Deductions

Interest (as amended by RA 9337) PAPER INDUSTRIES V. CA (01 DEC 1995)

Paper Industries Corporation of the Philippines (PICOP) is a Philippine Corporation registered with the Board of Investments (BOI) as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills.

In 1969, 1972 and 1977 PICOP obtained loans from foreign creditors in order to finance the purchase of machinery and equipment needed for its operations. PICOP paid interest expenses and deducted it from its 1977 gross income. CIR disallowed the deduction because such interest payments should have been capitalized and claimed as depreciation deduction.

SC held that the interest expenses can be deducted. The general rule is that interest expenses are deductible against gross income. The 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment. The 1977 Tax Code is simply silent on a taxpayer’s right to elect one or the other tax treatment of such interest payments. The general rule is that interest payments on a legally demandable loan are deductible from gross income must be applied.

CIR V. VDA. DE PRIETO (30 SEP 1960)

Respondent conveyed real property to her 4 children by way of gifts. CIR assessed the real property with donor’s gift tax, interest and compromises due in the amount of 117K. Roughly 56K of it is interest on account of delinquency. This 56K was deducted from gross income by the respondent which the CIR disallowed. Hence, this suit.

SC held that the interest for the late payment of her donor’s tax is deductible from her gross income.

RR 13-2000 (20 Nov 2000)

Requisites for Deductibility of Interest Expense

o Indebtedness

o Interest expense paid or incurred upon such indebtedness

o Indebtedness must be that of the taxpayer

o Connection with taxpayer’s trade, business or exercise of profession

o Paid or incurred during the taxable year

o Interest must be in writing

o Interest must be legally due

o Must not be between related taxpayers as mandated in §34(B)(2)(b), in

relation to §36(B) of Tax Code

o Must not be incurred to finance petroleum operations

o In case of interest incurred to acquire property used in trade, business or

exercise of profession, the same was not treated as capital expenditure

Rules on Deductibility of Interest Expense

o General Rule: Interest Expense deduction is allowed

o Limitation: deduction shall be reduced by the percentage of interest income

which had been subjected to withholding tax

38% beginning 01 Jan 2000 and thereafter

o Interest on unpaid taxes, connected with the business, are fully deductible

(without limitation)

o The following interest expenses are not deductible

Interest is paid in advance through discount or otherwise; such

interest can be deducted in the year the indebtedness is paid; by

analogy, interest can be deducted in amortization of indebtedness

The taxpayer is related to the creditor

Between members of the family

Between and individual and a corporation more than 50% in

value of the outstanding stock of which is owned, directly

and indirectly, by or for such individual; or

Between two corporations more than 50% in value of the

outstanding stock of each of which is owned, directly or

indirectly or indirectly, by or for the same individual;

Between the grantor and a fiduciary trust;

Between the fiduciary of a trust and the fiduciary of another

trust if the same person is a grantor with respect to each

trust;

Between a fiduciary of a trust and a beneficiary of a trust

o Optional treatment of interest expense on capital expenditure: interest

expense of CapEx can be deducted on the year when incurred.

Interest Arbitrage

BIR Ruling No. 006-00 (05 Jan 2000)

The limitation/ reduction shall apply to interest arbitrage.

Taxes CIR V. LEDNICKY (31 JUL 1964)

Spouses Lednicky are US citizens residing in the Philippines. All the sources of their income are derived from the Philippines. They sought to amend their income tax return by including the income tax they paid to the US as deductions. The CIR disallowed such amendment and claim.

The issue is whether or not foreign taxes can be claimed as deduction.

SC held that Lednicky cannot claim the deduction. Under the Tax Code, a taxpayer has two options regarding the taxes he paid to foreign government. He may opt either (1) to deduct or (2) to claim tax credits.

To claim as a deduction, the he must signify that his intention to claim a tax credit and waive the deduction.

Losses §38, Tax Code: Losses from Wash Sales of Stock or Securities. –

(A) In the case of any loss claimed to have been sustained from any sale or other

disposition of shares of stock or securities where it appears that within a period

beginning thirty (30) days before the date of such sale or disposition and ending

thirty (30) days after such date, the taxpayer has acquired (by purchase or by

exchange upon which the entire amount of gain or loss was recognized by law), or

has entered into a contact or option so to acquire, substantially identical stock or

securities, then no deduction for the loss shall be allowed under Section 34 unless

the claim is made by a dealer in stock or securities and with respect to a transaction

made in the ordinary course of the business of such dealer.

(B) If the amount of stock or securities acquired (or covered by the contract or

option to acquire) is less than the amount of stock or securities sold or otherwise

disposed of, then the particular shares of stock or securities, the loss form the sale

or other disposition of which is not deductible, shall be determined under rules and

regulations prescribed by the Secretary of Finance, upon recommendation of the

Commissioner.

(C) If the amount of stock or securities acquired (or covered by the contract or

option to acquire which) resulted in the non-deductibility of the loss, shall be

determined under rules and regulations prescribed by the Secretary of Finance,

upon recommendation of the Commissioner.

RR 12-77 (06 Oct 1977)

Nature of losses allowed as deductions: fires, storms, other casualty, and from

robbery, theft or embezzlement

o Casualty is the complete or partial destruction of property resulting from an

identifiable event of a sudden, unexpected, or unusual nature

It must be declared within 45 days after occurrence by filing a sworn declaration of

loss with the nearest Revenue District Officer

Proof of loss is subject to verification; mere filing does not automatically entitle the

taxpayer to deduct the loss

Deductible amount = value of property before casualty – value immediately after; it

must never exceed acquisition cost or depreciated cost

o Cost of repairs can show amount that can be deducted if:

Repairs are necessary

Cost of repairs is not excessive

Repairs do not cover more than the damage suffered

Value after repairs must not exceed original value

For total destruction, amount to be deducted is the net book value (cost less

accumulated depreciation) prior to the casualty

For livestock, acquisition cost of there is no inventory

RMO 31-2009 (16 Oct 2009)

Policies and guidelines in reporting of casualty loss due to Ondoy and Pepeng

Failure to report robbery/ theft can be held against the taxpayer but mere report is

not conclusive proof.

NOLCO (Net Operating Loss Carry-Over)

PAPER INDUSTRIES V. CA (01 DEC 1995)

Paper Industries Corporation of the Philippines (PICOP) is a Philippine Corporation registered with the Board of Investments (BOI) as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills.

PICOP entered into a merger agreement with Rustan Pulp and Paper Mills, Inc. (RPPM) and Rustan Manufacturing Corporation (RMC). PICOP was the surviving corporation. In effect RPPM and RMC became wholly owned corporations of PICOP. RPPM and RMC are BOI-registered companies. RPPM had accumulated losses of about 81M. PICOP claimed 44M of the losses as deduction in PICOP’s gross income.

CIR disallowed the deduction on two grounds. First, it was incurred by RