding tax P347.92 ====== Example 3. An employee who is married with two qualified dependent children receives P3,000.00 as his monthly regular salary from which the tax of P127,92 has already been deducted. In addition, he was paid P2,000.00 as bonus on a date other than the date of payment of the regular salary. Computation: Multiply the amount of bonus by the rate of tax given for the amount in excess of the regular compensation (P3,000.00), which is 11%, as per line 8 of col. 5. Tax on bonus (P2,000.00 x 11%) P220.00 Tax on salary already deducted 127.92 Total withholding tax P347.92 c) When the regular compensation is exempt from withholding, or when the supplemental compensation is equal to or more than the regular compensation. 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 a calendar quarter or year, the employer shall determine the tax to be deducted and withheld on the sum of compensation to be paid on the basis of the cumulative average compensation as follows: Step 1. Add the amount of regular and supplementary compensation to be paid to an employee for the payroll period to the sum of regular and supplementary compensation paid since the beginning of the current year. Step 2. Divide the aggregate amount of compensation computed in Step 1 by the number of payroll periods to which the amount relates. Step 3. Compute the tax to be deducted and withheld on the cumulative average compensation determined in Step 2 in accordance with the appropriate table. Step 4. Multiply the tax computed in Step 3 by the number of payroll periods to which it relates. casia Step 5. Determine the excess, if any, of the amount of tax computed in Step 4 over the total amount of tax already deducted and withheld from the beginning payroll period to the last payroll period. The excess as computed shall be deducted and withheld from the compensation to be paid for the current or last payroll period. Example 4. An employee, married with two (2) dependents, on a monthly basis received the following: No. of Payroll Regular Supplemental Total Periods Month Wage Wage Wage 1 January P1,000 P2,000 P3,000 2 February 1,000 4,000 5,000 3 March 1,000 4,000 5,000 Step 1. For January P3,000 + 0 = For February P5,000 + 3,000 For March P5,000 + 8,000 = Step 2. For January P3,000 + 1 For February P8,000 + 2 For March P13,000 + 3 Step 3. For January Tax on P2,500 (Col. 5, line 8) = P72.92 = = = P3,000 P4,000 P4,333 P3,000 = P8,000 P13,000
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Tax on excess (P500 x 11%) = Tax on P3,000 = P127.92 ====== For February Tax on P2,500 (Col. 5, line 8) = Tax on excess (P1,500 x 11%) = Tax on P4,000 = P237.92 ====== For March Tax on P4,166 (Col. 6, line 8) = Tax on excess (P167 x 15%) = Tax on P4,333 = P281.30 Step 4. For January P127.92 x 1 = For February P237.92 x 2 = For March P281.30 x 3 = Step 5. For January P127.92 - 0 = For February P475.84 - P127.92 For March P843.90 - P475.84 P127.92 P475.84 P843.90
55.00
P72.92 165.00
P256.25 25.05
P127.92 = P347.92 = P368.06
d) When the employer-employee relationship is terminated. If, in respect of a particular employee, the employer-employee relationship is terminated before the last payroll period, the tax to be deducted and withheld shall be computed on the average compensation for the payroll periods that have elapsed as follows: Step 1. Add the total regular and supplementary compensation from the beginning to the termination of the employer-employee relationship. Step 2. Divide the aggregate compensation computed in Step 1 by the number of payroll periods in a calendar year. Step 3. Compute the tax to be deducted and withheld on the average compensation determined in Step 2 in accordance with the appropriate table. Step 4. Multiply the tax computed in Step 3 by the number of payroll periods in a calendar year. Step 5. Determine the excess, if any, of the amount of tax computed in Step 4 over the total amount of tax already deducted and withheld from the beginning payroll period to the last payroll period. The excess as computed shall be deducted and withheld from the compensation (final payment) to be paid. cdt Example 5. An employee, married with four (4) qualified dependent children receives P5,000 a month for six months from which the corresponding withholding tax of P331.20 a month was deducted. At the end of the 6th month, his employment was terminated and he received a taxable retirement pay of P100,000. Step 1. P100,000 + (P5,000 x 6) = P 130,000.00 Step 2. P130,000 + 12 = P 10,833.00 Step 3. Tax on P9,(Col. 8, line 13) = P 1,139.58 Tax on excess (P1,333 x 24) = P319.92 = P 1,459.50 Step 4. - P1,459.50 x 12 = P 17,514.00 Step 5. - Less: Tax withheld on P5,000 (P331.20 x 6) = P 1,987.20 Tax on Retirement pay = P 15,526.80 ========== e. Withholding of tax on annualized compensation. The employer shall, whether he is computing the tax to be deducted and withheld under either one of the three methods (I(b) (c) and (d) thereof, determine the tax on the sum of the regular and supplementary compensation for the entire calendar year before the payment of the last
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compensation, by taking the following steps: Step 1. Add the amount of compensation (regular and supplementary) to be paid by the employee for the last payroll period to the total compensation paid since the beginning of the current calendar year. Step 2. Deduct from the aggregate amount of compensation computed in Step 1 the amount of exemptions of the employee. Step 3. Compute the amount of tax on the taxable compensation income of the employee for the entire calendar year arrived at in Step 2 in accordance with the following schedule: Not over P2,500 0% Over P2,500 but not over P5,000 1% Over P5,000 but not over P10,000 P 25 + 3% of excess over P5,000 Over P10,000 but not over P20,000 P 175 + 7% of excess over P10,000 Over P20,000 but not over P40,000 P 875 + 11% of excess over P20,000 Over P40,000 but not over P60,000 P 3,075 + 15% of excess over P40,000 Over P60,000 but not over P100,000 P 6,075 + 19% of excess over P60,000 Over P100,000 but not over P250,000 P 13,675 + 24% of excess over P100,000 Over P250,000 but not over P500,000 P 49,675 + 29% of excess over P250,000 Over P500,000 P 122,175 + 35% of excess over P500,000 Step 4. Determine the excess or deficiency, if any, of the cumulative tax already deducted and withheld since the beginning of the current calendar year over the tax computed in Step 3. cda The deficiency tax (when the amount of cumulative tax already deducted and withheld is lesser than the tax computed in Step 3) shall be deducted and withheld from the last payment of compensation for the calendar year. The excess (when the amount of cumulative tax already deducted and withheld is greater than the tax computed in Step 3) shall be credited or refunded to the employee. In turn, employer is entitled to deduct the amount refunded from his remittance for the last month or quarter not later than the 25th day of January of the following year. Example 6. Employees A and B, both married with (2) qualified dependents, on a monthly basis received the following: Total compensation Tax deducted & Total compensation received from Jan. withheld from Jan. to be received in Employee to November to November December A P30,000 P1,077.12 P6,000 B 25,000 729.20 2,500 Step 1. Employee A P6,000 + P30,000 Employee B P2,500 + P25,000 Step 2. Employee A P36,000 - P10,000 Employee B P27,500 - P10,000 Step 3. Employee A Tax on P20,000 = Tax on Excess (P6,000 x 11%) = Tax on P26,000 = P1,535.00 Employee B Tax on P10,000 Tax on excess (P7,500 x 7%) = P700.00 Step 4. = = P875.00 P660.00 = = P26,000 P17,500 = = P36,000 P27,500
P175.00 P525.00
Employee A P 1,535.00 - P1,077.12= P457.88 ======= Tax to be deducted and withheld from the P6,000 = P457.88 Employee B P700.00 - P729.20 = P(29.20) Tax to be refunded to the employee = P29.20
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======== (f) If compensation is paid than daily, weekly, semi-monthly or monthly, compute the tax to be deducted and withheld as follows: (i) annually refer to computation on annualized income. (ii) quarterly and semi-annually Divide the compensation by 3 or 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 3 or 6, accordingly. casia (iii) bi-weekly Divide the compensation by 2 to determine the average weekly compensation. Use the weekly withholding tax table to compute the tax, and tax so computed shall be multiplied by 2. (iv) 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. (g) When husband and wife are employed with separate employers, or an employee has multiple employers, etc. 1) Either employed husband or wife may request in writing his or her employer to withhold an additional amount of tax representing the excess of income tax computed on their consolidated compensation income of the preceding taxable year over the sum of the tax currently being withheld by their respective employers. The request shall be accomplished in triplicate and filed with the employer: original, for employers requested to make additional withholdings; duplicate, to be attached by the employer to the BIR Form W-1 for the quarter the additional tax withheld is remitted; and triplicate, for file of the requesting employee. The additional amount of tax requested to be withheld shall be specifically stated in the request without the necessity of indicating the basis of the computation. "Example 1. H and W, married with two qualified dependents are employed with separate employers. They receive monthly compensation of P3,000 and P2,000 on which the amounts of P127.92 and P109.66 are currently being withheld by their respective employers. The income tax due on their joint return of last year is P3,600.00. "Computation. "P3,600 + 12 = P300.00 Less: current w.t. (P127.92 + P109.66) 237.58 Additional w.t. = P62.48 ====== "2) The employee with multiple employers may also request his main employer (employer from whom he receives his biggest compensation) in writing in the same manner and form as in the case of husband and wife with different employers under subparagraph (1) hereof, to withhold the additional amount of tax representing the excess of the income tax on his income of the preceding taxable year over the sum of tax currently being withheld from him by all his employers. cdtai "EXAMPLE. "Employee E, married with two qualified dependents is employed by employers A, B & C. A is his main employer. The tax due on his consolidated compensation income in the preceding taxable year is P12,000. Presently, his compensation income and withholding taxes per month and per employer are as follows: Employer Income Withholding Tax A B C P5,000 P381.35 3,000 219.66 2,000 109.66 P10,000 P710.67 "Computation. P12,000 - 12 = P1,000.00 Less: current w.t. from all employers (P219.66 + P109.66) 710.00 Additional w.t. P289.33" "(3) In like manner, any other employee may request his employer to deduct and withhold from his compensation an amount of tax in addition to the tax determined in accordance with the prescribed tax tables." "In all these instances in paragraphs 1, 2, and 3, the employer shall, for the requesting employee, no longer reconcile the tax required to be withheld and the tax withheld in the year-end adjustment. It shall consider the additional tax
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requested to be withheld as part of the tax required to be withheld." (As amended by section 3 of Revenue Regulations No. 9-83). II. Withholding of tax on compensation of a citizen for services performed outside the Philippines. a. The withholding of creditable income tax is prescribed on compensation received for services performed outside of the Philippines by a citizen irrespective of the number of days of such service during the calendar year. This requirement does not in any way determine the status of the income recipient as to whether he is a non-resident citizen or not. b. Every employer or person having the control, receipt, custody, disposal, or payment of such compensation shall deduct and withhold tax in accordance with the following: (1) If the compensation is paid by a resident employer, the basis of computation shall be the sum of the basic compensation and guaranteed payments stipulated in the contract of employment, whether totally or partially paid within or without the Philippines. i) Determine the compensation to be paid to an employee for the entire calendar year. cd i ii) Deduct fifteen per centum (15%) from the amount of compensation determined in Step 1 if the income of the citizen is subject to foreign income tax; if not, proceed to Step 3. iii) Deduct the amount of exemptions to which the employee is entitled ($2,000 for single or married but legally separated, and $4,000 for married or head of the family) from the difference of Step 1 and Step 2. iv) Compute the estimated withholding tax for the entire calendar year based on the adjusted compensation income as computed in Step 3, using the following schedules: Not over $6,000 1% Over $6,000 but not over $20,000 $60 + 2% of excess of $6,000 Over $20,000 $340 + 3% of excess of $20,000 v) Divide the amount of estimated withholding tax by the number of months for which compensation is paid during the year, and the quotient is the tax to be deducted and withheld per month. Example 1 Mr. X, a citizen who is married, has been employed by Razon International Stevedoring Corporation, a resident employer, to work in Malaysia (a country which imposes a tax on income of non-resident aliens) from April 1, 1982 to March 31, 1983. Under the contract of employment, Mr. X will receive; a) $1,000 as basic monthly salary b) 305 of basic monthly salary as guaranteed overtime pay c) $2,000 as vacation leave pay payable at the end of the contract For CY 1982 April 1, 1982 to December 31, 1982 Step 1: [$1,000/month + 30% ($1,000/month] x 9 mos. = 11,700 Step 2: $11,700 - 15% ($11,700) = $9,945 Step 3: $9,945 - $4,000 = $5,945 Step 4: 1% ($5,945) = $59.45 Step 5: $59.45 9 months = $6.61/month For CY 1983 January 1, 1982 to March 31, 1983 Step 1: [($1,000/month + 30% ($1,000/month) x 3 mos.] + $2,000 = $5,900 Step 2: $5,900 - 15% ($5,900) = $5,015 Step 3: $5,015 - $4,000 = $1,015. Step 4: 1% ($1,015) = $10.15 Step 5: $10.15 3 months = $3.38/month Example 2 Mr. X, a citizen who is single, has been employed by Construction Development Corporation, a resident employer, to work in Saudi Arabia (a country which does not impose a tax on income of non-resident aliens) from January 1, 1982 to December 31, 1983. Under the contract of employment, Mr. X will receive $1,500 a month as gross compensation. acd Computation of withholding tax CY 1983 - January 1, 1983 to December 31, 1983 Step 1: $1,500/month x 12 months = $18,000 Step 2: Disregard Step 2 because there is no foreign tax. Step 3: $18,000 - $2,000 = $16,000 Step 4: $60 + 2% ($16,000) = $260 Step 5: $260 12 months = $21.67/month (b) If the compensation is paid by a non-resident employer thru an agent in the Philippines, the basis of computation shall be the amount paid by the agent. Compute the estimated withholding tax based on each payment. Not over $500 1%
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Over $500 but not over $1,667 $5 plus 2% of excess amount over 500 Over $1,667 $28.34 plus 3% of excess amount over $1,667 (c) The tax deducted and withheld in US dollars shall be converted to its peso value. If the compensation is paid in other foreign currency, convert it first to its US dollar value. (d) The rules herein prescribed for the remittance of taxes as well as the filing and furnishing of returns and statements, with respect to withholding of tax on compensation of resident citizens or aliens, shall be applicable to the withholding of tax prescribed on compensation of a citizen for services performed outside the Philippines. Sec. 91. Income tax collected at source. (d) Personal exemptions. (1) In general. Unless otherwise provided by this chapter, the personal and additional exemptions applicable under this chapter shall be determined in accordance with the main provisions of this Title. (B) Change of Status. In case of change of status of an employee as a result of which he would be entitled to a lesser amount of exemption, the employee shall, within ten days from such change, file with the employer a new withholding exemption certificate reflecting the change. If the change would entitle the employee to a greater amount of exemption, he may furnish the employer with a new withholding exemption certificate reflecting such change. cd (C) Use of certificate. The certificate filed hereunder shall be used by the employer in the determination of the amount of taxes to be withheld. (D) Failure to furnish certificate. Where an employee, in violation of this chapter, either fails or refuses to file a withholding exemption certificate the employer shall withhold the taxes prescribed under the schedule for zero exemption of the withholding tax table in subsection (a)." III. Withholding of income tax on compensation paid to alien employees of certain employers. a. Salaries, wages, annuities, compensations, remunerations and other emoluments, such as honoraria and allowances paid by area or regional headquarters of multinational corporations and offshore banking units to its alien employees are subject to withholding of income tax equal to fifteen per centum (15%) of such gross income. b. The responsibility of withholding, returning and paying the tax and furnishing the statements required re governed under these regulations. c. The withholding of final income tax equal to fifteen per centum (15%) of the salaries, wages, annuities, compensations, remunerations and other emoluments, such as honoraria and allowances paid by service contractors and sub-contractors engaged in petroleum operations in the Philippines to its alien employees is governed by Sec. 54 of the Tax Code. SECTION 8. Right to claim withholding exemption. In general, each employee may claim the following withholding exemptions in the withholding exemption certificate with respect to compensation paid on or after January 1, 1982. "a) if single Three Thousand Pesos (P3,000) "b) if married Six Thousand Pesos (P6,000) "c) if head of family Four Thousand Five Hundred pesos (P4,500) "d) additional exemption for each qualified dependent child but limited to four (4) dependents, Two thousand Pesos (P2,000); for each child, who otherwise qualifies as dependent and who was born prior to 1973, One thousand Pesos (P1,000). cda e) Beginning 1983, if the gross compensation income of an employee, including that of his/her employed spouse does not exceed Twenty Thousand Pesos (P20,000), he is further entitled to a SPECIAL EXEMPTION OF FOUR THOUSAND PESOS (P4,000). In the determination as to whether an employee is entitled to the special exemption, the amount of gross exemption paid to him as computed in the year-end and adjustment required to be made in accordance with Section 22 hereof shall be the final basis, without prejudice to the immediate application of the supplementary withholding tax tables. For this purpose, there is no need for an employee to file an amended withholding exemption certificate. The employer shall automatically add-up the amount of Four Thousand Pesos (P4,000) to the basic amount of personal exemption of an employee as established by him in his withholding exemption certificate (W-4). (As amended by Section 3 of Revenue Regulations NO. 6-83). SECTION 9. Withholding exemptions certificates. Except as hereinafter provided, every employee receiving compensation shall furnish his employer a signed withholding exemption certificate, or Form W-4, relating to the number of withholding exemptions he claims, which shall in no event exceed the number to which he is entitled. The employer is required to request a withholding exemption certificate from each employee, but if the employee fails to furnish such certificate, such employee shall be considered as claiming no withholding exemptions. Forms of certificate (Form W-4) will be supplied employers upon request from the Commissioner of Internal Revenue, Revenue District Officer or Collection Agent. In case the prescribed forms are not available for any reason, employers shall prepare and use forms substantially identical to the prescribed form and of the same size. The duplicate copies of the certificates must be retained by the employer as supporting record of the withholding exemption allowed. A withholding exemption certificate shall continue in effect with respect to the employee until another such certificate takes effect. The basis of determining the amount of the tax to be withheld by the employer is the exemption certificate filed by the employee. If no withholding exemption certificate is filed, the employer shall determine the tax to be withheld on the basis of the zero exemption.
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(a) Employee. Every individual employee as of January 1, 19872, must accomplish the Employer's Withholding Exemption Certificate in quadruplicate, and file the certificate with his employer not later than February 1, 1982; new employee, within five (5) days from the date of commencement of employment; and an employee with an increase or decrease of exemptions in a taxable year, within ten days after such change. casia The following shall be clearly indicated; (i) if the spouse is unemployed or employed, (ii) entitled or not entitled to exemptions, and (iii), names, dates of birth and relationships to dependents. The husband as head of the family is the proper claimant of exemption, and the employed wife is not entitled to any exemption (zero exemption). However, the employed wife may claim the exemptions if the husband is unemployed, or engaged in business or is a non-resident citizen deriving income from outside the Philippines, and such fact is indicated on the certificate. The wife may also claim the full exemption if the employed husband will waive his right to the exemptions in his sworn statement to be attached to his exemption certificate and that of his employed wife. An employee with multiple employers shall file the certificate with his main employer (the employer from whom the employee receives the highest compensation) and a separate certificate with his 2nd and or 3rd employer, etc. The employed husband and wife shall each file separate certificate with their employers. The employee with multiple employers and the employed wife shall both indicate on their separate exemption certificates to be filed with the second or third employers or employer of the wife that they are not entitled to any exemptions in which case the employer shall give effect to the exemption certificate filed with him and compute the tax under the zero exemption. The employee is liable to a fine of not more than P1,000 or imprisonment of not more than one (1) year or both, for willfully supplying false or fraudulent information or for willfully failing to supply information which would require an increase of tax to be withheld. (b) Employer. The employer with whom the employer exemption certificate is filed, must stamp the date of receipt on Employee's Exemption Certificate, and accomplish the Employer's Compensation Payment Certificate. The employer is required to transmit the original and duplicate copies of the Revenue District Officer in the city or municipality where it has its legal residence or place of business within thirty (30) days from February 1, 1982, on from date of receipt. The duplicate copy shall be retained while the 4th copy shall be given to the employee. The employer is liable to a fine of not more than P1,000 or an imprisonment of not more than one (1) year if it willfully accepts as a fact on true information the declaration given by the employee which would reduce the tax to be withheld. If the pursuit of the exemption certificate will result in a greater or lesser amount of tax to be withheld, the employer shall collect further the deficiency or refund the excess over the tax required to be withheld to the employee in the succeeding payroll period. The adjustment is required to be reflected in the quarterly return (W-1) for the quarter in which the collection or refund was made. SECTION 10. Wages paid for payroll period of more than one year. If compensation is paid to an employee for a payroll period of more than one year, for the purpose of determining the amount of tax is required to be deducted and withheld in respect of such compensation, the amount of the tax shall be determined as if such period is an annual payroll period. cdasia SECTION 11. Wages 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 also has the control, receipt, custody, or disposal of, or pays the compensation payable by another employer to such employee, the amount of the tax required to be withheld on each compensation payment made through each agent, fiduciary, or person shall, whether the compensation is paid separately on behalf of each employer or paid in a lump sum on behalf of all such employers, be determined upon 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 upon 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 the ratio which the amount contributed by the particular employer bears 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 authorization to perform such act should be addressed to the Commissioner of Internal Revenue. If such authority is granted by the Commissioner, all provisions of law (including penalties) and regulations prescribed in pursuance of law applicable in respect of an employer shall be applicable to such fiduciary, agent, or other person. However, the 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 law applicable in respect of employers. "Sec. 91 (e) Withholding on basis of average wages. The Commissioner of Internal Revenue may, under regulations promulgated by the Minister of Finance, authorize employers (1) to estimate the wages which will be paid to an employee in any quarter of the calendar year, (2) to determine the amount to be deducted and withheld upon
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each payment of compensation to such employee during such quarter as if the appropriate average of the compensation so estimated constituted the actual wages paid, and (3) to deduct and withhold upon any payment of wages to such employee during such quarter such amount as may be required to be deducted and withheld during such quarter without regard to this subsection." cdt SECTION 12. Withholding on basis of average compensation. The employer may withhold the tax under Chapter XI, Title 2, of the tax Code on the basis of the employee's average estimated compensation, with necessary adjustments, for any quarter. Before using such method the employer must notify the Commissioner of Internal Revenue. "Sec. 91 (f) Husband and Wife. When a husband and wife each are recipients of wages, whether from the same or different employers, taxes to be withheld shall be determined on the following basis: "(1) The husband shall be deemed the head of the family and proper claimant of the additional exemption in respect to any dependent children; "(2) Taxes shall be withheld from the wages of the wife in accordance with the schedule for zero exemption of the withholding tax table in section (a)." SECTION 13. Husband and wife both recipients of compensation. For the purpose of the provisions of the withholding tax on compensation where both husband and wife are the recipients of compensation either from the same or different employers, in the determination of the tax to be withheld, the husband is deemed be the head of the family and is entitled to the additional exemptions for the dependent children. From the compensation of the wife, the tax is determined by using for her the zero exemption in the withholding tax table. "Sec. 91(g) Non-resident aliens. Wages paid to non-resident alien individuals engaged in trade or business in the Philippines shall be subject to the provisions of this chapter." "Sec. 92. Liability for tax. The employer shall be liable for the payment of the tax required to be deducted and withheld under this Chapter and shall not be liable to any person for the amount of any such payment." "Sec. 91 (b) Tax paid by recipient. If the employer, in violation of the provisions of this chapter, fails to deduct and withhold the tax as required under this chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but this subsection shall in no case relieve the employer from liability for any penalties or additions to the tax otherwise applicable in respect of such failure to deduct and withhold." SECTION 14. Liability for the Tax. The employer is required to collect the tax by deducting and withholding the amount thereof from the employee's compensation as when paid, either actually or constructively. An employer is required to deduct and withhold the tax notwithstanding that the compensation is paid in something other than money (for example compensation paid in stocks or bonds) and to pay the tax to the collecting officer. If the compensation is paid in property other than money, the employer should make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the collecting officer. cdasia Every person required to deduct and withhold the tax from the compensation of an employee is liable for the payment of such tax whether or not collected from the employee. If, for example, the employer deducts less than the correct amount of tax, or if he fails to deduct any part of the tax, he is nevertheless liable for the correct amount of the tax. However, if the employer in violation of the provisions of Chapter XI, Title II of the Tax Code fails to deduct and withhold and thereafter the employee pays the tax, it shall no longer be collected from the employer. Such payment does not, however, operate to relieve the employer from liability for penalties 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. When the employer or other person required to deduct and withhold the tax under this Chapter XI, Title II of the Tax Code has withheld and paid such tax to the Commissioner of Internal Revenue or to any authorized collecting officer, then such employer or person shall be relieved of any liability to any person. "Sec. 91 (c) Refunds or credits. (1) Employer Where there has been an overpayment of tax under this section, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld hereunder by the employer. "Sec. (2) Employees. The amount deducted and withheld under this chapter during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under the main provisions of this Title. Refunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Minister of Finance. "Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three months from the fifteenth day of April. Refunds or credits Made after such time shall earn interest at the rate of six per centum (6%) per annum starting after the lapse of the three month period to the date of the refund or credit is made." casia SECTION 15. Nondeductibility of tax and credit for tax withheld. The Tax deducted and withheld at source on compensation 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 in the return required to be made by the recipient of the tax income without deduction for such tax.
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The tax withheld at source, however, is allowable as a recipient of the income. Any excess of the tax withheld at source, over the tax ascertained to be due on the income tax return upon office audit in the Bureau of Internal Revenue shall be refunded or credited at his option, to the recipient of the income. Such refund on 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 Title II. If the tax has actually been withheld at source, credit or refund shall be made to the recipient of the income even though such tax has not been paid over to the Government by the employer. For the purpose of the credit, the recipient of the income is the person subject to tax imposed under the main provisions of Title II upon compensation from which the tax was withheld. "Sec. 93. Return and payment to the Government of taxes withheld. Taxes deducted and withheld hereunder by the employer on wages of employees shall be covered by a return and paid to the collection agent of the city or municipality in which the employer has the legal residence or principal place of business, or, in case the employer is a corporation, in which the principal office is located. The return shall be filed and the payment made within twenty-five days from the close of each calendar quarter. The taxes deducted and withheld by employers shall be held in special fund in trust for the Government until the same are paid to the said collecting officers. The Commissioner of Internal Revenue may, with the approval of the Minister of Finance, require employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government." "Sec. 94. Return and payment in case of Government employees. If the employer is the Government of the Philippines or any political subdivision, agency or instrumentality thereof, the return of the amount deducted and withheld upon any wages shall be made by the officer or employee having control of the payment of such wages, or by any officer or employee duly designated for that purpose." SECTION 16. Return and payment of income tax withheld on compensation. Every person required under the provisions of Chapter XI, Title II, to deduct and withhold the tax on compensation shall make a return and pay such tax on or before the 25th day of the month following the close of each calendar quarter ending March 31, June 30, September 30, and December 31. Such return is to be made on Form W-1 (Return of Income Tax Withheld on Compensation) and must be filed with the Commissioner of Internal Revenue or Revenue District Officer, or the Collection Agent or any authorized officer of the city or municipality in which is located the principal place of business or office of the employer or in which is located his legal residence. Every person required to withhold and pay any tax under Chapter XI, Title II, shall keep such records as will indicate the names and addresses of the persons employed during the year payments to whom are subject to withholding tax, the periods of employment, and the amounts and dates of payment to such persons. No specific form for such records has been prescribed. Such records shall be kept available at all times for inspection by internal revenue officers. cdasia The return must be signed by the employer or other person required to withhold and pay the tax and shall contain or be verified by a written declaration that is made under the penalties of perjury. If the person required to withhold and pay the tax under Chapter II, Title II, 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 officer. With the respect to any tax required to be withheld under Chapter II, Title II by a fiduciary, the return 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. If the government of the Philippines, its political subdivision or any agency or instrumentality, as well as governmentowned or controlled corporation, is the employer, the return 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 that purpose. Except in the case of quarterly adjustments, as explained elsewhere in these regulations, a return on Form W-1 may not be made for more than one calendar quarter of the year nor may a portion of one calendar quarter be included with a portion of another calendar quarter in a single return on Form W-1 even though the entire period does not exceed three months. SECTION 17. Final returns. The last return of Form W-1 for any employer required to withhold and pay any tax, who during the calendar year either goes out of business or otherwise ceases to pay compensation, shall be marked "final return" by such employer. Such final return shall be filed with the Office of the Commissioner of Internal Revenue or Revenue District Officer or Collection Agent of the city or municipality in which the legal residence or place of business of the employer is located within 25 days after the date on which the final payment of compensation is made for services performed for such employer, and shall plainly show the period covered and also the date of the last payment of compensation. There shall be executed as part of each final return a statement giving the address at which the records required by this section, will be kept, the name of the person keeping such records, and, if the business has been sold or otherwise transferred to another person, the name and address of such person and the date on which such sale or other transfer took effect. If no such date or transfer occurred or the employer does not know the name of the person to whom the business was sold or transferred, that fact should be included in the statement. An employer who has only temporarily ceased to pay compensation, including an employer engaged in seasonal activities, shall continue to file returns, but shall enter on the face of any return on which no tax is required to be reported a statement showing the date of the last payment of compensation and the date when he expects to resume paying compensation.
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SECTION 18. Use of prescribed forms. Copies of the prescribed forms will so far as possible be regularly made available to employers in Revenue District Offices and offices of collection agents. An employer will not be excused from making the return, however, by the fact that no return form has been furnished to him. Employers not supplied with the proper forms should make application therefor to the Commissioner of Internal Revenue in ample time to have their returns prepared, verified, and filed with the Commissioner of Internal Revenue or Revenue District Officer or Collection Agent of the city or municipality in which his legal residence or place of business is located on or before the due date. If the prescribed form is not available, a statement made by the employer disclosing the amount of taxes due may be accepted as a tentative return. If filed within the prescribed time the statement so made will relieve the employer from liability for the addition to tax imposed for the delinquent filing of the return under this supplement, provided that without unnecessary delay such tentative return is supplemented by a return made on the proper form. cdasia SECTION 19. Requirement for monthly remittance of taxes withheld in the amount of P500 or more It shall be the duty or every employer who withheld taxes of P500 or more during the month to pay within ten (10) days after the close of the calendar month either to the collection agent or authorized municipal treasurer or Commissioner of Internal Revenue all funds withheld as taxes during the calendar month. On or before the 25th day of the month following the close of each quarter of each calendar year, every employer shall make a return on Form W-1, in duplicate, to the Commissioner of Internal Revenue or to the Revenue District Officer, Collection Agent or authorized municipal treasurer in which the legal residence or place of business of the employer is located, covering the aggregate amount of taxes withheld during the quarter, and present as evidence of payment for the taxes shown thereon, the confirmation receipt issued by the authorized agent bank of the Central Bank in places where payment thru banks is prescribed, or the revenue official receipt issued by the collection agent or authorized municipal treasurer of the city or municipality; provided, however, that taxes withheld by the employer during the last month of the quarter shall be remitted to the Commissioner of Internal Revenue or the Collection agent or authorized municipal treasurer together with the quarterly return (W-1), i.e., not later than the 25th day from the close of the quarter. For the purpose of the monthly remittance, the employer shall accomplish in duplicate the Monthly Statement of Income Tax Withheld on Compensation (BIR Form W1-A) and file with the Revenue District Officer or collection agent or authorized treasurer of the municipality where the employer's legal residence or principal place of business is located. "Sec. 95. Statements and returns. (a) Requirements. Every employer required to deduct and withhold a tax in respect of the wages of an employee shall furnish to each such employee in respect of his employment during the calendar year, on or before January thirty-first of the succeeding year, or, if his employment is terminated before the close of such calendar year, on the day of which the last payment of wages is made, a written statement showing the wages paid by the employer to such employees during the calendar year, and the amount of the tax deducted and withheld under this Chapter in respect of such wages. The statement required to be furnished by this section in respect of any wages shall be furnished at such other times, shall contain such other information, and shall be in such form as the Minister of Finance may, by regulations, prescribe. "(b) Returns. Every employer required to deduct and withhold the taxes in respect of the wages of his employees shall, on or before January thirty-first of the succeeding year, submit to the Commissioner of Internal Revenue a return of the total amount withheld in the preceding paragraph. This return, if made and filed in accordance with regulations promulgated by the Minister of Finance, shall be sufficient compliance with the requirements of Section seventy-seven of this Title in respect of such wages. cdtai "(c) Extension of time. The Commissioner of Internal Revenue under such regulations as may be promulgated by the Minister of Finance, may grant to any employer a reasonable extension of time to furnish and submit the statements and returns required under this Section." SECTION 20. Employer's Withholding Statement. (a) In general. Every employer or other person required to deduct and withhold the tax shall furnish every employee from whose compensation taxes have been withheld the Certificate of Income Tax Withheld on Compensation 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 BIR Form W-2 showing the name and address of the employer and employer's identification number; the name and address of the employee, taxpayer's account number, the sum of compensation paid and the amount of tax withheld during the calendar year. The employer's withholding statement in substantially like form and size as Form W-2 will be acceptable. The statement must be signed by the employer or other authorized officer and shall contain or be verified by 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. (b) Extension of time for furnishing statements to employee. An extension of time, not exceeding 30 days, within which to furnish the Employer's Withholding Statement (BIR Form W-2) required by Section 95(a) 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 reasonable
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expectation on the part of both employer and employee of further employment, there is no requirement that an employer's withholding statement be immediately furnished the employee; but when such expectation ceases to exist, the statement must be furnished within 30 days from the date of termination of employment. The extension mentioned under this section refers to extension of time for furnishing the employee the employer's withholding statement (BIR Form W-2) upon termination of employment. (c) Information return at source as to payments of one thousand eight hundred pesos. The making of Information returns as to payments of P1,800 or more required under Section 77 of the National Interval Revenue Code, as amended, will not be required with respect to any compensation from which the tax has been withheld. SECTION 21. 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 of Internal Revenue the Annual Return of Income Tax Withheld on Compensation (BIR Form W-3), to be submitted with an alphabetical list of employees, both in duplicate copies. cd i The annual Return of Income Tax Withheld on Compensation must show the following: a) Withholding agent's registered names, address, identification number and taxpayer's account number; b) Remittances for the four quarters; and c) The confirmation receipt numbers or revenue official receipt numbers, dates and places of payment of the monthly or quarterly remittances. The alphabetical list of employees must show the following: a) Name and taxpayer's account number of employee; b) Gross compensation paid; c) Amount of exemptions; d) The required to be withheld computed in accordance with Section 21 of the Tax Code; e) Tax withheld; and f) Adjustments, if any If the withholding agent is an employer of resident citizens or aliens, and at the same, employer of citizens performing services abroad or acts as an agent of non-resident employers, the resident employees must be separately listed from citizens being paid in compensation for services rendered outside the Philippines. SECTION 22. Quarterly adjustment. (a) In general. If, for any quarter of the calendar year, except the last quarter, more or less than the correct amount of the tax is withheld, or more or less than the correct amount of the tax is paid to the Commissioner of Internal Revenue, or to any authorized revenue officer, proper adjustment, without interest and surcharge, may be made in subsequent quarter of the same calendar year. No adjustment shall, however, be made under the provisions of this section in respect of an underpayment for any quarter after receipt from the Commissioner of Internal Revenue or any authorized revenue officer of notice and demand for payment thereof based upon assessment, but the amount shall be paid in accordance with such notice and demand; nor shall any adjustment under the provisions of this section be made in respect of an over-payment for any quarter after the filing of a claim for refund thereof. Every return on which an adjustment for a preceding quarter is reported must have securely attached as part thereof a statement explaining the adjustment, and designating the quarterly return period in which the error occurred. If an adjustment of an overcollection of tax which the employer has repaid to an employee is reported on a return, such statement shall include the fact that such tax was repaid to the employee. cdasia (b) Year-end adjustment. On or before the end of the calendar year, but prior to the payment of the compensation for the last payroll period, the employee shall determine the sum of the gross 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 in accordance with Section 21 of the National Internal Revenue Code. 1. Tax withheld is more than the correct amount. If after computation, the total amount of tax deducted and withheld, including that amount for the last compensation, is more than the correct amount of tax on the annualized gross compensation, the overcollection shall be repaid to such employee from the remittable amount of taxes deducted and withheld from the last quarter of the calendar year. Upon repayment of the overcollected amount, the employee shall be required to give a written acknowledgment showing the date and amount repaid, which shall form part of the records of the employer. 2. Tax withheld is less than the correct amount. If the computation shows that the total amount of tax deducted and withheld, including that amount for the last compensation, is less than the amount of tax on the annualized gross computation, the amount of tax withheld shall be deducted and withheld from the compensation to be paid to the employee in the last payroll period and remitted with the amount deducted and withheld for the last quarter of the calendar year. 3. Underwithheld tax more than the amount of last compensation. If no tax has been withheld, or if the amount of tax underwithheld is more than the amount of the last compensation to be paid an employee, the employer shall be liable to pay the amount of tax which cannot be collected from the employer. 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 compensation of the employee under the preceding paragraph is a matter for settlement between the employee and the employer.
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4. Exemption from interest and surcharge. If the amount of tax required to be withheld is less than the amount of tax actually withheld and remitted, and the difference is not more than ten per cent (10%) of the correct amount of tax required to be withheld, the employer shall be exempt from the ad valorem penalties of 25% surcharge and 20% interest as well as from the penal liability incident to the underwithholding and late remittance of tax. The employer shall be entitled to this exemption in cases of quarterly and year-end adjustments. "Any amount of the tax previously withheld from an employee, whose compensation income is no longer subject to the withholding under the supplementary tax tables, or any excess thereof over the tax required to be withheld under the supplementary tax tables shall be treated in accordance with paragraph (b) of this section." As amended by Revenue Regulations No. 6-83 dated July 19, 1983.) SECTION 23. Registration and issuance of withholding agent's identification number. Every person who makes payment or expects to make payment of compensation in the amount of P3,000 or more a year (P250 monthly, P125 semi-monthly), to any single employee shall register by filing in duplicate with the Revenue District Officer of the city or municipality in which the legal residence or place of business is located, an application, for withholding agent's identification number (BIR Form W-5) not later than ten (10) days after becoming an employer. The withholding agent's identification number, which shall be given by the Revenue District Officer with whom it is filed, shall be indicated in all returns and statements required under these regulations. cd In addition to the requirement of registration, every ministry, agency, office, or instrumentality shall submit to the Bureau of Internal Revenue the name and position of the employee or officer charged with the duty to withhold and remit taxes, not later than sixty (60) days from the issuance of this Order, and any change of designation thereafter shall reported within ten (10) days from the date thereof (Executive Order no. 651, effective February 16, 1981). "Sec. 96. Surcharge for failure to render returns; filing false or fraudulent returns; delinquency in payment of taxes; and failure to deduct and withhold. The surcharges and penalties prescribed in Sections 72 and 73 of this Title in cases of failure to render returns and for filing false or fraudulent returns shall apply to returns required under Sections 93 and 94. "In case the taxes deducted and withheld by the employer are not paid within the time prescribed, there shall be added a surcharge of twenty-five per centum and interest at the rate of twenty per centum per annum from the time the same become due until paid. "If the employer, in violation of the provisions of Section 91 hereof, fails to deduct and withhold the tax required, he shall be liable to pay a surcharge of twenty-five per centum. However, if the failure is due to willful neglect or with intent to defraud the government, a surcharge of fifty per centum shall be imposed. Interest at the rate of twenty per centum per annum shall likewise be imposed from the time the taxes were required to be withheld until the date of assessment. "If the withholding agent is the government or any of its agencies, political subdivisions, or instrumentalities, or is a government-owned or controlled corporation, the employee or officer thereof responsible for the withholding and/or remittance of the tax shall be personally liable for the surcharge and interest imposed herein." cdtai "Sec. 97. Penalties. (a) Penalties for failure to file; for filing false or fraudulent returns or statements; failure to deduct and withhold; and failure to remit. Any person who fails to file a return or statement as required in this Chapter, or who renders a false or fraudulent return, or who fails to deduct and withhold or fails to remit to the Commissioner or Internal Revenue the amount withheld by such agent, shall upon conviction, for each act or omission, be fined not less than one thousand pesos nor more than two thousand pesos and imprisoned for not more than one year." "(b) Penalties in respect of withholding exemption certificates. Any individual required to supply information who willfully supplies false or fraudulent information, or who willfully fails to supply information there under which would require an increase in the tax to be withheld under Section ninety-one, shall, in lieu of any penalty otherwise provided, upon conviction be fined not more than one thousand pesos or imprisoned for not more than one year, or both. "The same penalty shall apply to an employer who willfully accepts as a fact or as true information which would reduce the tax to be withheld under Section ninety-one hereof. "(c) Penalties on corporate officers. The penalties prescribed in this Section shall, in the case of an employer which is a corporation, partnership, or association, be imposed on the president, manager, treasurer, or other person responsible for the particular act or omission; Sec. 98. Verification of returns, etc. (a) Power of Commissioner of Internal Revenue to require. The Commissioner of Internal Revenue, under regulations promulgated by the Minister of Finance, may require that any return, statement, or other document required to be filed under this Chapter, or under regulations promulgated by the Minister of Finance, shall contain or be verified by a written declaration that it is made under the penalties of perjury, and such declaration shall be in lieu of any oath otherwise required. "(b) Penalties. Every person who willfully makes and subscribes and return, statement, or other document which contains or is verified by a written declaration that it is made under the penalties of every material matter, shall be guilty of a felony, and, upon conviction, shall be subject to the penalties prescribed for perjury under the Revised Penal Code." acd "Sec. 324. Preservation of books of accounts, and other accounting books. All the books of accounts including the subsidiary books, and other accounting records, of corporations, partnerships, or persons shall be
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preserved by them for a period beginning from the last entry in each book until the last day prescribed by Section 318 within which the Commissioner is authorized to make an assessment. The said books and records shall be subject to examination and inspection only once in a taxable year by internal revenue officers, except in the following cases: "(a) ... "(b) ... "(c) Verification of compliance with withholding tax laws and regulations. "(d) ... "(e) ... "Sec. 330. Statutory offenses of officials and employees. (b) Withholding agents under the provisions of this Code or Regulations promulgated thereunder. 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 who, under the provisions of this Code or regulations promulgated thereunder, is charged with the duty to deduct and withhold any internal revenue tax and to permit the same in accordance with the provisions of this Code and other laws is guilty of any delinquency hereinbelow specified shall be punished by a fine of not less than five thousand pesos (P5,000) and imprisonment of not less than one year nor more than two years. acd "1. 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." "2. Those who fail or cause the failure to remit taxes deducted and withheld within the time prescribed by law and implementing regulations." "3. Those who fail or cause the failure to file return or statement within the time prescribed, or render or furnish a false or fraudulent return or statement required under the withholding tax laws or regulations." SECTION 24. Penalties for false returns. Section 98(b) provides for penalties in the case of any person who willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter. Such person shall be guilty of a felony, and upon conviction, shall be subject to the penalties prescribed for perjury under the provisions of the Revised Penal Code. SECTION 25. Applicability; constructive receipt of compensation. The withholding tax on compensation shall apply to compensation paid on or after January 1, 1982, regardless of when such compensation was earned. Thus, if an employee is paid compensation on January 1, 1982 for services performed during the calendar year 1981 or any preceding year, the withholding provisions of Chapter 2 and these regulations shall apply. 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 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 the 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 within his control and disposition. SECTION 26. Repealing Clause. The provisions of Revenue Regulations V-8, 1-70, 9-75, 2-76, 2-79, 5-81, 1081, 20-81 are hereby repealed. Revenue Regulations No. 1-82 and all rules and regulations or parts thereof inconsistent with the provisions of these regulations are amended accordingly. cdasia SECTION 27. Effectivity. These regulations shall take effect immediately upon approval hereof. (SGD.) CESAR VIRATA Minister of Finance Recommending Approval: (SGD.) RUBEN B. ANCHETA Acting Commissioner REQUIREMENT Elements to be substantiated (a)
Factors to be proven
Substantiation
Amount Amount of each separate Receipts for expenditures for transportation, lodging/meals. lodging, and meals. Tickets for public Permissible to aggregate transportation incidental expenses in Dairy or log for reasonable categories, such incidental expenses. as gasoline and oil, taxis daily meals for travellers, etc. Time Dates of departure and return for each trip, and number of Lodging receipts. Tickets for public
(b)
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days attributable to business activities. Diary or log. (c) Place
transportation
Destination by name of city Letter/order from or other appropriate employer. designation.
(d)
Business Business reason for travel Letter/order from Purpose or nature of business benefit employer. derived or expected to be Contracts or other derived. written evidence of business transacted.
SPECIAL ADDITIONAL PERSONAL EXEMPTIONS Revenue Regulations No. 6-83 implementing PD No. 1868 provides special additional personal exemptions to employed individuals whose gross compensation income in a taxable year does not exceed Twenty Thousand Pesos (P20,000.00.) casia NOTE FROM RICKY I HAVE DELETED THE SUPPLEMENTARY WITHHOLDING TAX TABLES FOR Section 7 AS THEYRE TOO LONG AND ALREADY OBSOLETE. JUST CHECK THE UPLOADED SOFTCOPY IF YOU NEED TO SEE THEM.
August 1, 1986 REVENUE REGULATIONS NO. 12-86 SUBJECT : Amending pertinent provisions of the Revenue Regulations 6-82, as amended, otherwise known as the Withholding Tax Regulations on Compensation. TO : All Internal Revenue Officers, Withholding Agents and Others Concerned: SECTION 1. Scope. Pursuant to Section 277 and 82 of the National Internal Revenue Code in relation to Executive Order No. 37 series of 1986, these regulations are hereby promulgated prescribing the collection at source of income tax on compensation income paid on or after January 1, 1986 under the Withholding Tax tables (ANNEX "A") which take into account the increase of personal exemption and the option of married individuals to compute separately their individual income tax based on their respective taxable income. SECTION 2. Section 2 of the Revenue Regulations No. 6-82, as amended, is hereby further amended to read as follows: "Sec. 2. Definition of terms. As used herein, the following terms and phrases shall have the meaning hereunder indicated: 1. Taxable income on compensation. means gross compensation income as defined herein less the authorized deduction under Section 30(1) of the NIRC. 2. Gross compensation income. (a) In general. For purposes of withholding tax, the term "compensation" means all remuneration for services performed by an employee for his employer unless specifically excepted under Sections 29 and 90 of the National Internal Revenue Code. The name by which the remuneration for services is designated is immaterial. Thus salaries, wages, emoluments and honoraria, bonuses, allowances (such as transportation, representation, entertainment and the like), fringe benefits (monetary and non-monetary), fees, including directors fees, 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 a 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. 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 of the transfer. If a person receives as remuneration for services rendered a salary and in addition thereto living quarters or meals, the value to such person of the quarters and meals so furnished shall be added to the remuneration otherwise paid for the purpose of determining the amount of compensation subject to withholding. If, however, living quarters or meals are furnished to an employee to the convenience of the employer, the value thereof need not be included as compensation subject to withholding. cd Ordinarily, facilities or 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
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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 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 of Internal Revenue. Tips or gratuities paid directly to an employee by a customer of an employer, and not accounted for by the employee to the employer, are not subject to withholding. Remuneration for services, unless such remuneration is specifically excepted by the statute, constitutes compensation even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services are performed and the individual who performed them. (b) Pensions, retirement and separation pay. Pensions, retirement and separation pay constitutes a compensation subject to withholding, except the following: (1) Retirement benefits received by officials and employees of private firms under a reasonable private benefit plan maintained by the employer, if the following requirements are met: (i) The benefit plan must be approved by the Bureau of Internal Revenue; (ii) 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 the retirement; and (iii) The retiring official or employee shall not have previously availed of the privilege under the retirement benefit plan of the same or another employer. (2) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness, or other physical disability or for any other cause beyond the control of the said official or employee, such as retrenchment, redundancy and 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. aisa dc Whether or not the separation is beyond the control of the said official or employee shall be determined on the basis of prevailing facts and circumstances. This shall be duly established through competent evidence to be submitted by the employer which should be attached in his monthly return for the period in which the amount was paid due to involuntary separation. Any payment made by an employer to an employee on account of dismissal, that is, for causes other than those mentioned in paragraph b(2) hereof, constitutes compensation regardless of whether the employer is legally bound by contract, statute, or otherwise to make such payment. (3) Social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizen of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (4) Payment of benefits due to any person residing in the Philippines under the law of the United States administered by the United States Veterans Administration. (5) Payments of benefits made under the Social Security System Act of 1954, as amended. (6) Benefits received from the GSIS and the retirement gratuity received by government officials and employees. (c) In general. Fixed or variable transportation, representation and other allowances which are received by any officer or employee, in addition to the regular compensation fixed for his position or office is compensation subject to withholding. Amounts received by an employee, either as advance or reimbursement for transportation, representation and other bona-fide 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. However, if the reimbursement exceeds the actual expenses, the excess if not returned to the employer, constitutes taxable income. Transportation and other reimbursed expenses must be identified either by making a separate payment or by specifically indicating the separate amounts where both compensation and expense allowances are combined in a single payment. (d) Vacation and sick leave allowances. Amounts received by an employee as "vacation allowances" or "sick leave credits" constitute compensation income. Thus, the salary of an employee on vacation, or on sick leave, paid notwithstanding his absence from work, constitutes taxable compensation income. (e) Deductions 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 tax is considered to be part of the employee's compensation and is deemed to have been constructively paid to the employee as compensation at the time the deduction is made. cda (f) Remuneration for services as employee of non-resident alien individual or foreign entity. The term "compensation" includes remuneration for services performed by a citizen or resident of the Philippines, as an employee of a non-resident alien individual, foreign partnership or foreign corporation, whether or not such employer is engaged in trade or business within the Philippines. Any person paying compensation on behalf of such an employer which is not engaged in trade or business within the Philippines is subject to all provisions of law and
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regulations applicable to an employer. (g) Compensation for services performed outside the Philippines. Remuneration received by a citizen for services performed outside the Philippines for a domestic foreign corporation or partnership, or for a non-resident foreign corporation or partnership, or for a non-resident individual not engaged in trade or business in the Philippines, the payment of which is made in the Philippines, is subject to withholding under Section 7(II) of Revenue Regulations 6-82, as amended. 3. Head of family. Means an unmarried or legally separated man or woman with one or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural, or legally adopted children living and dependent upon him for their chief support, where such brothers or sisters or children are not more than twentyone (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. 4. Dependent. means a legitimate, recognized natural 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. SECTION 3. Section 3 of Revenue Regulations 6-82, as amended, is hereby further amended to read as follows: "Sec. 3. Exemptions from withholding. The following income payments are excepted from the requirement of withholding: (a) Fees paid to a public official. Authorized fees paid to public officials such as notaries public, clerks of court, sheriffs, etc., for services rendered in the performance of their official duties are excepted from the definition of the term "compensation" and hence are not subject to withholding. However, salaries paid such officials by the government, or government agency or instrumentality, are subject to withholding. (b) Remuneration paid for agricultural labor. (1) In general. 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. (2) Services constituting agricultural labor. Remuneration paid entirely in products of the farm where the labor is performed for services performed on a farm 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 acd (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, fruit, and truck farms, plantations, ranches, nurseries, ranges, orchards, and such greenhouses and such similar structures as are used primarily for the raising of agricultural or horticultural commodities. (3) The remuneration paid entirely in products of the farm where labor is performed for the following services in the employ of the owner or tenet or other operator of one or more farms is excepted 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 equipment; or (ii) Services performed in salvaging timber, or clearing land of 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, 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. (4) Remuneration paid entirely in products of the farm where labor is performed for services performed by the employee in the employ of any person in connection with any of the following operations is excepted as remuneration for agricultural labor without regard to the place where services are performed: (i) The making of copra, stripping of abaca, etc.; (ii) The hatching of poultry; (iii) 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; (v) The production or harvesting of crude gum from a living tree or the processing of such crude gum into spirits of turpentine and gum resin , provided such processing is carried on by the original producer of such crude gum. (5) Remuneration paid entirely in products of the farm where labor is performed for services performed by an employee in the employ of a farmer or farmer's cooperative organization or group in the handling, planting, drying,
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packing, packaging, processing, grading, storing or delivering to storage or to market or for a 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 farmers' organization or group in the handling, planting, drying, or packing, 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 farmers' organization or group are not performed "as an incident to ordinary farming operations." aisa dc 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. (c) Remuneration for domestic services. Remuneration paid for services of a household nature performed by an employee in or about the private home of his employer is not subject to withholding. 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 the remuneration paid to the employee for services performed therein is not excepted. In general, services of a household nature in or about a private home include services rendered by cooks, maid, butlers, valets, laundresses, gardeners and chauffeurs. The remuneration paid for the services above enumerated is not within the exception if performed in or about rooming or lodging houses, boarding houses, clubs, hotels, hospitals, or commercial offices or establishments. Remuneration paid for services performed as a private secretary, even though performed in the employer's home, is not within the exception. (d) Remuneration for casual labor not in the course of employer's trade or business. The term "casual labor" includes labor which is occasional, incidental or regular. The expression "not in the course of employers trade or business" includes labor that does not promote or does not advance the trade or business of the employer. Thus, remuneration paid for labor which is occasional, incidental or irregular, and does not promote or advance the employer's trade or business is excepted. Example: A's business is that of operating a sawmill. He employs B, a carpenter, at an hourly wage to repair his home. B works irregularly and spends the greater part of two days in completing the work. Since B's work is casual and is not in the course of A's trade or business, the remuneration paid for such services is excepted. cdt The remuneration paid for casual labor, that is, labor which is occasional, incidental or irregular, but which is in the course of the employer's trade or business, does not come within the above exception. Example (1) C's business is that of operating a sawmill. He employs D for two hours, at an hourly compensation, to remove sawdust from his mill. D's labor is casual since it is occasional, incidental or irregular, but it is in the course of C's trade or business and the remuneration, paid for such labor is not excepted. Example (2) E is engaged in the business of operating a department store. He employs additional clerks for short periods. While the services of the clerks may be casual, they are in the course of the employer's trade or business and, therefore, the remuneration paid for such services is not excepted. Remuneration paid for casual labor performed for a corporation does not come within this exception. (e) 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 excepted. The exception 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 a consular or other officer or employee of a foreign government or as a non-diplomatic representative of such government. However, compensation paid to Filipino civilian employees for services performed in military and naval bases and facilities of the United States within the Philippines which is subject to income tax is also subject to withholding tax. All such employees who are citizens or residents are required to file their income tax returns in compliance with Section 45 of the Tax Code. (f) 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, but if such amounts are held by the insurer under an agreement to pay an interest thereon, the interest payments shall be included in gross income. cd (g) Amount received by insured as return of premium. The amount received by the insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (h) Compensation for injuries or sickness. Amounts received, through Accidents or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received whether by suit or agreement on account of such injuries or sickness. (i) Income except under treaty. Income of any kind, to the extent required by any treaty obligation binding upon the government of the Philippines. (j) Retirement benefits, pensions, gratuities, etc. Retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the
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employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than 50 years of age at the time of his retirement: Provided, further, That the benefits granted under this paragraph shall be availed of by an official or employee only once. For purposes of this subsection, the term "reasonable private benefit plan" means a pension, gratuity, stock, bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer or officials and employees, or both, for the purpose of distributing to such officials or employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund to be used for, or be diverted to, any purpose other than for the exclusive benefit of the said official or employees. (k) Payments made by a general professional partnership to a partner for services rendered." SECTION 4. Section 7 of Revenue Regulation 6-82, as amended, is hereby further amended to read as follows: "Sec. 7. Requirement of withholding. xxx xxx xxx 1. Withholding of tax compensation paid to resident employees. (a) In general, an 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, 1986 (ANNEX "A"). A. Legend of symbols used and the amount of exemptions: (1) The symbols used in the Withholding Tax Tables represent the following: (a) Z Zero exemption for employee with multiple employers with respect to second, third, etc., employer and for the employee who fails to file an exemption certificate. cd i (b) S Single or married but legally separated individual. (c) EW(HE) Employed wife whose husband is also employed. (d) HF Single with qualified dependent parent, sister or brother, legitimate, recognized natural or legally adopted child; married but legally separated individual with a qualified dependent child. (e) EH(WE) Employed husband whose wife is also employed. (f) M(OSE) Married where only husband or wife is employed. (2) The numerals affixed to the status symbols represent the number of qualified legitimate, recognized natural or legally adopted children. (3) The asterisks (**) under column SAPE represent special additional personal exemption of Four Thousand Pesos (P4,000.00) to be allowed if the gross compensation income of a single, married or legally separated individual, or head of family, does not exceed the aggregate amount of Twenty Thousand Pesos (P20,000.00) during the calendar year (monthly, P1,667.00; Semi-monthly, P833.00; Weekly, P385.00; and Daily, P66.00). (4) Exemption The amount of exemption in Thousand of Pesos an employee is entitled to claim as a deduction from gross compensation income in accordance with his status, number of qualified dependents and applicable special additional personal exemption. B. Computation of withholding tax 1. "In general. The employer shall determine the tax to be deducted and withheld in accordance with the following: (a) Use the appropriate table for the payroll period: monthly, semi-monthly, weekly, daily, as the case may be. (b) Determine the total monetary and non-monetary (cash value) compensation paid to an employee. (c) Segregate the regular compensation from the supplementary compensation. Regular compensation includes basic salary, fixed allowances for representation, transportation, housing, cost of living and other allowances or benefits (monetary and non-monetary) 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, vacation and sick leave pay, profit sharing, bonus, 13th month pay, etc., with or without regard to a payroll period. aisa dc (d) Determine the line (horizontal) to be used corresponding to the status and number of qualified dependents. Except in the case of the employed wife whose husband is also employed, use the appropriate status symbol with the corresponding asterisks (**) indicated under the SAPE column if the gross compensation income does not exceed: Monthly, One Thousand Six Hundred Sixty Seven Pesos (P1,667.00); Semi-monthly, Eight Hundred Thirty Three
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Pesos (P833.00); Weekly, Three Hundred Eighty Five Pesos (P385.00); Daily, Sixty-Six Pesos (P66.00). If the gross compensation income exceeds the respective foregoing amounts us the status symbol without any asterisks. (e) Determine the column to be used by fixing the compensation level taking into account only the total amount of regular compensation income. The compensation level is the amount indicated in the line (as predetermined in paragraph B.1 (d)) to which the regular compensation is equal or in excess, but not to exceed the amount in the next column of the same line: Provided, However, That with respect to an employee entitled to a special additional personal exemption, the compensation level is the amount indicated in the line to which the gross compensation is equal or in excess, but not to exceed the amount in the next column of the same line. (f) Compute the withholding tax due by adding the tax predetermined in the compensation level indicated at the top of the column to the product, which is computed by multiplying the excess of the total regular and supplementary compensation over the compensation level by the rate also indicated at the top of the same column." EXAMPLE 1 Mr. A, single, with no qualified dependent, receives P1,200.00 as regular monthly compensation. COMPUTATION: Using the monthly Withholding Tax Tables, the monthly withholding tax is computed by referring to line A.4 S with double asterisks (gross compensation income does not exceed: Monthly, P1,667.00) of column 2, which shows a tax of P0.00 on P1,042.00 +1% of the excess (P1,200.00 - P1,042.00 = P158.00) Total Compensation P1,200.00 Less: Compensation level(line A.4 col. 2) 1,042.00 _______ Excess 158.00 Tax on (P1,042.00) 0.00 Tax on excess (P158.00 x 1%) 1.58 Monthly Withholding tax 1.58 ====== EXAMPLE 2 Mr. B, head of the family with no qualified dependent, receives P2,200.00 as regular monthly compensation and P300.00 as supplementary compensation for January or a total of P2,500.00. cd i COMPUTATION: Using the monthly withholding Tax Tables, the withholding tax for January is computed by referring to line A.5 HF of column 4 (fixed compensation level taking into account only the regular compensation income of P2,200.00) which shows a tax of P14.58 on P1,458.00 plus 7% of the excess (P2,500.00 - P1,458.00 = P1,042.00). Total Compensation P2,500.00 Less: Compensation level (line A.5 col. 4) 1.458.00 _______ Excess P1,042.00 ======== Tax on P1,458.00P14.58 Tax on excess (P1,042 x 7%) 72.94 _______ Withholding tax for January P87.52 ======= EXAMPLE 3 Mrs. C married with two (2) qualified dependents receives P1,500.00 as regular monthly compensation. Mr. C, her husband is also employed. COMPUTATION: Using the monthly Withholding Tax Tables, the withholding tax due is computed by referring to line A.2 EW(HE) of column 4 which shows a tax of P14.58 on P1,333.00 plus 7% of the excess (P1,500.00 - P1,333.00 = P167.00) Total Compensation P1,500.00 Less: Compensation level (line A.2 col. 4) 1,333.00 ________ Excess P167.00 ======= Tax on P1,333.00P14.58 Tax on excess (P167.00 x 7%) 11.69 _________ Monthly withholding tax P26.67 ======= EXAMPLE 4
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Mr. D, married with two (2) qualified dependents receives P900.00 as regular semi-monthly compensation. Mrs. D, his wife, is also employed. COMPUTATION: Using the semi-monthly Withholding Tax Tables, the withholding tax is computed by referring to line D.3 EH(WE) of col. 3, which shows a tax of P1.04 on P708.00 plus 3% of the excess (P900.00 - P708.00 = P192.00). Total Compensation P900.00 Less: Compensation level (line D.3 col. 3) 708.00 _______ Excess P192.00 ====== Tax on P708.00 P1.04 Tax on excess (P192.00 x 3%) 5.76 _______ Semi-monthly withholding tax P6.80 ====== EXAMPLE 5 Mr. E, married with two (2) qualified dependents receives P1,200.00 as regular semi-monthly regular compensation. Mrs. E, his wife, is not employed. cd COMPUTATION: Using the semi-monthly Withholding Tax Tables, the withholding tax due is computed by referring to line C.2 M2(OSE) of column 4 which shows a tax of P7.29 on P1,167.00 plus 7% of the excess (P1,200.00 - P1,167.00 = P33.00) Total Compensation P1,200.00 Less: Compensation level (line C.2 col. 4) P1,167.00 __________ Excess P33.00 ======== Tax on P1,167.00P7.29 Tax on excess (P33.00 x 7%) 2.31 _________ Semi-monthly withholding tax P9.60 ======= 2. Exceptions "(a) Cumulative average method. If in respect of a particular employee, the regular compensation is exempt from withholding, 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, the employer shall determine the tax to be deducted and withheld in accordance to the cumulative average method provided hereunder. (1) Add the amount of regular and supplementary compensation to be paid to an employee for the payroll period to the sum of regular and supplementary compensation paid since the beginning of the current calendar year. (2) Divide the aggregate amount of compensation computed in No. (1) by the number of payroll periods to which the amount relates. (3) Compute the tax to be deducted and withheld on the cumulative average compensation determined in No. (2) in accordance with the appropriate table. (4) Multiply the tax computed in No. (3) by the number of payroll periods to which it relates. (5) Determine the excess, if any, of the amount of tax computed in No. 4 over the total amount of tax already deducted and withheld from the beginning payroll period to the last payroll period. 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. cdt The cumulative average method, once applicable to a particular employee at anytime 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 6: Mr. F, married with four (4) qualified dependents and whose spouse is not employed received the following compensation. NOTE: Regular monthly compensation is exempt from withholding but supplementary compensation is paid during the calendar year. Month Regular Supplementary Total Compensation Compensation Compensation Jan. Feb. Mar. P2,000.00 P1,500.00 2,000.00 1,500.00 3,500.00 2,000.00 2,000.00 P3,500.00
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COMPUTATION: 1. For Jan. P3,500 + 0 = P3,500.00 For Feb. P3,500 + 0 = P7,000.00 For Mar. P2,000 + P3,500 + P3,500 = For Jan. P3,500/1 For Feb. P7,000/2 For Mar. P9,000/3 = = = P3,500.00 P3,500.00 P3,000.00 P14.58 46.69
P9,000.00
2.
3.
For Jan. Tax on P2,833.00 (line C.4, col. 4) Tax on excess (P667.00 x 7%) ________ Tax on P3,500.00 P61.27 ====== For Feb. Tax on P2,833.00 (line C.4, col. 4.) Tax on excess (P667.00 x 7%) ________ Tax on P3,500.00 P61.27 ====== For Mar. Tax on P2,833.00 (line C.4, col. 4) Tax on excess (P167.00 x 7%) _______ Tax on P3,000.00 P26.27 ======
P14.58 46.69
P14.58 P11.69
4.
For Jan. P61.27 x 1 = For Feb. P61.27 x 2 = _______ For Mar. P26.27 x 3 = =======
P61.27 P122.54 P78.81
5.
For Jan. P61.27 - 0 = P61.27 For Feb. P122.54 - P61.27 = P61.27 For Mar. P78.81 - P122.54 = NO W/HOLDING TAX EXAMPLE 7: Mr. G, married with one (1) qualified dependent and whose spouse is also employed received the following compensation. Month Regular Supplementary Total Compensation Compensation Compensation Jan. Feb. Mar. COMPUTATION: For Jan. Total Compensation P5,000.00 Less: Compensation level (line D.1 col. 5) 2,417.00 _________ Excess P2,583.00 ======= Tax on P2,417.00P72.92 P3,000.00 P2,000.00 3,000.00 5,000.00 8,000.00 3,000.00 2,000.00 5,000.00 P5,000.00
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Tax on excess (P2,583.00 x 11%) 284.13 _______ Withholding Tax for January P357.05 ======= For Feb. and Mar. 1. 2. 3. Feb. P8,000.00 + P5,000.00= Mar. P5,000.00 + P13,000.00 Feb. P13,000/2 Mar. P18,000/3 = = P13,000.00 = P18,000.00 P6,500.00 P6,000.00
Feb. Tax on P5,750.00 P506.25 Tax on excess (P750.00 x 19%) ________ Tax on P6,500.00 P648.75 ======= Feb. P648.75 x 2 Mar. P533.75 x 3 = =
142.50
4. 5.
P1,297.50 P1,661.25
Feb. P1,297.50 - P357.05 = P940.45 _______ Mar. P1,661.25 - P1,297.50 = P363.75 ====== NOTE: The supplemental compensation of P2,000.00 is less than the regular compensation of P3,000.00 for March. The rule to be followed will still be the cumulative average method. (b) Annualized Withholding tax method. (1) When the employer-employee relationship is terminated before the end of the calendar year, and (2) when computing for the year-end adjustment to determine the amount to be either withheld in December of the current calendar year or refunded as excess withheld taxes, the employer shall determine the tax on the sum of the regular and supplementary compensation for the entire calendar year before the payment of the last compensation in accordance with the following procedures: (1) Employer-employee relationship terminated: 1. Add the amount of regular and supplementary compensation to be paid to an employee for the payroll period to the sum of regular and supplementary compensation paid since the beginning of the current year. 2. Deduct from the aggregate amount of compensation computed in No. 1 the amount of total exemptions of the employee. 3. Compute the amount of tax on the difference arrived at in No. 2. in accordance with the following schedule: OVER BUT NOT AMOUNT RATE OF EXCESS OVER OVER P P P P P P P P P 0 2,500 5,000 10,000 20,000 40,000 60,000 100,000 250,000 500,000 P P P P P P P P P 2,500 5,000 10,000 20,000 40,000 60,000 100,000 250,000 500,000 P P P P P P P P P 0% 0 + 1% P 25 + 3% P 175 + 7% 875 + 11% 3,075 + 15% 6,075 + 19% 13,675 + 24% 49,675 + 29% 122,175 + 35% 2,500 5,000 P P P P P P P
10,000 20,000 40,000 60,000 100,000 250,000 500,000
4. Determine the deficiency or excess, if any, of the tax computed in No. 3 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 No. 3 is greater than the amount of cumulative tax already deducted and withheld) shall be deducted from the last payment of compensation for the calendar year. The excess tax (when the amount of cumulative tax already deducted is greater than the tax computed in No. 3) shall be credited or refunded from the remittable amount of taxes withheld 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. aisa dc (2) Year-end adjustment:
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The tax due from each employee for the entire year shall be decreased by the sum of the taxes withheld from the salary of such employee from January to November. The difference shall be the amount to be withheld in December of the current calendar year or amount to be refunded if the sum of the taxes withheld from January to November is greater than the tax due from such employee for the entire year. EXAMPLE 8: Employer-employee relationship terminated: Mr. X, head of the family with no qualified dependent children receives P4,000.00 as monthly regular compensation starting January 1, 1986. On June 1, 1986 he filed his resignation effective June 30, 1986. Tax withheld from January to May 1986 was P1,312.75. COMPUTATION 1. Total compensation received from January 1 to May 31, 1986 P20,000.00 Compensation to be received on June 4,000.00 __________ Gross Compensation P24,000.00 ======== 2. Gross compensation P24,000.00 Less: Personal exemption 7,500.00 __________ Taxable compensation income P16,500.00 ======== Tax on P10,000 P175.00 Tax on excess (P6,500 x 7%) _________ Tax on P16,500 P630.00 ======== 455.00
3.
4.
Tax Due P630.00 Less: Tax withheld from January to May P1,312.75 _________ Tax to be refunded to Employee X (P682.75) ======= EXAMPLE 9: Annualized Withholding tax (year-end adjustment) XYZ Company employer has the following employees: 1. Mr. A, married with one dependent receives a salary of P3,000.00 a month. Sometime in October his wife who is also employed, gave birth to a second child thereby increasing their additional exemption to P6,000.00. However, he was able to file an amended W-4 only in December, hence the need for adjustment. 2. Mr. B, married and whose wife is not employed, receives a monthly salary of P2,500.00. 3. Mr. C, receives a monthly salary of P1,500.00 and in claiming personal exemption of P6,000.00 as an employed wife whose husband is also employed. 4. Mr. D, started working only in August 1986 and is claiming personal exemption of P7,500.00 as head of the family receives a monthly salary of P3,000.00. 5. XYZ Company gave a 50% of their monthly salary as bonus for December to employees A, B, C and D for the calendar year 1986. COMPUTATION: Alphabetical List of Employees from whom taxes were withheld. NAME OF TAN GROSS COM- AMOUNT OF TAX DUE TAX WITHHELD DECEMBER EMPLOYEE PENSATION PERSONAL (COMPUFROM JAN. TO YEAR-END INCOME EXEMPTION TED UNNOV. (COMPU- ADJUSTMENT FROM JAN. DER SEC. TED MONTHTO DEC. IN21 (a) NIRC LY UNDER CLUDING ON NET THE WITH BONUS TAXABLE HOLDING COMPENTAX TABLE) SATION INCOME MR. A MR. B P37,500 P12,000 P1,480.00 P1,507.55 31,250 12,000 822.50 673.97 148.53 ** (P27.55) *
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MR. C MR. D
18,750 6,000 367.50 288.97 78.53 ** 16,500 11,500 25.00 603.20 (578.20) * -----------------P104,000 P2,695.00 P3,073.69 P(378.69) *** ----------------NOTE. The W-2 to be given to the employees will show gross compensation and tax withheld as adjusted as follows: cd i GROSS COMPENSATION TAX WITHHELD Mr. A. P37,500.00 P1,480.00 Mr. B. 31,250.00 822.50 Mr. C. 18,750.00 367.50 Mr. D. 16,500.00 25.00 ___________ ________ P104,000.00 P2,695.00 __________ ________ * Amount to be refunded by XYZ Company to the employee not later than January 31, 1987. ** Amount to be deducted from the December salary of the employee. *** Creditable against remittances of taxes withheld for the month of January. A Monthly Return of Income Tax Withheld (BIR Form 1743W) for December is still required to be filed by XYZ Company whether or not taxes have been withheld. SECTION 5. Section 8 of Revenue Regulations No. 6-82, as amended, is hereby further amended to read as follows: "Sec. 8. Right to claim the following exemption. xxx xxx xxx Each employee may claim the following exemptions, with respect to compensation paid on or after January 1, 1986. (a) If single P6,000.00. (b) If married, and both spouses are employed, the spouses shall each be entitled to a personal exemption of P6,000.00. cdt (c) If married, and only one spouse is employed, the employed spouse is entitled to P12,000.00. (d) If head of family P7,500.00. (e) Additional exemption for each qualified dependent child but not to exceed four (4) dependents P3,000.00; in excess of four (4) dependent children, for each child who otherwise qualified as a dependent prior to January 1, 1980 under the provision of Presidential Decree, meaning children who were born prior to 1973 P1,000.00. For purposes of compliance with the requirements of withholding tax on compensation income, the husband shall be deemed the proper claimant of the additional exemption for dependent children in the case of married individuals. The option of claiming additional exemption, and the special additional personal exemption by either husband or wife shall be exercised and reflected in the joint income tax return. (f) If the gross compensation income of single, married or legally separated individual, or heads of family does not exceed the aggregate amount of P20,000.00, he is further entitled to a special additional personal exemption of P4,000.00. There is no need for an employee to file an amended withholding exemption certificate unless there is a change in his exemption unit during the year. The employer shall automatically compute the tax to be withheld based on the increased amount of exemptions in accordance with the Withholding Tax Tables, effective January 1, 1986. SECTION 6. Paragraphs (a) and (b) of Section 22 or Revenue Regulations 6-82 as amended, is hereby further amended to read as follows: "Sec. 22. Monthly adjustments. (a) In general. If for any month of the calendar year, except the last month, more or less than the correct amount of the tax is withheld, or more or less than the correct amount of the tax is paid to the Commissioner of Internal Revenue or to any authorized Revenue Officer, proper adjustment without interest and surcharge, may be made: Provided, That the deficiency shall be paid not later than the next remittance date in the following month. No adjustment shall, however, be made under the provisions of this section in respect of underpayment for any month after receipt from the Commissioner of Internal Revenue or any authorized revenue officer of notice and demand for payment thereof based upon assessment, but the amount shall be paid in accordance with such notice and demand, nor shall any adjustment under the provisions of this section be made in respect of overpayment for any month after the filing of a claim for refund thereof. Every adjustment shall be reported in the "Adjustment for Previous Month" portion of BIR Form 1743W indicating the month/months when the underwithholding/overwithholding occurred: correct amount due and the amount erroneously paid; TCC encashed; and the adjusted amount. cdasia (b) Annualized withholding tax (year-end adjustment). On or before the end of the calendar year, but prior to the payment of the compensation for the last payroll period, the employer shall determine the sum of the gross 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 in accordance with Section 21 of the
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National Internal Revenue Code. The tax due from each employee for the entire year shall be decreased by the sum of the taxes withheld from the salary of such employee from January to November. The difference shall be the amount to be withheld in December of the current calendar year or amount to be refunded by the employer to the employee, if the sum of the taxes withheld from January to November is greater than the tax due from such employee for the entire year. The total amount actually refunded by the employer to his employees resulting from the year-end adjustment shall be repaid from the remittable amount of taxes withheld for the month of December of the current year and succeeding months of the following year until the total amount actually refunded is fully repaid. SECTION 7. Repealing Clause. All existing rules and regulations or parts thereof which are inconsistent with the provisions of these regulations are hereby revoked. SECTION 8. Effectivity. These regulations shall take effect on compensation income form January 1, 1986. SECTION 9. Transitory provision. 1. Refund or credit. A. Employee. (a) Any amount of tax previously withheld from an employee whose compensation income is no longer subject to withholding under the Withholding Tax Tables effective January 1, 1986 shall be refunded by the employer to his employee. (b) Any excess over the amount of tax already withheld from the compensation of employees from the months of January to July 31, 1986 over the tax required to be withheld for the same period under the Withholding Tax Tables effective January 1, 1986 shall be credited against the withholding tax due from such employee from August and the succeeding months of the current calendar year. B. Employer. The total amount actually refunded by the employer to his employees shall be repaid from the remittable amount of taxes withheld for the current month in which the refund was made and in succeeding months thereafter until the overwithheld tax is fully paid. cdtai (2) Report on refunds and credits. In addition to the mandatory requirement of filing the Monthly Remittance Return of Income Tax Withheld (BIR Form 1743W) by withholding agents on compensation, whether there are taxes to be remitted or no taxes are remittable, such agents shall also submit for the calendar year 1986 an Interim Report (ANNEX "B") showing taxes, withheld from January to July 1986 computed under the Withholding Tax Tables effective January 1, 1986 and the total amount of excess taxes withheld which shall be refunded and/or credited to the employees beginning August and the succeeding months of the current year. (SGD.) JAIME V. ONGPIN Minister of Finance Recommending Approval: (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue NOTE FROM RICKY I HAVE DELETED THE MONTHLY WITHHOLDING TAX TABLE AS IT WAS TOO LONG AND ALREADY OBSOLETE. JUST CHECK THE UPLOADED SOFTCOPY IF YOU NEED TO SEE THEM.
REVENUE REGULATIONS NO. 19-86, supra, page 33
July 10, 2002 REVENUE REGULATIONS NO. 10-02 SUBJECT : Implementing the Provisions of Section 34(A)(1)(a)(iv) of the Tax Code of 1997, Authorizing the Imposition of a Ceiling on "Entertainment, Amusement and Recreational Expenses" TO : All Internal Revenue Officers and Others Concerned Pursuant to Section 244 of the Tax Code of 1997, in relation to Section 34(A)(1)(a)(iv) of the same Code, these Regulations are hereby promulgated to provide a ceiling on the amount of entertainment, amusement and recreation expense claimed by individual taxpayers engaged in business or in the practice of their profession and of domestic or resident foreign corporations, to arrive at the taxable income subject to income tax under Sections 24(A); 25(A)(1); 26; 27(A), (B) and (C); 28(A)(1); 28(A)(6)(b) and Section 61, all of the Tax Code of 1997. THDIaC SECTION 1. Coverage. These regulations shall cover entertainment, amusement and recreation expenses of the following taxpayers: a. Individuals engaged in business, including taxable estates and trusts; b. Individuals engaged in the practice of profession; c. Domestic corporations; d. Resident foreign corporations; e. General professional partnerships, including its members. SECTION 2. Definition of Terms. For purposes of these Regulations, the term "Entertainment, Amusement and Recreation Expenses" includes representation expenses and/or depreciation or rental expense relating to
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entertainment facilities, as described below. The term "Representation Expenses" shall refer to expenses incurred by a taxpayer in connection with the conduct of his trade, business or exercise of profession, in entertaining, providing amusement and recreation to, or meeting with, a guest or guests at a dining place, place of amusement, country club, theater, concert, play, sporting event, and similar events or places. For purposes of these Regulations, representation expenses shall not refer to fixed representation allowances that are subject to withholding tax on wages pursuant to appropriate revenue regulations. CSAaDE In the case particularly of a country, golf, sports club, or any other similar club where the employee or officer of the taxpayer is the registered member and the expenses incurred in relation thereto are paid for by the taxpayer, there shall be a presumption that such expenses are fringe benefits subject to fringe benefits tax unless the taxpayer can prove that these are actually representation expenses. For purposes of proving that said expense is a representation expense and not fringe benefits, the taxpayer should maintain receipts and adequate records that indicate the (a) amount of expense (b) date and place of expense (c) purpose of expense (d) professional or business relationship of expense (e) name of person and company entertained with contact details. ITHADC The term "Entertainment Facilities" shall refer to (1) a yacht, vacation home or condominium; and (2) any similar item of real or personal property used by the taxpayer primarily for the entertainment, amusement, or recreation of guests or employees. To be considered an entertainment facility, such yacht, vacation home or condominium, or item of real or personal property must be owned or form part of the taxpayer's trade, business or profession, or rented by such taxpayer, for which the taxpayer claims a depreciation or rental expense. A yacht shall be considered an entertainment facility under these Regulations if its use is in fact not restricted to specified officers or employees or positions in such a manner as to make the same a fringe benefit for purposes of imposing the fringe benefits tax. cSaCDT The term "Guests" shall mean persons or entities with which the taxpayer has direct business relations, such as but not limited to, clients/customers or prospective clients/customers. The term shall not include employees, officers, partners, directors, stockholders, or trustees of the taxpayer. SECTION 3. Exclusions. The following expenses are not considered entertainment, amusement and recreation expenses as defined under Section 2 hereof. a. Expenses which are treated as compensation or fringe benefits for services rendered under an employeremployee relationship, pursuant to Revenue Regulations 2-98, 3-98 and amendments thereto; b. Expenses for charitable or fund raising events; c. Expenses for bonafide business meeting of stockholders, partners or directors; d. Expenses for attending or sponsoring an employee to a business league or professional organization meeting; e. Expenses for events organized for promotion, marketing and advertising including concerts, conferences, seminars, workshops, conventions, and other similar events; f. Other expenses of a similar nature. Notwithstanding the foregoing, such items of exclusions may, nonetheless, qualify as items of deduction under Section 34 of the Tax Code of 1997, subject to conditions for deductibility stated therein. DHESca SECTION 4. Requisites of Deductibility of "Entertainment, Amusement and Recreation Expense". The following are the requisites for deductibility of entertainment, amusement and recreation expense as defined above subject to the ceiling prescribed under Section 5 of these Regulations: a. It must be paid or incurred during the taxable year; b. It must be: (i) directly connected to the development, management and operation of the trade, business or profession of the taxpayer; or (ii) directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession; c. It must not be contrary to law, morals, good customs, public policy or public order; d. It must not have been paid, directly or indirectly, to an official or employee of the national government, or any local government unit, or of any government-owned or controlled corporation (GOCC), or of a foreign government, or to a private individual, or corporation, or general professional partnership (GPP), or a similar entity, if it constitutes a bribe, kickback or other similar payment; e. It must be duly substantiated by adequate proof. The official receipts, or invoices, or bills or statements of accounts should be in the name of the taxpayer claiming the deduction; and f. The appropriate amount of withholding tax, if applicable, should have been withheld therefrom and paid to the Bureau of Internal Revenue. SECTION 5. Ceiling on Entertainment, Amusement, and Recreation Expense. There shall be allowed a deduction from gross income for entertainment, amusement and recreation expense, as defined in Section 2 of these Regulations, in an amount equivalent to the actual entertainment, amusement and recreation expense paid or incurred within the taxable year by the taxpayer, but in no case shall such deduction exceed 0.50 percent (%) of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or 1.00 percent (%) of net revenue (i.e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties. However, if the taxpayer is deriving income from both sale of goods/properties and services, the allowable entertainment, amusement and recreation expense
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shall in all cases be determined based on an apportionment formula taking into consideration the percentage of the net sales/net revenue to the total net sales/net revenue, but which in no case shall exceed the maximum percentage ceiling provided in these Regulations. Apportionment Formula: Net sales/net revenue x Actual Expense Total Net sales and net revenue Illustration: ERA Corporation is engaged in the sale of goods and services with net sales/net revenue of P200,000 and P100,000 respectively. The actual entertainment, amusement and recreation expense for the second semester of 2002 totaled to P3,000. SACEca Ent., Amusement & Recreation Expense (EAR) Allowable Amt to be based on Max. Percentage claimed as EAR Net sales/ Apportionment Ceiling of Expense (whichever is Net revenue Formula* EAR Expense** lower of col. 2 and 3) (1) (2) (3) (4) Sale of P200,000 P2,000 P1,000 P1,000 Goods Sale of 100,000 1,000 Services 1,000 1,000
Total P300,000 P3,000 P2,000 P2,000 *Apportionment Formula Sale of Goods (P200,000/P300,000) x P3,000 Sale of Services(P100,000/P300,000) x P3,000 **Maximum Percentage Ceiling Sale of Goods (P200,000 x 0.50%) Sale of Services (P100,000 x 1%) In the above illustration, ERA Corporation can only claim a total of P2,000 as entertainment, amusement and recreation expense. Notwithstanding the ceiling imposed on such expense, the claimed expense shall be subject to verification and audit for purposes of determining its deductibility as well as compliance with the substantiation requirements as provided in these Regulations. However, if after verification a taxpayer is found to have shifted the amount of the entertainment, amusement and recreation expense to any other expense in order to avoid being subjected to the ceiling herein prescribed, the amount shifted shall be disallowed in its totality, without prejudice to such penalties as may be imposed by the Tax Code of 1997. TCIEcH SECTION 6. Reporting. The taxpayer is hereby required to use in its financial statements and income tax return the account title "entertainment, amusement and recreation expense", or in the alternative, to disclose in the notes to financial statements the amount corresponding thereto when recording expenses paid or incurred of the nature as defined in Section 2 of these Regulations. However, such expense should be reported in the taxpayer's income tax return as a separate expense item. SECTION 7. Repealing Clause. All existing rules, regulations and other issuances or portions thereof inconsistent with the provisions of these Regulations are hereby modified, repealed or revoked accordingly. SECTION 8. Effectivity. The ceiling provided herein shall apply only to entertainment, amusement and recreation expenses paid or incurred beginning Sept. 1, 2002, regardless of the taxpayer's accounting period (i.e., whether calendar or fiscal year). APPROVED: (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance Recommending Approval: (SGD.) REN G. BAEZ Commissioner of Internal Revenue
November 20, 2000 REVENUE REGULATIONS NO. 13-00 SUBJECT : Implementing Section 34(B) of the Tax Code of 1997 on the Requirements for Deductibility of Interest Expense from the Gross Income of a Taxpayer. TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope. Pursuant to the provisions of Section 244 of the Tax Code of 1997, these Regulations
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are hereby promulgated to implement the provisions of Section 34(B) of the same Code on the requirements for deductibility of interest expense from the gross income of a corporation or an individual engaged in trade, business or in the practice of profession. TaCEHA SECTION 2. Definition of Terms. For purposes of these Regulations, the following words and phrases shall have the following meanings, viz: (a) Interest shall refer to the payment for the use or forbearance or detention of money, regardless of the name it is called or denominated. It includes the amount paid for the borrower's use of money during the term of the loan, as well as for his detention of money after the due date for its repayment. cAaETS (b) Taxpayer shall refer to a person, whether natural or juridical, engaged in trade, business or in the exercise of profession, except one earning compensation income arising from personal services rendered under an employer-employee relationship. SECTION 3. Requisites for Deductibility of Interest Expense. In general, subject to certain limitations, the following are the requisites for the deductibility of interest expense from gross income, viz: (a) There must be an indebtedness; (b) There should be an interest expense paid or incurred upon such indebtedness; (c) The indebtedness must be that of the taxpayer, (d) The indebtedness must be connected with the taxpayer's trade, business or exercise of profession; (e) The interest expense must have been paid or incurred during the taxable year; (f) The interest must have been stipulated in writing; (g) The interest must be legally due; (h) The interest payment arrangement must not be between related taxpayers as mandated in Sec. 34(B)(2)(b), in relation to Sec. 36(B), both of the Tax Code of 1997; (i) The interest must not be incurred to finance petroleum operations; and aDICET (j) In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure. SECTION 4. Rules on the Deductibility of Interest Expense. (a) General Rule. In general, the amount of interest expense paid or incurred within a taxable year on indebtedness in connection with the taxpayer's trade, business or exercise of profession shall be allowed as a deduction from the taxpayer's gross income. (b) Limitation. The amount of interest expense paid or incurred by a taxpayer in connection with his trade, business or exercise of a profession from an existing indebtedness shall be reduced by an amount equal to the following percentages of the interest income earned which had been subjected to final withholding tax depending on the year when the interest income was earned, viz: Forty-one percent (41%) beginning January 1, 1998; Thirty-nine percent (39%) beginning January 1, 1999; and Thirty-eight percent (38%).beginning January 1, 2000 and thereafter. This limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer or regardless of the date when the interest bearing loan and the date when the investment was made for as long as, during the taxable year, there is an interest expense incurred on one side and an interest income earned on the other side, which interest income had been subjected to final withholding tax. This rule shall be observed irrespective of the currency the loan was contracted and/or in whatever currency the investments or deposits were made. DTAIaH Illustration: Supposing on January 15, 1998, Company A, who has a deposit account with BCD Bank, obtained a loan from XYZ Financing Corporation in connection with the operation of its business. Assume that Company A's net income for the year 1998 before the deduction of the interest expense amounted to P1,000,000. For the year 1998, the interest income it derived from the said deposit with BCD Bank amounted to P180,000 on which a final tax of P36,000 had been withheld. Its interest expense on the loan obtained from XYZ Financing Corporation during the same year amounted to P150,000. Under this illustration, the deductible interest expense, the taxable income and the income tax due of Company A shall be computed as follows: 1998 Net income before interest expense P1,000,000 Less: Interest expense P150,000 Less: 41% of interest income from deposit (41% x P180,000) 73,800 Deductible interest expense 76,200 Taxable income P923,800 Income tax due for taxable year 1998 (34%) P314,092 ======== (c) Interest on Unpaid Taxes. Provisions of Sec. 4(b) hereof to the contrary notwithstanding, interest incurred
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or paid by the taxpayer on all unpaid business-related taxes shall be fully deductible from gross income and shall not be subject to the limitation on deduction heretofore mentioned. Thus, such interest expense incurred or paid shall not be diminished by the percentage of interest income earned which had been subjected to final withholding tax. CTSHDI (d) Other cases where interest expense is not deductible from gross income. No interest expense shall be allowed as deduction from gross income in any of the following cases: (1) If within the taxable year, an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed as a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortization, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. Illustration: Mr. Cruz, a self-employed individual, consistently employs the cash-basis accounting method in keeping his books of accounts. Assuming that on January 1, 1998, he contracted a loan of P1,000,000 from XYZ Bank for use in his business operations. Terms: Payable in two (2) years at 15% interest per annum, payable in advance. On January 1, 1998, he received from the bank the proceeds of his loan in the sum of P700,000, net of interest paid in advance in the amount of P300,000. cSaATC In general, the interest expense shall be taken for the taxable year in which "paid or incurred" or "paid or accrued" depending upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income, the deduction should be taken as of a different period. Thus, a self-employed individual is allowed to deduct from his gross income the entire amount of interest expense actually paid during the taxable year. However, if the interest expense is paid in advance and the accounting method used by the self-employed individual is the cash-basis accounting method, such interest expense paid in advance shall only be allowed as deduction in the year when he has fully paid his liability. So that if the said debtor has fully paid his loan as of the end of the taxable year 1999, his interest expense paid in advance on January 1, 1998 in the amount of P300,000 shall only be allowed as deduction from his gross income in the taxable year 1999. On the other hand, even if the interest expense is paid in advance but the indebtedness is payable in periodic amortization, the amount of interest expense which corresponds to the amount of the principal amortized or paid during the respective years 1998 and 1999 shall be allowed as deduction in such respective taxable years. EATcHD (2) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Sec. 36(B) of the Tax Code of 1997, viz: (i) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors and lineal descendants; or (ii) Between an individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly and indirectly, by or for such individual; or (iii) Between two corporations more than fifty percent (50%) in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual; or (iv) Between the grantor and a fiduciary of any trust; or aCTHEA (v) Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (vi) Between a fiduciary of a trust and a beneficiary of such trust. (3) If the indebtedness on which the interest expense is paid is incurred to finance petroleum exploration in the Philippines. The non-deductible interest expense herein referred to pertains to interest or other consideration paid or incurred by a Service Contractor engaged in the discovery and production of indigenous petroleum in the Philippines in respect of the financing of its petroleum operations, pursuant to Section 23 of P.D. No. 8, as amended by P.D. No. 87, otherwise known as "The Oil Exploration and Development Act of 1972." (e) Optional treatment of interest expense on capital expenditure. At the option of the taxpayer, interest expense on a capital expenditure incurred to acquire property used in trade, business or exercise of a profession may be allowed as a deduction in full in the year when incurred, the provisions of Sec. 36 (A)(2) and (3) of the Tax Code of 1997 to the contrary notwithstanding, or may be treated as a capital expenditure for which the taxpayer may claim only as a deduction the periodic amortization of such expenditure. SECTION 5. Repealing Clause. The provisions of any revenue regulations or any revenue issuance or ruling inconsistent with these Regulations are hereby repealed, amended, or modified accordingly. SECTION 6. Effectivity Clause. These Regulations shall take effect immediately. EHCDSI (SGD.) JOSE T. PARDO Secretary of Finance Recommending Approval: (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue
July 17, 2007
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BIR RULING [DA-390-07] DA112-04 SGV & Co 6760 Ayala Avenue Makati City Attention : R.C. Vinzon Tax Services Gentlemen : This refers to your letter dated February 15, 2007 stating that your client, Radio Communications of the Philippines, Inc. (RCPI), is a corporation duly organized and existing under and by virtue of the laws of the Philippines; that RCPI is the holder of a legislative franchise to provide telecommunications services of all types; that the National Telecommunications Commission (NTC) has authorized RCPI to provide and operate the following major services: local exchange carrier, international gateway facility, leased line service, and cellular mobile telephone systems; that during the years ended December 31, 2005 and 2006, respectively, RCPI continued to be in a capital deficit position; that the company's financial position is such that its auditors have expressed the existence of a material uncertainty which may cast doubt on RCPI's ability to continue operations normally; that in order to address this problem, RCPI requested its creditors for the restructuring of its bank loans and bonds payable; that the debt restructuring plan includes, among others, the extension of the repayment of terms of RCPI's outstanding loans and bonds, reduction in interest rates and conversion of certain debt into equity; that pursuant to a rehabilitation plan duly approved by RCPI's creditors, there will be a change in the payment scheme which does not include the reduction of the principal liability but only the reclassification of the debt into sustainable (68.933% of the total debt) and unsustainable debt (31.067% of the total debt), recalculation of interest expense based on lower interest rates provided by the court, which also form part of the unsustainable debt, and the waiver of penalties; and that pursuant to the rehabilitation plan, RCPI shall continue to pay interest on the portion of its debt classified as sustainable debt. SDIACc Based on the foregoing representations, you now request confirmation of your opinion that the interest expense to be paid by the company on its debt payments pursuant to a debt restructuring plan is an allowable expense for income tax purposes. In reply thereto, please be informed that Section 3 of Revenue Regulations No. 13-2000 provides that for interest to be deductible from gross income, the following are the requisites, to wit: (1) There must be an indebtedness; (2) There should be an interest expense paid or incurred upon such indebtedness; (3) The indebtedness must be that of the taxpayer; (4) The indebtedness must be connected with the taxpayer's trade, business or exercise of profession; (5) The interest expense must have been paid or incurred during the taxable year; (6) The interest must have been stipulated in writing; (7) The interest must be legally due; (8) The interest payment arrangement must not be between related taxpayers as mandated in Section 34 (B) (2), in relation to Section 36 (B), both of the Tax Code of 1997; (9) The interest must not be incurred to finance petroleum operations; and (10) In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure. cSATEH In stressing the principle of the above-mentioned section, this Office elucidated the matter in BIR Ruling No. DA11204 dated March 11, 2004, as follows: "In general, the amount of interest expense paid or incurred within a taxable year on indebtedness in connection with the CPI's trade or business shall be allowed as deduction from its gross income. The term 'interest' shall refer to the payment for the use or forbearance or detention of money, regardless of the name it is called or denominated. SaHcAC However, for the interest to be deductible, said interest payments should not be among the exceptions to deductibility under Section 34(B)(2)(b) and (c) of the Tax Code, which provide (a) ... (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36(B); or (c) If the indebtedness is incurred to finance petroleum exploration. Prescinding from the above-cited provision, it is apparent that for the interest to be deductible, the ownership of both corporations (CTFBV and CPI) must be traced to the level of the individual shareholder. (Sec. 36(B), Tax Code of 1997) Considering that both CPI and CTFBV are 100% owned by CTGEI which in turn is wholly-owned by CTC, which are ultimately owned by a publicly-held or listed US corporation, hence, no individual owns directly or indirectly more than 50% of the outstanding capital stock of both CPI and CTFBV. Accordingly, the interest payments by CPI to CTFBV on the refinancing loan are deductible from its gross income for income tax purposes. aDcTHE Likewise, in BIR Ruling No. UN251-95 dated July 7, 1995, this Office ruled that the disallowance of interest expense arising from indebtedness incurred by Philodrill, a corporation engaged in the exploration of all kinds of petroleum and petroleum products, to fund the payment of various obligations arising from its investment activities, such as
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acquisition of shares of stock and subscription payments to companies in which it holds equity, has no legal and factual basis. It was also ruled that interest incurred from indebtedness used to finance petroleum operations are not deductible from gross income. Corollarily, under Section 3(d) of P.D. No. 87, the term 'petroleum operations' is defined as searching for and obtaining petroleum within the Philippines through drilling and pressure or suction or the like, and all other operations incidental thereto. It includes the transportation, storage, handling and sale (whether for export or for domestic consumption) of petroleum so obtained but does not include any: (1) transportation of petroleum outside the Philippines; (2) processing or refining at a refinery; or (3) any transactions in the products so refined. CTaSEI It is clear from the aforesaid definition that petroleum operations refers only to upstream activities (i.e., search and obtaining of petroleum) and not to downstream activities (i.e., importing, exporting, shipping, transporting, processing, refining, storing, distributing, marketing, selling). Hence, interest on loans used to finance upstream activities is nondeductible while interest relating to loans used for downstream activities is deductible. Accordingly, since the proceeds of the original US dollar-denominated loans subject of refinancing were used for the repair and maintenance of CPI's refineries and in general, for CPI's operations, which are clearly not upstream activities, the interest paid thereon may be claimed as a tax deduction by CPI in the year the interest is paid or incurred. In fine, the interest to be paid by CPI on the loans to be extended by CTFBV for purposes of refinancing CPI's US dollar denominated loans shall be deductible from its gross income pursuant to Section 34(B) of the Tax Code of 1997." (BIR Ruling No. DA196-03 dated June 26, 2003) EScAID IN VIEW OF THE FOREGOING, this Office hereby confirms your opinion that the interest expense to be paid by the company on its debt payments as mandated by a court-approved debt restructuring plan is an allowable expense for income tax purposes subject to the limitation prescribed under Section 34 (B) (2) of the Tax Code of 1997, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. HIACEa Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service
August 27, 2001 REVENUE REGULATIONS NO. 14-01 SUBJECT : Implementing Section 34(D)(3) of the National Internal Revenue Code of 1997 Relative to the Allowance of Net Operating Loss Carry-Over (NOLCO) as a Deduction from Gross Income. TO : All Internal Revenue Officers and Others Concerned. SECTION 1. Scope. Pursuant to the provisions of Section 244 of the National Internal Revenue Code of 1997 (hereinafter referred to as the Code), these Regulations are hereby promulgated to govern the deduction from gross income of the Net Operating Loss Carry-Over (NOLCO) pursuant to Section 34 (D) (3) of the Code, which provides: "Net Operating Loss Carry-Over The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection. Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that "(i) Not less than seventy percent (75%) in nominal value of outstanding issued shares if the business is in the name of a corporation is held by or on behalf of the same persons; or "(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation if the business is in the name of a corporation, is held by or on behalf of the same persons. "For purposes of this Subsection the term 'net operating loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year: "Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining four (4) years." SECTION 2. General Principles anal Policies. 2.1 For purposes of these Regulations, the allowance for deduction of NOLCO shall be limited only to net operating losses accumulated beginning January 1, 1998. 2.2 In general, NOLCO shall be allowed as a deduction from the gross income of the same taxpayer who
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sustained and accumulated the net operating losses regardless of the change in its ownership. This rule shall also apply in the case of a merger where the taxpayer is the surviving entity. 2.3 Unless otherwise provided in these Regulations, NOLCO of the taxpayer shall not be transferred or assigned to another person, whether directly or indirectly, such as, but not limited to, the transfer or assignment thereof through a merger, consolidation or any form of business combination of such taxpayer with another person. ASaTCE 2.4 NOLCO shall also be allowed if there has been no substantial change in the ownership of the business or enterprise in that not less than 75% in nominal value of outstanding issued shares or not less than 75% of the paid up capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons. The 75% equity, ownership or interest rule prescribed in these Regulations shall only apply to a transfer or assignment of the taxpayer's net operating losses as a result of or arising from the said taxpayer's merger or consolidation or business combination with another person. In case the transfer or assignment of the taxpayer's net operating losses arises from the said taxpayer's merger, consolidation or combination with another person, the transferee or assignee shall not be entitled to claim the same as deduction from gross income unless, as a result of the said merger, consolidation or combination, the shareholders of the transferor/assignor, or the transferor (in case of other business combinations) gains control of at least 75% or more in nominal value of the outstanding issued shares or paid up capital of the transferee/assignee (in case the transferee/assignee is a corporation) or 75% or more interest in the business of the transferee/assignee (in case the transferee/assignee is other than a corporation). DACaTI 2.5 Unless otherwise provided in these Regulations, an individual (including estate or trust) engaged in trade or business or in the exercise of profession, or a domestic or resident foreign corporation may be allowed to claim deduction of his/its corresponding NOLCO: Provided, however, that an individual who claims the 10% optional standard deduction shall not simultaneously claim deduction of the NOLCO: Provided, further, that the three-year reglementary period shall continue to run notwithstanding the fact that the aforesaid individual availed of the 10% optional standard deduction during the said period. SDaHEc 2.6 The three-year reglementary period on the carry-over of NOLCO shall continue to run notwithstanding the fact that the corporation paid its income tax under the "Minimum Corporate Income Tax" computation. 2.7 NOLCO shall be availed of on a "first-in, first-out" basis. 2.8 The net operating loss incurred by a taxpayer in the year in which a substantial change in ownership in such taxpayer occurs shall not be affected by such change in ownership, notwithstanding subsections 2.3 and 2.4. SECTION 3. Definition of Terms. For purposes of these Regulations, the words and phrases herein provided shall mean as follows: 3.1 Gross Income Except as otherwise provided in these Regulations, the term "Gross Income" means the pertinent items of income referred to in Section 32(A) of the Tax Code of 1997 which are required to be declared in the taxpayer's Income Tax Return for purposes of computing his taxable income as defined in Section 31 of the same Code. All exempt income and other items of income subject to final tax shall not form part of the gross income. 3.2 Allowable Deductions The term "Allowable Deductions" means the items of deduction enumerated under Section 34(A) to (J) and Section 34(M), including the special deductions allowed to insurance companies under Section 37 of the Code, but excluding NOLCO and any item of incentive deduction allowable under any special law that does not actually involve cash outlay: Provided, that, in the case of an individual entitled to claim the Optional Standard Deduction (OSD) under Section 34(L), in lieu of the deductions enumerated under Section 34(A) to (K), the term "allowable deductions" shall mean the aforesaid OSD plus deduction of premium payments on health and/or hospitalization insurance as provided under Section 34(M) of the Code, if applicable. ICHDca 3.3 Net Operating Loss The term Net Operating Loss" shall mean the excess of allowable deduction over gross income of the business in a taxable year. 3.4 Nominal Value of Outstanding Issued Shares The term "Nominal Value of Outstanding Issued Shares " shall refer to the par value (in case of par value shares of stock) or stated value (in case of no par value shares of stock) of shares of stock issued to the stockholders of the corporation. 3.5 Paid Up Capital of the Corporation The term "Paid Up Capital of the Corporation" shall refer to the total amount paid by stockholders for their subscriptions in the shares of stock of the corporation, including any amount paid over and above the par value or stated value of the share of stock (e.g., premium on capital). For this purpose, the taxpayers shall maintain complete and accurate records of the paid-up capital of the shareholders. 3.6 Taxable Income The term "Taxable Income" means the excess amount of the pertinent items of gross income over the allowable deductions and/or personal and additional exemptions, if any, authorized under the Code or under any special law. 3.7 Taxable Year The term "Taxable Year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under Title II of the Code. Taxable year includes, in the case of a return made for a fractional part of a year, the period for which such return is made. The term "Fiscal Year" means an accounting period of twelve (12) months ending on the last day of any month other than December. 3.8 Substantial Change in the Ownership of the Business or Enterprise The term "Substantial Change in the Ownership of the Business or Enterprise" shall refer to a change in the ownership of the business or enterprise as a
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result of or arising from its merger or consolidation or combination with another person in the manner as provided in subsection 2.4 of these Regulations. Any change in ownership as a result of or arising thereunder shall not be treated as a substantial change for as long as the stockholders of the party thereto, to whom the net operating loss is attributable, gains or retains 75% or more interest after such merger or consolidation or combination. 3.9 Merger For purposes of these Regulations, the term "Merger" shall refer to the absorption of a corporation by another corporation, the latter retaining its own name and identity and acquiring the assets, liabilities, franchises and powers of the former, and the absorbed corporation ceasing to exist as a separate juridical person. 3.10 Consolidation For purposes of these Regulations, the term "Consolidation" shall refer to a situation when two or more corporations are extinguished, and by the same process a new one is created, taking over the assets and assuming the liabilities of the said extinguished corporations; or the unification of two or more corporations into a single new corporation, having the combined capital, franchises and powers of all its constituents. 3.11 Combination For purposes of these Regulations, the term "Combination" shall refer to a situation when an owner of a business, organized as a sole proprietorship, admits a partner in his business for the purpose of forming a co-partnership, or any such business combination which, in effect, is similar or synonymous thereto. 3.12 By or on Behalf of the Same Persons The term "By or on Behalf of the Same Persons" shall refer to the maintenance of ownership despite change as when: 1. No actual change in ownership is involved in case the transfer involves change from direct ownership to indirect ownership, or vice versa. Illustration: Facts: P Corporation owns Q Corporation that has NOLCO. P Corporation transfers Q Corporation's shares to R Corporation in exchange for 100% of R Corporation shares. Held: Q Corporation's NOLCO is retained because Q Corporation's shares are held "by" R Corporation "on behalf of" P Corporation, the original owner. 2. No actual change in ownership is involved as in the case of merger of the subsidiary into the parent company. Illustration: Facts: X Corporation owns 100% of Y Corporation. Y Corporation owns 100%, of Z Corporation. Z Corporation has NOLCO. Z Corporation is merged into Y Corporation. Held: Z Corporation's NOLCO should be retained and transferred to Y Corporation. Prior to the merger, X Corporation already indirectly owned Z Corporation, i.e., Z Corporation's shares were held "by" Y Corporation "on behalf of" X Corporation. After the merger, X now directly owns Z Corporation [absorbed corporation] which continues to exist in Y Corporation. Any reference in these Regulations to the "75% equity, ownership, or interest rule", "75% or more in nominal value", "75% or more interest", and other similar terms shall be construed within the context of this definition. Notwithstanding the above, in determining whether there is actual change in ownership in the above-mentioned and similar cases, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit. SECTION 4. Taxpayers Entitled to Deduct NOLCO from Gross Income. Any individual (including estates and trusts) engaged in trade or business or in the exercise of his profession, and domestic and resident foreign corporations subject to the normal income tax (e.g., manufacturers and traders) or preferential tax rates under the Code (e.g., private educational institutions, hospitals, and regional operating headquarters) on their taxable income as defined in Section 3 of these Regulations shall be entitled to deduct from his/its gross income for the current year his/its accumulated net operating losses for the immediately preceding three (3) consecutive taxable years: Provided, however, that net operating losses incurred or sustained prior to January 1, 1998 shall not qualify for purposes of the NOLCO. Provided, further, that any provision of these Regulations notwithstanding, the following shall not be entitled to claim deduction of NOLCO: 4.1 Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign Currency Deposit Unit (FCDU) of a domestic or foreign banking corporation, duly authorized as such by the Bangko Sentral ng Pilipinas (BSP); 4.2 An enterprise registered with the Board of Investments (BOI) with respect to its BOI-registered activity enjoying the Income Tax Holiday incentive. Its accumulated net operating losses incurred or sustained during the period of such Income Tax Holiday shall not qualify for purposes of the NOLCO; 4.3 An enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to R.A. No. 7916, as amended, with respect to its PEZA-registered business activity. Its accumulated net operating losses incurred or sustained during the period of its PEZA registration shall not qualify for purposes of the NOLCO; 4.4 An enterprise registered under R.A. No. 7227, otherwise known as the Bases Conversion and Development Act of 1992, e.g., SBMA-registered enterprises, with respect to its registered business activity. Its accumulated net operating losses incurred or sustained during the period of its said registered operation shall not qualify for purposes of the NOLCO; 4.5 Foreign corporations engaged in international shipping or air carriage business in the Philippines; and 4.6 In general, any person, natural or juridical, enjoying exemption from income tax, pursuant to the provisions of the Code or any special law, with respect to its operation during the period for which the aforesaid exemption is applicable. Its accumulated net operating losses incurred or sustained during the said period shall not qualify for
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purposes of the NOLCO. SECTION 5. Determination of Substantial Change in the Ownership of the Business. 5.1 Time of Determination of Substantial Change in the Ownership of the Business; Determined as of the End of the Taxable Year The substantial change in the ownership of the business or enterprise shall be determined as of the end of the taxable year when NOLCO is to be claimed as deduction. Whether or not substantial change in ownership occurred shall be determined on the basis of any change in the ownership of interest in the said business or enterprise arising from or incident to its merger, or consolidation, or combination with another person (e.g., in the case of merger or consolidation of two or more corporations, such change shall be determined based on the ownership of the outstanding shares of stock issued or based on paid-up capital as of the end of the taxable year, and as a result of or arising from the said merger or consolidation). 5.2 When Change Occurs A change in the ownership of the business occurs when the person who sustained net operating losses enters into a merger, or consolidation or combination with another person, thereby resulting to the transfer or conveyance of the said net operating losses, to another person, in the course of the said merger or consolidation or combination. (a) When No Substantial Change Occurs No substantial change in ownership of the business occurs if, as a result of the said merger or consolidation or combination, the stockholders of the transferor, or the transferor, in case of other business combinations, gains control of at least 75% or more in nominal value of the outstanding issued shares or paid-up capital of the transferee-assignee (in case the transferee-assignee is a corporation) or 75% or more interest in the business of the transferee-assignee (in case the transferee-assignee is other than a corporation). (b) When Substantial Change Occurs A substantial change in ownership of the business occurs if, as a result of the transaction referred to in subsection 5.2 (a) hereof, the stockholders of the transferor or the transferor, in case of other business combinations, gains control of the aforesaid transferee-assignee only to the extent of less than 75%. SECTION 6. Entitlement to Net Operating Loss Carry-Over. 6.1 In General In general, only net operating losses incurred by a qualified taxpayer for the period beginning January 1, 1998 may be carried over to the next three (3) immediately succeeding taxable years following the year of such loss for purposes of the NOLCO deduction. Provided, however, that for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, as amended, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. Provided, further, that the entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining (4) four years. 6.2 Transitory Apportionment of NOLCO, in Case of Corporation Using the Fiscal Year Accounting Period In general, only net operating losses incurred beginning January 1, 1998 may be claimed as a NOLCO deduction. In the case of a corporation using a fiscal year accounting period as of the said dates whose result of operations for the fiscal year 1997-1998 shows a net operating loss, the allowable NOLCO for the succeeding fiscal years shall be determined, as follows: NOLCO for the entire fiscal year (1997-1998) xxx Multiplied by the ratio of: No. of months in 1998 12 mos. covering FY 97-98 xxx NOLCO to be carried over to FYs 1998-1999, 1999-2000, and/or 2000-2001 xxx 6.3 Where Taxpayer is Exempt, or Partly Exempt from Income Tax, or Enjoying Preferential Tax Treatment Under Special Laws Net operating loss or losses incurred by any person who is exempt from income tax, or enjoying preferential tax treatment pursuant to the provisions of special laws, shall not be allowed a NOLCO deduction (e.g., any BOI-registered enterprise enjoying income tax holiday pursuant to E.O. No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987; or any PEZA-registered enterprise enjoying preferential tax treatment or income tax holiday pursuant to R.A. No. 7916, as amended; any person enjoying preferential tax treatment pursuant to R.A. No. 7227, otherwise known as the Bases Conversion and Development Act of 1992. See Section 4 of these Regulations for further discussion). In case any of the aforementioned persons is engaged in both registered and unregistered business activities under any of the aforesaid laws (e.g., a corporation with a BOI-registered activity enjoying income tax holiday; and other unregistered business activities not enjoying any BOI incentive) the net operating loss or losses sustained or incurred by the said BOI-enterprise from its registered activities shall not be allowed as NOLCO deduction from its gross income derived from the unregistered business activities. 6.4 Quarterly and Annual Availment of NOLCO NOLCO shall be allowed as deduction in computing the taxpayer's income taxes per quarter and annual final adjustment income tax returns: Provided, however, that if per the taxpayer's final annual adjustment income tax return, the entire operations for the year resulted to a net operating loss, such net operating loss may be claimed as NOLCO deduction in the immediately succeeding taxable year: Provided, further, that NOLCO may be claimed as deduction only within a period of three (3) consecutive taxable
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years immediately following the year the net operating loss was sustained or incurred. In order that compliance with this three-year statutory requisite may be effectively monitored, the taxpayer shall, at all times, show its NOLCO deduction, in its income tax return, as a separate item of deduction. In no case may NOLCO be claimed, as a part of the taxpayer's other itemized deductions, like under deduction of "losses," in general. 6.5 NOLCO in Relation to the Minimum Corporate Income Tax (MCIT) In general, domestic and resident foreign corporations subject to the normal income tax rate are liable to the 2% MCIT, if applicable, computed based on gross income, whenever the amount of the MCIT is greater than the normal income tax due (computed with the benefit of NOLCO, if any), pursuant to Sections 27 or 28 of the Code. Thus, such corporation cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any taxable year. Provided, however, that the running of the threeyear period for the expiry of NOLCO is not interrupted by the fact that such corporation is subject to MCIT in any taxable year during such three-year period. SECTION 7. Presentation of NOLCO in Tax Return and Unused NOLCO in the Income Statement. The NOLCO shall be separately shown in the taxpayer's income tax return (also shown in the Reconciliation Section of the Tax Return) while the Unused NOLCO shall be presented in the Notes to the Financial Statements showing, in detail, the taxable year in which the net operating loss was sustained or incurred, and any amount thereof claimed as NOLCO deduction within three (3) consecutive years immediately following the year of such loss. Failure to comply with this requirement will disqualify the taxpayer from claiming the NOLCO. SECTION 8. Repealing Clause. Any revenue ruling or issuance inconsistent herewith shall be considered repealed, amended or modified accordingly. SECTION 9. Effectivity Clause. These Regulations shall take effect beginning January 1, 1998. (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance Recommending Approval: (SGD.) RENE G. BAEZ Commissioner of Internal Revenue
March 10, 1999 REVENUE REGULATIONS NO. 05-99 SUBJECT : Implementing Section 34(E) of the Tax Code of 1997 on the Requirements for Deductibility of Bad Debts from Gross Income TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope. Pursuant to the provisions of Section 244 of the Tax Code of 1997, these regulations are hereby promulgated to implement the provisions of Section 34(E) of the same Code on the requirements for deductibility of bad debts from the gross income of a corporation or an individual engaged in trade or business or a professional engaged in the practice of his profession. cdasia SECTION 2. Definition of Terms. For purposes of these regulations, the following words and phrases shall have the following meaning, viz: a. "Bad debts" shall refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. b. "Securities" shall mean shares of stock in a corporation and rights to subscribe for or to receive such shares. The term includes bonds, debentures, notes or certificates, or other evidence of indebtedness, issued by any corporation, including those issued by a government or political subdivision thereof, with interest coupons or in registered form. c. "Actually ascertained to be worthless" In general, a debt is not worthless simply because it is of doubtful value or difficult to collect. Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business judgment. The determination of worthlessness in a given case must depend upon the particular facts and the circumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis of a mere hope of ultimate collection or because of a continuance of attempts to collect notes which have long become overdue, and where there is no showing that the surrounding circumstances differ from those relating to other notes which were charged off in a prior year. While a mere hope probably will not justify postponement of the deduction, a reasonable possibility of recovery will permit the account to be carried along notwithstanding that the probabilities are that the debt may not be collected at all. The creditor may offer evidence to show some expectation that the debt would have been paid in the intervening years, and that subsequently, the hope was shattered or appeared to have been unfounded. If, for example, the creditor could show that during the years he attempted to collect the debt, the debtor had property the title of which was in dispute but which would enable him to pay his debts when the title was cleared, the creditor would be entitled to defer the deduction on the ground that there was no genuine ascertainment of worthlessness. Thus, accounts receivable, the amount whereof is insignificant and the collection of which through court action may be more costly to the taxpayer, may be written-off as bad debts even without conclusive evidence that the taxpayer's receivable from a debtor has definitely become worthless. LexLib
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Good faith does not require that the taxpayer be an "incorrigible optimist" but on the other hand, he may not be unduly pessimistic. Creditors do not have to wait until some turn of the wheel of fortune may bring their debtors into affluence. The taxpayer may strike a middle course between pessimism and optimism and determine debts to be worthless in the exercise of sound business judgment based upon as complete information as is reasonably ascertainable. The taxpayer need not have perfect discernment. d. "Actually charged off from the taxpayers books of accounts" This phrase means that the amount of money lent by the taxpayer (in the course of his business, trade or profession) to his debtor had been recorded in his books of account as a receivable has actually become worthless as of the end of the taxable year, that the said receivable has been cancelled and written-off from the said taxpayer's books of account. A mere recording in the taxpayer's books of account of estimated uncollectible accounts does not constitute a write-off of the said receivable, hence, shall not be a valid basis for its deduction as a bad debt expense. In no case may any bad debt deduction be allowed unless the facts pertaining to the money or property lent and its cancellation or write-off from the taxpayer's accounting records, after having been determined that the same has actually become worthless, have been complied with by the taxpayer. SECTION 3. Requisites for Valid Deduction of Bad Debts From Gross income. General Rule. In general, the requisites for deductibility of bad debts are: (1) There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; (2) The same must be connected with the taxpayer's trade, business or practice of profession; (3) The same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997; (4) The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and (5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to demonstrate with reasonable degree of certainty the uncollectibility of the debt. The Commissioner of Internal Revenue will consider all pertinent evidence, including the value of the collateral, if any, securing the debt and the financial condition of the debtor in determining whether a debt is worthless, or the assigning of the case for collection to an independent collection lawyer who is not under the employ of the taxpayer and who shall report on the legal obstacle and the virtual impossibility of collecting the same from the debtor and who shall issue a statement under oath showing the propriety of the deductions thereon made for alleged bad debts. Thus, where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of those facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction. Exception: In the case of banks, however, in lieu of requisite No. 5 above, the Bangko Sentral ng Pilipinas (BSP), thru its Monetary Board, shall ascertain the worthlessness and uncollectibility of the bad debts and it shall approve the writing off of the said indebtedness from the banks' books of accounts at the end of the taxable year. The bank though should still comply with requisites Nos. 1-4 as enumerated above before it can avail of the benefit of deduction. Also, in no case may a receivable from an insurance or surety company be written-off from the taxpayer's books and claimed as bad debts deduction unless such company has been declared closed due to insolvency or for any such similar reason by the Insurance Commissioner. cda SECTION 4. Tax Benefit Rule. The recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer's gross income in the year of such recovery to the extent of the income tax benefit of said deduction. Example: If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due from him on account of the said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. Conversely, if the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his business operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable income. SECTION 5. Securities Becoming Worthless. If securities, as defined under Sec. 2(b) hereof, held as capital asset, are ascertained to be worthless and charged off within the taxable year, the loss resulting therefrom shall be considered as a loss from the sale or exchange of capital asset made on the last day of such taxable year. The taxpayer, however, has to prove through clear and convincing evidence that the securities are in fact worthless. This rule, however, is not true in the case of banks or trust companies incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits. SECTION 6. Repealing Clause. The provision of any revenue regulations, revenue memorandum order, revenue memorandum circular or any other revenue issuances inconsistent with these Regulations are hereby repealed, amended, or modified accordingly. Cdpr SECTION 7. Effectivity Clause. These Regulations shall take effect fifteen (15) days after publication in any newspaper of general circulation. (SGD.) EDGARDO B. ESPIRITU
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Secretary of Finance Recommending Approval: (SGD.)BEETHOVEN L. RUALO Commissioner of Internal Revenue
November 19, 2002 REVENUE REGULATIONS NO. 25-02 SUBJECT : Amending Revenue Regulations No. 5-99, Further Implementing Section 34(E) of the Tax Code of 1997 on the Requirements for Deductibility of Bad Debts from Gross Income. TO : All Internal Revenue Officers and Others Concerned. SECTION 1. Scope. Pursuant to the provisions of Section 244 of the Tax Code of 1997, these regulations are hereby promulgated to amend Revenue Regulations No. 5-99 thereby further implementing the provisions of Section 34(E) of the same Code on the requirements for deductibility of bad debts from the gross income of a corporation, including banks and insurance companies, or an individual, estate and trust that is engaged in trade or business or a professional engaged in the practice of his profession. CTIEac SECTION 2. Amendment. Section 3 of RR 5-99 on the requisites for valid deduction of bad debts from gross income is hereby amended by deleting the penultimate paragraph of the said Section and should now read as follows: "Sec. 3. Requisites for valid deduction of bad debts from gross income. The requisites for deductibility of bad debts are: (1) There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; (2) The same must be connected with the taxpayer's trade, business or practice of profession; (3) The same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997; (4) The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and (5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. "Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to demonstrate with reasonable degree of certainty the uncollectibility of the debt. The Commissioner of Internal Revenue will consider all pertinent evidence, including the value of the collateral, if any, securing the debt and the financial condition of the debtor in determining whether a debt is worthless, or the assigning of the case for collection to an independent collection lawyer who is not under the employ of the taxpayer and who shall report on the legal obstacle and the virtual impossibility of collecting the same from the debtor and who shall issue a statement under oath showing the propriety of the deductions thereon made for alleged bad debts. Thus, where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of those facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction. In the case of banks, the Commissioner of Internal Revenue shall determine whether or not bad debts are worthless and uncollectible in the manner provided in the immediately preceding paragraph. Without prejudice to the Commissioner's determination of the worthlessness and uncollectibility of debts, the taxpayer shall submit a Bangko Sentral ng Pilipinas/Monetary Board written approval of the writing off of the indebtedness from the banks' books of accounts at the end of the taxable year. TaISEH "Also, in no case may a receivable from an insurance or surety company be written-off from the taxpayer's books and claimed as bad debts deduction unless such company has been declared closed due to insolvency or for any such similar reason by the Insurance Commissioner." SECTION 3. Repealing Clause. The provisions of any revenue regulations, revenue memorandum order, revenue memorandum circular or any other revenue issuances inconsistent with these Regulations are hereby repealed, amended, or modified accordingly. SECTION 4. Effectivity Clause. These Regulations shall take effect after fifteen (15) days following publication in any newspaper of general circulation and shall apply to taxable year 2002. HAEDIS (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance Recommending Approval: (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
December 8, 1998 REVENUE REGULATIONS NO. 13-98 SUBJECT : Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue
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Code, as amended" Specifically Section 34 (H) Relative to the Deductibility of Contributions or Gifts Actually Paid or Made to Accredited Donee Institutions in Computing Taxable Income SECTION 1. Definition of Terms. For purposes of these Regulations, the terms herein enumerated shall have the following meanings: a) "Non-stock, non-profit corporation or organization" shall refer to a corporation or association/organization referred to under Section 30 (E) and (G) of the Tax Code created or organized under Philippine laws exclusively for one or more of the following purposes: cdasia (i) religious; (ii) charitable; (iii) scientific; (iv) athletic; (v) cultural; (vi) rehabilitation of veterans; and (vii) social welfare no part of the net income or asset of which shall belong to or inure to the benefit of any member, organizer, officer or any specific person. b) "Non-government Organization (NGO)" shall refer to a non-stock, non-profit domestic corporation or organization as defined under Section 34 (H)(2)(c) of the Tax Code organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual. (i) Which, not later than the fifteenth (15th) day of the third month after the close of the NGO's taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance, upon recommendation of the Commissioner; (ii) The level of administrative expenses of which shall, on an annual basis, not exceed thirty percent (30%) of the total expenses for the taxable year; and (iii) The assets of which, in the event of dissolution, would be distributed to another accredited NGO organized for similar purpose or purposes, or to the State for public purpose, or purposes, or to the state for public purpose, or would be distributed by a competent court of justice to another accredited NGO to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. (c) "Utilization" by an accredited NGO shall refer to (i) Any amount in cash or in kind, including administrative expenses, paid or utilized by an accredited NGO to accomplish one or more purposes for which it was created or organized; or (ii) Any amount paid to acquire an asset used, or held for use, directly in carrying out one or more purposes for which the accredited NGO was created or organized; or (iii) Any amount set aside for a specific project which comes within one or more purpose or purposes for which the accredited NGO was created, but only if at the time such amount is set aside, the accredited NGO has established to the satisfaction of the Commissioner of Internal Revenue that the amount will be utilized for a specific project within a period not to exceed five (5) years, and the project is the one which can be better accomplished by setting aside such amount than by immediate payments of funds: Provided, That, the utilization requirements prescribed under Sec. 5 of these Regulations shall be complied with; or (iv) Any amount in cash or in kind invested in any activity related to the purpose for which it was created or organized. (v) Any amount in cash or in kind invested in capital sustaining and generating activities, such as but not limited to, endowment funds, trust funds, money market placements, shares of stock and similar instruments: Provided, That, any income derived from these investments shall be exclusively used in activities directly related to one or more purposes for which the accredited NGO was created or organized. (d) "Accrediting Entity" shall refer to a non-stock, non-profit organization composed of NGO networks, duly designated by the Secretary of Finance to establish and operationalize a system of accreditation to determine the qualification of non-stock, non-profit corporations or organizations and NGOs for accreditation as qualified-donee institutions. The Secretary of Finance and the Commissioner of Internal Revenue shall oversee, monitor and coordinate with the Accrediting Entity to ensure that the provisions of these Regulations are complied with. In this connection, the Secretary of Finance or the Commissioner of Internal Revenue or their duly authorized representative shall sit as ex-officio member of the Board of Trustees of the Accrediting entity with the right to vote. The Secretary of Finance may also designate an official of a concerned government agency, e.g. Department of Science and Technology, to assist the Board of Trustees in the accreditation of foundations. The Secretary of Finance shall designate an entity as an Accrediting Entity provided it has a countrywide membership composed of (a) NGOs which belong to the sector that the Private Accrediting Entity intends to certify; (b) NGOs which have been in existence for at least five (5) years; and (c) NGOs not more than 50% of the members of which belong to other existing NGOs or Private Accrediting Agencies. dctai The Philippine Council for NGO Certification, Inc. (PCNC), a non-stock, non-profit corporation which was established
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by several NGO networks (e.g., Caucus of Development NGO Networks (CODE-NGO); Philippine Business for Social Progress (PBSP); Association of Foundations (AF); League of Corporate Foundations (LCF); BishopsBusinessmen's Conference for Human Development (BBC); and the National Council for Social Development Foundation (NCSD), has been duly designated by the Secretary of Finance as an Accrediting Entity pursuant to Memorandum of Agreement dated January 29, 1998 executed by and between the Secretary of Finance and PCNC's Interim Chairman. (e) "Religious purpose" shall refer to the promotion, propagation and accomplishment of any form of religion, creed or religious belief recognized by the Government of the Republic of the Philippines. (f) "Charitable Activity" shall refer to extending relief to the poor, distressed and underprivileged and shall include fighting against juvenile delinquency and community deterioration. (g) "Scientific and research purpose" shall refer to undertaking or assisting in pure or basic, applied and scientific research in the field of agriculture, forestry, fisheries, industry, engineering, energy development, food and nutrition, medicine, environment and biological, physical and natural sciences for the public interest. (i) Basic research shall refer to an experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts without any particular application or use in view. It analyzes properties, structures or relationships with a view to formulating and testing hypothesis, theories or laws. The results of basic research are not generally sold but are usually published in scientific journals or circulars to interested colleagues. (ii) Applied research shall refer to an original investigation undertaken in order to acquire new knowledge. It is directed primarily towards a specific practical aim or objective. It is undertaken either to determine possible uses for the findings of basic research or to determine new methods or ways of achieving some specific and predetermined objectives. It involves the consideration of the available knowledge and its extension in order to solve particular problems. Applied research develops ideas into operational form. (iii) Scientific research will be regarded as carried on for public interest if the results of such research are made available to the public on a non-discriminatory basis; or if such research is performed for the Government of the Philippines or any of its agencies or political subdivisions; or if such research is directed to benefit the public. (h) "Character building and youth and sports development (or athletic) purposes" shall refer to and include conducting basic and applied research on youth development, initiating and establishing youth organizations to promote and develop youth activities, including the establishment of summer camps or centers for leadership training, conducting a program on physical fitness and amateur sports development for the country; developing and maintaining recreational facilities, playgrounds and sports centers; and conducting training programs for the development of youth and athletes for national and international competitions. cdll (i) "Cultural activity" shall refer to and include undertaking and/or assisting in research activities on all aspects of history, social system, customs and traditions; developing, enriching and preserving Filipino arts and culture; developing and promoting the visual and performing arts; and participating in vigorous implementation of bilingual policy through translation and wider use of technical, scientific and creative publications, development of an adaptive technical dictionary and use of Filipino as the medium of instruction. (j) "Educational activity" shall refer to and include the granting of scholarships to deserving students and professional chairs for the enhancement of professional courses, and instructing or training of individuals either through formal and informal methods, viz: (i) Formal method of instruction refers to the institutionalized, chronologically graded and hierarchically structured educational system at all levels of education; (ii) Non-formal method of instruction refers to any deliberately organized, systematic educational activity carried on outside the framework of the formal system to provide selected types of learning to particular subgroups of the population, particularly out-of-school youths and adults, for the purpose of communicating ideas, developing skills, changing attitudes or modifying behavior or improve their character and to provide them with tools necessary for the achievement of a higher standard of living. For the purpose of this section, a certification from the Technical Education and Skills Development Authority (TESDA) is required for the accreditation of the non-formal educational program which is implemented or carried out by a non-stock, non-profit corporation, organization or an NGO. It also includes upgrading of existing facilities to support the conduct of the above activities. (k) "Rehabilitation of veterans" shall include services extended to Philippine veterans and members of their families because of financial difficulties and attendant problems; and services extended to disabled veterans towards productive life. (l) "Social welfare purposes" shall refer to and include (i) undertaking and/or assisting in the amelioration of the living conditions of distressed citizens particularly those who are handicapped by reasons of poverty, youth, physical and mental disability, illness, old age, and natural disasters, including assistance to cultural minorities; (ii) pursuing a program for the protection and development of children and youth, such as providing services for drop-outs, pre-school children of low-income working mothers, and physically handicapped children; (iii) providing for the rehabilitation of the youth and disabled adults, released prisoners, drug addicts, alcoholics, mentally retarded, hansenites and similar cases; and (iv) providing for services to squatter families and to displaced workers.
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(m) "Health purposes" shall refer to include the pursuit of any of the following: (i) control, prevention and treatment of communicable and degenerative diseases, accidents and other health disabilities; (ii) family planning program designed to indicate knowledge and understanding of population, human growth and development of family life; (iii) environment sanitation, such as, public sewerage system and sanitary toilets; and (iv) nutrition, which aims to reduce the prevalence of malnutrition and increase the energy and protein intake among households. prcd SECTION 2. Accreditation of non-stock, non-profit corporations/NGOs by the Accrediting Entity. a) The Accrediting Entity shall examine, evaluate and accredit non-stock, non-profit corporations and NGOs as a pre-requisite for their registration with the BIR as qualified-donee institutions under Section 34 (H)(1) and (2)(c) of the Tax Code. (b) Newly-organized and existing non-stock, non-profit corporations and NGOs shall apply with the Accrediting Entity for accreditation and submit to a process of examination and evaluation. The application for accreditation shall be accompanied by the following documents: (i) Articles of Incorporation and By-laws; (ii) Certificate of Registration with the Securities and Exchange Commission; (iii) Affidavit of Modus Operandi showing: 1. the character of the organization; 2. the purpose for which it is organized; 3. the lists of projects/activities for the past two (2) years, or list of proposed projects/activities for the first two (2) years of operations for newly-organized non-stock, non-profit corporations/NGOs; 4. the source of income and the utilization thereof, or target fund sources for newly-organized non-stock, nonprofit corporations/NGOs; and 5. other facts relating to their operations which are relevant to their qualification as donee institutions; (iv) Duly audited financial statements for the past two (2) years showing the assets, liabilities, receipts and disbursements of existing organizations, or financial projections for the first two (2) years for newly-organized nonstock, non-profit corporations/NGOs. prLL (c) The Accrediting Entity shall evaluate and accredit non-stock, non-profit corporations/NGOs using the following major criteria: (i) Mission and Goals The mission and goals of the non-stock, non-profit corporation/NGO should justify its existence. Statements of mission and goals shall serve as guideposts for its planning and operations and a framework for decision-making. (ii) Resources The criterion focuses on the adequacy of the resources and the effectiveness of the structure and systems of the non-stock, non-profit corporation/NGO. Areas that should be evaluated under this criterion include the organization structure, human, financial and physical resources. Evaluation shall take into account the names, positions and qualifications of the individuals or committee members who manage and make decisions for the non-stock, non-profit corporation/NGO, its sources of funds and distribution of financial resources, and the following exhibits at the time of examination, among others: 1. Minutes of the Board meetings 2. Table of organization; 3. Policy Manual, if any; 4. Personnel Manual, if any; 5. Budget for the past two (2) years, or proposed projects for the first two (2) years of operations for newlyorganized non-stock, non-profit corporations/NGOs; and 6. Audited financial statements for the past two years for existing non-stock, non-profit corporations/NGOs. (iii) Program Implementation and Evaluation The non-stock, non-profit corporation/NGO must demonstrate that it is effectively using its resources to accomplish the purposes for which it was created. There should be clearly defined policies, priorities and guidelines for implementing the various programs and projects. Evaluation shall consider programs and projects implemented within the last two years; description of how its programs/projects/services are managed; how the following procedures are carried out; record keeping, monitoring, evaluating and contingency planning; programs/projects visa-vis the needs and priorities of its beneficiaries; the present documentation or results of evaluation and provisions for adequate training, people participation, development of leaders and eventual self-sufficiency. (iv) Planning for the Future The non-stock, non-profit corporation/NGO must provide evidence that it has the capability to plan, implement and monitor its programs and projects. Evaluation shall provide evidence that the non-profit corporation/NGO has mechanisms for planning, implementing and monitoring its programs and projects and for ensuring the continuity of programs/projects even when external funding has ceased. Evaluation shall also rely on the presentation of the following exhibits at the time of visit: 1. Organizational plan
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2. Monitoring and evaluation tools (d) The Secretary of Finance, upon the recommendation of the Board of Trustees of the Accrediting Entity can waive the submission of duly audited financial statements for newly-organized non-stock, non-profit corporations/NGOs which have been organized to carry out programs of national significance, e.g. foundation to build the National Museum. They shall be eligible to apply for a three (3)-year probationary accreditation and registration as qualified donee institutions with the Accrediting Entity. (e) Existing non-stock, non-profit corporations/NGOs which have qualified as donee institutions under BIRNEDA Regulations 1-81, as amended, shall have three (3) years beginning the effectivity of these rules and regulations within which to secure a Certificate of Accreditation from the Accrediting Entity. Failure by the said nonstock, non-profit corporations/NGOs to secure accreditation within the three-year period shall be a ground for the cancellation by the BIR of their Certificates of Registration as qualified-donee institutions: Provided, however, That donations and contributions to the said non-stock, non-profit corporations/NGOs during the three-year period shall still be allowed as deductible expense on the part of the donors subject to the provisions of Sec. 4 of these Regulations: Provided, further, That after the three-year period, only donations and contributions to non-stock, nonprofit corporations/NGOs which have been accredited under these Regulations, shall be allowed as deductible expense on the part of the donors. LLpr (f) The Accrediting Entity shall issue a Certificate of Accreditation to a non-stock, non-profit corporation/NGO upon determination that it meets the criteria for accreditation; Provided, that the Certificate of Accreditation shall be valid for a maximum period of five (5) years for existing non-stock, non-profit corporations/NGOs and three (3) years for newly-organized non-stock, non-profit corporations/NGOs. (g) The Accrediting Entity shall deny the applications of any non-stock, non-profit corporation/NGO which does not meet the criteria for accreditation. The Private Accrediting Entity shall notify the non-stock, non-profit corporation/NGO of the denial of the application, the reasons therefor, and the evaluators' recommendation in order that the non-stock, non-profit corporation/NGO may meet the criteria for accreditation. A non-stock, non-profit corporation/NGO whose application for accreditation has been denied by the Private Accrediting Entity shall have one (1) year within which to implement the evaluator's recommendations. After the one-year implementation period, the non-stock, non-profit corporation/NGO may re-apply for accreditation. (h) The Secretary of Finance and the Commissioner of Internal Revenue shall oversee, monitor and coordinate with the Accrediting Entity to ensure that the provisions of these Regulations are complied with. SECTION 3. Donations to Accredited Non-stock, Non-profit Corporations/NGOs. Donations to accredited non-stock, non-profit corporations/NGOs shall be entitled to the following benefits: (1) Limited Deductibility. Donations, contributions or gifts actually paid or made within the taxable year to accredited non-stock, non-profit corporations shall be allowed limited deductibility in an amount not in excess of ten percent (10%) for an individual donor, and five percent (5%) for a corporate donor, of the donor's income derived from trade, business or profession as computed without the benefit of this deduction. (2) Full Deductibility. Donations, contributions or gifts actually paid or made within the taxable year to accredited NGOs shall be allowed full deductibility, subject to the following conditions: (i) The accredited NGO shall make utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, not later than the fifteenth (15th) day of the third month after the close of the accredited NGOs taxable year in which contributions are received, unless an extended period is granted by the Secretary of Finance, upon recommendation of the Commissioner. For this purpose, the term "utilization" shall have the meaning as defined under Sec. 1(c) of these Regulations. (ii) The level of administrative expenses of the accredited NGO, shall, on an annual basis, not exceed thirty percent (30%) of the total expenses for the taxable year; (iii) In the event of dissolution, the assets of the accredited NGO, would be distributed to another accredited NGO organized for similar purpose or purposes, or to the State for public purpose, or purposes, or to the state for public purpose, or would be distributed by a competent court of justice to another accredited NGO to be used in such manner as in the judgment of said court shall best accomplished the general purpose for which the dissolved organization was organized. llcd (iv) The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property (v) All the members of the Board of Trustees of the non-stock, non-profit corporation, organization or NGO do not receive compensation or remuneration for their service to the aforementioned organization. (3) Exemption from Donor's Tax Donations and gifts made in favor of accredited non-stock, non-profit corporations/NGOs shall be exempt from donor's tax: Provided, however, That not more than thirty percent (30%) of the said donations and gifts for the taxable year shall be used by such accredited non-stock, non-profit corporations/NGOs institutions qualified-donee institution for administration purposes pursuant to the provisions of Section 101 (A)(3) and (B)(2) of the Tax Code. SECTION 4. Utilization Requirements. Amounts set aside or to be set aside for a specific project must have the prior approval of the Commissioner in writing: Provided, however, That a certification issued by the Accrediting Entity that the accredited NGO's specific project is one which can be better accomplished by setting aside the funds, shall be sufficient basis for the Commissioner to grant his/her approval.
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The application for the Commissioner's prior approval must contain the following: (a) the nature and purpose of the specific project and the amount programmed therefor; (b) a detailed description of the project, including estimated costs, sources of any future funds expected to be used for completion of the project, and the location or locations (general or specific) of any physical facility to be acquired or constructed as part of the project; and (c) a statement by an authorized official of the organization that the amount to be set aside will actually be disbursed for the specific project within five (5) years from the date of approval by the Commissioner, unless the nature of the project is such that the five-year period is impracticable. Amounts set aside shall be evidenced by book entries and documents showing evidence of deposits or investments, including of the funds so set aside, or other documents that the Commissioner may require. llcd SECTION 5. Certificate of Donations. All accredited non-stock, non-profit corporation/NGO are required to issue a certificate of donation in such form as prescribed by the BIR, on every donation or gift they receive. Such certificate shall be accomplished by the said accredited non-stock, non-profit corporation/NGO in triplicate and distributed within thirty (30) days after the receipt of the donation, as follows: (a) Original copy Donor (b) Duplicate copy BIR (c) Triplicate copy Donee SECTION 6. Notice of Donations. The donor, on the other hand, should give a notice for every donation worth over One Million pesos (P1,000,000) to the Revenue District Officer where his place of business is located within thirty (30) days after the receipt of the Certificate of Donation attaching to the said notice the copy of the Certificate of Donation issued to him by the accredited non-stock, non-profit corporation/NGO. SECTION 7. Date and Place of Filing Returns. (a) Time of Filing. Claims for limited or full deductibility of donations and contributions by the donors shall be filed by the donors at the time of filing their income tax returns. On the other hand, the accredited non-stock, non-profit corporation/NGO shall file its annual information return not later than the fifteenth (15th) day of the fourth month after the close of its taxable year in order to maintain its status as an accredited non-stock, non-profit corporation/NGO. (b) Place of Filing. The income tax return and/or the annual information return of the donor or of the accredited non-stock, non-profit corporation/NGO shall be filed in the Revenue District Office where the place of business of the donor or the donee, as the case may be, is located. SECTION 8. Substantiation Requirements. (a) For Donors. Donors claiming donations and contributions to accredited non-stock, non-profit corporation/NGO as deductions from their taxable business income should submit evidences or proofs to the BIR by showing the Certificate/s of Donation and indicating therein the following: (i) Actual receipt by the accredited non-stock, non-profit corporation/NGO of the donation or contribution and the date of receipt thereof; and (ii) The amount of the charitable donation or contribution, if in cash; if property, whether real or personal, the acquisition cost of the said property. On the other hand, donors claiming exemption from donor's tax on their donations and contributions to accredited non-stock, non-profit corporations/NGOs should submit evidences or proofs showing the amount of donation, if in cash; if real property, the zonal value thereof at the time of donation; and if personal property, the acquisition cost thereof, but if said personal property had already been used at the time of donation, the depreciated or book value thereof. (b) For Accredited Non-stock, Non-profit Corporations/NGOs. Accredited non-stock, non-profit corporations/NGOs shall, upon filing their income tax returns/annual information returns, furnish the Revenue District Officer of the place where the said accredited non-stock, non-profit corporation/NGO is located, the following: (i) A list of the donations and income received during the year, showing the name and address of the donors; the sources of income; the amount or market value of each donation and items of income and the disposition thereof; (ii) A list of the activities and/or projects undertaken by the institution and the cost of each undertaking indicating in particular where and how the donations has been utilized. (iii) A list of projects, their corresponding costs; the amount "set aside" and the status of funds balances at the end of the year; (iv) A declaration that the utilization requirements under Section 2(c) and 8 of these Regulations have been sufficiently complied with; (v) A declaration that no part of the net income of the accredited non-stock, non-profit corporation/NGO inures to the benefit of any private stockholder or individual; and (vi) A declaration of the status of project implementation. SECTION 9. Monitoring and Verification of Annual Information Return. Pursuant to the last paragraph of Section 235 of the Tax Code, any provision of existing general or special law to the contrary notwithstanding, the books of accounts and other pertinent records, as well as the operations, of accredited non-stock, non-profit corporations/NGOs may be examined by the BIR annually for purposes of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives, and their tax liability, if any.
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Compliance by the accredited non-stock, non-profit corporation/NGO with the conditions set forth in the grant of incentives under Sec. 4 of these Regulations shall be strictly monitored to ascertain whether or not they have met the requirements for maintaining the status as an accredited qualified-donee institution. cdasia SECTION 10. Prohibited Transactions. any accredited non-stock, non-profit corporation/NGO enjoying the benefits provided for under Sec. 4 of these Regulations is prohibited from undertaking any of the following transactions: (a) Lending any part of its income or property without adequate security and/or a reasonable rate of interest unless the institution has a formal micro-credit or micro-finance program as approved by their Board of Trustees; (b) Purchasing any security and/or property for more than an adequate consideration in money or money's worth; (c) Selling any part of the security or other property for less than adequate consideration in money or money's worth; (d) Diverting its income or transferring its property by way of lease or sale to any member of its Board of Trustees, founder/s or principal officers or any member of their families or to any corporation controlled directly or indirectly by the aforesaid individuals or their families in accordance with the attribution of stock ownership under Section 73 (A) and (B) of the Tax Code; (e) Using any part of its property, income or seed capital for any purpose other than that for which the corporation was created or organized; or (f) Engaging in any activity which is contrary to law, public order or public policy. SECTION 11. Withdrawal of Certificate of Accreditation and Revocation of the Certificate of Registration. (a) The Accrediting Entity shall have the authority to withdraw the Certificate of Accreditation which it issued to a non-stock, non-profit corporation/NGO upon a determination that the latter no longer meets the criteria for accreditation under Sec. 2 (c) of these Regulations. The Private Accrediting Entity concerned shall inform the Legal Service of the National Office or the concerned division of the Regional Offices of the withdrawal of the Certificate of Accreditation and recommend to the BIR the revocation of the Certificate of Registration of the non-stock, non-profit corporation/NGO concerned. (b) The Accrediting Entity which issued the Certificate of Accreditation shall report to the Legal Service of the National Office or to the concerned division of the Regional Offices any violation of any provision of these Regulations by the accredited non-stock, non-profit corporation/NGO. Violation of any provision of these Regulations shall constitute a ground for the withdrawal by the Private Accrediting Entity concerned of the Certificate of Accreditation and the revocation by the BIR of the Certificate of Registration. (c) Any donor found to have participated in or consented to the violation of these Regulations shall be deprived of the benefits provided under Sec. 4 of these Regulations implementing Sections 34 (H)(1), (2)(c) and 101(A)(3), (B) (2) of the Tax Code. Thus, the limited or full deductibility of donations and contributions shall be disallowed and the corresponding donor's tax due on the donation, including statutory increments or penalties thereto provided in the Tax Code, shall be assessed and collected. The said penalties shall be in addition to any administrative or criminal penalty provided for by law or regulations. SECTION 12. Repealing Clause. All internal revenue issuances, rules and regulations, or parts thereof, which are contrary to or inconsistent with these Regulations are hereby repealed, amended or modified accordingly. SECTION 13. Effectivity. These Regulations shall take effect fifteen (15) days after publication in the Official Gazette or any newspaper of general circulation in the Philippines. cdtai (SGD.) EDGARDO B. ESPIRITU Secretary of Finance Recommending Approval: (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue
NOTE FROM RICKY AS OF THE PRINTING OF THIS COMPILATION, NO RR HAS YET BEEN RELEASED IMPLEMENTING THE NEW STATUTORY AMOUNTS OF BASIC AND ADDITIONAL EXEMPTIONS FOR INDIVIDUAL TAXPAYERS. THATS PROBABLY WHY PROF. MOVIDO USED THE WORDS RR 2-98, AS AMENDED BUT DID NOT SPECIFY THE AMENDING REVENUE REGULATION. TAX PRACTITIONERS STILL USE THE OLD AMOUNTS IN COMPUTING WITHOLDING TAXES ON COMPENSATION, ALTHOUGH, I THINK THEY WILL HAVE TO RECOMPUTE BY YEAR-END APPLYING THESE NEW AMOUNTS SINCE THE RULING IN UMALI VS. ESTANISLAO MIGHT BE AN APPLICABLE PRECEDENT. AS FAR AS I KNOW (CORRECTIONS ARE WELCOME), THE RULES UNDER 2.79(I)(1)(a&b) WILL STILL BE THE SAME EXCEPT FOR THESE NEW AMOUNTS: BASIC PERSONAL EXEMPTION (REGARDLESS OF STATUS) = P 50,000 ADDITIONAL EXEMPTION FOR EACH DEPENDENT CHILD (A MAXIMUM OF 4) = P 25,000
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April 17, 1998 REVENUE REGULATIONS NO. 02-98 SECTION 2.79. Income Tax Collected at Source on Compensation Income. (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 nonresident 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 than 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. LLpr 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.
April 8, 1998 REVENUE REGULATIONS NO. 01-98 SUBJECT : Re-Defining the Term "Large Taxpayers", Modifying the Criteria for Determining Large Taxpayers, and Prescribing the Time, Place and Manner of Filing of Tax Returns and Payment of Taxes by Large Taxpayers Amending Further RR No. 12-93, as Amended by RR 3-94 TO : All Internal Revenue Officers and Others Concerned SECTION 1. Objectives. These regulations are hereby promulgated to: 1. Re-define the term "Large Taxpayers", in view of the passage of the Comprehensive Tax Reform Package under Republic Act No. 8424, also known as the Tax Reform Act of 1997; 2. Modify the criteria in determining Large Taxpayers in consideration of inflation, volume of business, wage and employment levels and similar economic factors pursuant to the provisions of Section 245 (j) of the National Internal Revenue Code (NIRC) of 1997; prcd 3. Expand the selection of one thousand (1,000) Large Taxpayers initially identified under Revenue Regulations (RR) No. 12-93 (as amended by RR No. 3-94), to one thousand five hundred (1,500), at the outset, and provide for the continuous expansion of the selection, until such time that eighty-five percent (85%) of the Bureau's total collections shall have been captured and monitored through the database of Large Taxpayers; and 4. Prescribe the time, place and manner of filing of tax returns and payment of taxes of Large Taxpayers in
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relation to the pertinent provisions of the NIRC and further amending RR No. 2-93 as amended by RR No. 3-94. SECTION 2. Coverage. 1. The initial 1,500 Large Taxpayers to be identified and covered under these Regulations shall comprise those Large Taxpayers located within the following Revenue Regions: 1.1 Revenue Region No. 4, San Fernando, Pampanga; 1.2 Revenue Region No. 5, Valenzuela; cdtai 1.3 Revenue Region No. 6, Manila, with the exception of: 1.3.1 Revenue District No. 35, Romblon 1.3.2 Revenue District No. 36, Puerto Princesa, and 1.3.3 Revenue District No. 37, San Jose, Occidental Mindoro 1.4 Revenue Region No. 7, Quezon City 1.5 Revenue Region No. 8, Makati City; and 1.6 Revenue Region No. 9, San Pablo City, with the exception of: 1.6.1 Revenue District No. 62, Boac, Marinduque; and 1.6.2 Revenue District No. 63, Calapan, Oriental Mindoro. 2. Large Taxpayers whose offices are not located in any of the aforementioned Revenue Regions, but who maintain branch offices in any of said Revenue Regions, may also be classified as Large Taxpayers, and shall be duly notified by the Commissioner of their status as such. 3. Any taxpayer not located in or maintaining branch offices in any of the aforementioned Revenue Regions, but who may in the future, be classified as a Large Taxpayer and duly notified by the Commissioner of Internal Revenue of its status as such, shall be covered by these Regulations, and shall fall under the jurisdiction of the Large Taxpayers Offices that shall be created in other areas. cdlex 4. Additional Large Taxpayers may be selected and notified by the Commissioner of Internal Revenue, and covered by these Regulations. 5. Separate venues may also be designated by the Commissioner of Internal Revenue for the filing of tax returns and payment of taxes by said Large Taxpayers. 6. Once a taxpayer has been identified and notified of his/its status as a Large Taxpayer by the Commissioner of Internal Revenue, he/it shall continue to be classified as such, and shall therefore be covered by these Regulations, until otherwise notified. SECTION 3. Criteria for Determination of Large Taxpayers. A "Large Taxpayer" is a taxpayer who has been classified as such, and has been duly notified by the Commissioner of Internal Revenue as having satisfied any or a combination of the following criteria: 1. As to tax payment: a. Value-Added Tax (VAT) Any taxpayer with net VAT paid or payable of at least P100,000 per quarter; b. Excise Tax Any taxpayer with annual excise tax paid or payable of at least P1,000,000; c. Income Tax Any taxpayer with annual income paid or payable of at least P1,000,000; d. Withholding Tax Any taxpayer with annual withholding tax payment/remittance for all kinds of withholding taxes (i.e., on compensation, expanded, final and government money payment) of at least P1,000,000; (For taxpayers, business establishments and government offices with branches/units, the basis is the total annual taxes withheld by the Head Office and all the branches/units.) e. Percentage Taxes Any taxpayer with percentage taxes of at least P100,000 per quarter; or f. Documentary Stamp Taxes Any taxpayer with aggregate annual documentary stamp taxes of at least P1,000,000. 2. As to financial condition and results of operations: a. Gross Sales/Receipts Any taxpayer with total annual gross sales/receipts of P1,000,000,000; and b. Net Worth Any taxpayer with a total Net Worth at the close of each calendar or fiscal year of at least P300,000,000. LLphil SECTION 4. Filing of Returns and Payment of Taxes. 1. Where to File and Pay: lexlib All Large Taxpayers shall file all internal revenue tax returns, information returns or declarations, and other required documents at the Large Taxpayers Division, Ground Floor, BIR National Office Building; and pay the taxes thereon at either the Development Bank of the Philippines (DBP) or the Land Bank of the Philippines (LBP) branches located at the same place. This constitutes an exception to the place of filing and payment as provided for in Sections 58, 77, 81, 114, 128, 130 and 200 of the NIRC. 2. Modes of Payment: Payments may be made only through any or a combination of the following modes: 2.1 Bank Debit Memo/Advice against the taxpayer's account with the DBP of LBP; and 2.2 Tax Debit Memo applied by the taxpayer against the unutilized portion of duly issued tax credit certificates for all taxes except for withholding taxes. 3. When to File and Pay: 3.1 Income Tax 3.1.1 Corporate Large Taxpayers shall file quarterly tax returns, and pay the taxes thereon, not later than sixty
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(60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal. The final return and the corresponding income tax shall be paid on or before the fifteenth (15th) day of the fourth (4th) month following the close of the calendar or fiscal year, as the case may be, in accordance with Sections 75, 76 and 77 of the NIRC. 3.1.2 Individual Taxpayers who may, in the future, be classified as Large Taxpayers and notified by the Commissioner of Internal Revenue of their status as such, shall file a declaration of their estimated income for the current taxable year on or before April 15 of the same taxable year, pursuant to Section 74 (A) of the NIRC, and shall file the tax returns and pay the taxes due in four (4) installments, with the first installment to be paid at the time of declaration and the second and third to be paid on August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or before April 15 of the following calendar year when the final adjustment return is due to be filed in accordance with Section 74 (B) of the NIRC. Cdpr 3.1.3 In the matter of quarterly and final annual income tax returns, in case separate income tax returns are prepared for each operational unit (e.g. banks filing separate income tax returns for their regular banking operations, trust operations and foreign currency units), these taxpayers may continue to do so. However, the returns shall be forwarded to the Head Office of the Large Taxpayer who shall file a consolidated return and pay the total income taxes due. The said Head Office shall prepare a covering schedule (Annex A) of all its units/departments showing the following information: a. Quarter/year covered; b. Head office and unit names and addresses; and c. Amounts of income taxes payable. 3.2 Withholding Tax Remittance and Information Returns All withholding taxes of the Head Office and/or any branch/unit of a Large Taxpayer shall be covered by a consolidated return, and remitted within twenty five (25) days after the close of each month. An accompanying schedule (Annex B) shall be attached to the return filed with the following information: a. Month covered; b. Name and addresses of Head Office and branches/units; and c. Amount of withholding taxes to be remitted. Annual information returns on final withholding taxes shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. 3.3 Value-Added Tax (VAT) Monthly VAT declarations and quarterly VAT returns of Large Taxpayers shall be filed, and the taxes paid, not later than the 25th day following the end of each month and quarter, respectively, in accordance with Section 114 of the NIRC. cdrep 3.4 Other Percentage Taxes Large Taxpayers who are presently preparing separate percentage tax returns shall file a consolidated return, and pay the aggregate percentage taxes due, within twenty five (25) days after the end of each taxable quarter subject to the pertinent provisions of Section 128 (A) of the NIRC. The Head Office shall prepare a schedule (Annex C) of all percentage tax returns of the branches/units with the following information: a. Quarter/period covered; b. Head office and branch/unit names and addresses; and c. Kind and amount of percentage tax payable. 3.5 Excise Tax Payments of Large Taxpayers, as indicated in the corresponding Authorities to Accept Payment (ATAPs) issued for excise taxes, shall be made before removal from the place of production or before release of the articles from the customs house subject to the pertinent provisions of Sections 130 (A) (2) and 131 (A) of the NIRC. 3.6 Documentary Stamp Taxes Large Taxpayers shall pay their documentary stamp taxes within ten (10) days after the close of the month when the taxable document was made, signed, issued, accepted or transferred as provided under Sec. 200 B of the NIRC, by the filing of the documentary stamp tax returns, through purchase or actual affixture or by imprinting the documentary stamps through a documentary stamp metering machine. cda 3.7 Capital Gains Tax and Withholding Tax on Gains Realized on the Sale/Transfer of Property A Large Taxpayer shall file capital gains and withholding tax returns, and pay the corresponding taxes, for gains from the sale or disposition of real property under Section 24 (D) or Section 27 (D)(5) of the NIRC, within thirty (30) days following each sale or disposition. 3.8 Capital Gains and Withholding Taxes on Gains Realized on the Sale/Transfer of Share of Stock 3.8.1 Large Taxpayers (Individuals) shall file capital gains and withholding tax returns, and pay the corresponding taxes, for gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(C) of the NIRC, within thirty (30) days following each transaction, and a final consolidated return on or before April 15, of each year covering all stock transactions of the preceding taxable year. 3.8.2 Large Taxpayers (Corporate) deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (C), 25 (A)(3), 27 (E)(2), 28 (A)(7)(c), and 28 (B)(5)(c),
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shall file a return within thirty (30) days after each transaction, and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year. SECTION 5. Amendments to Selection Criteria. The Commissioner of Internal Revenue may recommend to the Secretary of Finance the amendment/modification to any or all of the criteria in the determination and selection of Large Taxpayers after considering such factors as inflation, volume of business, wage and employment levels, and similar economic factors. LLjur SECTION 6. Repealing Clause. All rules and regulations or parts thereof inconsistent with the provisions of these regulations are hereby amended accordingly. cdrep SECTION 7. Effectivity. These regulations shall take effect immediately. (SGD.) SALVADOR ENRIQUEZ Secretary of Finance MILWIDA M. GUEVARA Acting Secretary Recommending Approval: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue
November 26, 1991 BIR RULING NO. 254-91 24 000-00 254-91 Gentlemen: This refers to your letter dated December 12, 1990 stating that your client, Empire Stateland and Resources, Inc. (Empire) a domestic corporation entered into a business tie-up with Uniphil Marketing, Inc. (Uniphil) another domestic corporation, whereby both firms agreed to pool their resources together for the purpose of developing and constructing condominium units and selling them to the public; that to accomplish their objectives, Uniphil will contribute a parcel of land as well as labor and materials while Empire will supply labor and materials; that the development and construction of housing units and the eventual sale thereof will be undertaken and managed by Uniphil Empire Venture (Venture), an entity that will be put up by the contracting parties solely for said purpose; that the parties have agreed that Uniphil will receive 70% of the profits that Venture will realize, while Empire will share 30% thereof; and that you are of the opinion that the respective shares of Uniphil and Empire in the net profits of Venture is not subject to income tax, the same having been taxed in the hands of Venture otherwise the same income would be subjected to 35% tax each in the hands of Venture, Uniphil and Empire or a total tax of 70%. cdtech In connection therewith, you now request a ruling on the following: "1. What is the tax status of Venture? Is it considered a joint venture and therefore taxable as a domestic corporation? "2. What is the tax treatment of the distributive shares of Uniphil and Empire in the respective amount of 70% and 30% accruing from the net profits of venture? In reply thereto, I have the honor to inform you that to constitute a "joint venture" certain factors are essential: "(a) each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money; "(b) profits must be shared amount the parties; "(c) there must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise; "(d) usually, there is single business transaction rather than a general or continuous transaction." (Words and Phrases, Vol. 23, p. 230) Likewise, a joint venture was created when two corporations while registered and operating separately were place under one sole management which operated the business affairs of said companies as though they constituted a single entity thereby obtaining substantial economy and profits in the operation (Collector vs. Batangas Transportation et al. 102 Phil 822; See also B.I.R. Ruling Nos. 020 (b) -020-80-187-82 dated June 3, 1982; 24-00-00115-86 dated July 17, 1986; 069-90 dated May 9, 1990) Thus, Uniphil Empire Venture which has been constituted as a single entity whereby Empire and Uniphil agreed to pool their resources for the development of a parcel of land and the construction condominium units thereon as well as the eventual sale of said units is a joint venture which is subject to the 35% tax under Section 24 (a) of the Tax Code, as amended. However, the respective 70% and 30% shares of Uniphil and Empire from the profits of the joint venture are not subject to income tax since said profits are in the nature of dividends which are not subject to tax under Section 24 (e) (4) of the Tax Code, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation the same could not be substantiated then this ruling shall be considered null and void. cdtai Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner
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(Officer-in-Charge)
November 12, 2003 REVENUE REGULATIONS NO. 30-03 SUBJECT : Amending Further Pertinent Provisions of Revenue Regulations No. 2-98, as Last Amended by Revenue Regulations No. 17-2003, and Revenue Regulations No. 8-98, as Amended, Providing for the Imposition of Final Withholding Tax on the Sale, Exchange or Other Disposition of Real Property Classified as Capital Assets by Non-resident Aliens, Increasing the Withholding Tax Rates on Certain Income Payments, Inclusion of Certain Income Payments, Sanctions to be Imposed on Payees Who Refuse the Withholding of Tax on Their Income/Receipts, and for Other Purposes. TO : All Internal Revenue Officers, Employees and Others Concerned. SECTION 1. Scope. Pursuant to the provisions of Section 244, in relation to Sections 57(A) and (B) of the Tax Code of 1997, these regulations are hereby promulgated to further amend portions of Revenue Regulations Nos. 2-98, as last amended by Revenue Regulations No. 17-2003, and 8-98, as amended, providing for withholding as a mode of remitting final capital gains tax on the sale of real property classified as capital assets by non-resident aliens, increasing the withholding tax rates on certain income payments, inclusion of non-food products in the coverage of expanded withholding tax, providing sanctions to payees who refuse the withholding of tax on their income/receipts, and for other purposes. AEHCDa SECTION 2. Income Payments Subject to Final Withholding Tax. Sec. 2.57.1 of Revenue Regulations No. 298, as amended, is hereby further amended to read as follows: Sec. 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. xxx xxx xxx (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: xxx xxx xxx (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%). acHCSD In case of sale on installment of real property classified as capital asset, the procedures stated under Sec. 2.57.2(J) hereof on the sale of real property classified as ordinary asset shall apply with the exception that the withholding tax on the former shall be final whereas that on the latter shall be creditable. In case of dispositions of real property classified as capital asset 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 Sec. 24(A) of the Code for the normal rate of income tax for individual citizens or residents or under Sec. 24(D)(1) of the Code for the final tax on the presumed capital gains from sale of property at six percent (6%) at the option of the taxpayer-seller. xxx xxx xxx (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: xxx xxx xxx (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 sale on installment of real property classified as capital asset, the procedures stated under Sec. 2.57.2(J) hereof on the sale of real property classified as ordinary asset shall apply with the exception that the withholding tax on the former shall be final whereas that on the latter shall be creditable. In case of dispositions of real property classified as capital asset 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 the normal rate of income tax for individual citizens or residents or under Section 24(D)(1) of the Code for the final tax on the presumed capital gains from sale of property at six percent (6%) at the option of the taxpayer-seller.
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xxx xxx xxx." SECTION 3. Income Payments Subject to Creditable Withholding Tax. Sec. 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon. . . . (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 Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise; (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; interior decorators, designers and all other profession requiring government licensure examinations and/or regulated by the Professional Regulations Commission, Supreme Court, etc. (2) Professional entertainers, such as, but not limited to, actors and actresses, singers, lyricist, composers and emcees; (3) Professional athletes, including basketball players, pelotaris and jockeys; aDTSHc (4) All directors and producers 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 recipient 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. xxx xxx xxx Furthermore, in order to determine the applicable tax rate (10% or 15%) to be applied/withheld by the withholding agent, every individual professional/talent/corporate directors herein enumerated, shall periodically disclose his gross income for the current year to the Bureau of Internal Revenue (BIR) by submitting a notarized sworn declaration attached as Annex A hereof in three (3) copies (two (2) copies for the BIR and one (1) copy for the taxpayer), copy furnished all the current payors of the declaration duly stamped received by the BIR (Collection Division of the Regional Office having jurisdiction over the place where the income earner is registered/Large Taxpayers Collection Division for large taxpayers in Metro Manila/LTDO for large taxpayers outside Metro-Manila). Sworn declaration may likewise be filed by the income payor on behalf of the professionals/talents/directors whose services were being rendered exclusively to the aforesaid payor. The disclosure should be filed on June 30 of each year or within fifteen (15) days after the end of the month the professional/talent/directors income reaches P720,000, whichever comes earlier. In case his total gross income is less than P720,000 as of June 30, he/she shall submit a second disclosure within fifteen (15) days after the end of the month that his/her gross income for the current year to date reaches P720,000. The payee professional/talent/director shall furnish each payor a copy of the BIR duly stamped received sworn declaration not later than five (5) days from the date of receipt by the BIR. In case of failure to submit the June 30 annual declaration/disclosure to the BIR, and to furnish the payor/s a copy thereof, the payor shall withhold the tax at the rate of 15%. The Collection Division/Large Taxpayers Collection Division/LTDO shall transmit one (1) copy of the duly submitted notarized sworn declaration, to the Withholding Tax Division within five (5) days from receipt thereof. The remaining copy shall be the file copy of the concerned Regional Office/Large Taxpayer Service/LTDO for monitoring purposes. ITSacC These requirements shall likewise apply to taxable juridical persons (sworn declaration shall be executed by the president/managing partner of the corporation/company), partners of general professional partnerships and medical practitioners stated under sub-sections (B), (H) and (I) hereof. Notwithstanding the foregoing, if an individual recipient receives professional fees/talent fees/directors fees in addition to salaries from the same payor, the said fees shall be considered as supplemental compensation and, thus be subject to the withholding tax on compensation. (B) Professional fees, talent fees, etc., for services of taxable juridical persons. On the gross professional, promotional and talent fees, or any other form of remuneration enumerated in the preceding subparagraph for the services of taxable juridical persons Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise; xxx xxx xxx (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. Fifteen percent (15%), if the income payments to the partner for the current year exceeds P720,000; and Ten percent (10%), if otherwise; (I) Professional fees paid to medical practitioners. Any amount collected for and paid to medical practitioners (includes doctors of medicine, doctors of veterinary science and dentists) by hospitals and clinics, or paid directly to the medical practitioners by patients who were admitted and confined to such Hospitals or Clinics, or paid directly to
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such medical practitioners by health maintenance organizations (HMOs) and/or similar establishments which is likewise covered by Section 2.57.2(A)(1) Fifteen percent (15%), if the income payments to the medical practitioner for the current year exceeds P720,000; and Ten percent (10%), if otherwise. a) It shall be the duty and responsibility of the hospital, clinic or HMO to remit taxes withheld from the following: 1. Professional fees paid by HMOs to medical practitioners 2. Professional fees paid by patients to medical practitioners thru the hospitals or clinics. 3. Professional fees paid by patients directly to medical practitioners where the 10% or 15% expanded withholding tax, whichever is applicable, shall in turn be given by medical practitioners directly to the Accounting Office of the hospitals or clinics xxx xxx xxx c) ... xxx xxx xxx (ii) Medical practitioners whose professional fee was paid to them directly by the patients and the 10% or 15% withholding tax, whichever is applicable, was given by such practitioners to the Accounting Office of the hospital or clinic (iii) Medical practitioners whose professional fee was paid to them directly by the patients but the 10% or 15% withholding tax, whichever is applicable, was not given by such practitioners to the Accounting Office of the hospital or clinic. TIaCAc xxx xxx xxx (e) Hospitals and clinics shall be responsible for the accurate computation of taxes to be withheld on professional fees paid by patients thru the hospitals and clinics, in the same way that HMOs shall be responsible for the computation of taxes to be withheld from the professional fees paid by them to the medical practitioners, and timely remittance of the 10% or 15% expanded withholding tax, whichever is applicable. The list of all income recipients-payees in this Subsection shall be included in the Alphalist of Payees Subject to Expanded Withholding Tax attached to BIR Form No. 1604-E (Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax). Likewise, the hospitals, clinics or HMOs shall issue a Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) to medical practitioners who are subjected to withholding, every 20th day following the close of the taxable quarter or upon request of the payee. xxx xxx xxx (N) Income payments made by the government to its local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. Income payments, except any casual or single purchase of P10,000.00 and below, which are made by a government office, national or local, including barangays, or their attached agencies or bodies, and government-owned or controlled corporations, on their purchases of goods and purchases of services from local/resident suppliers Supplier of goods One percent (1%) Supplier of services Two percent (2%) xxx xxx xxx (S) Income payments made to suppliers of agricultural products. Income payments made to regular agricultural suppliers such as those, but not limited to, payments made by hotels, restaurants, resorts, caterers, food processors, canneries, supermarkets, livestock, poultry, fish and marine products dealers, hardwares, factories, furniture shops and all other establishments, except for income payments to casual agricultural suppliers where the annual gross purchases therefrom do not exceed P20,000 One percent (1%) xxx xxx xxx The term agricultural suppliers refers to suppliers/sellers of agricultural, forest and marine food and non food products, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. Livestock shall include cows, bulls and calves, pigs, sheep, goats and other animals similar thereto. Poultry shall include fowls, ducks, geese, turkey and others similar thereto. Marine products shall include fish and crustaceans, such as but not limited to, eels, trout, lobsters, shrimps, prawns, oysters, mussels and clams, shells and other aquatic products. xxx xxx xxx" SECTION 4. Income Payments to Other Contractors. Sec. 2.57.2(E) of Revenue Regulations No. 2-98, as amended, is hereby further amended to correct the typographical error in RR 17-2003 to read as follows: Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon. . . . (E) Income payments to certain contractors. On gross payments to the following contractors, whether individual or corporate Two percent (2%) (1) General engineering contractors. xxx xxx xxx (2) General building contractors. . . . xxx xxx xxx (3) Specialty contractors. . . . (4) Other contractors. . . .
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xxx xxx xxx SECTION 5. Persons Required to Deduct And Withhold. Sec. 2.57.3 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: Sec. 2.57.3. Persons required to deduct and withhold. . . . xxx xxx xxx Agents, employees or any person purchasing goods or services/paying for and in behalf of the aforesaid withholding agents shall likewise withhold in their behalf, provided that the official receipts of payment/sales invoice shall be issued in the name of the person whom the former represents and the corresponding certificate of taxes withheld (BIR Form No. 2307) shall immediately be issued upon withholding of the tax. All income payments which are required to be subjected to withholding tax shall be subject to the corresponding withholding tax rate to be withheld by the person having control over the payment and who, at the same time, claims the expenses, [e.g. payments to utility companies which are required to be subjected to withholding tax shall likewise be subjected to withholding tax even if the meter or billing statement (e.g. electric or water meter or the telephone bill) is not in the name of the payor, as long as valid proof that payment of a particular expense is being shouldered by the aforementioned payor (i. e. contract between the registered user of the meter and the payor); payments made by persons who are sharing portion of the bill which is in the name of another person as long as he is a duly constituted withholding agent and shall only withhold on the portion of the expense being shouldered by him]. DaAETS Income payments made thru brokers or agents or other person authorized to collect/receive payments for and on behalf of the payee, whether for consideration or otherwise, shall likewise be subject to the corresponding withholding tax rates to be withheld by the payor/person having control over the payment with the corresponding issuance of certificate of taxes withheld in the name of the payee whom the agent represents. The obligation to withhold is imposed upon the buyer-payor of income although the burden of tax is really upon the seller-income earner hence, unjustifiable refusal of the latter to be subjected to withholding shall be a ground for the mandatory audit of his income tax liabilities (including withholding tax) upon verified complaint of the buyer-payor. SECTION 6. Repealing Clause. All existing revenue regulations and other issuances or portions thereof which are inconsistent herewith are hereby revoked, repealed or amended accordingly. SECTION 7. Transitory Provisions. Accrued income earned prior to January 1, 2004 shall be based on the prevailing withholding tax rate at the time of accrual and must be withheld and remitted at the time the income accrues. SECTION 8. Effectivity. These regulations shall take effect on January 1, 2004. AaDSTH (SGD.) JUANITA T. AMATONG Secretary of Finance Recommending Approval: (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
December 28, 2007 BIR RULING [DA-702-07] Joint Venture, Sec. 22 DA-058-07; DA-325-07 SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr. Joel L. Tan-Torres Partner, Tax Services Gentlemen : This refers to your letter dated December 14, 2007 requesting for a ruling on the tax consequences of the Project Development Agreement between Rockwell Land Corporation ("RLC") and Manila Electric Company ("MERALCO") for the construction of a mid-rise business process outsourcing ("BPO") office complex (the "Project"), to wit: SECATH 1. The Project Development Agreement will not create a separate taxable joint venture within the meaning of Section 22 (B), in relation to Section 27 (A) of the National Internal Revenue Code of 1997 (hereinafter, the "Tax Code"); EaCSTc 2. Since the Project Development Agreement will not create a separate taxable joint venture, the subsequent division and allocation of ownership over floor areas pursuant to Allocation Agreements between the parties is not be subject to income tax. Documents submitted disclosed that MERALCO is the owner of a certain parcel of land with an approximate aggregate area of One hectare and Three Thousand square meters situated in the Meralco-Ortigas complex along Ortigas Avenue, Pasig City. RLC is a corporation engaged in the real estate business and is duly licensed to undertake real estate development and management. RLC and MERALCO will enter into a Project Development Agreement (the, "Agreement") for the construction, on the land owned by MERALCO, of a mid-rise business process outsourcing ("BPO") office complex with retail spaces situated on the ground floor consistent with the redevelopment
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plan of converting the Meralco-Ortigas complex into a mixed-use development (the "Project"). THCASc Under the proposed Agreement, RLC and MERALCO will finance, develop, implement, and complete the Project based on a Master Development Plan through an unincorporated joint venture. MERALCO has agreed to contribute the use of its land and P3,000,000.00 in cash, which in the aggregate will be equivalent to thirty percent (30%) of the "Project Contribution" as said term will be defined in the Agreement on the other hand, RLC agreed to shoulder all construction costs of the Project and to contribute P7,000,000.00, which in the aggregate shall be equivalent to seventy percent (70%) of the "Project Contribution". RLC and MERALCO further agreed that within a reasonable time as will be subsequently agreed by the parties, from the completion of each phase of the Project, the Parties shall divide and allocate ownership over the floor areas for such phase of the Project in proportion to their 70%-30% agreed contributions under the proposed Agreement to be executed between the parties. In reply, please be informed that your opinion is hereby confirmed as follows: IDcHCS Pursuant to Section 22 (B) of the Tax Code of 1997, as amended, the term corporation includes partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. Considering that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office is of the opinion as it hereby holds that the Project Development Agreement entered into by RLC and MERALCO will not create a separate taxable joint venture within the meaning of Section 22 (B) of the Tax Code of 1997, as amended, and the resulting joint venture between said parties is not subject to the corporate income tax under Section 27 (A) of the same Code. However, RLC and MERALCO are separately subject to the regular corporate income tax on their taxable income during each taxable year respectively derived by them from the Project. ADHaTC The subsequent division and allocation of ownership over floor areas pursuant to Allocation Agreements between the parties is not a taxable event and is not subject to income tax, withholding tax, value-added tax and documentary stamp tax because the allocation is a mere return of capital that each party to the joint venture has contributed. However, upon subsequent sale by RLC and MERALCO of their respective shares in the saleable floor areas to third parties, any gain that may be realized by them from such sale will be subject to the regular corporate income tax under Section 27 (A) of the Tax Code of 1997, as amended, and consequently, to the creditable withholding tax under Revenue Regulations No. 2-98, as amended. Likewise, said sale is subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, as amended, and to the value-added tax imposed under Section 106 thereof, as amended by Republic Act No. 9337, and as implemented by Revenue Regulations No. 162005, as amended. HTDAac In connection with the above construction undertaking, the Joint Venture and the co-venturers are hereby required to register with the Revenue District Office (RDO) where their principal place of business is located. Moreover, this ruling authorizes the Revenue District Officer of the revenue district where the property is located to issue the corresponding Tax Clearance Certificate (TCL) with regard to the transfer of the floor areas to be received by RLC and MERALCO based on their respective allocations based on their agreement without need of presentation of proof of payment of the capital gains tax or the creditable Withholding Tax, Documentary Stamp Tax and Value-Added Tax and/or Donor's Tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. cACHSE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service
February 21, 2006 REVENUE MEMORANDUM CIRCULAR NO. 16-06 SUBJECT : Application and Computation of the 32% and 35% Income Tax Rates for Taxable Year 2005 in the Light of the Effectivity of RA 9337 TO : All Revenue Officials, Employees and Others Concerned This Revenue Memorandum Circular is issued to clarify the effectivity date for the application and computation of the 32% and 35% Income tax rates for the year 2005 to effect the amendments made under RA 9337. TDaAHS Q1. When is the effectivity of the 35% income tax rate as provided by RA 9337? A1. The effectivity date is on November 1, 2005. Q2. How shall the income tax due for taxable year 2005 be computed if the taxpayer is under the calendar year accounting period? A2. In the computation of the taxable income, there should be no regard to the dates of the transactions within
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the calendar year. The income and expenses for the year shall be considered earned and spent equally for each month or period. cda1uptax06 Formula:Taxable Income x No. of months covered by 32% x 32% = P xx 12 Taxable Income x No. of months covered by 35% x 35% = xx 12 TOTAL TAX DUE PER ITR P xxx ===== Q3. A corporation has an income for calendar year 2005 of P200,000.00. How shall the Income tax due for 2005 be computed? prLL A3. The Income tax due for the year shall be computed as follows: P200,000.00 x 10 x 32% = P53,333.33 12 P200,000.00 x 2 x 35% = 11,666.67 12 Tax Due for 2005 Before any claim For tax credits P65,000.00 ========= Q4. If a corporation is under the fiscal year accounting period (April, 2005 to March 2006), how shall the Income tax due for fiscal year 2005 be computed if the taxable income for the year is P100,000.00? HTDAac A4. The Income tax due for the year shall be computed as follows: P100,000.00 x 7 x 32% = P18,666.67 12 P100,000.00 x 5 x 35% = 14,583.33 12 Tax Due for fiscal year 2005 before claim of available Tax credits P33,250.00 ========= All internal revenue officials and others concerned are hereby enjoined to give this Revenue Memorandum Circular the widest publicity possible. CHcETA (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue
October 13, 2006 BIR RULING [DA-614-06] 32(B)(6)(a); 60(B) DA-377-2004; DA-345-2000 Pelaz Gregorio Gregorio & Lim Attorneys & Counsellors At Law Padilla Building, Emerald Avenue, Ortigas Center 1605 Pasig City Attention : Atty. Vicente G. Gregorio Counsel Gentlemen : This refers to your letter dated September 20, 2006 requesting on behalf of your client Lantaka Hotel By the Sea, Inc. ("Lantaka" for brevity) for a ruling that its Employees' Retirement Fund deposited with several banks in Zamboanga City is exempted from the 20% final withholding tax imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements. AaIDCS Background Lantaka Hotel By The Sea, Inc. established a Retirement Plan for its employees which qualified under Republic Act No. 4917 within the contemplation of section 28 (b) (7) (A) of the National Revenue Code (now Section 32 (B) (6) (a) of the Tax Code of 1997, as amended by R.A. 9337) as amplified by Revenue Regulation Nos. 1-68 and 1-83, and
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was duly approved by the Bureau of Internal Revenue as a tax-exempt retirement fund on July 24, 1990. In the leading case of "Commissioner of Internal Revenue vs. Hon. Court of Appeals, Court of Tax Appeals and GCL Retirement Plan", (G.R. No. 95022, March 23, 1992), the Supreme Court affirmed the decision of the Court of Appeals and held "that interest earnings of BIR-approved employees' trust derived from money market placements and purchase of treasury bills are exempt from the 20% final withholding tax imposed on interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements under Section 21(c) (1) of the Tax Code." In the aforesaid case, GCL Retirement Plan, BIR-qualified employees' trust maintained by the employer, GCL, Inc., to provide retirement, pension, disability, and death benefits to its employees, filed a claim for refund of P11,302.19 representing the then 15% (now 20%) final tax withheld from its earnings from money market placements and purchase of treasury bills. aITECD In reply, please be informed that since Lantaka's Employees' Retirement Fund is an employees trust exempt from income tax under Section 60(B) of the Tax Code of 1997, as amended, it need not file an income tax return. Likewise, the income of the trust fund from its investments are also exempt from income tax, provided, that in its investment activities, no part of the corpus or income of the fund shall be used for or diverted to purposes other than for the exclusive benefit of the member-employees or their beneficiaries. Moreover, Lantaka's Employees' Retirement Fund is no longer subject to the 20% final tax on interest and/or yield on deposit substitute instruments and on interest on its Philippine Currency bank deposits. (CIR vs. GCL Retirement Plan, GR. No. 95022, March 23, 1993 and BIR Ruling No. DA-377-2004) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. CTEaDc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service
July 31, 1991 REVENUE MEMORANDUM CIRCULAR NO. 63-91 SUBJECT : Issuance of the New TIN to Taxpayers and its Use on Documents/Receipts. TO : All Internal Revenue Officers and Others Concerned SECTION 1. Objective. This Circular is issued to clarify and to expound on the provisions of Revenue Memorandum Order (RMO) No. 23-91 concerning issuance of the new Taxpayer Identification Number (TIN) to taxpayers and its use on documents/receipts. SECTION 2. Procedures for the Issuance of TIN ID Cards and Pre-printed Labels Thru Local Employer. 2.1 Existing (Old) Employees/ Wage Earners. cdt A. Local Employer shall 2.1.a. Determine existing employees from its company/office roster or list of personnel and/or workers. Note: Existing (old) employees/ wage earners are local employees/ workers, including casual employees who are employed or hired as of July 31, 1991, whether or not they were previously issued/holders of TANs. 2.1.b. Accomplish TIN application (Annex A), reflecting all the necessary information required therein. 2.1.c. File TIN application with the Revenue District Office (RDO) where its principal office is located, or Revenue Information Systems Services, Inc. (RISSI) not later than August 30, 1991. 2.1.d. Secure claim stub indicating scheduled date of release. 2.1.e. Secure TIN ID Cards and pre-printed labels from the RDO or RISSI on scheduled date of release. 2.1.f. Distribute TIN ID Cards and pre-printed labels to employees/workers concerned. B. Existing (Old) Employee shall 2.1.g. Inform BIR/RISSI by mail if his/her TIN ID Card and pre-printed label are not received by October 31, 1991. acd 2.2 New Employees/Wage Earners. A. New Employee/Wage Earner shall 2.2.a. Request his/her employer for his/her inclusion in the list of company or office employees/workers applying for TIN, if he/she has not yet been issued the TIN and/or has not yet applied previously for a TIN. Note: New employees/wage earners are those local employee/worker first timers employed or hired after July 31, 1991. B. Local Employer shall 2.2.b. Accomplish the TIN application (Annex A), reflecting all the necessary information required therein. 2.2.c. File the TIN application with the RDO or RISSI. (The frequency of the filing of TIN application, whether on a weekly or monthly, basis, depends upon the employer, but should not be later than the 10th day of the following
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month the new employee was hired.) 2.2.d. Secure claim stub indicating scheduled date of release. 2.2.e. Secure TIN ID Cards and pre-printed labels from RDO or RISSI on scheduled date of release. 2.2.f. Distribute TIN ID Cards and pre-printed labels to employees/ workers concerned. SECTION 3. Procedures for the Issuance of the TINs/Pre-printed Labels Thru the Philippine Overseas Employment Agency (POEA) and/or Accredited Recruitment Agency. 3.1 Returning Overseas Contract Workers (OCWs) (Balik Manggagawa). A. Returning OCW shall 3.1.a. Accomplish the TIN application (Annex B), reflecting all the necessary information required therein. 3.1.b. File the TIN application with the BIR counter located in POEA upon filing his/her employment papers with POEA. 3.1.c. Secure claim stub indicating scheduled date of release from the BIR counter. 3.1.d. Pick up the TIN ID Card and pre-printed label or authorize a representative to do such from the BIR counter (located in the POEA) on scheduled date of release. 3.2 New OCWs. A. New OCWs whose papers are processed by an accredited recruitment agency New OCW shall 3.2.a. Request the accredited recruitment agency processing his/her employment papers for his/her inclusion in the list of OCWs applying for TIN if he/she has not yet been issued the TIN and/or has not previously applied for TIN. cdasia Accredited Recruitment Agency shall 3.2.b. Accomplish the TIN application (Annex A), reflecting all the necessary information required therein. 3.2.c. File the TIN application with the POEA when its "Request for Processing" (RFP) papers are filed therein. 3.2.d. Inform the OCW to pick up his/her TIN ID Card and pre-printed label or to authorize a representative to do such from the BIR counter (located in the POEA) after ten (10) days from the filing of the RFP with POEA. B. New OCWs who personally process his/her papers with the Government Placement Branch (GPB), POEA. New OCW shall 3.2.e. Accomplish the TIN application (Annex A), reflecting all the necessary information required therein, if He/she has not yet been issued the TIN and/or has not yet applied previously for a TIN. 3.2.f. File the TIN application with the BIR counter located in POEA upon filing his/her employment papers with GPB. 3.2.g. Secure claim stub indicating scheduled date of release from the BIR counter. 3.2.h. Pick up the TIN ID Card and pre-printed label or authorized a representative to do such from the BIR counter (located in the POEA) on scheduled date of release. SECTION 4. Procedures for the Issuance of TIN ID Cards and Pre-printed Labels to Self-Employed Taxpayers and Business Entities (Include Professional Practitioners, Withholding Tax Agents, Estates/Trusts) 4.1. Existing (Old) Self-Employed Taxpayers/Business Entities. A. Existing (Old) Self-Employed Taxpayer/Business Entity as of July 31, 1991 shall 4.1.a. Await either delivery by the RDO of his/her TIN ID Card and pre-printed labels to his local address/ residence or notification by RDO requesting the taxpayer to pick up his/her TIN ID Card and pre-printed labels from said RDO. 4.1.b. Inform BIR (RISSI) by mail if his/her TIN ID Card and pre-printed labels are not received by October 31, 1991. 4.2. New Self-Employed Taxpayers/ Business Entities. A. New Self-Employed Taxpayer/ Business Entity Established after July 31, 1991 shall 4.2.a. Secure an application form (refer to Annex B, in case of individuals; and C, in case of corporations) from the nearest RDO/ RISSI, if he/she has not yet been issued the TIN and/or has not yet applied previously for a TIN. 4.2.b. Fill up the application form, taking careful note of the instructions printed thereon. 4.3.c. Submit the accomplished form and present business permit and/or SEC Registration and/or such other documents when applicable, to the receiving clerk of RDO/RISSI. 4.3.d. Secure claim stub indicating the scheduled date of issuance/release of TIN ID Card and pre-printed labels. 4.3.e. Secure TIN ID Card and labels from the Office where the application was filed on the scheduled date of issuance. acd SECTION 5. Use of the New TIN. 5.1. Only persons required to make, render or file a return, statement or document with the Bureau of Internal Revenue shall be supplied with or assigned a taxpayer identification number to be indicated on such documents. In addition to the persons enumerated in RMO 23-91, Filipinos who are immigrants to other countries may apply for the issuance of a TIN with the RISSI/RDO by accomplishing the pertinent application form and presenting his/her passport. 5.2 The new TIN shall replace the existing TANs, VAT registration numbers, non-VAT registration number and withholding tax agent identification numbers. Therefore, only the TIN shall be reflected on all documents, papers and/or records that previously required the indication/reflection of any of the aforementioned numbers.
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5.3 On Invoices/Receipts. 5.3.a. The new TIN shall be reflected/super-imposed on all unexpended/unissued VAT/non-VAT receipts/invoices. 5.3.b. All receipts/invoices to be printed subsequently shall contain the TIN, with the letter(s) "V" (for VAT registered) or "NV" (for non-VAT registered) placed after the last digit of the TIN. This shall facilitate the determination of whether the taxpayer is VAT registered or not. SECTION 6. This Circular takes effect immediately. (SGD.) JOSE U. ONG Commissioner of Internal Revenue
April 9, 2002 DOF-BLGF MEMORANDUM CIRCULAR NO. 009-02 TO : All Bureau Officials and Personnel; Regional Directors for Local Government Finance; District Treasurers and Assessors of Metropolitan Manila; Provincial, City and Municipal Treasurers and Assessors; and Others Concerned SUBJECT : Department Order No. 2-02 dated March 5, 2002 of the Department of Finance Corollary to BLGF Memorandum Circular No. 13-99 dated July 12, 1999 of this Bureau disseminating Executive Order No. 98 dated April 28, 1999 of the President which directs all government agencies and instrumentalities to incorporate the Taxpayer's Identification Number (TIN) in all form, permits, licenses, clearances, official papers and documents which they issue to persons transacting business with them; be they natural or judicial, attached, for the information and guidance of all concerned, is Department Order No. 2-02 dated March 5, 2002 of the Department of Finance reiterating the above directives to incorporate the TIN in all official documents transacted in government offices. This TIN will enhance tax monitoring and shall serve as the common secondary reference index in all official transactions. AcDHCS Strict observance and compliance with the abovestated directives are hereby enjoined, attention being invited to the penulminate paragraph of subject Department Order that non-compliance thereto shall subject the responsible officials and employees to appropriate sanctions as provided for in Revenue Regulations No. 11-99 of the Bureau of Internal Revenue, implementing Executive Order No. 98 aforestated. The District Treasurers and Assessors of Metropolitan Manila and all Provincial Treasurers and Assessors are hereby instructed to disseminate the contents of this Circular, including the attachments, to all City/Municipal Treasurers and Assessors within their respective jurisdictions, likewise enjoining them to observe and comply strictly with the provisions of the directives aforementioned in order to help realize the objectives thereof. (SGD.) JUANITA D. AMATONG Undersecretary and Officer-in-Charge, BLGF March 5, 2002 DOF ORDER NO. 2-02 TO : All Government Agencies, Instrumentalities, Bureaus, Government Owned and Controlled Corporations, Local Government Units, Securities and Exchange Commission, The Bangko Sentral ng Pilipinas, Bureau of Internal Revenue, Bureau of Customs, Registers of Deeds SUBJECT : Incorporation of the Tax Identification Number (TIN) in all forms, permits, licenses, clearances, official papers and documents which they will issue to persons transacting business with them 1.0. PURPOSE This Order is issued to direct all government agencies, instrumentalities, bureaus, government owned or controlled corporations, (GOCCs), local government units (LGUs), the Securities and Exchange Commission (SEC), the Bangko Sentral ng Pilipinas (BSP), the Bureau of Internal Revenue (BIR); the Bureau of Customs (BOC), all Registers of Deeds to comply with Executive Order (EO) No. 98 as implemented by Revenue Regulations No. 1199. aCASEH 2.0. POLICIES 2.1. EO No. 98 mandates that all government agencies and instrumentalities, including all GOCCs and LGUs, shall incorporate the TIN in all forms., permits, licenses, clearances, official papers and documents which they issue to persons transacting business with them to enhance tax monitoring. 2.2 Pursuant to this mandate, Revenue Regulations No. 11-99 was issued directing government agencies and instrumentalities, GOCCs and LGUs to provide a space for the TIN in all government forms for permits, licenses, clearances and other official papers or documents. In the said Regulations government offices are given a period of six months counted from the effectivity date of the Regulations within which to put in place the system requirement for TIN. 2.3. To ensure compliance with the Regulations, violations of the provisions thereof are subjected to fines and penalties. 2.4. As part of this Department's efforts to strengthen the fiscal position of the government and to enhance tax monitoring as envisioned under EO No. 98, all government agencies, instrumentalities, bureaus, GOCCs, LGUs, registers of deeds, the BIR, the BOC, the BSP and the SEC shall provide a space for the TIN in all registration and
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transaction forms or documents and shall require all applicants for government permits, licenses and official papers to indicate their duly issued TIN thereon. 3.0. RESPONSIBILITY AND SANCTIONS It has come to our attention that some government agencies and instrumentalities have yet to comply with the provisions of the Regulations. Now, therefore, all heads of government agencies, instrumentalities, bureaus, GOCCs, LGUs, registers of deeds, the BIR, the BOC, the BSP and the SEC are hereby directed to strictly comply with Revenue Regulations No. 11-99. Failure to comply with the said Regulations shall subject the responsible officials and/or employees to appropriate sanctions as provided therein. HDATSI 4.0. EFFECTIVITY This Order shall take effect immediately. (SGD.) JOSE ISIDRO N. CAMACHO Secretary EXECUTIVE ORDER NO. 98 Directing All Government Agencies, Instrumentalities, Local Government Units, and Government Owned and/or Controlled Corporations (Goccs) to Include the Taxpayer Identification Number (Tin) as Part of the Essential Requirements in All Applications for a Government Permits, License, Clearance, Official Paper or Document WHEREAS, for tax purposes, a Taxpayer Identification Number (TIN) is prescribed under Section 236 (J) of the National Internal Revenue Code for all taxpayers and it is required to be indicated in certain documents; WHEREAS, the TIN is a vital information for tracing a person's taxable transactions under a computerized system or administration; WHEREAS, revenue collection needs to be enhanced to finance the country's growing infrastructure requirements and support the poverty alleviation projects of the government; WHEREAS, tax monitoring, leading to increased compliance with tax laws, will be greatly improved if such Taxpayer's Identification Number will be made a mandatory requirement in all applications for any government permit, license, clearance, official paper or document by the transacting public; WHEREAS, the uniform observance by all government agencies of this requirement is necessary to effectively carry out the purposes of this Order. NOW, THEREFORE, I, JOSEPH EJERCITO ESTRADA, President of the Republic of the Philippines, do hereby order that: SECTION 1. All government agencies and instrumentalities, including Government-Owned and/or Controlled corporations, and all Local Government Units, are hereby directed to incorporate the Taxpayer Identification Number (TIN) in all forms, permits, licenses, clearances, officials papers and documents which they issue to persons transacting business with them, be they natural or judicial. SECTION 2. The said agencies, GOCCs, and LGUs shall develop procedures such that permits, licenses and clearances, whenever possible and where applicable, shall not be issued to persons or entities without a duly issued TIN. Likewise, procedures shall be developed such that persons or entities with TIN or valid TIN cards shall enjoy priority or preferential action in his transactions with government offices. aEcSIH SECTION 3. The Bureau of Internal Revenue (BIR) shall assign a permanent TIN and within two (2) years from the issuance of this ORDER, supply permanent TIN cards to all taxpayers. A valid TIN card produced by a person shall be sufficient for identification purposes in all this official dealings with the government. Provided, however, that for purposes of this Order, it shall be sufficient for a person still without TIN or TIN card to present his application for registration thereof (BIR Form 1901/1902/1903) duly stamped by the BIR. SECTION 4. In all official transactions with the public, the TIN shall serve as the common secondary reference index of all government agencies. For computerized agencies, the TIN shall be part of the data to be encoded in their official records, which shall be transmitted electronically to the revenue authorities as may be required by law or regulations. SECTION 5. Any person who falls to comply with the requirements of this Executive Order, including, the parties involved in transactions where a TIN is prescribed, and the government functionary involved in the monitoring or regulating of these transactions, shall be subject to all the appropriate sanctions provided for to the National Internal Revenue Code and other pertinent laws and regulations. SECTION 6. Where necessary or desirable, the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, shall promulgate rules and regulations for the effective implementation of this Executive Order. Provided, however, that the absence of such regulations shall not exempt any government agency from complying with this Order. SECTION 7. The Secretary of the Department of Budget and Management shall give preferential budgetary support to the Bureau of Internal Revenue to enable it to accomplish its objective of supplying permanent TIN cards to at taxpayers. SECTION 8. This Executive Order shall take effect immediately. Done in the City of Manila, this 28th day of April 1999, in the year of our Lord nineteen hundred and ninety nine. AaSTIH
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August 25, 1998 REVENUE REGULATIONS NO. 09-98 SUBJECT : Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as Amended" Relative to the Imposition of the Minimum Corporate Income Tax (MCIT) on Domestic Corporations and Resident Foreign Corporations TO : All Internal Revenue Officers and Others Concerned Pursuant to Section 244, in relation to Section 27(E) and Section 28(A)(2), these Regulations are hereby promulgated to govern the imposition of the minimum corporate income tax on domestic and resident foreign corporations. Cdpr Sec. 2.27(E) MINIMUM CORPORATE INCOME TAX (MCIT) ON DOMESTIC CORPORATIONS (1) Imposition of the Tax A minimum corporate income tax (MCIT) of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum-corporate income tax is greater than the normal income tax due from such corporation. For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code at 34% on January 1, 1998; 33% effective January 1, 1999; and at 32% effective January 1, 2000 and thereafter. In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT shall apply on operations covered by the regular income tax system. For example, if a BOI-registered enterprise has a "registered" and an "unregistered" activity, the MCIT shall apply to the unregistered activity. (2) Carry forward of excess minimum corporate income tax Any excess of the minimum corporate income tax (MCIT) over the normal income tax as computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the normal income tax for the three (3) immediately succeeding taxable years. LLphil Illustration on how to carry forward excess minimum corporate income tax Excess of MCIT Normal Income Over the Normal Year Tax MCIT Income Tax 1998 P50,000 P75,000 P25,000 1998 amount of tax payable P75,000 1999 P60,000 P100,000 P40,000 1999 amount of tax payable P100,000 2000 P100,000 P60,000 Computation of Net Amount of Tax Payable in 2000: Amount of tax payable P100,000 Less: 1998 excess MCIT (25,000) 1999 excess MCIT (40,000) P65,000 Net amount of tax payable P35,000 The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate income tax which is imposed under Sec. 27(A) of the Code. The comparison between the normal income tax payable by the corporation and the MCIT shall be made at the end of the taxable year. Thus, under the example, the taxpayer will pay the MCIT of P75,000.00 since this amount is greater than the normal income tax of P50,000.00 in 1998. In 1999, the firm will also pay the MCIT since the MCIT of P100,000.00 is greater than the normal income tax of P60,000.00. In the year 2000, where the normal or regular corporate income tax of P100,000.00 is greater than the MCIT of P60,000.00, the firm will pay the normal income tax. The corporation can credit the excess of its MCIT over the normal income tax for 1998 (i.e. P25,000) and 1999 (i.e. P40,000), or a total amount of P65,000 from the amount of normal income tax which is payable by the firm in the year 2000. Thus, the amount of income tax payable by the firm is P35,000 after deducting P65,000 from P100,000. The excess MCIT is creditable against the normal income tax within the next three (3) years from payment thereof. Thus, in the illustration above where the corporation had an excess MCIT of P25,000 over its normal income tax in 1998, the P25,000 can be claimed as a tax credit against the normal income tax up to the year 2001 and only when the normal income tax is greater than the MCIT. The excess MCIT cannot be claimed as a credit against the MCIT itself or against any other losses. (3) Relief from the Minimum Corporate Income Tax under Certain Conditions The Secretary of Finance, upon recommendation of the Commissioner, may suspend imposition of the MCIT upon submission of proof by the applicant-corporation, duly verified by the Commissioner's authorized representative, that the corporation sustained substantial losses on account of a prolonged labor dispute or because of "force majeure" or because of legitimate
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business reverses. (4) Definition of Terms (a) "Gross Income" defined For purposes of the minimum corporate income tax prescribed under this Subsection, the term "gross income" means gross sales less sales returns, discounts and allowances and cost of goods sold. "Gross sales" shall include only sales contributory to income taxable under Sec. 27(A) of the Code. "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. Passive incomes which have been subject to a final tax at source shall not form part of gross income for purposes of the minimum corporate income tax. For a trading or merchandising concern, "cost of goods sold" means the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit. cdtai For a manufacturing concern, "cost of goods manufactured and sold" means all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of sales of services, the term "gross income" means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of services" means all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (a) salaries and employee benefits of personnel, consultants and specialists directly rendering the service, and (b) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that "cost of services" shall not include interest expense except in the case of banks and other financial institutions. The term "gross receipts" as used herein means amounts actually or constructively received during the taxable year; Provided, that for taxpayers employing the accrual basis of accounting, the term "gross receipts" shall mean amounts earned as gross income. (b) The term "substantial losses from a prolonged labor dispute" means losses arising from a strike staged by the employees which lasted for more than six (6) months within a taxable period and which has caused the temporary shutdown of business operations. (c) The term "force majeure" means a cause due to an irresistible force as by "Act of God" like lightning, earthquake, storm, flood and the like. This term shall also include armed conflicts like war or insurgency. (d) The term "legitimate business reverses" shall include substantial losses sustained due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance. (5) Specific Rules for Determining the Period When a Corporation Becomes Subject to the MCIT For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998. Firms which were registered with BIR in any month in 1998 shall be covered by the MCIT three calendar years thereafter (i.e. after the lapse of three calendar years from 1998). For example, a firm which was registered in May 1998 shall be covered by the MCIT in 2002. The reckoning point for firms using the fiscal year shall also be 1998. For example, a firm which registered with the BIR on July 1, 1998 shall be subject to an MCIT on his gross income earned for the entire fiscal year ending in the year 2002. Transitory Rule for determining the MCIT for 1998 on firms which are taxable on a fiscal year basis. For firms using the fiscal year basis and whose first taxable period under the minimum corporate income tax covers month/months in 1997 (i.e. prior to the imposition of MCIT under RA 8424), the MCIT which is due for 1998 shall be computed using an apportionment formula. The ratio to be applied is the number of months in 1998 to twelve (12) months (i.e. the total number of months in a fiscal year). cda Illustration. Firm A registered with the BIR in July 1994. It becomes subject to the MCIT in 1998. Since it is using a fiscal year as basis of its taxable period, a part of the tax base for the MCIT was earned by the corporation in 1997 prior to the imposition of the MCIT (i.e. gross income from July to December 1997). The MCIT which is due from the firm is computed using the gross income of the firm for 1998 (January to June) which is computed on an apportionment basis as follows: Gross income of the firm for the entire fiscal year Multiply: 0.50 (i.e. ratio of 6 months in 1998 to 12 months covering FY 97-98) Equals: Tax base of the MCIT for 1998 Multiply: 2% (i.e. MCIT tax rate) Equals: MCIT for 1998. (6) Manner of filing and payment The minimum corporate income tax (MCIT) shall be paid on a taxable year basis. It shall be covered by a tax return designed for the purpose which will be submitted together with the corporation's annual final adjustment income tax return. Domestic corporations shall not be required to pay the minimum corporate income tax on a quarterly basis, the provisions of Sec. 75 of the Code notwithstanding. (7) Accounting treatment of the excess minimum corporate income tax paid Any amount paid as excess
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minimum corporate income tax shall be recorded in the corporation's books as an asset under account title "deferred charges-minimum corporate income tax". This asset account shall be carried forward and may be credited against the normal income tax due for a period not exceeding three (3) taxable years immediately succeeding the taxable year/s in which the same has been paid. Any amount of the excess minimum corporate income tax which has not or cannot be so credited against the normal income taxes due for the 3-year reglementary period shall lose its creditability. Such amount shall be removed and deducted from "deferred charges-minimum corporate income tax" account by a debit entry to "retained earnings" account and a credit entry to "deferred charges-minimum corporate income tax" account since this tax is not allowable as deduction from gross income it being an income tax. dctai Illustration on the accounting treatment of the excess minimum corporate income tax paid Assume that ABC Corporation commenced business operations in calendar year 1991. It is already more than four (4) years in operation as of calendar year 1998 hence, subject to the minimum corporate income tax beginning taxable year 1998. Assume, further, that its income taxes during the years from 1998 to year 2005 are as follows: EXCESS OF MCIT OVER NORMAL INCOME NORMAL YEAR TAX MCIT INCOME TAX 1998 P25,000 P100,000 P75,000 1999 130,000 150,000 20,000 2000 200,000 190,000 2001 300,000 300,000 2002 10,000 50,000 40,000 2003 15,000 60,000 45,000 2004 8,000 40,000 32,000 2005 1,000 50,000 49,000 In this case, ABC Corporation shall not be allowed to carry forward and credit the 1998 excess MCIT against the income tax liability for 1999 since the 1999 MCIT is greater than the normal income tax for said year. However, for year 2000, where the normal income tax is greater than the computed MCIT, ABC Corporation shall be allowed to apply the excess MCIT of 1998 and 1999 amounting to P95,000 (P75,000 plus P20,000) against the normal income tax liability of P200,000. The excess MCIT for the year 2001 (P300,000) may only be credited against normal income tax liabilities for the succeeding three years from 2002 to 2004. However, since the normal income tax liabilities for these succeeding years are lesser than the respective MCITs, the excess MCIT for the year 2001 of P300,000 loses its creditability by the year 2005 hence, must be removed and deducted from "Deferred charges-MCIT" account and charged to "Retained Earnings" account. cdll Illustrative accounting entries to record excess MCIT (a) For taxable year 1998 when MCIT is greater than the normal income tax liability of the company 1998 (1) Debit: Provision for income tax P25,000 Credit: Income tax payableP25,000 To record income tax liability using the normal income tax rate (2) Debit: Deferred Charges-MCIT P75,000 Credit: Income Tax Payable P75,000 To record excess MCIT (P100,000 - P25,000) (3) Debit: Income Tax Payable P100,000 Credit: Cash in bank P100,000 To record payment of income tax due for 1998 (b) For taxable year 2000 when excess MCIT (1998 and 1999) is applied against normal income tax liability 2000 (1) Debit: Provision for income tax P200,000 Credit: Income Tax Payable P200,000 To record income tax liability using the normal income tax rate (2) Debit: Income tax payable P95,000 Credit: Deferred Charges-MCIT (P75,000 plus P20,000) P95,000 To record application of excess MCIT against normal income tax liability for taxable year 2000 (3) Debit: Income Tax Payable P105,000 Credit: Cash in Bank P105,000 To record payment of income tax due (P200,000 less P95,000) (c) For taxable year 2005 when the expired portion of excess MCIT (P300,000) for taxable year 2001 is closed to the retained earnings account due to its non-application. 2005 Debit: Retained Earnings P300,000
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Credit: Deferred Charges-MCIT P300,000 To record the expired portion of Deferred Charges-MCIT (8) Exceptions The minimum corporate income tax (MCIT) shall apply only to domestic corporations subject to the normal corporate income tax prescribed under these Regulations. Accordingly, the minimum corporate income tax shall not be imposed upon any of the following: (a) Domestic corporations operating as proprietary educational institutions subject to tax at ten percent (10%) on their taxable income; or (b) Domestic corporations engaged in hospital operations which are nonprofit subject to tax at ten percent (10%) on their taxable income; and (c) Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit system, otherwise known as Foreign Currency Deposit Units (FCDUs), on their income from foreign currency transactions with local commercial banks, including branches of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the foreign currency deposit system, including their interest income from foreign currency loans granted to residents of the Philippines under the expanded foreign currency deposit system, subject to final income tax at ten percent (10%) of such income. (d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively). Sec. 2.28(A)(2) MINIMUM CORPORATE INCOME TAX (MCIT) ON RESIDENT FOREIGN CORPORATION A minimum corporate income tax of two percent (2%) of the gross income from sources within the Philippines is hereby imposed upon any resident foreign corporation, beginning on the fourth (4th) taxable year (whether calendar or fiscal year, depending on the accounting period employed) immediately following the taxable year in which the corporation commenced its business operations, whenever the amount of the minimum corporate income tax is greater than the normal income tax due for such year. In computing for the minimum corporate income tax due from a resident foreign corporation, the rules prescribed under Sec. 2.27(E) of these Regulations shall apply: Provided, however, that only the gross income from sources within the Philippines shall be considered for such purposes. Exceptions The minimum corporate income tax shall only apply to resident foreign corporations which are subject to normal income tax. Accordingly, the minimum corporate income tax shall not apply to the following resident foreign corporations: (a) Resident foreign corporations engaged in business as "international carrier" subject to tax at two and onehalf percent (2 %) of their "Gross Philippine Billings"; (b) Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on their income from foreign currency transactions with local commercial banks, including branches of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with Offshore Banking Units (OBUs), including interest income from foreign currency loans granted to residents of the Philippines, subject to a final income tax at ten percent (10%) of such income; and (c) Resident foreign corporations engaged in business as regional operating headquarters subject to tax at ten percent (10%) of their taxable income. (d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively). cda EFFECTIVITY CLAUSE. These Regulations shall apply to domestic and resident foreign corporations on their aforementioned taxable income derived beginning January 1, 1998 pursuant to the pertinent provisions of RA 8424, provided, however, that corporations using the fiscal year accounting period and which are subject to MCIT on income derived pertaining to any month or months of the year 1998 shall not be imposed with penalties for late payment of the tax. (SGD.) EDGARDO B. ESPIRITU Secretary of Finance Recommending Approval: (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue
October 10, 2007 REVENUE REGULATIONS NO. 12-07 SUBJECT : Amending Certain Provisions of Revenue Regulations No. 9-98 Relative to the Due Date Within Which to Pay Minimum Corporate Income Tax (MCIT) Imposed on Domestic Corporations and Resident Foreign Corporations Pursuant to Section 27 (E) and Section 28 (A) (2) of the 1997 National Internal Revenue Code, as Amended. TO : All Internal Revenue Officers and Others Concerned. SECTION 1. Scope. Pursuant to the provisions of Sections 244, 27 (E), and 28 (A) (2) of the 1997 National Internal Revenue Code (Tax Code), as amended, in relation to Section 245 thereof which requires that the rules and
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regulations of the Bureau of Internal Revenue shall stipulate the manner in which internal revenue taxes shall be paid, these Regulations are hereby promulgated to amend Revenue Regulations No. 9-98, in order to align the time of payment of minimum corporate income tax (MCIT) imposed on domestic corporations and resident foreign corporations with the mandatory quarterly filing of normal corporate income tax returns pursuant to Sec. 75 and Sec. 77 of the same Tax Code. cDCaTS SECTION 2. Amendatory Provision. Pertinent portions of Sec. 2.27 (E) of Revenue Regulations No. 9-98 are hereby amended to read as follows: "Sec. 2.27(E) Minimum Corporate Income Tax (MCIT) on Domestic Corporations. "(1) Imposition of the Tax. A minimum corporate income tax (MCIT) of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning on the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation. DcICEa Notwithstanding the above provision, however, the computation and the payment of MCIT shall likewise apply at the time of filing the quarterly corporate income tax as prescribed under Section 75 and Section 77 of the Tax Code, as amended. Thus, in the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than the quarterly normal income tax the tax due to be paid for such taxable quarter at the time of filing the quarterly corporate income tax return shall be the MCIT which is two percent (2%) of the gross income as of the end of the taxable quarter. In the payment of said quarterly MCIT, excess MCIT from the previous taxable year/s shall not be allowed to be credited. Expanded withholding tax quarterly corporate income tax payments under the normal income tax, and the MCIT paid in the previous taxable quarter/s are allowed to be applied against the quarterly MCIT due. TaEIcS Example: Panday Corporation computed normal income tax and MCIT, and creditable income taxes withheld for the 1st to 4th quarters including excess MCIT and excess withholding taxes from prior year/s are as follows: Excess Excess Normal Taxes MCIT Taxes W/Tax Quarter Income Tax MCIT Withheld Prior Year Prior Year 1st 100,000 80,000 20,000 P30,000 10,000 2nd 120,000 250,000 30,000 3rd 250,000 100,000 40,000 4th 200,000 100,000 35,000 For the 1st quarter, the quarterly income tax payable by Panday Corporation shall be computed as follows: Quarterly corporate income tax due (higher amount between normal income tax and MCIT) normal income tax P100,000 Less: Taxes Withheld Prior Year 10,000 Taxes Withheld 1st qtr 20,000 Excess MCIT prior year 30,000 60,000 Net Income Tax Due, 1st quarter normal income tax P40,000 ====== For the 2nd quarter, the quarterly income tax payable by Panday Corporation shall be computed as follows: Excess Excess Normal Taxes MCIT Taxes W/Tax Quarter Income Tax MCIT Withheld Prior Year Prior Year 1st 100,000 80,000 20,000 P30,000 10,000 2nd 120,000 250,000 30,000 Total 220,000 330,000 50,000 ====== ====== ===== Quarterly corporate income tax due ESITcH (higher amount between normal income tax and MCIT) MCIT P330,000 Less: Taxes Withheld Prior Year 10,000 Taxes Withheld 1st qtr 20,000 Taxes Withheld 2nd qtr 30,000 Net income tax payment 1st qtr 40 000 100,000 Net Income Tax Due, 2nd quarter MCIT P230,000 =======
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For the 3rd quarter, the quarterly income tax payable by Panday Corporation shall be computed as follows: Normal Taxes MCIT Taxes W/Tax Quarter Income Tax MCIT Withheld Prior Year Prior Year 1st 100,000 80,000 20,000 P30,000 10,000 2nd 120,000 250,000 30,000 3rd 250,000 100,000 40,000 Total 470,000 430,000 90,000 ====== ====== ===== Quarterly corporate income tax due (higher amount between normal income tax and MCIT) Normal Income Tax P470,000 Less: Taxes Withheld Prior Year 10,000 Taxes Withheld 1st qtr 20,000 Taxes Withheld 2nd qtr 30,000 Taxes Withheld 3rd qtr 40,000 Net income tax payment 1st qtr 40,000 MCIT paid in the 2nd quarter 230,000 Excess MCIT in prior year 30,000 400,000 Net Income Tax Due, 3rd quarter Normal Income Tax P70,000 ======= At year end, the computation of the annual income tax payable by Panday Corporation shall be computed as follows: TSacID Excess Excess Normal Taxes MCIT Taxes W/Tax Quarter Income Tax MCIT Withheld Prior Year Prior Year 1st 100,000 80,000 20,000 P30,000 10,000 2nd 120,000 250,000 30,000 3rd 250,000 100,000 40,000 4th 200,000 100,000 35,000 Total 670,000 530,000 125,000 ====== ====== ====== Annual corporate income tax due (higher amount between normal income tax and MCIT) Normal Income Tax P670,000 Less: Taxes Withheld Prior Year 10,000 Taxes Withheld 1st qtr 20,000 Taxes Withheld 2nd qtr 30,000 Taxes Withheld 3rd qtr 40,000 Taxes Withheld 4th qtr 35,000 Net income tax payment 1st qtr 40,000 Net income tax payment 3rd qtr 70,000 MCIT paid in the 2nd quarter 230,000 Excess MCIT in prior year 30,000 505,000 Annual Net Income Tax Due Normal Income Tax P165,000 ======== As can be seen from the above illustrative computation, quarterly MCIT paid on the Quarterly Income Tax Return shall be credited against the normal income tax at year end if in the preparation and filing of the annual income tax return and in the final computation of the annual income tax due, it appears that the normal income tax title is higher than the computed annual MCIT. Moreover, in addition to the quarterly MCIT paid and quarterly normal income tax payments in the taxable quarters of the same taxable year excess MCIT in the prior year/s (subject to the prescriptive period allowed for its creditability), expanded withholding taxes in the current year and excess expanded withholding taxes in the prior year shall be allowed to be credited against the annual income tax computed under the normal income tax rules. AIDcTE However, if in the computation of the annual income tax due, the computed annual MCIT due appears to be higher than the annual normal income tax due, what may be credited against the annual MCIT due shall only be the quarterly MCIT payments of the current taxable quarters, the quarterly normal income tax payments in the quarters of the current taxable year, the expanded withholding taxes in the current year and excess expanded withholding taxes in the prior year. Excess MCIT from the previous taxable year/s shall not be allowed to be credited therefrom as the
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same can only be applied against normal income tax. Thus, in the above illustration, suppose the MCIT at year end is higher than the normal income tax, then computation of the income tax liability of Panday Corporation shall be as follows: CDScaT Excess Excess Normal Taxes MCIT Taxes W/Tax Quarter Income Tax MCIT Withheld Prior Year Prior Year 1st 100,000 80,000 20,000 P30,000 10,000 2nd 120,000 250,000 30,000 3rd 250,000 100,000 40,000 4th 50,000 120,000 35,000 Total 520,000 550,000 125,000 ====== ====== ====== Annual corporate income tax due (higher amount between normal income tax and MCIT) MCIT P550,000 Less: Taxes Withheld Prior Year 10,000 Taxes Withheld 1st qtr 20,000 Taxes Withheld 2nd qtr 30,000 Taxes Withheld 3rd qtr 40,000 Taxes Withheld 4th qtr 35,000 Net income tax payment 1st qtr 40,000 Net income tax payment 3rd qtr 70,000 MCIT paid in the 2nd quarter 230,000 475,000 Annual Net Income Tax Due MCIT P75,000 ====== "For purposes of these Regulation of the term, "normal income tax" means the income tax rates prescribed under Sec. 27 (A) and Sec. 28 (A) (1) of the Code at 34% on January l, 1998; 33% effective January l, 1999; at 32% effective January 1, 2000 and 35% effective November 1, 2005 and thereafter. Provided, however, that effective January 1, 2009 the rate of income tax shall be thirty percent (30%), pursuant to RA No. 9337. "In the case of a domestic corporation xxx xxx xxx "(2) Carry forward of excess minimum corporate income tax AcHSEa xxx xxx xxx "Illustration on how to carry forward excess minimum corporate income tax presented on annualized basis "Excess of MCIT "Normal Income Over the Normal "Year Tax MCIT Income Tax "1998 P50,000 P75,000 P25,000 "1998 amount of tax payable P75,000 "1999 P60,000 P100,000 P40,000 "1999 amount of tax payable P100,000 "2000 P100,000 P60,000 "Computation of Net Amount of Tax Payable in 2000: "Amount of tax payable P100,000 "Less: "1998 excess MCIT (25,000) "1999 excess MCIT (40,000) P65,000 "Net amount of tax payable P35,000 "The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate income tax which is imposed under Sec. 27 (A) and Sec. 28 (A) (1) of the Code. The final comparison between the normal income tax payable by the corporation and the MCIT shall be made at the end of the taxable year and the payable or excess payment in the Annual Income Tax Return shall be computed taking into consideration corporate income tax payment made at the time of filing of quarterly corporate income tax returns whether this be MCIT or normal income tax. Thus, under the example, the taxpayer should have paid the MCIT of P75,000.00 since this amount is greater than the normal income tax of P50,000.00 in 1998. AaCcST "xxx xxx xxx
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"(3) Relief from the Minimum Corporate income Tax under Certain Conditions "xxx xxx xxx "(4) Definition of Terms "(a) "Gross income" defined For purposes of the minimum corporate income tax prescribed under this Subsection, the term "gross income" means gross sales less sales returns, discounts, and allowances and cost of goods sold, in case of sale of goods, or gross revenue less sales returns, discounts, allowances and cost of services/direct cost, in case of sale of services. This rule, notwithstanding, if apart from deriving income from these core business activities there are other items of gross income realized or earned by the taxpayer during the taxable period which are subject to the normal corporate income tax, the same items must be included as part of the taxpayer's gross income for computing MCIT. This means that the term "gross income" will also include all items of gross income enumerated under Section 32(A) of the Tax Code, as amended, except income exempt from income tax and income subject to final withholding tax described in the succeeding subparagraph. "Gross sales" shall include only sales contributory to income taxable under Sec. 27 (A) of the Code." "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. Gross Revenue shall include income from sale of services, likewise, taxable under Sec. 27 (A). Cost of Services or Direct Cost of Services shall include business expenses directly incurred or related to the gross revenue from rendition of services. EcAISC "Passive incomes which are subject to final tax at source shall not form part of gross income for purposes of minimum corporate income tax. xxx xxx xxx "(5) Specific Rules for Determining the Period When a Corporation Becomes Subject to the MCIT xxx xxx xxx "(6) Manner of filing and payment The minimum corporate income tax (MCIT) shall be paid in the sane manner prescribed for the payment of the normal corporate income tax which is on a quarterly and on a yearly basis. It shall be covered by a tax return designed for the purpose which will be submitted together with the corporation's annual final adjustment income tax return. Domestic corporations shall be required to pay the minimum corporate income tax on a quarterly basis, pursuant to the provisions of Sec. 75 and Sec. 77 of the Code in relation to Section 245 of the same Code, as amended. "xxx xxx xxx" SECTION 3. Transitory Provisions. In the filing of the quarterly income tax return for the taxable quarter which is due for filing after the effectivity of these Regulations, the computation of the MCIT shall be done on cumulative basis covering not only the current taxable quarter but also the previous taxable quarters of the same taxable year. Such computed MCIT shall be compared with the cumulative normal income tax, whereupon the higher amount between the two shall be the basis of the quarterly income tax payment to be made for said taxable quarter. TcEDHa Thus, for those using calendar year basis accounting period, in the filing of the quarterly income tax return for the third quarter ended September 2007 which is due for filing on or before November 29, 2007, the gross income for the 1st and 2nd quarters shall be added to the gross income for the quarter ended September 2007, the total of which shall be the basis of the 2% MCIT which shall then be compared with the computed cumulative normal income tax. The cumulative MCIT for the three (3) said quarters shall be paid in case the same appears to be higher than the normal income tax computed for the same period. Excess normal income tax carried over from previous taxable year and payments made for the previous quarters of the same taxable year, including withholding tax credits claimed for said previous quarters of same taxable year shall be credited against the computed tax due in the cumulative quarterly tax return. SECTION 4. Repealing Clause. The provisions of Revenue Regulations No. 9-98 and all other internal revenue issuances inconsistent herewith are hereby repealed, modified or amended accordingly. SECTION 5. Effectivity Clause. These Regulations shall take effect after fifteen (15) days following publication in a newspaper of general circulation. aEDCAH (SGD.) MARGARITO B. TEVES Secretary of Finance Recommending Approval: (SGD.) LILIAN B. HEFTI Commissioner of Internal RevenuE
February 12, 2001 REVENUE REGULATIONS NO. 2-01 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 99 of the same Code, these Regulations are being issued to prescribe the rules governing the imposition of Improperly Accumulated
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Earnings Tax. aHIDAE SECTION 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. SECTION 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 so-called "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) 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; b) Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body; c) Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body; d) Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement; e) 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; f) 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. SECTION 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) Banks and other non-bank financial intermediaries; b) Insurance companies; c) Publicly-held corporations; d) Taxable partnerships; e) General professional partnerships; f) Non- taxable joint ventures; and g) 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. AScHCD 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,
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estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. (2) Family and Partnership Ownership. An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by 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. (3) 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. (4) 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. SECTION 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) income exempt from tax; (b) income excluded from gross income; (c) income subject to final tax; and (d) the amount of net operating loss carry-over (NOLCO) deducted. The taxable income as thus determined shall be reduced by the sum of: (a) income tax paid/payable for the taxable year; (b) dividends actually or constructively paid/issued from the applicable year's taxable income; (c) 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 proceeding statement, such fact must be supported by a duly executed Board Resolution to that effect. SECTION 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. SECTION 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) Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business; (b) Investment in bonds and other long-term securities; (c) 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. IaDTES
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SECTION 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. SECTION 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. (SGD.) ALBERTO G. ROMULO Secretary of Finance Recommending Approval: (SGD.) RENE G. BAEZ Commissioner of Internal Revenue
December 2, 2005 REVENUE REGULATIONS NO. 04-06 SUBJECT : Implementing the Tax Privileges Provisions of Republic Act No. 9257, Otherwise Known as the "Expanded Senior Citizens Act of 2003", and Prescribing the Guidelines for the Availment Thereof TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope. Pursuant to Section 244 of the Tax Code of 1997, as amended (Tax Code), in relation to Section 2 of Republic Act No. 9257 (Act), otherwise known as the "Expanded Senior Citizens Act of 2003" and its Implementing Rules and Regulations (IRR) promulgated by the Department of Social Welfare & Development (DSWD), in consultation with other government agencies, these Regulations are hereby promulgated to prescribe the guidelines for the availment of the income tax exemption privilege granted to senior citizens, the tax benefit granted to benefactors taking care of senior citizens, the tax privilege granted to establishments giving discount on their sale of goods and services to senior citizens, as well as the tax privilege of those employing senior citizens. SCaIcA SECTION 2. Definitions. For purposes of these Regulations, the following terms and phrases shall be defined as follows: a. Act shall refer to Republic Act No. 9257, otherwise known as the "Expanded Senior Citizens Act of 2003." b. Senior citizen or elderly shall refer to any resident Filipino citizen aged 60 years old and above. c. Resident citizen shall refer to a Filipino citizen with permanent/legal residence in the Philippines, and shall include one, who, having migrated to a foreign country, has returned to the Philippines with a definite intention to reside therein, and whose immigrant visa has been surrendered to the foreign government. d. Head of family shall refer to an unmarried or legally separated man or woman, widow or widower, who is the benefactor of a dependent senior citizen. e. Benefactor shall refer to any person, whether related to the senior citizen or not, who takes care of him/her as a dependent. f. Dependent shall refer to a senior citizen, who may or may not be related to his benefactor and who is living with and dependent upon his benefactor for his chief support. g. OSCA shall refer to the Office for Senior Citizens Affairs of cities and municipalities headed by a senior citizen for a term of three (3) years. h. NEDA shall refer to the National Economic and Development Authority. i. NSCB shall refer to the National Statistical Coordinating Board. j. Annual taxable income of a resident senior citizen shall refer to the annual gross compensation, business and other income received by a resident senior citizen during each taxable year from all sources as defined in Section 31 of the Tax Code. DcTaEH k. Sales discount shall refer to the actual discount, or that discount, which in no case shall exceed 20% of the gross selling price of the goods sold or services rendered to senior citizens by certain establishments enumerated under the Act and in these Regulations. l. Establishment shall refer to any entity, public or private, duly licensed and/or franchised by the national government agencies or the local government units. SECTION 3. Income Tax Benefit and Privileges for the Senior Citizens. Senior citizens shall be entitled to the following tax benefits and privileges: a. Exemption from the payment of individual income tax provided that their annual taxable income does not exceed the poverty level as determined by the National Economic and Development Authority (NEDA) for the corresponding taxable year; b. Twenty percent (20%) discount from all establishments relative to the utilization of services in hotels and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the death of senior
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citizens. c. Twenty percent (20%) discount on admission fees charged by theaters, cinema houses and concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement for the exclusive use or enjoyment of senior citizens; d. Twenty percent (20%) discount on medical and dental services, professional fees of attending doctors, and diagnostic and laboratory fees such as, but not limited to, x-rays, computerized tomography scans and blood tests, in all private hospitals and medical facilities, in accordance with the rules and regulations to be issued by the Department of Health, in coordination with the Philippine Health Insurance Corporation. e. Twenty percent (20%) discount in fare for domestic air and sea travel for the exclusive use or enjoyment of senior citizens; and SHADEC f. Twenty percent discount in public railways, skyways and bus fare for the exclusive use and enjoyment of senior citizens. SECTION 4. Availment of Income Tax Exemption of Senior Citizens. A senior citizen must comply with the following requirements before he can be exempted from the payment of individual income tax, viz: (1) A senior citizen must first be qualified as such by the Commissioner of Internal Revenue or his duly authorized representative (i.e., the Revenue District Officer (RDO) having jurisdiction over the place where the senior citizen resides) by submitting a certified true copy of his Senior Citizen Identification Card (OSCA ID) issued by the OSCA of the city or municipality where he resides; (2) He must file an Annual Information Return indicating that his annual taxable income does not exceed the poverty level as determined by the NEDA thru the NSCB through a formal written document sent to the Commissioner of Internal Revenue for this year and every year thereafter; and (3) If qualified, his name shall be recorded by the RDO in his MASTER LIST OF TAX EXEMPT SENIOR CITIZENS for that particular year, which the RDO is mandatorily required to keep. However, a senior citizen who is a compensation income earner deriving from only one employer an annual taxable income exceeding the poverty level or the amount determined by the NEDA thru the NSCB on a particular year, but whose income had been subjected to the withholding tax on compensation, shall, although not exempt from income tax, be entitled to the substituted filing of income tax return under Revenue Regulations No. 2-98, as amended. SECTION 5. Taxes on Passive Income. A senior citizen, however, shall be subject to the following income taxes: (1) Individual income tax under Section 24(A) of the Tax Code on the annual taxable income, if it exceeds the poverty level as may be determined by the NEDA, thru the NSCB, for a certain taxable year; (2) 20% final withholding tax on interest income from any currency bank deposit, yield and other monetary benefit from deposit substitutes, trust fund and similar arrangements; royalties (except on books, as well as other literary works and musical compositions, which shall be imposed a final withholding tax of 10%); prizes (except prizes amounting to P10,000 or less which shall be subject to income tax at the rates prescribed under Sec. 24(A) of the Tax Code, and other winnings (except Philippine Charity Sweepstakes and Lotto winnings) (Sec. 24(B)(1), Tax Code); ETaSDc (3) 7 1/2% final withholding tax on interest income from a depository bank under the expanded foreign currency deposit system (Sec. 24(B)(1), Tax Code); (4) If the senior citizen will pre-terminate his 5-year 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 before the fifth year, he shall be subject to the final withholding tax imposed on the entire income based on the remaining maturity thereof, viz: Four years to less than five years 5% Three years to less than four years 12%; and Less than three years 20% (Sec. 24(B)(1), Tax Code) (5) 10% final withholding tax on cash and/or property dividends actually or constructively received from a domestic corporation or from a joint stock company, insurance or mutual fund company and a regional operating headquarters of a multinational company, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, 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 taxable as a corporation of which he is a member or a co-venturer (Sec. 24(B)(2), Tax Code); (6) Capital gains tax from sales of shares of stock not traded in the stock exchange (Sec. 24(C), Tax Code); and (7) 6% final withholding tax on presumed capital gains from sale of real property, classified as capital asset, except capital gains presumed to have been realized from the sale or disposition of principal residence (Sec. 24(D), Tax Code). SECTION 6. Liability for Other Internal Revenue Taxes. A senior citizen shall also be subject to the following internal revenue taxes imposed under the Tax Code: (1) Value added tax (VAT) or other percentages taxes, as the case may be. If he is self-employed or engaged in business or practice of profession, and his gross annual sales and/or receipts exceeds P1,500,000 or such amount to which this may be adjusted pursuant to Sec. 109(1)(V) of the Tax Code, he shall be subject to VAT. Otherwise, he shall be subject to the 3% percentage tax; CaDEAT
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(2) Donor's tax; (3) Estate tax; (4) Excise tax on certain goods; and (5) Documentary stamp tax. SECTION 7. Availment of the Head of Family Status By Benefactors of Senior Citizens. A benefactor of a senior citizen shall be considered as head of family and shall be allowed to avail himself/herself of that status subject to the following conditions: (1) The senior citizen, whose annual taxable income does not exceed the poverty level as determined by the NEDA for the corresponding taxable year, must be living with and dependent upon his benefactor for his chief support; (2) It shall be the duty of the benefactor of a senior citizen to register the senior citizen as his dependent and himself/herself as benefactor in the RDO having jurisdiction over the place where he/she and the senior citizen reside. In that case, he/she will be granted the exclusive right to claim the senior citizen as dependent for income tax purposes; (3) The benefactor shall be ENTITLED ONLY to the BASIC PERSONAL EXEMPTION equivalent to TWENTYFIVE THOUSAND PESOS (P25,000.00) or as allowed under the Tax Code for head of family. (4) If required to file an income tax return (ITR), the benefactor shall state therein the name, birthday and OSCA ID number of the dependent senior citizen. The benefactor of a senior citizen shall NOT, however, be entitled to claim the additional exemption of P8,000.00 per dependent (not exceeding four) allowable only to a married individual or head of family with qualified dependent child/children under Section 35(B) of the Tax Code. SECTION 8. Availment By Establishments of Sales Discounts as Deduction from Gross Income. Establishments enumerated in subparagraph (6) hereunder granting sales discounts to senior citizens on the sale of goods and/or services specified thereunder are entitled to deduct the said discount from gross income subject to the following conditions: ATcEDS (1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED BY THE SENIOR CITIZEN shall be eligible for the deductible sales discount. (2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN THE OFFICIAL RECEIPT OR SALES INVOICE issued by the establishment for the sale of goods or services to the senior citizen; (3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price can be deducted from the gross income, net of value added tax, if applicable, for income tax purposes, and from gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes. (4) The discount can only be allowed as deduction from gross income for the same taxable year that the discount is granted. (5) The business establishment giving sales discounts to qualified senior citizens is required to keep separate and accurate record of sales, which shall include the name of the senior citizen, TIN, OSCA ID, gross sales/receipts, sales discount granted, dates of transactions and invoice number for every sale transaction to senior citizen. (6) Only the following business establishments which granted sales discount to senior citizens on their sale of goods and/or services may claim the said discount granted as deduction from gross income, namely: (a) Hotels and similar lodging establishments The discount shall be for room accommodation and other amenities offered by the establishment, such as, but not limited to, massage parlor, sauna bath, food, drinks and other services offered. For this purpose, the term "hotel/hostel" shall refer to the building, edifice or premises or a completely independent part thereof, which is used for the regular reception, accommodation or lodging of travelers and tourists and the provision of services incidental thereto for a fee. "Lodging establishment" shall refer to any of the following: SDECAI (i) Tourist inn shall refer to lodging establishment catering to transients, which does not meet the minimum requirement of an economy hotel. (ii) Apartel shall refer to building or edifice containing several independent and furnished or semi-furnished apartments, regularly leased to tourists and travelers for dwelling on a more or less long-term basis and offering basic services to its tenants, similar to hotels. (iii) Motorist hotel shall refer to any structure with several separate units, primarily located along the highway, with individual or common parking space, at which motorists may obtain lodging and in some instance, meals. (iv) Pension house shall refer to a private, or family-operated tourist boarding house, tourist guest house or tourist lodging house, regularly catering to tourist, and/or traveler, containing several independent table rooms, providing common facilities, such as toilets, bathrooms/showers, living and dining rooms and/or kitchen and where a combination of board and lodging may be provided. The term lodging establishment shall also include lodging houses, which shall mean such establishments are regularly engaged in the hotel business, but which, nevertheless, are not registered, classified and licensed as hotels by reason of inadequate essential facilities and services. (b) Restaurants The discount shall be for the sale of food, drinks, dessert and other consumable items served by the establishments, including value meals and promotional meals offered for the consumption of the
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general public. For this purpose, the term "restaurant" shall refer to any establishment offering to the public, regular and special meals or menu, fast food, cooked food and short orders. Such eating places may also serve coffee, beverages and drinks. STADIH (c) Recreation centers The discount shall be for the utilization of services in the form of fees, charges and rental facilities, such as, but not limited to, sports facilities and equipment. (d) Theaters, cinema houses and concert halls, circuses, carnivals and other similar places of culture, leisure, and amusement The discount shall be on admission fees charged by the said establishments. (e) Drug stores, hospital pharmacies, medical and optical clinics and similar establishments dispensing medicines The discount for sales of drugs/medicines shall be subject to the Guidelines to be issued by the Bureau of Food and Drugs, Department of Health (BFAD-DOH), in coordination with the Philippine Health Insurance Corporation (PHILHEALTH). For this purpose, the term "medicines" shall refer to both prescription and nonprescription medicines, and articles approved by the BFAD-DOH, which are intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in man; but do not include food and devices or their components, parts, or accessories. (f) Medical and dental services in private facilities The discount shall be on medical and dental services and diagnostic and laboratory fees, in all PRIVATE HOSPITALS AND MEDICAL FACILITIES, in accordance with the rules and regulations to be issued by the DOH, in coordination with the PHILHEALTH. For this purpose, "medical services" shall refer to hospital room and services, professional services of attending physicians and other health care professionals, and diagnostic and laboratory tests that are necessary for the diagnosis and/or treatment of an illness or injury. Diagnostic and laboratory tests shall refer to X-ray, CT scans, blood chemistry exams, histopathology and immunopathology, hematology, urinalysis, parasitology and bacteriology test, serology, blood banking, and other diagnostic examinations that are necessary for the diagnosis and/or treatment of an illness and injury. IEDHAT On the other hand, the term "dental services" shall refer to oral examination, cleaning, permanent and temporary filling, extraction and gum treatments, restoration, replacement or repositioning of teeth, or alteration of the alveolar or periodontium process of the maxilia and the mandible that are necessary for the diagnosis and/or treatment of a dental illness or injury. (g) Domestic air and sea transportation companies The discount shall be on the actual fare, including the promotion fare, advance booking and similar discounted fare for the exclusive use and enjoyment of senior citizens in accordance with the rules and regulations to be issued by the Maritime Industry Authority (MARINA) and the Civil Aeronautics Board (CAB). (h) Public land transportation utilities A senior citizen shall likewise be given discount in PUBLIC railways, including LRT, MRT, PNR, Skyways and bus fares (PUB), jeepneys (PUJ), taxi and shuttle services (AUV), in accordance with the rules and regulations to be issued by the Department of Transportation and Communications (DOTC), Light Rail Transit Authority (LRTA), Philippine National Railways (PNR), Toll Regulatory Board (TRB) and Land Transportation Franchising and Regulatory Board (LTFRB). (i) Funeral parlors and similar establishments The beneficiary or any person who shall shoulder the funeral and burial expenses of the deceased senior citizen shall claim the discount, such as casket, embalmment, cremation cost and other related services for the senior citizen upon payment and presentation of his death certificate. SECTION 9. Additional Deduction from Gross Income of Private Establishments for Compensation Paid to Senior Citizens. Private establishments employing senior citizens shall be entitled to additional deduction from their gross income equivalent to fifteen percent (15%) of the total amount paid as salaries and wages to senior citizens subject to the provision of Section 34 of the Tax Code and its implementing rules and regulations provided the following conditions are met: aSITDC (1) The employment shall have to continue for a period of at least six (6) months; (2) The annual taxable income of the senior citizen does not exceed the poverty level as may be determined by the NEDA thru the NSCB. For this purpose, the senior citizen shall submit to his employer a sworn certification that his annual taxable income does not exceed the poverty level. SECTION 10. Penalties and Other Sanctions. Any person who violates any provision of these Regulations shall suffer the following penalties: (1) For the first violation, a fine of not less than Fifty thousand pesos (P50,000.00) but not exceeding One hundred thousand pesos (P100,000.00) and imprisonment of not less than six (6) months but not more than two (2) years; and (2) For any subsequent violation, a fine of not less than One hundred thousand pesos (P100,000.00) but not exceeding Two hundred thousand pesos (P200,000.00) and imprisonment for not less than two (2) years but not less than six (6) years. Any person who abuses the privileges granted herein shall be punished with a fine of not less than Five thousand pesos (P5,000.00), but not more than Fifty thousand pesos (P50,000.00), and imprisonment of not less than six (6) months. If the offender is an alien or a foreigner, he shall be deported immediately after service of sentence without further deportation proceedings.
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If the offender is a corporation, organization or any similar entity, the official/s thereof directly involved shall be liable therefore. Upon filing an appropriate complaint, and after due notice and hearing, the proper authorities may also cause the cancellation or revocation of the business permit, permit to operate, franchise and other similar privileges granted to any business entity that fails to abide by the provisions of the Act and its IRR and these Regulations. SECTION 11. Repealing Clause. The provisions of RR 2-94 and all existing rules, regulations and other issuance or portions thereof inconsistent with the provisions of these Regulations are hereby modified, repealed or revoked accordingly. SEDICa SECTION 12. Effectivity. These Regulations shall take effect fifteen (15) days after publication in the Official Gazette or newspaper of general circulation, whichever comes first. (SGD.) MARGARITO B. TEVES Secretary of Finance Recommended by: (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue
December 4, 2006 REVENUE REGULATIONS NO. 01-07 SUBJECT : Amending Revenue Regulations No. 4-2006 Implementing the Tax Privileges Provisions of R.A. No. 9257, Otherwise Known as the "Expanded Senior Citizens Act of 2003" TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope. Pursuant to Section 244 of the Tax Code of 1997, as amended, in relation to Section 2 of R.A. No. 9257, otherwise known as the "Expanded Senior Citizens Act of 2003," and its Implementing Rules and Regulations promulgated by the Department of Social Welfare & Development, these Regulations are hereby promulgated to amend Section 8(5) of RR 4-2006 deleting the TIN requirement under the said Section, and to add a provision clarifying the basis of computation of the VAT on the sale of goods and services to senior citizens who have been granted sales discounts. acHITE SECTION 2. Deleting the TIN Requirement Under Section 8(5) of RR 4-2006. Section 8(5) of RR 4-2006 is hereby amended deleting the TIN requirement as one of the conditions in order that establishments may claim the sales discounts as deductions from gross income, and further giving the senior citizens a hassle-free privilege to enjoy the purchase discount, which Section shall read as follows: 1stuptax2007 "Sec. 8. Availment by Establishments of Sales Discounts as Deduction from Gross Income. . . . xxx xxx xxx "(5) The business establishment giving sales discounts to qualified senior citizens is required to keep separate and accurate record of sales, which shall include the name of the senior citizen, OSCA ID, gross sales/receipts, sales discounts granted, date of transaction and invoice number for every sale transaction to senior citizen. CcAIDa xxx xxx xxx SECTION 3. A new Section is hereby added to RR 4-2006 as Section 10 thereof clarifying the basis of computation of the value-added tax on the sale to senior citizens with sales discounts by the subject establishments to read as follows: "Sec. 10. Basis of Computation of Value-Added Tax on Sale to Senior Citizens. VAT on sales of goods or services with sales discounts granted by establishments enumerated under Section 8 hereof shall be computed in accordance with the following illustration: Amount of sale (without the VAT) P100.00 Less: 20% sales discount 20.00 Vatable sale P80.00 Plus: 12% VAT (based on P80) 9.60 Total amount to be paid by the senior citizen P89.60 ====== SECTION 4. Renumbered Sections. Original Sections 10 and 11 of RR 4-2006 shall be renumbered as Sections 11 and 12 thereof, respectively. TcEaAS SECTION 5. Amendatory Clause. Provisions of existing issuances which are or may be inconsistent with the foregoing, if any, are hereby deemed amended and/or superseded accordingly. SECTION 6. Effectivity Clause. These Regulations shall take effect fifteen (15) days after publication in the Official Gazette or newspaper of general circulation, whichever comes first. These Regulations shall in no case be given retroactive effect such that no refund can be claimed for any previous transactions using different basis of computation from that reflected in Section 10 above. AaHcIT (SGD.) MARGARITO B. TEVES Secretary of Finance
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Recommended by: (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue
January 4, 1993 REVENUE REGULATIONS NO. 7-93 SUBJECT : Filing of quarterly income tax returns and payment of quarterly income tax by individuals receiving self-employment income. TO : All internal revenue officers and others concerned. SECTION 1. Scope. Pursuant to Sections 245 and 67 of the National Internal Revenue Code (NIRC), these regulations are hereby promulgated prescribing the procedures for the filing of quarterly returns and payment of the quarterly income tax by individuals receiving self-employment income. SECTION 2. General Provisions. A return of summary declaration of gross income and deductions (BIR Form No. 1701Q) for each of the first three quarters of the calendar year, and a final or adjustment return (BIR Form No. 1701), shall be filed by all individuals, including estates and trusts, pursuant to the procedures prescribed in these regulations. In general, these persons shall declare their income from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a general partnership of which he is a member, and are taxable under Section 21(f) of the NIRC. Nonresident Filipino citizens, with respect to income from without the Philippines, and nonresident aliens not engaged in trade or business in the Philippines are not required to render this declaration. cdasia SECTION 3. Time of filing the income tax returns and payment of the income tax. The tax returns shall be filed on or before the indicated dates: First quarterly return May 15 of the current year; Second quarterly return August 15 of the current year; Third quarterly return November 15 of the current year; Final return April 15 of the following year; The corresponding income tax, as computed, shall be paid at the same time that the returns are filed based on declarations of actual income and deductions for the particular quarter. The filing of these returns and payment of taxes shall be in lieu of the filing of a declaration of estimated income for the current taxable year and the payment of the estimated tax as provided for in Section 67(a) and (b) of the NIRC primarily for the reason that the procedure prescribed in Section 67 of the NIRC of estimating the amount of income and tax to be paid may not reasonably approximate the correct amount of tax to be paid by the individual. As defined in Section 67(c) of the NIRC, the "estimated tax" to be paid for the current year by an individual is equivalent to the amount which the individual declared as his income tax in his final income tax return for the preceding taxable year. This may not be a reasonable estimate of the current income tax liability and correspondingly disadvantageous to the taxpayer especially if the current operations result in a taxable income, if not a loss, which is lower than the preceding year's income and tax liability. SECTION 4. Place of filing the income tax returns and payment of the income tax. The returns shall be filed with and the income tax shall be paid in the accredited bank in the city or municipality where the principal place of business is located. In place(s) where there are no accredited banks, the return shall be filed and tax shall be paid with the collection officer or authorized Municipal Treasurer. acd SECTION 5. Computation of quarterly taxable income and quarterly income tax. To determine the taxable income to be reported in the quarterly tax returns, the gross income and deductions shall be computed on a cumulative basis. The gross income that shall be reported are those subject to tax under Section 21(f) of the NIRC. Therefore, this does not include those income taxable under Section 21 (a) to (e) of the NIRC, i.e. compensation income, passive income, etc. The deductions that shall be allowed for the first three quarters shall not include the amounts for the personal and additional exemptions of the individual. It is only in the last quarter, when these amounts for exemptions can be claimed as deduction. The income tax due every quarter shall be computed in accordance with Section 21(f) of the NIRC, based on the cumulative taxable income for the quarter and any preceding quarters. The amount of income tax to be paid shall be the balance of the income tax after deducting therefrom the total quarterly income taxes previously paid and any taxes withheld under the Expanded Withholding Tax System from the items of gross income reported for the period. Any excess of the total quarterly payments and taxes withheld over the income tax computed in the final income tax return shall, at the option of the taxpayer, either be (1) issued a tax refund or tax credit certificate or (2) applied as a credit against the quarterly income tax liabilities for the taxable quarters of the immediately succeeding year. The second option is available to individuals who desire not to await anymore the processing of any tax refund that is available to them. In the case that the excess payments or taxes withheld are applied as credit against the tax liabilities of the succeeding year and these are not completely utilized or applied during such year, the remaining amount shall be claimed for refund or credit by the taxpayer pursuant to Section 204 of the NIRC. cd i SECTION 6. Additions to the tax. Where there is failure to file the quarterly tax return, or if this is filed after the
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prescribed due date, or the amount shown by the taxpayer as tax on the return or part of such amount is not paid on or before the date prescribed for its payment, or there is underpayment of the quarterly tax, there shall be imposed the penalties prescribed in Sections 248 and/or 249 of the NIRC. SECTION 7. Effectivity. These regulations shall take effect immediately. (Sgd.) Ramon R. del Rosario, Jr. Secretary of Finance Recommended by: (Sgd.) JOSE U. ONG Commissioner of Internal Revenue
August 31, 1993 REVENUE REGULATIONS NO. 14-93 Subject : Payment of Taxes by Checks or Bank Debit Memos TO : All Internal Revenue Officers, Accredited Banks and Others Concerned SECTION 1. Scope. Pursuant to the provisions of Section 245 in relation to Sections 49, 51, 74, 84, 97, 110, 125, 127 and 200 of the National Internal Revenue Code, as amended, these regulations are promulgated to govern payment of internal revenue taxes by check or bank debit memos. cdasia SECTION 2. Checks or Bank Debit Memos acceptable as Payment for Taxes. Payment of internal revenue taxes amounting to P10,000.00 or more shall be made in check or bank debit memos, debiting a taxpayer's bank account maintained with any of the accredited banks of the BIR, for the payment of taxes; otherwise, if the amount involved is less than P10,000.00, payment thereof can be made in cash, check or bank debit memos. However, payment for capital gains tax and creditable withholding tax by individuals on sales or transfers of real property classified as capital assets as well as documentary stamp tax shall be made only by or thru Manager's or Cashier's check or bank debit memo, regardless of amount (RMO Nos. 28-91 dated September 10, 1991 and 11-73 dated March 2, 1973). Provided, that, in the case of check payment, the taxpayer shall issue a separate check for each kind and nature of the tax to be paid. If the payment is through a bank debit memo, the kind and nature of the tax to be paid should also be separately identified by the bank and reflected in its reports. Only checks specially issued and drawn for credit to BIR (as provided for in Section 3 hereof) and collectible within the local clearing facilities of the Central Bank of the Philippines, the Philippine Clearing House Corp. (PCHC), or other established clearing channels may be accepted as payment for national internal revenue taxes. However, the following checks are not acceptable: cda a) Accommodation checks checks issued or drawn by a party other than the taxpayer making the payment, except the following: 1) Manager's or cashier's checks; 2) Checks drawn against joint or multiple accounts for tax payment purposes by anyone of them or either for himself or in behalf of the other members thereof; 3) Checks issued by either of the spouses to pay the tax liability of anyone of them; 4) Checks issued by the father or mother for the tax liability of his/her child/children or vice-versa; 5) Checks drawn by a corporation/partnership for the tax liability of its officers/partners only; and 6) Other special arrangements duly approved by the Commissioner of Internal Revenue or his authorized representatives on case-to-case basis. b) Out-of-town checks checks drawn on banks outside the local area coverage (local clearing) of the Central Bank/PCHC clearing house; c) Stale checks checks dated more than six (6) months prior to presentation to accredited banks; d) Postdated checks; e) Unsigned checks; and f) Checks with unauthorized erasures/alterations. cda SECTION 3. To Whom and How Checks Shall be Made Payable. To protect the interest of the taxpayer and preclude unauthorized diversion of the proceeds of checks intended to cover tax payment, such checks, including Manager's or Cashier's checks, shall be made payable to the Bureau of Internal Revenue with parenthetical reference to the payor and the kind of tax to be paid. For example, a check of Juan dela Cruz, taxpayer, in payment of a Value Added Tax (VAT) will be prepared as follows: Pay to the Bureau of Internal Revenue (VAT of Juan dela Cruz) or Pay to the Commissioner of Internal Revenue (VAT of Juan dela Cruz) SECTION 4. Authority of Accredited Banks to refuse acceptance of payment of taxes. Accredited Banks authorized to accept payment of taxes by checks have the right to refuse acceptance thereof if the same were not
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drawn in accordance with the requirement of Section 3 above. SECTION 5. Liability of the Drawer/Taxpayer and Drawee/Bank. Taxpayers using checks in payment of taxes not drawn in accordance with Section 3 above shall be liable for the unpaid taxes and increments therefor. However, when said checks are accepted by the Bank and subsequently diverted for other uses or purposes through the fault or negligence of the bank accepting such check and without the fault of the taxpayer, the bank accepting such check shall be liable to the BIR for the amount of the check so diverted plus increments. In both instances as aforesaid and in addition to the foregoing sanctions, the person liable, whether the taxpayer or the bank, as the case may be, shall face the civil and criminal liabilities/sanctions provided for in the Tax Code and other existing laws. The taxpayers/drawers of dishonored checks for whatever reason, shall be liable for the unpaid tax and the increments due to late payment. cdasia SECTION 6. Repealing Clause. Rules and regulations or parts thereof which are inconsistent with the provisions of these regulations are hereby modified, repealed or amended accordingly. SECTION 7. Effectivity. These regulations shall take effect fifteen (15) days after publication in the Official Gazette or newspaper of general circulation whichever comes first. cdtai ERNEST LEUNG Acting Secretary of Finance Recommending Approval: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue
October 11, 2002 REVENUE REGULATIONS NO. 16-02 SUBJECT : Modes of and Procedure for the Payment of Internal Revenue Taxes Through Authorized Agent Banks Amending Revenue Regulations No. 4-97, as amended by Revenue Regulations No. 6-98 TO : All Internal Revenue Officers, Authorized Agent Banks, and Others Concerned SECTION 1. Scope. Pursuant to Section 244 of the National Internal Revenue Code of 1997 (CODE) in relation to Sections 8, 12, 56, 58, 81, 103, 114, 128, 130, 200 and 245, all of the same Code, these Regulations are hereby promulgated to amend Revenue Regulations No. 4-97, as amended by Revenue Regulations No. 6-98, on the provisions relative to acceptable modes of payment of internal revenue taxes coursed through authorized agent banks (AABs), the recording of such payments and issuance of validated BIR-prescribed deposit slips which likewise serve as acknowledgment receipts for payments of taxes deposited by taxpayers for BTR-BIR account, and the control mechanisms to deter and detect the diversion of tax payments. SECTION 2. Recording of BIR Tax Payments by the AABs. A) All internal revenue taxes collected through authorized agent banks (AABs) shall be credited to the demand deposit accounts opened and maintained by the Bureau of Treasury (BIR) for BIR in the head offices of AABs; B) Head offices of AABs shall assign and maintain a separate general ledger account for said BTr demand deposit accounts; C) Using the online tellering system, the bank tellers shall immediately post the BIR tax payments they collect by crediting the BTr demand deposit accounts in the head offices of the AABs, instead of recording them as mere payables to BTr at the end of each banking day in the AABs backrooms. D) In filing a tax declaration and making payment to an AAB, a taxpayer must accomplish and submit a BIR prescribed deposit slip which AABs must design, print and make available in all participating branches. The deposit slip must in addition to those needed by the bank, provide for the following information: Transaction Date Name of Taxpayer TIN BTR-BIR Account Number Account Name which must be BTRBIR Name of Drawee Bank Check Number Bank Debit Advice Number (for debit system payments) Amount E) The bank teller shall machine validate the BIRprescribed deposit slip accomplished by the taxpayer as evidence that the BIR tax payment was deposited to the account of the BTr. Said deposit slip shall be accomplished and issued in triplicate copies, distributed as follows: original (taxpayers copy), duplicate (AABs copy) and triplicate (to be attached to the tax return. Additionally, the AAB receiving the tax return/payment form shall also machine validate and stamp mark the word "Received" on the return/payment form as proof of filing the return/payment form and payment of the tax by the taxpayer. The machine validation on the return/payment form shall reflect the date of payment, amount paid and transaction code, the name of the bank, branch code, tellers code and tellers initials. F) Before 12:00 NN of the following banking day, the head offices of the AABs shall provide to BTR/BIR the
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daily total amount of BIR taxes they collected. G) After receipt of payment but not later than 24 hours thereafter, the AAB branch shall encode into the LBDE System and transmit to the concerned BIR Data Center, the below data and copy furnish the AAB head office. 1. Date of the transaction; 2. Name of the taxpayer; 3. Taxpayer Identification Number (TIN) of the taxpayer; 4. Tax type which is being paid for; 5. Return period for the tax type being paid for; 6. Amount of tax paid; 7. Name of the drawee bank and check number, for tax payments through checks; SECTION 3. Modes Of Payment To AABs. Aside from the electronic payment system currently used by some taxpayers in paying their BIR taxes, the rest shall pay their tax liabilities through any of the following modes: a) over thecounter cash payments; b) bank debit system; or c) check payment system. a) "Overthecounter cash payment" refers to payment of tax liabilities to authorized agent bank in the currencies (paper bills or coins) that are legal tender in the Philippines. The maximum amount allowed per tax payment shall not exceed ten thousand pesos (P10,000.00) b) "Bank debit system" refers to the system whereby a taxpayer, through a bank debit memo/advice, authorizes withdrawals from his/its existing bank accounts for payment of tax liabilities. The bank debit system mode is allowed only if the taxpayer has a bank account with the AAB branch where he/it intends to file and pay his/its tax return/form/declaration, provided said AAB branch is within the jurisdiction of the BIR Revenue District Office (RDO)/Large Taxpayers District Office (LTDO) where the tax payment is due and payable. c) "Checks" refers to a bill of exchange or Order Instrument drawn on a bank payable on demand. In the issuance and accomplishment of checks for the payment of internal revenue taxes, as illustrated below, the taxpayer shall indicate in the space provided for "PAY TO THE ORDER OF" the following data: (1) presenting/collecting bank or the bank where the payment is to be coursed and (2) FAO (For the Account Of) Bureau of Internal Revenue as payee; and under the "ACCOUNT NAME" the taxpayer identification number (TIN). (Below is a sample of a tax check payment where the drawee bank and presenting bank are different from each other.) (Below is sample of a check tax payment drawn from and presented to the same bank.) The following checks are, however, not acceptable as check payments for internal revenue taxes: 1. Accommodation checks checks issued or drawn by a party other than the taxpayer making the payment; 2. Second endorsed checks checks issued to the taxpayer as payee who indorses the same as payment for taxes; 3. Stale checks checks dated more than six (6) months prior to presentation to the authorized agent bank; 4. Postdated checks checks dated a day or several days after the date of presentation to the authorized agent bank; 5. Unsigned checks checks with no signature of the drawer; 6. Checks with alterations/erasures. AABs accepting checks for the payment of BIR taxes and other charges must see to it that the check covers one tax type for one return period only. Moreover, AABs must strictly comply with the systems and procedures for the reception, processing, clearing and accounting of the checks to be prescribed under a separate regulation. Second indorsement of checks which are payable to the Bureau of Internal Revenue or Commissioner of Internal Revenue is absolutely prohibited. SECTION 4. Tax Returns Partly Paid Thru Tax Debit Memos (TDMs) AABs are mandated to accept tax returns/payment forms partly paid thru any of the modes of payment mentioned in Section 3 hereof and partly thru TDMs duly and validly issued by the BIR. Before accepting the BIR tax return/payment form partly paid thru tax debit memo, the AAB shall insure that the number of the TDM is indicated in the BIR tax return/payment form in the same manner that the check number/drawee bank and bank debit advice number are indicated in the tax return/payment form paid thru check or bank debit system, respectively. A photocopy of the tax credit certificate (TCC), front and back page, which was the source of the TDM, together with a copy of the TDM, must be required from the taxpayer and attached to the BIR tax return/payment form. TDMs are, however, not acceptable as payments for withholding taxes, including Fringe Benefit Tax (clarified and implemented under RR No. 2-98, as amended, and RR No. 3-98), and for taxes, fees and charges collected under special schemes/procedures/programs of the Government / BIR as discussed and elucidated in a separate revenue regulation. AABs shall see to it that this restriction is strictly observed in the BIR tax returns/payment forms they receive. SECTION 5. Enrollment Of Taxpayers With Authorized Agent Bank Not Required Taxpayers are not required to enroll with any AAB where they intend to file tax returns/payment forms and/or pay internal revenue taxes. Taxpayers may file tax returns/payment forms and pay internal revenue taxes with any AAB of the appropriate BIR office (Revenue District Office (RDO), Large Taxpayers District Office (LTDO), or Large Taxpayers Service, etc.,
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whichever is applicable) where they are required to file the particular return/payment form. SECTION 6. Responsibility And Privilege Of Taxpayers. Taxpayers shall see to it that their tax returns/payment forms with payment are filed with and internal revenue taxes paid to legitimate AABs of the BIR. Nonetheless, they may confirm their tax payments with their home RDO/LTDO or LTDO/RDO where they are required to file tax returns/payment form and pay internal revenue taxes. SECTION 7. Additional Liabilities/Responsibilities Of Authorized Agent Banks (AABs). (a) Any diversion, non-remittance or under-remittance of the taxes collected by AABs through fault or negligence of the bank accepting such payment as well as the diversion of any payment for BIR taxes using the facilities of the bank through fault or negligence of any of the banks personnel shall subject the bank to civil and criminal liabilities provided for under Sections 248 and 275 of the Tax Code, as amended, and other existing laws, rules and regulations. AABs shall be liable to the BIR for double the amount of taxes diverted and unremitted, plus the increments and penalties prescribed by the Tax Code, as amended, but the total penalties imposed may be reduced on meritorious grounds subject to the approval of the majority of the members of the Management Committee (MANCOM) of the BIR, composed of the Commissioner of Internal Revenue and the four (4) Deputy Commissioners, where the Commissioner of Internal Revenue votes for such reduction. (b) The reports of AABs to be submitted to BTr/BIR (under Sec. 2) of all the tax payments collected shall be in accordance with the forms prescribed by BIR. (c) The requirements prescribed in these regulations shall be included in the accreditation criteria to be mentioned in the Memorandum of Agreement to be signed by and among the BTR, BIR and the AAB for compliance by all AABs. SECTION 8. Repealing Clause. All rules and regulations or portions thereof inconsistent with the provisions of these regulations are hereby modified, amended or repealed accordingly. SECTION 9. Effectivity. These regulations shall take effect fifteen days from date of publication in the Official Gazette or any newspaper of general circulation. However, to provide sufficient time for AABs to make available to all participating branches the deposit slip required under Section 2-D, the effectivity date of the switch-over from the current acknowledgment slip shall be fifteen days from the effectivity of this Revenue Regulation. IaDTES (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance Recommending Approval: (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
August 14, 1998 REVENUE REGULATIONS NO. 12-98 SUBJECT : Amending Sec. 2.57.2 of Revenue Regulations No. 2-98 TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope. Pursuant to the provisions of Section 244, in relation to Section 57 (B) of the National Internal Revenue Code of 1997, these regulations are hereby promulgated in order to streamline and make more efficient the collection of the creditable withholding tax on income payments to medical practitioners. prcd SECTION 2. Amendment. Section 2.57.2, Sub-section (I) of Revenue Regulations No. 2-98, is hereby amended to read as follows: "Sec. 2.57.2. Income payments 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: "xxx xxx xxx "(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%). "(a) It shall be the duty and responsibility of the hospital or clinic to collect from any patient admitted by such hospital or clinic, the professional fee of the attending medical practitioner and to withhold the tax herein prescribed. It is the intent of these Regulations that the hospital or clinic shall, at all times, collect the professional fee for and in behalf of the medical practitioner and to withhold therefrom the tax herein prescribed. "(i) In general. It shall be presumed that the hospital or clinic has collected the professional fee of the said medical practitioner and shall, accordingly, be liable for the withholding of the tax vis-a-vis each and every patient admitted into the hospital or clinic under the care of the said medical practitioner. "(ii) Exception. The withholding tax herein prescribed shall not apply whenever there is proof that no professional fee has in fact been charged by the medical practitioner and paid by his patient, Provided, however, that this fact is shown in a sworn declaration (ANNEX A hereof) jointly executed by the medical practitioner, the patient or his duly authorized representative, and the administrator of the hospital or clinic. This sworn declaration shall form part of the records of the hospital or clinic and shall constitute as part of its records and shall be made readily available to any duly authorized Revenue Officer for tax audit purpose, Provided, further, that the said administrator
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of the hospital or clinic shall inform the Revenue District Office having jurisdiction over such hospital or clinic about any medical practitioner who fails or refuses to execute the sworn statement herein prescribed, within ten (10) days from the occurrence of such event. cda "(b) The rules herein prescribed shall likewise apply to rendering of medical services by medical practitioners through a duly registered professional partnership for the practice of the medical profession provided, however, that the rate of the withholding tax to be imposed shall be at five percent (5%), pursuant to the provisions of Sub-section (B) of this Section." SECTION 3. Repealing Clause. All rules and regulations or any part thereof inconsistent with the provisions of these Regulations are hereby amended or repealed accordingly. SECTION 4. Effectivity. These Regulations shall take effect fifteen (15) days after publication in the official gazette or in a newspaper of general circulation. cdll (SGD.) EDGARDO B. ESPIRITU Secretary of Finance Recommending Approval: (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue Annex A SWORN DECLARATION Date _________________ WE, ____________________________________ (name of patient/authorized representative); ___________________________ (name of Medical Practitioner); and _______________________ (name of hospital/clinic administrator), do hereby certify that the said patient was admitted to ____________________ (name of hospital/clinic) for the period ________________ under the care of the said Medical Practitioner for medical care treatment and that the said Medical Practitioner did not charge from the said patient any professional fee. cdasia WE DECLARE UNDER THE PENALTIES OF PERJURY THAT THIS CERTIFICATE HAS BEEN MADE IN GOOD FAITH, VERIFIED BY US, AND TO THE BEST OF OUR KNOWLEDGE AND BELIEF, IS TRUE AND CORRECT, PURSUANT TO THE PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND THE REGULATIONS ISSUED UNDER AUTHORITY THEREOF. _____________________ _____________________ Name of Patient Name of Medical Practitioner _______________________ Name of Hospital/Clinic Administrator
July 31, 2001 REVENUE REGULATIONS NO. 6-01 SUBJECT : Amending Pertinent Provisions of Revenue Regulations Nos. 1-98, 2-98, as Amended, and 7-95, as Amended, and Revenue Memorandum Circular No. 1-98 Relative to the Inclusion of Additional Taxpayers to be Subject to Final Withholding Tax, Revision of the Withholding Tax Rates on Certain Income Payments Subject to Creditable Withholding Tax, Time for the Filing of Various Tax Returns and Payment of the Taxes Due Thereon And Others TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope. Pursuant to Section 244 of the Tax Code of 1997, in relation to Sections 25(C), 25(D), 25(E), 57, 58, 59, 81, 114(A), 128(A)(3) and 200(B) of the same Code and Presidential Decree (P.D.) No. 1354, these Regulations are hereby promulgated, in order to, among others, revise the rates of withholding tax on certain income payments subject to creditable withholding tax, and provide for the time for the filing of the various tax returns, and the payment of the taxes due thereon. SECTION 2. Income Payments Subject to Final Withholding Tax. Section 2.57.1 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "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 xxx xxx xxx (7) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354 TaCDAH (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:
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xxx xxx xxx (4) Gross income from all sources within the Philippines derived by non-resident cinematographic film owners, lessors or distributors Twenty Five percent (25%). For purposes of these regulations, the term 'cinematographic film' includes motion picture films, films, tapes, discs and other such similar or related products. (5) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354. xxx xxx xxx (D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies and Those Employed by Offshore Banking Units and Petroleum Service Contractors and Subcontractors. 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 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 is applicable to Filipinos employed and occupying the same positions as those aliens employed by multinational companies, regardless of whether or not there is an alien executive occupying the same position, provided, that such Filipinos shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the Tax Code of 1997. In case of the latter, the withholding tax rates under Sections 2.78 and 2.79 of Revenue Regulations No. 2-98 shall apply. The term "multinational company" means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia Pacific Region and other foreign markets. (E) Income Derived by Alien Individuals Employed by Offshore Banking Units. A final withholding tax equivalent to fifteen percent (15%) shall be withheld by the withholding agent from the gross income of alien individuals occupying managerial and technical positions in offshore banking units established in the Philippines, as salaries, wages, annuities, compensation, remuneration, and other emoluments, such as honoraria and allowances received from such offshore banking units. TEaADS The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by offshore banking units, regardless of whether or not there is an alien executive occupying the same position. (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 is applicable to Filipinos employed and occupying the same positions as those aliens employed by foreign petroleum service contractors and subcontractors, regardless of whether or not there is an alien executive occupying the same position. (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: xxx xxx xxx (6) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354 (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 resident foreign corporation, based on the gross amount thereof and at the rate of tax prescribed therefor: xxx xxx xxx (6) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354 xxx xxx xxx SECTION 3. Revised Rates of Creditable Withholding Tax. Section 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "SECTION 2.57.2 Income payment subject to creditable withholding tax and rates prescribed thereon
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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 (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; dentists; professional appraisers; connoisseurs of tobacco; actuaries; and interior decorators Ten percent (10%) (2) Professional entertainers, such as, but not limited to, actors and actresses, singers and emcees Twenty percent (20%) (3) Professional athletes, including basketball players, pelotaris and jockeys Twenty percent (20%) (4) All directors involved in movies, stage, radio, television and musical productions Twenty percent (20%) (5) Insurance agents and insurance adjusters Ten percent (10%) (6) Management and technical consultants Ten percent (10%) (7) Bookkeeping agents and agencies Ten percent (10%) (8) Other recipients of talent fees Twenty percent (20%) (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 Twenty percent (20%) 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 recipients of talent fees, the amounts 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 Ten percent (10%) (C) Rentals On the 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 Two percent (2%) (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: EaHATD (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 above-mentioned 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
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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 Ten percent (10%) (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 (includes doctors of medicine, doctors of veterinary science and dentists) by hospitals and clinics or paid directly to the medical practitioners by patients who were admitted and confined to such hospitals or clinics Ten percent (10%) a) It shall be the duty and responsibility of the hospital or clinic to remit taxes withheld from the following: 1. Professional fees paid directly to hospitals or clinics by patients. 2. Professional fees paid by patients directly to medical practitioners where the 10% expanded withholding tax shall in turn be given by medical practitioners directly to the Accounting Office of the hospitals or clinics. b) Exception The withholding tax herein prescribed shall not apply whenever no professional fee has been charged by the medical practitioner and paid by his patient. c) Hospitals and clinics shall submit the names and addresses of medical practitioners in the following classifications, every 15th day after the end of each calendar quarter, to the Collection Division of the Revenue Region where such hospital or clinic is located, using "Annex A" [i.e., as indicated in Revenue Regulations No. 3-99]: (i) Medical practitioners whose professional fee was paid by patients directly to the hospital or clinic. (ii) Medical practitioners whose professional fee was paid to them directly by the patients and the 10% withholding tax was given by such practitioners to the Accounting Office of the hospital or clinic. ITScAE (iii) Medical practitioners whose professional fee was paid to them directly by the patients but the 10% withholding tax was not given by such practitioners to the Accounting Office of the hospital or clinic. (iv) Medical practitioners who did not charge any professional fee from their patients. d) The rules herein prescribed shall likewise apply to rendering of medical services by medical practitioners through a duly registered professional partnership for the practice of the medical profession. e) Hospitals or clinics shall be responsible for the accurate computation of professional fees paid directly to hospitals and clinics and timely remittances of the 10% expanded withholding taxes. Likewise, the hospitals or clinics shall issue a Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) to medical practitioners who were subjected to withholding, every 20th day following the close of the taxable quarter. The names of medical practitioners shall be included in the Alphabetical List of Income Recipients attached to the Annual Information Return (BIR Form No. 1604). (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 classified as ordinary asset A creditable withholding tax based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance with the following schedule: A. Where the seller/transferor is exempt from creditable withholding tax in accordance with Sec 2.57.5 of these regulations Exempt B. Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate
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business: 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 a selling price of more than Two Million Pesos (P2,000,000.00) 5.0% C. Where the seller/transferor is not habitually engaged in the real estate business 6.0% Registration with the HLURB or HUDCC shall be sufficient for a seller/transferor to be considered as habitually engaged in the real estate business. If the seller/transferor is not registered with HLURB or HUDCC, he/it may prove that he/it is engaged in the real estate business by offering other satisfactory evidence (for example, he/it consummated during the preceding year at least six taxable real estate transactions, regardless of amount). Notwithstanding the foregoing, for purposes of these Regulations, banks shall not be considered as habitually engaged in the real estate business. 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, whichever is higher. In an exchange, the fair market value of the property received in exchange shall be considered as the consideration. If the buyer is an individual not engaged in trade or business, the following rules shall apply: (i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the selling price), no withholding of tax is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or fair market value of the property, whichever is higher, shall be withheld on the last installment or installments to be paid to the seller until the tax is fully paid. (ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first installment. However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply: (i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every installment. (ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first installment. SDIaHE In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the creditable withholding tax due on the sale, transfer or exchange of real property other than capital asset has been fully paid. (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 one-half (1/2) of the gross amounts paid by any credit card company in the Philippines to any business entity, whether natural or juridical person, representing the sales of goods/services made by the aforesaid business entity to cardholders One percent (1%) (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, makes its purchases of goods. (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 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 government-owned or controlled corporation rather than as one of the top five thousand (5,000) corporations." HCSEcI
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SECTION 4. Time for Filing of Withholding Tax and Value-Added Tax Returns and the Payment of Taxes Due Thereon. The time for filing of the various tax returns as indicated below and the payment of the taxes due thereon shall be revised in accordance with the appropriate amendments to the existing regulations, as presented below. (1) Sections 2.58(A)(2) and 2.81 of Revenue Regulations No. 2-98, as amended, are hereby further amended to read as follows: "SECTION 2.58 RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE. (A) Monthly return and payment of taxes xxx xxx xxx (2) WHEN TO FILE (a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final (including 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 payments should be made, within ten (10) days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the following year. (b) With respect, however, to taxpayers, whether large or non-large, who availed of the electronic filing and payment (EFPS), the deadline for electronically filing the applicable withholding tax returns and paying the taxes due thereon via the EFPS shall be five (5) days later than the deadlines set above." "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, including large taxpayers as determined by the Commissioner, 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/employer's 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 15 of the succeeding year; Provided, however, that with respect to taxpayers, whether large or non-large, who availed of the EFPS, the deadline for electronically filing the aforesaid withholding tax return and paying the tax due thereon via the EFPS shall be five (5) days later than the deadlines set above. EHASaD xxx xxx xxx" (2) Section 4.110-1(A), (B) and (C) of Revenue Regulations No. 7-95, as amended, is further amended to read as follows: "SECTION 4.110-1. Filing of return and payment of VAT. A) Filing of Return. Every person liable to pay VAT shall file a quarterly return of the amount of his gross sales or receipts within twenty five (25) days following the close of the calendar quarter. B) Payment of VAT All persons liable to VAT shall pay the tax monthly based on the taxable sales/receipts for the month, using the monthly VAT declaration form within ten (10) days after the end of each month; provided, however, that with respect to taxpayers who availed of the electronic filing and payment system (EFPS), the deadline for electronically filing the monthly VAT declaration and paying the tax due thereon via the EFPS shall be five (5) days later than the deadline set above. The declaration shall be accomplished only for the first two (2) months of each calendar quarter. xxx xxx xxx C) Short Period Return. Any person who retires from business or whose registration has been canceled shall file a quarterly return and pay the tax due thereon within twenty five (25) days from the cessation of business operations or from the date of cancellation of registration, as the case may be. All persons first registered under Section 4.107-1(b)(3) and 4.107-1(c) of these Regulations shall be liable to VAT on the effective date of registration stated in their Certificates of Registration; i.e., the first day of the month following their registration. If the effective date of registration falls on the first or second month of a calendar quarter, the initial VAT monthly declaration shall be filed within ten (10) days after the end of the month, and the initial quarterly return shall be filed on or before the 25th day after the end of the calendar quarter. On the other hand, if the effective date of registration falls on the third month of the calendar quarter, the quarterly return shall be filed on or before the 25th day of the month following the end of the calendar quarter, and no VAT monthly declaration need be filed." IDaEHC (3) SECTION 4(3.3) of Revenue Regulations No. 1-98 is hereby amended to read as follows: "SECTION 4. Filing of Returns and Payment of Taxes. xxx xxx xxx 3. When to File and Pay 3.3 Value-Added Tax (VAT) Monthly VAT declarations of Large Taxpayers shall be filed, and taxes paid, not later than the 10th day following the end of each month; provided, however, that with respect to Large Taxpayers who availed of the electronic filing and payment system (EFPS), the deadline for electronically filing the monthly VAT declaration and paying the tax due thereon via the EFPS shall be five (5) days later than the deadline set above. The quarterly VAT returns of Large Taxpayers shall be filed, and the taxes paid, not later than the 25th day following the end of each quarter." SECTION 5. Time for Filing of Documentary Stamp Tax Returns and the Payment of Taxes Due Thereon. The time for filing of the documentary stamp tax returns and the payment of the taxes due thereon shall be revised in
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accordance with the appropriate amendments to existing regulations, as presented below. (1) Paragraph 19 of Revenue Memorandum Circular No. 1-98 is hereby amended to read as follows: "(19) The documentary stamp tax return shall be filed within five (5) days after the close of the month when the taxable document was made, signed, accepted, or transferred, and the tax thereon shall be paid at the same time the aforesaid return is filed." (2) For large taxpayers, Section 4(3.6) of Revenue Regulations No. 1-98 is hereby amended to read as follows: "SECTION 4. Filing of Returns and Payment of Taxes. xxx xxx xxx 3. When to File and Pay 3.6 Documentary Stamp Taxes Large taxpayers shall pay their documentary stamp taxes within five (5) days after the close of the month when the taxable document was made, signed, issued, accepted or transferred by the filing of the documentary stamp tax returns, through purchase or actual affixture or by imprinting the documentary stamps through a documentary stamp tax metering machine." cCaEDA SECTION 6. Time for Filing of Percentage Tax Returns and the Payment of Taxes Due Thereon. The time for filing of the percentage tax returns and the payment of the taxes due thereon shall be revised in accordance with the rules and appropriate amendments to existing regulations, as presented below. a. For non-large taxpayers, percentage tax returns shall be filed within ten (10) days after the end of each month and the tax thereon shall be paid at the same time the aforesaid return is filed, provided, however, that with respect to non-large taxpayers who availed of the electronic filing and payment system (EFPS), the deadline for electronically filing the percentage tax return and paying the tax due thereon via the EFPS shall be five (5) days later than the deadline set above, provided, further, that for percentage tax returns required to be filed under Sections 120, 126 and 127 of the Tax Code of 1997, they shall be filed within the periods stated in those sections. b. For large taxpayers, Section 4(3.4) of Revenue Regulations No. 1-98 is hereby amended to read as follows: "SECTION 4. Filing of Returns and Payment of Taxes. xxx xxx xxx 3. When to File and Pay 3.4 Other Percentage Taxes Large taxpayers who are presently preparing separate percentage tax returns shall file a consolidated return, and pay the aggregate taxes due, within ten (10) days after the end of each month, provided, however, that with respect to Large Taxpayers who availed of the EFPS, the deadline for electronically filing the percentage tax returns and paying the taxes due thereon shall be five (5) days later than the deadline set above, provided, further, that for percentage tax returns required to be filed under Sections 120, 126 and 127 of the Tax Code of 1997, they shall be filed within the periods stated in those sections. The Head Office shall prepare a schedule (Annex C) of all percentage tax returns of the branches/units with the following information: a. Period covered; b. Head office and branch/unit names and addresses; and c. Kind and amount of percentage tax payable." SECTION 7. Repealing Clause. The provisions of any revenue regulations, revenue memorandum order, revenue memorandum circular or any other issuance of the Bureau of Internal Revenue inconsistent with these Regulations are hereby repealed, amended, or modified accordingly. SECTION 8. Effectivity Clause. These Regulations shall take effect with respect to income payments that are paid or payable in September 2001 and which are required to be remitted to the Bureau of Internal Revenue within the month of October 2001. (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance Recommending Approval: (SGD.) REN G. BAEZ Commissioner of Internal Revenue
September 7, 2001 REVENUE REGULATIONS NO. 12-01 SUBJECT : Amendment to the Pertinent Provisions of Revenue Regulations No. 1-98, as Amended, Revenue Regulations No. 2-98, as Amended, and Revenue Regulations No. 6-2001, Relative to the Revision of Withholding Tax Rates on Certain Income Payments Subject to Withholding Tax, the Deferment of the New Deadline Dates For Filing Selected Tax Returns, the Reporting Requirements for Recipients of Talent Fees, and for Other Purposes. TO : All Internal Revenue Officers and Others Concerned. SECTION 1. Scope. Pursuant to Section 244 of the Tax Code of 1997, in relation to Sections 57 and 128(A) (3) of the same Code, these Regulations are hereby promulgated in order to amend pertinent provisions of Revenue Regulations No. 6-2001 (RR 6-2001) relative to the rates of creditable withholding tax, effectivity of the adjustment in
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the creditable withholding tax rates as well as the new deadline dates for the filing of selected tax returns, compliance or reporting requirements prescribed from recipients of talent fees, and for other purposes. ScCEIA SECTION 2. Final Withholding Tax on Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. Sec. 2.57.1(D) of Revenue Regulations No. 2-98 (RR 2-98), as amended, is hereby further amended to read as follows "(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. xxx xxx xxx The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by regional or area headquarters and regional operating headquarters of multinational companies, regardless of whether or not there is an alien executive occupying the same position. Provided, that such Filipinos shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the Tax Code of 1997 if the employer (Regional Operating Headquarters/Regional or Area Headquarters) is governed by Book III of E. O. 226 as amended by R.A. 8756. In case the Filipino opted to be taxed at the regular tax rate under Section 24 of the Tax Code of 1997, the provisions of Section 2.79 (A) to (D) of Revenue Regulations No. 2-98. xxx xxx xxx SECTION 3. Creditable Withholding Tax on Talent Fees for Services Rendered by Individuals. Pertinent portions of Section 2.57.2(A) of RR 2-98, as amended by RR 6-2001, are hereby further amended to read as follows: "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 xxx xxx xxx (2) Professional entertainers, such as, but not limited to, actors and actresses, singers and emcees Twenty percent (20%), if the professional entertainer's gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise; (3) Professional athletes, including basketball players, pelotaris and jockeys Twenty percent (20%), if the professional athlete's gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise; (4) All directors involved in movies, stage, radio, television and musical productions Twenty percent (20%), if the director's gross income for the current year exceeds P720,000; and Ten Percent (10%); if otherwise; xxx xxx xxx (8) Other recipients of talent, fees Twenty percent (20%), if the recipient's gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise. xxx xxx xxx The amounts subject to withholding tax under this paragraph shall include not only fees, but also per diems, allowances and any other form of income payments not subject to withholding tax on compensation. In the case of professional entertainers, professional athletes, directors involved in movies, stage, radio, television and musical productions and other recipients of talent fees, the amounts 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 proportion. Furthermore, in order to determine the applicable tax rate (10% or 20%) to be applied/withheld by the withholding agent, every professional entertainer, professional athlete, director involved in movies, stage radio, television and musical productions and other recipients of talent fees shall annually disclose his gross incomes for the current year to the Bureau of Internal Revenue (BIR), by submitting a notarized sworn declaration thereof, copy furnished all the current payors of the declaration duly stamped received by the BIR (Withholding Tax Division of the National Office). The disclosure should be filed on June 30 of each year or within fifteen (15) days after the end of the month the talent's income reaches P720,000, whichever comes earlier. In case his total gross income is less than P72,000 as June 30, he/she shall submit a second disclosure within fifteen (15) days after the end of the month that his/her gross income for the current year to date reaches P720,000. The initial disclosure after the effectivity or these Regulations shall be filed on or before September 30, 2001 or within fifteen (15) days after the effectivity of these Regulations, whichever comes later. In case of failure to submit the annual declaration/disclosure to the BIR, the payor shall withhold the tax at the rate of 20%. Notwithstanding the foregoing, if an individual recipient receives talent fees in addition to salaries from the same payor, the said talent fees shall be considered as supplemental compensation and, thus, be subject to the withholding tax on compensation." caAICE SECTION 4. Time of Withholding. Section 2.57.4 of RR 2-98, is hereby amended to read as follows: "Sec. 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 payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books, whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable.
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Provided, however, that where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor's books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes. "Example X Corporation, a domestic corporation which reports income and expenses on a calendar year basis, issues 2-Year bonds with face value of P100,000,000 at a discount amounting to P6,000,000 on January 1, 2002 to twenty five (25) investors. It records in its books the amortized portion of the discount as expense in the amount of P250,000/month (P6,000,000 divided by 24 months). "Since the discount is not yet paid or payable but the aliquot portion of which has already been recorded as expense for tax purposes, the withholding of the 20% final tax shall be done on the last month of the quarter when the same has been claimed as an expense in the quarterly income tax returns/final adjustments returns filed by X Corporation. Thus, in the above illustration, the amortized discount to be recorded by X Corporation for the months of January, February and March 2002 amounting to P750,000 shall be subject to 20% final tax of P150,000 come March 2002, which tax shall be remitted within 10 days after the quarter ending March 2002 (that is, on or before April 10, 2002). The said withholding tax shall be reported in its Monthly Remittance Return of Final Income Taxes Withheld required to be filed in April 2002. On the other hand, for the calendar quarter ending December 2002, the withholding of the final tax for the amortized discount pertaining to the months of October, November and December shall be done in December 2002 and the remittance thereof shall be on or before January 15, 2003. The said withholding tax shall be reported in its Monthly Remittance Return of Final Income Taxes Withheld required to be filed in January 2003." SECTION 5. Issuance of Certificate of Value-Added Tax Withheld and Percentage Tax Withheld. (a) Section 4.114(D) of Revenue Regulations 2-98 is hereby amended to read as follows: "(D) Certificate of value added tax withheld at source. 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 fifth (5th) day of the following month. The fourth copy shall be the file copy of the withholding agent." (b) Section 5.116(C) of Revenue Regulations 2-98 is hereby amended read as follows: "(C) Certificate of percentage tax withheld at source. Every withholding agent 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 fifth (5th) day of the following month. The third copy of the certificate shall be the file copy of the withholding agent." SECTION 6. Time of Filing of Percentage Tax Returns and Payment of Taxes Due Thereon. (a) Section 6(a) of Revenue Regulations No. 6-2001 is hereby amended to read as follows: "SECTION 6. Time for Filing of Percentage Tax Returns and the Payment of Taxes Due Thereon. The time for filing of the percentage tax returns and the payment of the taxes due thereon shall be revised in accordance with the rules and appropriate amendments to existing regulations, as presented below. a. For non-large taxpayers, percentage tax returns shall be filed within ten (10) days after the end of each month and the tax thereon shall be paid at the same time the aforesaid return is filed, provided, however, that with respect to non-large taxpayers who availed of the electronic filing and payment system (EFPS), the deadline for electronically filing the percentage tax return and paying the tax due thereon via the EFPS shall be five (5) days later than the deadline set above, provided, further, that for percentage tax returns required to be filed under Sections 120, 125, 126 and 127 of the Tax Code of 1997, they shall be filed within the periods stated in those sections." b) Section 4(3.4) of Revenue Regulations No. 1-98 (RR 1-98), as amended by RR 6-2001, is further amended to read as follows: "Section 4. Filing of Returns and Payment of Taxes. xxx xxx xxx 3. When to File and Pay 3.4 Other Percentage Taxes Large taxpayers who are presently preparing separate percentage tax returns shall file a consolidated return, and pay the aggregate taxes due, within ten (10) days after the end of each month, provided, however, that with respect to Large Taxpayers who availed of the EFPS, the deadline for electronically filing the percentage tax returns and paying the taxes due thereon shall be five (5) days later than the deadline set above, provided, further, that for percentage tax returns required to be filed under Sections 120, 125, 126 and 127 of the Tax Code of 1997, they shall be filed within the periods stated in those sections. The Head Office shall prepare a schedule (Annex C) of all percentage tax returns of the branches/units with the following information: a. Period covered; b. Head office and branch/unit names and addresses; and c. Kind and amount of percentage tax payable." SECTION 7. Effectivity of the New Deadline Dates in the Filing of Selected Returns and Payment of Taxes Due Thereon as well as the Adjustment of Creditable Withholding Tax Rates as Prescribed in Revenue Regulations No. 62001. Section 8 of RR 6-2001 is hereby amended to read as follows:
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"SECTION 8. Effectivity Clause. These Regulations shall take effect with respect to money/income payments that are paid or payable or accrued/recorded as expense/asset in the books of accounts in October 2001 the withholding taxes of which are required to be paid/submitted to the Bureau of Internal Revenue within the month of November 2001. The new filing deadline dates shall apply to October 2001 returns which are due for filing in November 2001." SECTION 8. Penalty Clause. Any violation of the provisions of these Regulations shall be punishable under the pertinent provisions of the Tax Code of 1997. cISDHE SECTION 9. Transitory Provision. Considering that employees are being taxed on a calendar year basis, the 15% final withholding tax on the gross income of alien individuals occupying managerial and technical positions in representative offices, as well as of Filipinos occupying the same position as such aliens shall continue to be imposed until December 31, 2001. Thereafter, the pertinent provisions of the Tax Code of 1997 shall apply to these taxpayers depending upon their classification as taxpayers (Secs. 24, 25(A), 25(B) and 33). SECTION 10. Repealing Clause. The provisions of RR 6-2001 and any other revenue regulations, revenue memorandum order, revenue memorandum circular or other issuance of the Bureau of Internal Revenue inconsistent with these Regulations are hereby repealed, amended, or modified accordingly. SECTION 11. Effectivity Clause. These Regulations shall take effect fifteen (15) days after publication in any newspaper of general circulation. (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance Recommending Approval: (SGD.) RENE G. BAEZ Commissioner of Internal Revenue ANNEX "A" Adjustment of the Creditable Withholding Tax Rates Income Subject to CWT From To A. 1. Professional fees, talent fees, etc. for services rendered by individuals Professional entertainers, such as, 10% 20% if the current but not limited to, actors and actresses, year's gross income singers and emcees exceeds P720,000; 10% if the current year's gross income does not exceed P720,000 Professional athletes, including 10% 20% if the current basketball players, pelotaris and year's gross income jockeys exceeds P720,000; 10% if the current year's gross income does not exceed P720,000 All directors involved in movies, 10% 20% if the current stage, radio, television and musical year's gross income productions exceeds P720,000; 10% if the current year's gross income does not exceed P720,000 Other recipients of talent fees 10% 20% if the current year's gross income exceeds P720,000; 10% if the current year's gross income does not exceed P720,000 Fees of directors, who are not 10% employees of the company paying 20%
2.
3.
4.
5.
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such fees, whose duties are confined to attendance at and participation in the meetings of the board of directors B. C. Professional fees, talent fees, etc. for services of taxable juridical persons Income payments to certain 1% contractors 1. General engineering contractors 2. General building contractors 3. Specialty contractors 4. Other contractors Income payments to customs, 5% insurance, real estate and commercial brokers and agents of professional entertainers Gross selling price or fair market 7.5% value paid to the seller/owner for the sale, exchange or transfer of real property classified as ordinary asset, where the seller is not habitually engaged in the real estate business 5% 2% 10%
D.
10%
E.
6%
F.
Certain income payments made by 1/2% on the gross 1% on one-half of the credit card companies amounts paid gross amounts paid ANNEX "B" Taxes Affected By The Acceleration Of Filing Of Returns And Payment Of Taxes Due Thereon Tax From To (Manual) To (EFPS) 1. Creditable and final withholding tax (excluding the month of December and excluding the final withholding tax on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from thrust funds and similar arrangements): a. Non-Large Within 10 days Within 10 days Within 15 days Taxpayer after the end of after the end of after the end of each month each month each month Large Taxpayer Within 25 days Within 10 days Within 15 days after the end of after the end of after the end each month each month of each month
b.
2.
Creditable and final withholding tax for the month of December
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(excluding the final withholding tax on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements): a. Non-Large On before On or before On or before Taxpayer January 25 of the January 25 of the following year following year following year January 25 of the
b.
Large Taxpayer On or before On or before On or before January 25 of the January 25 of the January 25 of the following year following year following year
3.
Final withholding tax on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements: a. Non-Large Within 25 days from For January to For January to Taxpayer the close of each November-within November-within calendar quarter 10 days after the 15 days after the end of each month end of each month For December-on or before January 15 of the following year year b. For December-on or before January 20 the following
Large Taxpayer Within 25 days from For January to For January to Taxpayer the close of each November-within November-within calendar quarter 10 days after the 15 days after the end of each month end of each month For December-on For December-on or before January or before January 15 of the following 20 of the following year year
4.
Withholding tax on compensation (excluding the month of December): a. Non-Large On or before the On or before the On or before the Taxpayer 10th day of the 10th day of the 15th day of the month following month following month following the month in the month in which the month in which which withholding withholdings withholding was made was made was made
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b.
Large Taxpayer On or before the On or before the On or before the 25th day of the 10th day of the 15th day of the following month month following month following the month in which the month in which withholding was withholding was made made
5.
Withholding tax on compensation for the month of December: a. Non-Large Not later than Not later than Not later than Taxpayer January 25 of January 15 of January 20 of the following the following the following year year year Large Taxpayer On or before the Not later than Not later than 25th day of the January 15 of January 20 of following month the following year the following year
b.
6.
Value-Added tax monthly VAT declaration: a. Non-Large Within 25 days Within 10 days Within 15 days Taxpayer after the end of after the end of after the end of each month each month each month b. Large Taxpayer Not later than the Not later than the Not later than the 25th day following 10th day following 15th day following the end of each the end of each the end of each month month month
7.
Documentary stamp tax: a. Non-Large Within 10 days Within 5 days Taxpayer after the close after the close of the month of the month when the taxable when the taxable document was document was made, signed, made, signed, accepted, or accepted, or transferred transferred Large Taxpayer Within 10 days Within 5 days after the close of after the close of the month when the month when the taxable document the taxable document was made, signed, was made, signed, accepted, or accepted, or transferred transferred
b.
8.
Percentage tax: a. Non-Large Within 25 days Within 10 days Within 15 days Taxpayer after the end of after the end of after the end of each taxable each month, each month, except quarter except those under those under Sections 120, 125, Sections 120, 125, 126 and 127 of the 126 and 127 of the
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Tax Code of 1997Tax Code of 1997 b. Large taxpayer Within 25 days Within 10 days Within 15 days after the end of after the end of after the end of each taxable each month, each month, quarter except those under except those under Sections 120, 125, Sections 120, 125 126 and 127 of the 126 and 127 of the Tax Code of 1997Tax Code of 1997
Notes: 1. Section 120 Overseas communication tax 2. Section 125 Amusement tax 3. Section 126 Tax on winnings 4. Section 127 Stock transaction tax and IPO tax ANNEX "C" AFFIDAVIT-DECLARATION OF CURRENT YEAR'S GROSS INCOME Republic of the Philippines ) Province of _______________________) SS City/Municipality of _________________) I, __________________________________, of legal age, single/married, residing at ______________________________________, after being sworn in accordance with law, depose and say that: 1. I am a/an [state nature of work] for which I receive talent fees; 2. As such, I have received a gross income of __________________ for the current year as of _________________, 20 ___; 3. I am executing this Affidavit-Declaration as a requirement of Revenue Regulations No. _____________ of the Bureau of Internal Revenue in the determination of the applicable creditable withholding tax rate (10% or 20%) to be imposed by withholding agent/s. IN WITNESS WHEREOF, I have hereunto set my hand this ______ day of _____________________, 20 ____, in the City/Municipality of ______________, Province of __________________________, Philippines. Affiant-Declarant SUBSCRIBED and sworn to before me, in the City/Municipality of ______________________, this __________ day of _____________, 20 ____ by _____________________ with Community Tax Certificate No. __________ issued at ___________________________ on _________________, 20 ____. Notary public My commission expires on _____________ Doc. No. : __________ Page No. : __________ Book No. : __________ Series of 20 __________ GUIDELINES AND INSTRUCTIONS WHO WILL EXECUTE Every professional entertainer, professional athlete, director involved in movies, stage radio, television and musical production and other recipients of talent fees shall annually disclose his/her gross income for the current year. WHEN TO EXECUTE The Affidavit-Declaration of Current Year's Gross Income shall be filed on June 30 of each year or within fifteen (15) days after the end of the month the talent's income reaches P720,000.00, whichever comes earlier. In case his/her total gross income is less than P720,000.00 as of June 30, he/she shall submit a second disclosure within fifteen (15) days after the end of the month that his/her gross income for the current year to date reaches P720,000.00. In case of failure to submit the annual declaration/disclosure to the BIR, the payor shall withhold the tax at the rate of 20%. WHERE TO FILE The duly notarized Affidavit-Declaration of Current Year's Gross Income shall be filed with the Withholding Agents Monitoring Division, Room 207, Bureau of Internal revenue (BIR), National Office, Diliman, Quezon City. AaECSH
September 9, 2002 REVENUE REGULATIONS NO. 14-02 SUBJECT : Amending Further Pertinent Provisions of Revenue Regulations No. 2-98, as amended. TO : All Internal Revenue Officers, Employees, Withholding Agents and Others Concerned. SECTION 1. Scope. Pursuant to the provisions of Section 244, in relation to Sections 57(B), 58, 114, 116 and other pertinent Sections, all of the National Internal Revenue Code of 1997 (Tax Code), in relation to P.D. 1354 and R.A. 9010, these Regulations are hereby promulgated to further amend portions of Revenue Regulations No. 2-98,
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as last amended by Revenue Regulations No 12-2001, providing for additional income payments to be subjected to withholding tax and clarifying pertinent provisions in relation thereto. EcSCAD SECTION 2. Income payments subject to creditable withholding tax and rates prescribed thereon. Section 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 2.57.2. 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: xxx xxx xxx (C) Rentals (1) Real properties. 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%); (2) Personal properties. On gross rental or lease in excess of Ten Thousand Pesos (P10,000.00) per payment for the continued use or possession of personal property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity which include, but not limited to the following: land transport equipment, water transport equipment, air transport equipment, industrial equipment, commercial equipment, scientific equipment, agricultural machinery and equipment, construction/civil engineering machinery and equipment, telecommunication equipment, office furniture/machines/equipment, main frame computer and all other computer machines/equipment, materials handling equipment and auxiliary equipment Five percent (5%); However, the Ten Thousand Pesos (P10,000.00) threshold shall not apply when the accumulated gross rental or lease paid by the lessee to the same lessor exceeds or is reasonably expected to exceed P10,000.00 within the year. In which case, the lessee shall withhold the five percent (5%) withholding tax on the entire amount. (3) Poles, satellites and transmission facilities. On gross rentals or lease for the use of poles, satellites and/or transponder and transmission facilities which include but not limited to the following: switchboards, land lines/aerial cables, underground cables and submarine cables Five percent (5%); (4) Billboards. On gross rentals or lease of spaces used in posting advertisements in the form of billboards and/or structures similar thereto, posted in public places such as, but not limited to, buildings, vehicles, amusement places, malls, street posts, etc. Five percent (5%) (D) ... (E) Income payments to certain contractors. On gross payments to the following contractors, whether individual or corporate Two percent (2%) xxx xxx xxx (4) Other contractors xxx xxx xxx (m) Persons engaged in the sale of computer services, computer programmers, software/program developer/designer, internet service providers, web page designing, computer data processing, conversion or base services and other computer related activities; xxx xxx xxx (F) ... (G) Income payments to certain brokers and agents. On gross commissions of customs, insurance, stock, real estate, immigration and commercial brokers, and fees of agents of professional entertainers. Ten percent (10%) (H) ... (I) Professional fees paid to medical practitioners. Any amount collected for and paid to medical practitioners (includes doctors of medicine, doctors of veterinary science and dentists) by hospitals and clinics or paid directly to the medical practitioners by patients who were 'admitted and confined' to such Hospitals or Clinics. Ten percent (10%) a) It shall be the duty and responsibility of the Hospital or Clinic to remit taxes withheld from the following: IaCHTS xxx xxx xxx b) Exception The withholding tax herein prescribed shall not apply whenever there is proof that no professional fee has in fact been charged by the medical practitioner and paid by his patient. Provided, however, that this fact is shown in a sworn declaration jointly executed by the medical practitioner, and the patient or his duly authorized representative, in case the patient is a minor or otherwise incapacitated. This sworn declaration, to be executed in the form presented in Annex "A" of these Regulations, shall form part of the records of the hospital or clinic and shall constitute as part of its records and shall be made readily available to any duly authorized Revenue Officer for tax audit purpose. Provided, further, that the said administrator of the hospital or clinic shall inform the Revenue District Office having jurisdiction over such hospital or clinic about any medical practitioner who fails or refuses to execute the sworn statement herein prescribed, within ten (10) days from the occurrence of such event. c) Hospitals and Clinics shall submit the names and addresses of medical practitioners in the following classifications, every 15th day after the end of each calendar quarter, to the Collection Division of the Revenue Region for non-large taxpayers and at the Large Taxpayers Document Processing and Quality Assurance Division (LTDP&QAD) in the National Office or Large Taxpayers District Office (LTDO) in the Region for large taxpayers,
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where such hospital or clinic is registered, using the prescribed format. xxx xxx xxx d) For this purpose, the term 'medical practitioners' includes, medical technologists, allied health workers (e.g., occupational therapists, physical therapists, speech therapists, nurses etc.) and other medical practitioners who are not under an employer-employee relationship with the hospital or clinic. e) Hospitals and clinics shall be responsible for the accurate computation of professional fees paid directly to hospitals and clinics and timely remittance of 10% expanded withholding tax. The list of all income recipients-payees in this Subsection shall be included in the Alphalist of Payees Subject to Expanded Withholding Tax attached to BIR Form No. 1604-E (Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax). xxx xxx xxx (N) Income payments by government. Income payments, except any casual or single purchase of P10,000.00 and below, which are made by a government office, national or local including barangays, or their attached agencies or bodies, and government-owned or controlled corporations, on their purchases of goods from local suppliers Two percent (2%); A government-owned or controlled corporation shall withhold the tax in its capacity as a government-owned or controlled corporation rather than as a corporation stated in Subsection (M) hereof. (O) Commissions of independent and exclusive distributors, medical/technical and sales representatives, and marketing agents of multi-level marketing companies. On gross commissions paid by multi-level marketing companies to independent and exclusive distributors, medical/technical and sales representatives, and marketing agents and sub-agents on their sale of goods or services by way of direct selling or similar arrangements. Ten percent (10%); 'Multi-level marketing' is a system of direct selling in which consumer products are sold by individuals where consumer products and services are supplied by an established multi-level marketing company who encourages the distributor to build and manage his own sales force by recruiting, motivating, and training others to sell the product or service. A percentage on the sales of the distributor's sales force would be his compensation in addition to his personal sales. 'Multi-level marketing companies' means any entity that is engaged in the sale of its products or services through individual that directly sell such products or services to the consumers. (P) Tolling fees paid to refineries. On the gross processing/tolling fees paid to refineries for the conversion of molasses to its by-products and raw sugar to refined sugar Five percent (5%) (Q) Payments made by pre-need companies to funeral parlors. On gross payments made by pre-need companies to funeral parlors for funeral services rendered. One percent (1%) (R) Payments made to embalmers. On gross payments made to embalmers for embalming services rendered to funeral companies. One percent (1%) For purposes of these regulations, all income payments paid to sub-agents or their equivalent, whether paid directly or indirectly by the agent or the owner of the goods, shall be subject to withholding tax in the same manner as that of the agent." SECTION 3. Persons required to deduct and withhold. Section 2.57.3 of Revenue Regulations No. 2-98 is hereby amended to read as follows: "Sec. 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 and barangays." SECTION 4. Exemption from Withholding. Section 2.57.5 of Revenue Regulations No. 2-98 is hereby amended to read as follows: "Sec. 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 agencies and its instrumentalities including provincial, city, municipal governments and barangays except government-owned and controlled corporations. (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: aIETCA (1) ... (2) Corporations duly registered with the Board of Investments, Philippine Export Processing Zones and Subic Bay Metropolitan Authority enjoying exemption from income tax pursuant to E.O. 226, as amended, R.A. 7916, the Omnibus Investment Code of 1997 and R.A. 7227, as amended, respectively; (3) ...
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(4) General professional partnerships (5) Joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal & other energy operations pursuant to an operating or consortium agreement under a service contract with the government. SECTION 5. Registration. Sec. 2.58.2 of Revenue Regulations No. 2-98 is hereby amended to read as follows: "Sec. 2.58.2. Registration Registration with the Register of Deeds. . . . The Register of Deeds shall annotate on the Original Certificate of Title, Transfer Certificate of Title or Condominium Certificate of Title of the said property such information required under Section 58(E) of the Tax Code. In case of any violation of the said requirement, he shall be liable to the penalties provided under Section 269 of the said Tax Code." SECTION 6. Requirements for Deductibility of Certain Expenses. Section 2.58.5 of Revenue Regulations No. 2-98 is hereby amended to read as follows: "Sec. 2.58.5. Requirements 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 pays the tax due thereon and the withholding agent pays the tax including the interest incident to the failure to withhold the tax, and surcharges, if applicable, at the time of the audit investigation or reinvestigation/reconsideration. (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 audit/investigation or reinvestigation/reconsideration. (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 audit/investigation or reinvestigation/reconsideration." SECTION 7. Withholding of Value Added Tax. Section 4.114 of Revenue Regulations No. 2-98 is hereby amended to read as follows: "Sec. 4.114. Withholding Of Value Added Tax. In general, value-added tax due on the sale of goods and services are not subject to withholding since the tax is not determinable at the time of sale. However, gross payments to non-residents by both government and private entities for services rendered in the Philippines shall be subject to final withholding tax at the rate of 10% to be filed and paid using BIR Form No. 1600 Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld. Moreover, sale of goods and services subject to VAT to the government shall be subject to withholding pursuant to Sec. 114(C) of the National Internal Revenue Code of 1997. (A) Rates and basis of 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/service providers who are subject to the value-added tax On gross selling price for the purchase of goods (creditable) 3% On gross payment for services rendered (creditable) 6% (2) Payments made to government public works contractors (creditable) 8.5% (3) Payments for services rendered in the Phils. by non-residents
For lease or use of property or property rights owned by non-residents in the Phils. (final) 10% Services rendered to local insurance companies, with respect to reinsurance premiums payable to non-resident insurance or reinsurance companies (final) 10% Other services rendered in the Phil. by non-residents (final) 10% (B) Persons required to deduct and withhold. All local government units, represented by the Provincial Treasurer in the provinces, the City Treasurer in the cities, the Municipal Treasurer in the municipalities, and Barangay Treasurer in the barangays, Treasurers of GOCCs and the Chief Accountants or any person holding similar
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position and performing similar function in government offices and GOCCs, as withholding agents, shall deduct and withhold the value-added tax before making any payment to the seller of goods and services. Where the government as herein defined has regional offices, branches or units, the withholding and remittance of the VAT withheld 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 VAT before making any payment to the seller of goods and services. Decentralized remittance, however, is not applicable if the taxpayerwithholding agent is classified as large taxpayer by the Commissioner of Internal Revenue. AcICHD Private entities are likewise considered as withholding agents on gross payments made to non-residents, applying the final withholding tax rate of ten (10%) percent. (C) Returns and payment of taxes withheld. The withholding agents shall accomplish the Monthly Remittance Returns of Value-Added Tax and Other Percentage Taxes Withheld (BIR Form No. 1600) in triplicate and the amount withheld paid upon filing the return with the authorized agent banks under the jurisdiction of the Revenue District Office (RDO)/Large Taxpayers District Office (LTDO) where the withholding agent is required to register and file the return. In places where there is no authorized agent bank, the return shall be filed directly with the Revenue Collection Officer or the duly authorized Municipal/City Treasurer of the Revenue District Office where the withholding agent is required to register or file the return, except in cases where the Commissioner otherwise permits. xxx xxx xxx" SECTION 8. Withholding of Percentage Tax. Section 5.116 of Revenue Regulations No. 2-98 is hereby amended to read as follows: "Sec. 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 percentage 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: xxx xxx xxx (12) On gross payments to stock, real estate, commercial, customs, insurance and immigration brokers based on gross receipts for services rendered pursuant to R.A. 9010. Seven percent (7%). (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 Remittance Return of VAT and Other Percentage Taxes Withheld (BIR Form No. 1600) in triplicate to be filed and the tax to be paid to the Authorized Agent Bank under the jurisdiction of the Large Taxpayers Service including the Large Taxpayer's District Office, in case of large taxpayer, or the Authorized Agent Bank under the jurisdiction of the Revenue District Office where the withholding agent is located, for non-large taxpayer. In places where there are no authorized agent bank, the return shall be filed directly with the Revenue Collection Officer or the duly authorized Treasurer of the City or Municipality where the withholding agent is required to register 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 or the withholding tax has accrued. xxx xxx xxx" SECTION 9. Repealing Clause. All existing rules and regulations or any revenue issuances or parts thereof which are inconsistent with the provisions of these regulations are hereby revoked or amended accordingly. SECTION 10. Effectivity. These Regulations shall take effect on October 1, 2002 and shall cover income payments to be paid or payable starting October 2002, which are required to be remitted to the Bureau of Internal Revenue within the month of November. CDESIA (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance RECOMMENDING APPROVAL: (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
March 31, 2003 REVENUE REGULATIONS NO. 17-03 SUBJECT : Amending Further Pertinent Provisions of Revenue Regulations No. 2-98, as Amended, Providing for Additional Transactions Subject to Creditable Withholding Tax; Re-Establishing the Policy that the Capital Gains Tax on the Sale, Exchange or Other Disposition of Real Property Classified as Capital Assets Shall be Collected as a Final Withholding Tax, Thereby Further Amending Revenue Regulations Nos. 8-98 and 13-99, as Amended by Revenue Regulations No. 14-2000; and for Other Purposes TO : All Withholding Agents, Internal Revenue Officers and Employees and Others Concerned SECTION 1. Scope. Pursuant to the provisions of Section 244, in relation to Sections 24(A), 24(D)(1), 25,
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27(A), 27(D)(5), 34(K), 57(A), 57(B), 58, 151, 173, 196 and 245, all of the National Internal Revenue Code of 1997 (Code), as amended, these regulations are hereby promulgated to further amend portions of Revenue Regulations Nos. 2-98 and 13-99, as amended, providing for additional income payments subject to creditable withholding tax; clarifying existing provisions on income payments subject to creditable/expanded withholding tax and the requirements for deductibility of certain payments; providing for withholding as the mode of remitting final capital gains tax on the sale of real property classified as capital asset, and for other purposes. ESAHca SECTION 2. Income Payments Subject To Final Withholding Tax. Sec. 2.57.1 of Revenue Regulations No. 298, as amended, is hereby further amended to read as follows: "Sec. 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. xxx xxx xxx (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 real property values), whichever is higher Six percent (6%). In case of sale on installment of real property classified as capital asset, the procedures stated under Sec. 2.57.2(J) hereof on the sale of real property classified as ordinary asset shall apply with the exception that the withholding tax on the former shall be final whereas that on the latter shall be creditable. In case of dispositions of real property classified as capital asset 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 the normal rate of income tax for individual citizens or residents or under Section 24(D)(1) of the Code for the final tax on the presumed capital gains from sale of property at six percent (6%), at the option of the taxpayer-seller. In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or manager's check in interest-bearing account with an Authorized Agent Bank (AAB) under an Escrow Agreement between the concerned Revenue District Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferor's new principal residence within eighteen (18) calendar months from date of the said sale or disposition. The date of sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of said property. In general, the term "Escrow" means a scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee, promisee or obligee. After depositing the amount representing the six percent (6%) capital gains tax as mentioned above, the Buyer/Transferee and the Seller, shall jointly file, within thirty (30) days from the date of the sale or disposition of the principal residence, with the Revenue District Office having jurisdiction over the property, in duplicate, the Final Capital Gains Tax Return (BIR Form No. 1706, or any form number assigned by the BIR), covering the property bought with no computed tax due stating that the supposed-tax due/amount so withheld by the buyer is maintained in an escrow account, which amount will be used to satisfy future tax liability, if any, on the subject transaction. For purposes of the capital gains tax otherwise due on the sale, exchange or disposition of the said Principal Residence, the execution of the Escrow Agreement referred to in the immediately preceding paragraph shall be considered sufficient. The tax return so filed in pursuance hereof shall bear the addresses of both the seller and the buyer. If within thirty (30) days after the lapse of the aforesaid 18-month period, the Seller/Transferor fails to submit documentary evidence showing that he has utilized the proceeds of sale or disposition of his old principal residence to acquire/construct his new principal residence, he shall be treated as deficient in the payment of his capital gains tax on the sale or disposition of his aforesaid Principal Residence, and shall be accordingly assessed for deficiency capital gains tax, inclusive of penalties and the 20% interest per annum computed from the 31st day after the date of sale/disposition of the said principal residence, pursuant to the provisions of Section 228 of the Code, as implemented by Revenue Regulations No. 12-99, in relation to Section 249 of the said Code. In the issuance of assessments, the Seller shall receive all the required notices following existing procedures. Upon the time that the said deficiency tax assessment has become final and executory, the deposit in escrow, inclusive of its interest earnings, shall be forfeited and applied against the deficiency capital gains tax liability. If the same is insufficient to cover the entire amount assessed, the Seller/Transferor shall remain liable for the remaining balance of the assessment. On the other hand, the excess of the deposit in escrow, if any, shall forthwith be returned to the Seller, by the Bank upon written authorization from the Commissioner or his duly authorized representative. xxx xxx xxx (G) Income Payment to a Domestic Corporation The following items of income shall be subject to a final withholding tax in the hands of domestic corporation, based on the gross amount thereof and at the rate of tax prescribed therefore:
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xxx xxx xxx (5) On capital gains presumed to have been realized from the sale, exchange or other disposition of land and building located in the Philippines classified as capital assets, 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%). In case of sale on installment of real property classified as capital asset, the procedures stated under Sec. 2.57.2(J) hereof on the sale of real property classified as ordinary asset shall apply with the exception that the withholding tax on the former shall be final whereas that on the latter shall be creditable. xxx xxx xxx SECTION 3. Income Payments Subject to Creditable Withholding Tax. Sec. 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 2.57.2. Income payments 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: xxx xxx xxx (C) Rentals xxx xxx xxx (2) Personal properties. On gross rental or lease in excess of Ten Thousand Pesos (P10,000.00) annually for the continued use or possession of personal property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity, except those under financial lease arrangements with leasing and finance companies authorized to operate under Republic Act No. 8556 (Financing Company Act of 1998). Five percent (5%) xxx xxx xxx (E) Income payments to certain contractors On gross payments to the following contractors, whether individual or corporate Two percent (2%) xxx xxx xxx (3) Other contractors xxx xxx xxx (k) Labor recruiting agencies and/or "labor-only" contractors. For this purpose, any person who undertakes to supply workers to an employer shall be deemed to be engaged in "labor-only" contracting where such person does not have substantial capital or investment in the form of tools, equipment, machineries, work premises and other materials and the workers recruited and placed by such person are performing activities which are directly related to the principal business or operations of the employer which the workers are habitually employed; STcHDC xxx xxx xxx (G) Income payments to certain brokers and agents. On gross commissions or service fees of customs, insurance, stock, real estate, immigration and commercial brokers and fees of agents of professional entertainers. Ten percent (10%); xxx xxx xxx (I) Professional fees paid to medical practitioners. Any amount collected for and paid to medical practitioners (includes doctors of medicine, doctors of veterinary science and dentists) by hospitals and clinics, or paid directly to the medical practitioners by patients who were 'admitted and confined' to such Hospitals or Clinics, or paid directly to such medical practitioners by health maintenance organizations (HMOs) and/or similar establishments which is likewise covered by Section 2.57.2 (A)(1). Ten percent (10%); xxx xxx xxx d) For this purpose, the term 'medical practitioners' shall likewise include medical technologists, allied health workers (e.g., occupational therapists, physical therapists, speech therapists, nurses, etc.) and other medical practitioners who are not under an employer-employee relationship with the hospital, clinic or HMO and other similar establishments. xxx xxx xxx (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 classified as ordinary asset. . . . xxx xxx xxx If the buyer is an individual not engaged in trade or business, the following rules shall apply: (i) If the sale is a sale of property on the installment plan (i.e., payments in the year of sale do not exceed twenty five percent (25%) of the selling price), no withholding is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or fair market value of the property at the time of the execution of the contract to sell, whichever is higher, shall be withheld on the last installment or installments immediately prior to such last installment, if the last installment is not sufficient to cover the tax due, to be paid to the seller until the tax is fully paid. (ii) ... However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply: (i) If the sale is a sale of property on the installment plan [i.e., payments in the year of sale do not exceed twenty five percent (25%) of the selling price], the tax shall be deducted and withheld by the buyer from every
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installment which tax shall be based on the ratio of actual collection of the consideration against the agreed consideration appearing in the Contract to Sell applied to the gross selling price or fair market value of the property at the time of the execution of the Contract to Sell, whichever is higher. The term 'consideration' refers to the selling price exclusive of interest. Interest earned as an incident of installment payment, if any, shall be subject to the ordinary income tax rate. (ii) ... In any case, no Certificate Authorizing Registration (CAR)/Tax Clearance Certificate (TCL), shall be issued to the buyer unless the withholding tax due on the sale, transfer, or exchange of real property has been fully paid. For sale of property on installment basis or deferred payment basis where the Contract to Sell is always executed before the execution of the Deed of Sale, the said Contract to Sell must be attached to the Deed of Absolute Sale executed upon completion of the payments and the duly notarized original duplicate copy of both documents must be presented to the RDO having jurisdiction of the place where the property is located for validation of the correctness of issuance of CAR/TCL. It is to be noted, however, that in case of sale of real property paid under installment payment or deferred payment basis, the payment of the documentary stamp tax (DST) shall accrue upon the execution of the Deed of Absolute Sale but the basis for the imposition thereof shall be the gross selling price or fair market value of the property, whichever is higher, at the time of the execution of the Contract to Sell. If upon completion of the payment of the purchase price of real property classified as ordinary asset, but before the execution of the Deed of Sale, the buyer decides to assign his right over the property to another person for a consideration, the assignment shall be considered a separate sale of real property and, therefore, subject to the creditable/expanded withholding tax (EWT) or final withholding of capital gains tax, as the case may be, which shall be withheld by the assignee of such property based on the consideration per Deed of Assignment or the fair market value of such property at the time of assignment, whichever is higher, and to the DST imposed under Sec. 196 of the same Code using the same basis. It is to be clarified, however, that sale of interest in real property (real property purchased on installment covered by Contract to Sell which was sold by the original buyer before it was fully paid) shall be taxable on the part of the original buyer (now seller) based on the realized gain thereon which is measured by the difference between the agreed consideration and the amount actually paid by the said original buyer. xxx xxx xxx (M) Income payments made by the top ten thousand (10,000) private corporations to their local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. Income payments made by any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, to their local/resident supplier of goods and local/resident supplier of services, including non-resident alien engaged in trade or business in the Philippines Supplier of goods One percent (1%) Supplier of services Two percent (2%) Top ten thousand (10,000) private corporations shall include a corporate taxpayer who has been determined and notified by the Bureau of Internal Revenue (BIR) as having satisfied any of the following criteria: a) Classified and duly notified by the Commissioner as a large taxpayer under Revenue Regulations No. 1-98, as amended (automatic inclusion); b) Any taxpayer with net VAT paid or payable for the preceding year of at least P100,000.00; c) Any taxpayer with annual income tax paid or payable for the preceding year of at least P200,000.00; d) Any taxpayer with percentage taxes for the preceding year of at least P100,000.00; e) Any taxpayer whose gross sales for the preceding year is over P10,000,000.00; or f) Any taxpayer whose gross purchases for the preceding year is over 5,000,000.00. The term "goods" pertains to tangible personal property. It does not include intangible personal property as well as real property. The term "local/resident supplier of goods" pertains to a supplier from whom any of the top ten thousand (10,000) private 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 ten thousand pesos (P10,000.00) or more shall be subject to a withholding tax. The term "regular suppliers" refers to suppliers who are engaged in business or exercise of profession/calling with whom the taxpayer-buyer has transacted at least six (6) transactions, regardless of amount per transaction, either in the previous year or current year. The same rules apply to local/resident supplier of services other than those covered by separate rates of withholding tax. CDAHaE 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 ten thousand (10,000) private corporations. Any corporation which has been duly classified and notified as large taxpayer by the Commissioner pursuant to RR 198, as amended, shall be automatically considered one of the top ten thousand (10,000) private corporations, provided, however, that its authority as a withholding agent shall be effective only upon receipt of written notice from the Commissioner that it has been classified as a large taxpayer, as well as one of the top ten thousand (10,000)
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private corporations, for purposes of these regulations. Any corporation shall remain a withholding agent for purposes of these regulations, unless the Commissioner notifies it in writing that it shall cease to be one. The following, however, are some of the reasons that a taxpayer shall automatically cease to be a withholding agent, and therefore no prior written notice, for purposes of these Regulations, is required, to wit: a) closure/cessation of business/dissolution (for taxpayer with notice of dissolution given to the BIR), b) merger/consolidation (for dissolved or absorbed corporation); c) any other form of business combination wherein by operation of law a corporate taxpayer loses its juridical personality. The withholding agent shall submit on a semestral basis a list of regular suppliers of goods and/or services to the Large Taxpayers Assistance Division/Large Taxpayers District Office in the case of large taxpayers duly notified as such pursuant to RR 1-98, as amended, or Revenue District Office having jurisdiction over the withholding agent's principal place of business on or before July 31 or January 31 of each year. A government-owned or controlled corporation previously classified as one of the top five thousand (5,000) corporations under RR 14-94, as amended, shall cease to be a withholding agent or included in the top ten thousand (10,000) private corporations for purposes of these regulations but rather shall be treated as one under the succeeding sub-section (N) since it is already withholding two percent (2%) of the amount paid for the purchase of goods/services from local/resident suppliers. The Commissioner of Internal Revenue may recommend to the Secretary of Finance the amendment/modification to any or all of the criteria in the determination and selection of taxpayers forming part of the top ten thousand (10,000) private corporations after considering such factors as inflation, volume of business, and similar factors. Provided, however, That the Commissioner is empowered to conduct periodic review as to the number of taxpayers who ceased to qualify under the category of top ten thousand private corporations for purposes of delisting them or excluding them from the list and to identify taxpayers to be added to the list of top 10,000 private corporations. The top ten thousand (10,000) private corporations will be announced through the issuance of a Revenue Memorandum Circular to be issued for this purpose. All taxpayers previously included in the list of Top 5,000 Corporations under RR 12-94, as amended, shall continue to withhold the one percent (1%) withholding tax (which shall become 1% for supplier of goods and 2% for supplier of services upon the effectivity of these Regulations) unless any of the following situations occur: (a) the Commissioner communicates in writing that they have ceased to qualify as taxpayers includible in the list of top ten thousand private corporations, or (b) those officially identified to have ceased business operations, or undergone any of the business combinations wherein by operation of law the juridical personality of said taxpayers ceased. (N) Income payments made by the government to its local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. Income payments, except any casual or single purchase of P10,000.00 and below, which are made by a government office, national or local, including barangays, or their attached agencies or bodies, and government-owned or controlled corporations, on their purchases of goods and purchases of services from local/resident suppliers Two per cent (2%). A government-owned and controlled corporation shall withhold the tax in its capacity as a government-owned and controlled corporation rather than as a corporation stated in Subsection (M) hereof. (O) Commissions of independent and/or exclusive sales representatives, and marketing agents of companies. On gross commissions, rebates, discounts and other similar considerations paid/granted to independent and/or exclusive sales representatives and marketing agents and sub-agents of companies, including multi-level marketing companies, on their sale of goods or services by way of direct selling or similar arrangements where there is no transfer of title over the goods from the seller to the agent/sales representative. Ten percent (10%) xxx xxx xxx (S) Income payments made to suppliers of agricultural products. Income payments made to regular agricultural suppliers such as those, but not limited to, payments made by hotels, restaurants, resorts, caterers, food processors, canneries, supermarkets, livestock, poultry, fish and marine food products dealers and all other establishments, except for income payments to casual agricultural suppliers where the annual gross purchases therefrom do not exceed P20,000 One Percent (1%) The term "regular agricultural suppliers" refers to suppliers with whom the taxpayer has transacted at least six (6) transactions, regardless of amount per transaction, either in the previous or current year. The term "casual agricultural supplier" refers to suppliers who did not qualify as regular agricultural supplier as defined in the preceding statement. The term "agricultural suppliers" refers to suppliers/sellers of agricultural and marine food products, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. "Livestock" shall include cows, bulls and calves, pigs, sheep, goats and other animals similar thereto. "Poultry" shall include fowls, ducks, geese, turkey and others similar thereto. "Marine food products" shall include fish and crustaceans, such as but not limited to, eels, trout, lobsters, shrimps, prawns, oysters, mussels and clams. Meat, fruits, fish, vegetables and other agricultural and marine food products, even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying salting, smoking or stripping,
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including those using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pak and other similar packaging method, shall still be covered by this subsection. Polished and/or husked rice, corn grits, locally produced raw cane sugar and ordinary salt shall be considered as agricultural food products. (T) Income payments on purchases of minerals, mineral products and quarry resources as defined and discussed in Section 151 of the Code. Income payments on purchases of minerals, mineral products, and quarry resources such as but not limited to silver, gold, marble, granite, gravel, sand, boulders and other materials/products One percent (1%)" SECTION 4. Persons Required To Deduct And Withhold. Section 2.57.3 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 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) ... (B) An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sales, exchanges or transfers of real property are concerned, the buyers, whether or not engaged in trade or business, are constituted as withholding agents. In any case, no Certificate Authorizing Registration (CAR)/Tax Clearance Certificate (TCL) shall be issued to the buyer unless the withholding tax due on the sale, transfer or exchange of real property has been duly paid." Since the tax herein involved and being withheld is income tax, the burden of the tax is really upon the seller although the mode of payment of the tax is through withholding by the buyer. As such, the tax withheld is considered a part of the consideration agreed between the seller and buyer resulting, therefore, to a net take to the seller of only the difference between the agreed consideration/selling price and the tax withheld. (C) . . ." SECTION 5. Returns And Payments Of Taxes Withheld At Source. Section 2.58 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 2.58. RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE. (A) Monthly return and payment of taxes withheld at source. (1) ... (2) WHEN TO FILE (a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final (including 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 payments should be made, within ten (10) days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the following year; and except for the final capital gains tax on the sale or other onerous disposition of real property considered as capital asset which must be taken/withheld from the seller by the buyer and remitted within thirty (30) days from the date of notarization of the transfer document to the collecting agent of the RDO having jurisdiction over the place where the property is located. TCaEIc Nonetheless, in case of disposition of real property classified as capital asset by an individual to the government, the tax to be imposed shall be determined either under the normal income tax rate imposed in Sec. 24(A) or under a final capital gains tax of six percent (6%) imposed under Sec. 24(D)(1) of the Code, at the option of the taxpayer-seller. Thus, if the seller chooses the first option, the buyer does not have to withhold the six percent (6%) final capital gains tax but no Certificate Authorizing Registration shall be issued for the transaction until the seller or the buyer shows the seller's filed income tax return reflecting the result of the subject real estate transaction. (b) With respect, however, to taxpayers, whether large or non-large, who availed of the electronic filing and payment system (EFPS), the deadline for electronically filing the applicable withholding tax returns and paying the taxes due thereon via the EFPS shall be five (5) days later than the deadlines set above, unless the EFPS regulations provide for different deadline dates and except for the final capital gains tax on the sale, barter or exchange of real property where the law fixes a definite deadline for the payment thereof." SECTION 6. Requirements For Deductibility Of Certain Income Payments. Section 2.58.5 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 2.58.5. Requirements 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) . . .; (B) . . .; (C) . . .; Items of deduction representing return of capital such as those pertaining to purchases of raw materials forming part of finished product or purchases of goods for resale, shall be allowed as deductions upon the withholding agent's payment of the basic withholding tax and penalties incident to non-withholding or underwithholding." SECTION 7. Withholding Of Percentage Tax. Section 5.116(A) of Revenue Regulations 2-98, as amended by
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Revenue Regulations 14-2002, is hereby further amended to exclude paragraph 12 from the enumeration of income payments subject to withholding of percentage tax which shall no longer apply due to the lapse of Republic Act No. 9010. SECTION 8. Repealing Clause. Portions of Revenue Regulations No. 8-98 which require that the capital gains tax return shall be filed by the seller is hereby repealed. Pertinent portions of RR No. 13-99, as amended by RR No. 14-2000, and of all other existing rules and regulations such as Revenue Regulations No. 2-98, as amended, or of any revenue issuances or parts thereof which are inconsistent with the provisions of these Regulations are hereby revoked, repealed or amended accordingly. SECTION 9. Effectivity. These Regulations shall take effect on June 1, 2003 or after fifteen (15) days following publication in the newspaper of general circulation, whichever comes later and shall cover income payments made starting June 1, 2003. TAIaHE (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance Recommending Approval: (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
REVENUE REGULATIONS NO. 30-03, Supra, page 127
January 14, 2004 REVENUE REGULATIONS NO. 01-04 SUBJECT : Amending Further Sec. 2.57.2(S) of Revenue Regulations No. 2-98, as Last Amended By Revenue Regulations No. 30-2003, Exempting Marginal Income Earners From Creditable Withholding Tax on Payments Made By Hotels, Restaurants, Resorts, Caterers, Food Processors, Canneries, Supermarkets, Livestock, Poultry, Fish and Marine Product Dealers, Hardwares, Factories, Furniture Shops, and All Other Establishments TO : All Internal Revenue Officers, Employees and Others Concerned SECTION 1. Scope. Pursuant to the provisions of Section 244, in relation to Sections 57(A) and (B) of the Tax Code of 1997, these regulations are hereby promulgated to further amend portions of Revenue Regulations No. 2-98, as last amended by Revenue Regulations No. 30-2003, exempting marginal income earners from creditable withholding tax on payments made by hotels, restaurants, resorts, caterers, food processors, canneries, supermarkets, livestock, poultry, fish and marine product dealers, hardwares, factories, furniture shops, and all other establishments. ScHAIT SECTION 2. Income Payments Subject to Creditable Withholding Tax. Sec. 2.57.2(S) of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon. xxx xxx xxx (S) Income payments made to suppliers of agricultural products. Income payments made to agricultural suppliers such as those, but not limited to, payments made by hotels, restaurants, resorts, caterers, food processors, canneries, supermarkets, livestock, poultry, fish and marine products dealers, hardwares, factories, furniture shops and all other establishments, except for income payments to marginal income earners which, as defined in Revenue Regulations 11-2000 dated December 12, 2000, refer to individuals not otherwise deriving compensation as an employee under an employee-employer relationship, but who are self-employed and deriving gross sales/receipts not exceeding P100,000.00 during any 12-month period. One percent (1%) The term "agricultural suppliers" refers to suppliers/sellers of agricultural, forest and marine food and non food products, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefore. "Livestock" shall include cows, bulls and calves, pigs, sheep, goats and other animals similar thereto. "Poultry" shall include fowls, ducks, geese, turkey and others similar thereto. "Marine products" shall include fish and crustaceans such as but not limited to, eels, trout, lobsters, shrimps, prawns, oysters, mussels and clams, shells and other aquatic products. xxx xxx xxx." SECTION 3. Repealing Clause. All existing revenue regulations and other issuances or portions thereof that are not inconsistent herewith are hereby revoked, repealed or amended accordingly. SECTION 4. Effectivity. These regulations shall retroact to January 1, 2004. CEDScA (SGD.) JUANITA D. AMATONG Secretary of Finance Recommending Approval: (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
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March 1, 2004 REVENUE REGULATIONS NO. 03-04 SUBJECT : Suspending the implementation of withholding tax on income payments made to suppliers of agricultural products under Section 2.57.2(S) of Revenue Regulations 2-98, as amended by RR 17-2003, further amended by RR 30-2003 and 1-2004 TO : All Withholding Agents, Internal Revenue Officers and Employees and Others Concerned SECTION 1. Scope. Pursuant to the provisions of Section 244, in relation to Section 57(B) of the Tax Code of 1997, these regulations are hereby promulgated to suspend the implementation of Section 2.57.2 (S) of Revenue Regulations No. 2-98, as amended by Revenue Regulations Nos. 17-2003, 30-2003, and 1-2004; which provides as follow: IAETSC "(S) Income payments made to suppliers of agricultural products. Income payments made to agricultural suppliers such as those, but not limited to, payments made by hotels, restaurants, resorts, caterers, food processors, canneries, supermarkets, livestock, poultry, fish and marine products dealers, hardwares, factories, furniture shops and all other establishments, except for income payments to marginal income earners which, as defined in Revenue Regulations 11-2000 dated December 12, 2000, refer to individuals not otherwise deriving compensation as an employee under an employee-employer relationship, but who are self-employed and deriving gross sales/receipts not exceeding P100,000.00 during any 12-month period. One percent (1%). The term "agricultural suppliers" refers to suppliers/sellers of agricultural, forest and marine food and non-food products, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefore. "Livestock" shall include cows, bulls and calves, pigs, sheep, goats and other animals similar thereto. "Poultry" shall include fowls, ducks, geese, turkey and others similar thereto. "Marine products" shall include fish and crustaceans, such as but not limited to, eels, trout, lobsters, shrimps, prawns, oysters, mussels and clams, shells and other aquatic products. Meat, fruits, fish, vegetables and other agricultural and marine food products, even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, smoking or stripping, including those using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pak and other similar packaging method, shall still be covered by this subsection. Polished and/or husked rice, corn grits, locally produced raw cane sugar and ordinary, salt shall be considered as agricultural food products." SECTION 2. Rationale. In relation to the proper implementation of above-quoted Section 2.57.2 (S) of Revenue Regulations Nos. 2-98, as amended, the Bureau recognizes that there is a need: 1. to conduct a comprehensive and extensive public education and information campaign to ensure its uniform implementation in all regions all over the country, and 2. to establish and maintain the necessary systems and control measures in order to ensure that the withholding tax agents properly report and remit the amount of taxes actually withheld. SECTION 3. Suspension. In view of the foregoing, the implementation of the above-quoted Section 2.57.2 (S) of Revenue Regulations Nos. 2-98, as amended, is hereby suspended until further notice. HCEaDI SECTION 4. Action Programs. Pending the lifting of the suspension of the implementation of the abovequoted Section 2.57.2(S) of Revenue Regulations Nos. 2-98, as amended, the following action programs shall be undertaken immediately: 1. Education and information program for Taxpayers end Revenue Officials. 2. Development and implementation of an information and control system to ensure the proper reporting and remittance of the amounts withheld by the withholding agents. 3. Audit of withholding agents on their purchases of agricultural products from June 1, 2003 to February 29, 2004; Regional Directors and Revenue District Officers shall obtain from agricultural suppliers in their respective jurisdictions information on transactions entered into by said suppliers for which taxes were withheld and determine if these have been properly reported and remitted, otherwise they shall take the necessary measures to collect said taxes. SECTION 5. Transitory Provision. All withholding made on income payments in relation to Section 2.57.2 (S) of Revenue Regulations Nos. 2-98, prior to the effectivity of this Regulations shall be reported and remitted by the withholding agent to the Bureau on or before the tenth of the following month for which the amount was withheld, provided, however, that the deadline for electronic filing shall be in accordance with the rules and regulations governing EFPS. Provided, further, that in order for any income payments made prior to the effectivity of this Regulations to be deductible against the withholdings agent's income, the amount required under the above quoted Sec. 2.57.2 (S) of Revenue Regulations No. 2-98, as amended, must have been properly withheld, reported and remitted. SECTION 6. Effectivity. This Regulations shall take effect beginning March l, 2004. Provisions of existing rules and regulations not otherwise inconsistent with this regulations shall continue to be in force. AcDaEH (SGD.) JUANITA D. AMATONG Secretary of Finance Recommending Approval:
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(SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
December 29, 2005 REVENUE REGULATIONS NO. 01-06 SUBJECT : Amendments to Sections 2.78.1(B), Section 2.79(A) and (F), 2.83.4(C) and 2.83.5 of Revenue Regulations No. 2-98, as Amended TO : All Internal Revenue Officers and Others Concerned Pursuant to Section 244 in relation to Section 79(A) of the National Internal Revenue Code of 1997, as amended, these Regulations are hereby promulgated to amend Sections 2.78.1(B), Section 2.79(A) and (F), 2.83.4(C) and 2.83.5 of Revenue Regulations No. 2-98, as amended, with respect to the withholding of income tax on compensation income received by minimum wage earners. SECTION 1. Section 2.78.1(B) of Revenue Regulations No. 2-98, as amended, is hereby amended to read as follows: "SECTION 2.78.1. Withholding of Income Tax on Compensation Income. xxx xxx xxx "(B) Exemptions from withholding tax on compensation. The following income payments are exempted from the requirement of withholding tax on compensation: xxx xxx xxx "(13) COMPENSATION INCOME OF INDIVIDUALS THAT DO NOT EXCEED THE STATUTORY MINIMUM WAGE OR FIVE THOUSAND PESOS (PHP5,000.00) PER MONTH (SIXTY THOUSAND PESOS [PHP60,000.00] A YEAR), WHICHEVER IS HIGHER." "(14) COMPENSATION INCOME OF EMPLOYEES OF THE GOVERNMENT OF THE PHILIPPINES, OR ANY OF ITS POLITICAL SUBDIVISIONS, AGENCIES OR INSTRUMENTALITIES, WITH SALARY GRADES 1 TO 3." SECTION 2. Section 2.79(A) and (F) of Revenue Regulations No. 2-98, as amended, is hereby amended to read as follows: "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 COMPENSATION INCOME OF (1) INDIVIDUALS THAT DO NOT EXCEED THE STATUTORY MINIMUM WAGE OR FIVE THOUSAND PESOS (PHP5,000.00) PER MONTH (SIXTY THOUSAND PESOS [PHP60,000.00] A YEAR), WHICHEVER IS HIGHER, AND (2) EMPLOYEES OF THE GOVERNMENT OF THE PHILIPPINES, OR ANY OF ITS POLITICAL SUBDIVISIONS, AGENCIES OR INSTRUMENTALITIES, WITH SALARY GRADES 1 TO 3, SHALL NOT BE SUBJECT TO WITHHOLDING TAX. "THE AFOREMENTIONED INDIVIDUALS WHOSE COMPENSATION INCOME IS NOT SUBJECT TO WITHHOLDING TAX SHALL REMAIN LIABLE FOR INCOME TAXES AND SHALL CONTINUE TO FILE THEIR ANNUAL INCOME TAX RETURNS AND PAY THE INCOME TAXES DUE THEREON, IF ANY, NOT LATER THAN APRIL 15 OF THE YEAR IMMEDIATELY FOLLOWING THE TAXABLE YEAR. xxx xxx xxx "(F) Requirement for Deductibility. The provisions of Sec. 2.58.5 of these Regulations shall apply. PROVIDED, THAT COMPENSATION INCOME WHERE NO INCOME TAXES WERE WITHHELD PURSUANT TO SECTION 2.79(A) OF THESE REGULATIONS, SHALL BE ALLOWED AS A DEDUCTION FROM AN EMPLOYER'S GROSS INCOME WHEN THE REQUIRED EMPLOYEES WITHHOLDING STATEMENT (BIR FORM NO. 2316) HAVE BEEN ISSUED TO SUBJECT EMPLOYEES IN ACCORDANCE WITH SECTION 2.83.1 OF RR 2-98. PROVIDED, FURTHER, THAT THE ALPHABETICAL LIST OF THE SUBJECT EMPLOYEES SHALL BE SUBMITTED UNDER SCHEDULE 7.2 OF BIR FORM NO. 1604-CF IN ACCORDANCE WITH SECTION 2.83.2 OF RR 2-98." xxx xxx xxx" SECTION 3. Section 2.83.4(C) of Revenue Regulations No. 2-98, as amended, is hereby amended to read as follows: "SECTION 2.83.4. Substituted Filing of Income Tax Returns by Employees Receiving Purely Compensation Income. . . . . xxx xxx xxx The following individuals, however, are not qualified for substituted filing and therefore, still required to file BIR Form No. 1700 in accordance with existing regulations: xxx xxx xxx "(C) EMPLOYEES WHOSE GROSS COMPENSATION INCOME DO NOT EXCEED THE STATUTORY MINIMUM WAGE OR FIVE THOUSAND PESOS (PHP5,000.00) PER MONTH (SIXTY THOUSAND PESOS [PHP60,000.00] A YEAR), WHICHEVER IS HIGHER, INCLUDING EMPLOYEES OF THE GOVERNMENT OF THE PHILIPPINES, OR ANY OF ITS POLITICAL SUBDIVISIONS, AGENCIES OR INSTRUMENTALITIES, WITH SALARY GRADES 1 TO 3."
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xxx xxx xxx" SECTION 4. Section 2.83.5 of Revenue Regulations No. 2-98, as amended, is hereby amended to read as follows: "SECTION 2.83.5. Registration as Withholding Agent. Every person who makes payment or expects to make payment of compensation in AN AMOUNT EXCEEDING THE STATUTORY MINIMUM WAGE OR SIXTY THOUSAND PESOS (P60,000.00) A YEAR (FIVE THOUSAND PESOS [PHP5,000.00] MONTHLY), WHICHEVER IS HIGHER, 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 5. Effectivity. These Regulations shall take effect on 1 January 2006. Provisions of existing rules and regulations not otherwise inconsistent with these regulations shall continue to be in force. (SGD.) MARGARITO B. TEVES Secretary of Finance Recommending Approval: (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue
November 16, 2004 REVENUE MEMORANDUM CIRCULAR NO. 72-04 SUBJECT : Clarification of Issues on the Additional Transactions Subject to Creditable Withholding Tax under Revenue Regulations No. 17-2003 (RR 17-2003), as amended by RR 30-2003, RR 1-2004 and RR 3-2004 TO : All Withholding Agents, Internal Revenue Officers and Employees and Others Concerned I. BASIS OF WITHHOLDING TAX Q1. What shall be the basis of expanded withholding tax (EWT) or creditable withholding tax (CWT) on payments made to a Non-VAT registered supplier of goods or services? A1. The basis shall be the gross billing. EDISaA Example of income payment to NON-VAT registered contractor: Gross Billing on Services P100,000.00 Less: 2% EWT x P100,000.00 2,000.00 Net amount due the payee P98,000.00 ========= Q2. What shall be the basis of CWT to a VAT registered supplier of goods and services? A2. The basis shall be the gross amount paid exclusive or net of VAT. Example of income payment to VAT registered contractor: Gross amount paid P110,000.00 Less: 2% EWT (P110,000.00 x 10/11 x 2%) 2,000.00 Amount due the payee P108,000.00 ========= Q3. What shall be the basis of EWT in case goods and services are not billed separately on purchases made by the Top 10,000 Private Corporations (TTC)/Government Office (GO)/Large Taxpayer (LT)? A3. In cases where purchase of goods are separately billed from purchase of service, the applicable rate of 1% on goods and 2% on services shall be applied respectively. However, in case of failure to separately bill goods and services, the higher rate of 2% shall apply. Q4. On rentals of personal property in excess of P10,000.00 per year under Section 2.57.2(C)(2) of RR 2-98 as amended by RR 17-2003, what will be the basis of the 5% EWT considering the following payments for taxable year 2003 and on what month will the payor withhold the tax? June P3,000.00 July 3,000.00 August 3,000.00 September 5,000.00 TOTAL P14,000.00 ========= A4. The basis of the 5% EWT shall be the total amount of P14,000.00 to be deducted from the September payment since it is the period when it exceeded the threshold of P10,000.00/annum. However, if the withholding agent reasonably expects that the annual rental will exceed P10,000.00, then it may start withholding on the first month in the above example (June). "Reasonably expects" is determined when it clearly shows in the documents like lease contract/agreement the amount to be received within a given period. CAIHaE The basis of withholding as applied above shall also be applicable to other income payments with applicable
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threshold amount of income payments. Q5. Could we consider a seller of goods or services as regular supplier if the amount per transaction is only P500.00 but has more than six (6) transactions in a taxable year? A5. The term "regular suppliers" is defined as suppliers who are engaged in business or exercise of profession/calling with whom the taxpayer-buyer has transacted at least six (6) transactions, regardless of amount per transaction, either in the previous year or current year. The threshold amount of less than P10,000.00 applies only to a "single purchase". II. ON INCOME PAYMENTS TO MERALCO, COMMUNICATIONS AND OTHER UTILITY COMPANIES Q6. Are payments to Meralco and telecommunications companies like PLDT, SMART, etc. considered payment for services and as such, subject to the 2% EWT if the payor is TTC/GO/LT? A6. Payments to Meralco and telecommunications companies are considered payments for services and therefore subject to the 2% EWT if the payor is a TTC/GO/LT pursuant to Sections 2.57.2 (M) and (N) of RR 2-98, as amended. Q7. For payments made to Meralco by TTC/GO/LT, what will be the tax base in the computation of the 2% EWT. A7. It shall be the current amount due appearing in the billing statement. Q8. Is the installation and removal cost of service application for temporary service, reimbursements made by the payor to Meralco for charges for relocation of poles and other electrical facilities, use of rubber hose for safety precaution and testing of meters considered as non-revenues subject to the 2% EWT? A8. The payment made by the TTC/GO/LT to Meralco on installation and removal cost of service application for temporary service is subject to the 2% EWT. On the other hand, all amounts reimbursed by the payor to Meralco for relocation of poles and other electrical facilities are not subject to 2% EWT. Q9. Is the payment to telecommunications companies by the TTC/GO/LT on overseas dispatch, message or conversation originating in the Philippines subject to the 2% EWT? What shall be the tax base? A9. Yes. The tax base shall be the amount paid less the overseas communication tax. Q10. Is the TTC/GO/LT-lessee required to withhold the 2% EWT on its payments to Meralco, PLDT and other utility companies which are coursed through the lessor, the electric meter being in the name of the lessor? A10. Yes, the TTC/GO/LT-lessee shall withhold the 2% EWT whether or not the electric meter is in its name provided that valid proof that payment of a particular expense is being shouldered by the payor claiming the expense. The lessee shall present the contract of lease together with the photocopy of the notice from the BIR designating the corporation as one of the Top 10000 Private Corporations to Meralco, PLDT and other utility companies through the lessor and shall likewise issue the corresponding BIR Form No. 2307 in the name of the utility companies. aETADI Q11. TTC/GO/LT failed to withhold tax on payments to Meralco, telecommunications companies, service providers, purchase of supplies or goods etc. as enumerated under RR 17-2003 from June, 2003 to present. May the TTC/GO/LT deduct the tax from the current billing of the said companies? Will the TTC/GO/LT be penalized for its failure to withhold for the months of June and July, 2003? A11. No, withholding of the EWT shall be in the current month and may only be deducted in the billings for the current month. Penalties for failure to withhold the 2% EWT from prior periods shall be imposed on the payorwithholding agent but it may request for abatement of penalties under RR 13-2001 dated September 27, 2001. III. ON INCOME PAYMENTS TO PROFESSIONALS/TALENTS ETC. Q12. What are the prevailing withholding tax rates applicable to income payments made to professionals, talent, etc.? A12. On gross professional, promotional and talent fees or any other form of remuneration for the services of professionals, talents, etc., the withholding tax shall be 15% if the gross income for the current year exceeds P720,000 and 10%, if otherwise. The income tax withheld are creditable against the income tax due computed at the end of the quarter or taxable year. Q13. How will the withholding agent determine the applicable rate considering that he/it may not have knowledge of the gross earning of the payee from all sources? A13. In order to determine the applicable rate of 10% or 15% to be applied by the withholding agent, every payee (professional/talent/corporate director/juridical person) shall periodically disclose his/its gross income for the current year to the BIR by submitting a NOTARIZED SWORN DECLARATION in three (3) copies {2 copies for BIR and 1 copy for the taxpayer} to the Collection Division of the Regional Office/LTAD/LTDO where the income earner is registered. The disclosure should be filed on June 30 of each year or within 15 days after the end of the month the payee's income reaches P720,000, whichever comes earlier. In case the total gross income is less than P720,000 as of June 30, he shall submit a second disclosure within 15 days after the end of the month when his gross income exceeded P720,000. Copies of the sworn declaration stamped "RECEIVED" by the BIR shall be furnished to each concerned withholding agent/payor. Thus, for the period January 1 to June 30, unless the payee has informed the payor/withholding agent through the sworn declaration that his gross income has exceeded P720,000, the applicable withholding tax rate is 10%. Starting July 1, if the payee fails to execute a sworn declaration or furnish a copy to the payor if one has been executed, the withholding tax shall be 15%. In case the withholding agent has made accumulated payments within the year exceeding P720,000 to a particular payee, then subsequent payments by the payee shall be subjected to 15% even without the sworn
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declaration. EacHCD Q14. Are honoraria paid to instructors of cooking lessons, martial arts and various sports and health activities subject to EWT? A14. Yes, they are considered talent fees subject to the 10% EWT if current annual income of the instructor is P720,000.00 and below and 15%, if otherwise. IV. OTHER CLARIFICATION Q15. Are payments for life and non-life insurance premium by the TTC/GO/LT to domestic/resident foreign insurance companies considered payment for services subject to the 2% EWT? A15. Yes. Q16. What will be the basis of the 2% EWT to be deducted on the premium for the insurance coverage of the vehicle sold to the customer of a TTC-automotive dealer to the Insurance Company considering the information on the insurance policy as follows: Premium (CTPL, OD, TPPD, etc.) P26,000.00 VAT 2,600.00 Doc. Stamp Tax 3,250.00 Local Tax 130.00 Total amount per policy P31,980.00 ========= A16. The 2% EWT shall be computed based on the amount of premium paid, exclusive of the VAT and other taxes. Thus, P26,000.00 x 2% = P520.00. Q17. Are insurance premiums paid through brokers/agents subject to the 2% EWT? A17. Yes, premium payments to insurance companies through brokers or agents or any other person authorized to receive/collect payment on behalf of the insurance company shall be subject to the 2% EWT to be withheld by the payor or person having control over the payment. However, the payor is required to issue the corresponding certificate of taxes withheld (BIR Form No. 2307) in the name of the insurance company, not in the name of the insurance broker. TDcHCa Q18. Is payment of interest on bank loans by the TTC/GO/LT and other fees paid to the bank subject to the 2% EWT? A18. Yes. However, payment of interest to OBUs/FCDUs shall be subject to final withholding tax of 10%. Q19. Is the payment of the principal and interest on loans, service fees and other charges considered as income extended by local banks, quasi-banks and other financial institutions to the TTC/GO/LT subject to the 2% EWT? A19. Only the interest payments on loans, service fees and other charges considered as income are considered payment for services rendered, hence, subject to 2% EWT. Payment corresponding to the principal amount is not subject to EWT. Q20. If the payment for the purchase of goods or services to their regular suppliers by the TTC/GO/LT is through credit card or through company issued credit card to officers/employees for purposes of reimbursements, will the TTC/GO/LT be required to withhold the tax when it presents the credit card to the supplier? A20. The TTC/GO/LT is not required to withhold the tax upon presentation of the credit card to the supplier. The TTC/GO/LT, however, is required to withhold the 2% expanded withholding tax corresponding to the interest payment and/or service fee and other charges imposed by the credit card company. The credit card company, on the other hand, shall withhold 1% of 50% of the gross amount paid to any business entity pursuant to Section 2.57.2(L) of RR 2-98, as amended. acHCSD Q21. Is the payment by the TTC/GO/LT to their regular suppliers through employees/agents or any persons purchasing for or in its behalf representing reimbursable expenses by the payee subject to the EWT? A21. Yes, the reimbursable expenses are subject to the EWT of 1% on goods or 2% on services provided that the sales invoice/official receipt shall be in the name of the persons whom the former represents and the corresponding certificate of taxes withheld at source (BIR Form No. 2307) is issued. It is reiterated that BIR Form No. 2307 shall only be issued by duly authorized representative of the employer-withholding agent. Q22. Is the payment made by the TTC/GO/LT to a customs broker for arrastre, customs duties, wharfage, documentation, handling fee and forwarders subject to the 2% EWT? A22. Yes, it is subject to the 2% EWT. However, advance payment by the customs brokers for expenses such as arrastre, wharfage, documentation fee, etc. should not form part of the gross receipts if invoiced directly in the name of the broker's client and if reimbursement to the broker is not invoiced with the broker's VAT invoice/official receipt. Q23. Is the payment for membership dues of the TTC/GO/LT to country clubs and/or sports club and the like considered service subject to the 2% EWT under RR 17-2003? A23. Yes, membership fees are considered services subjected to the 2% EWT. However, when the payee-club or organization is a non-stock, non-profit organization not subject to income tax, hence, payment is not subject to EWT upon presentation of proof of exemption issued by the BIR. Q24. What will be the basis of the 2% EWT if the charges of hotel, motel, resort and similar establishments to TTC/GO/LT include room accommodation, food and beverage, laundry, business center charges, etc. including service charges?
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A24. The basis shall be the gross billing exclusive or net of the VAT for VAT registered payees and gross billing for NON-VAT registered payees. Q25. Are payments made by TTC/GO/LT for the purchase of movie and/or concert tickets subject to the 2% EWT? A25. Yes, payment for movie/concert tickets are considered payment for services and therefore subject to 2% EWT. Q26. Are the corporations previously belonging to the Top 5000 corporations still required to file the list of regular suppliers of goods? How about suppliers of services? A26. Yes, former Top 5000 corporations are still required to submit the list of their regular suppliers of goods and services unless they have been informed by the BIR that they ceased to be included in the Top 10000 corporations. They are required to submit their 1st semester list on July 31 and 2nd semester on January 31 of the following year. They shall continue to withhold 1% EWT for the purchase of goods and 2% for services unless informed otherwise. Q27. Are services rendered by private hospitals and entities considered as government owned or controlled corporations (GOCC) subject to the 2% EWT if the payor is a TTC/GO/LT? A27. Yes, since they are also engaged in the supply of services. Only GSIS, SSS, PHILHEALTH, PAGCOR & PCSO are exempted from income tax, and consequently from EWT. aETADI Q28. Is payment by TTC/GO/LT for magazine/newspaper subscription subject to 1% EWT? A28. Yes, it shall be considered purchase of goods subject to 1% EWT. Q29. Is the amount paid to TV or radio stations by the TTC/GO/LT for airing commercials and payment made directly to newspaper publishers for print advertisements subject to the 2% EWT? A29. Yes, they are considered suppliers of service and therefore subject to 2% EWT. Q30. Is the payment made by an advertising agency for the print advertisement of TTC/GO/LT to newspaper publishers (Manila Bulletin, Manila Times, etc.) subject to EWT? A30. The payment made by the advertising agency for the print advertisement of TTC/GO/LT to the newspaper publisher is subject to the 2% EWT provided that the advertising agency is a TTC/LT. Q31. Is the payment made to Health Maintenance Organizations (HMOs) by TTC/GO/LT subject to EWT? A31. Yes, the payment is subject to 2% EWT. Q32. Are payments made by TTC/GO/LT to cooperatives for the purchase of goods and/or services subject to EWT? A32. Yes, except when they can show proof of exemption from income tax issued by the BIR. Q33. Are payments made to companies registered with PEZA/BOI for the purchase of goods or services subject to EWT? A33. Yes. However, payments to PEZA/BOI registered companies which are exempt from income tax shall not be subjected to EWT pursuant to Section 2.57.5 of RR 2-98, as amended, upon presentation of proof of exemption issued by the BIR. Q34. Are payments made to embassies for visa fees/services subject to EWT? A34. No. Q35. Is the payment by a TTC-bank to the Car or Automotive Dealer representing a certain percentage of the cost of the vehicle bought by a customer through financing subject to EWT? What is the rate? A35. The payment shall be considered purchase of goods (vehicle) and shall be subject to 1% EWT. IASTDE Q36. Is the amount paid by a TTC/GO/LT to the automotive dealer representing the entire amount of a car availed of by an employee through a company car plan subject to EWT if the car will be registered with Land Transportation Office (LTO) under the name of the employee? A36. Yes, the amount paid by the TTC/GO/LT to the automotive dealer is subject to 1% EWT. Q37. For those availing of EFPS, what shall be the deadlines for filing of returns and remittance of taxes withheld? A37. The date of filing of withholding tax returns shall be in accordance with the deadlines set in RR 26-2002 while the remittance of taxes withheld shall be five (5) days later than the deadlines set for taxpayer/withholding agents not availing of the EFPS. All internal revenue officers and employees are hereby enjoined to give this Circular as wide a publicity as possible. TCaSAH (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue
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BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus

UP College of Law Block A2010

1st Sem 2008-09; Prof. Movido

BIR ISSUANCES, ETC

Pages 3-14 of the Syllabus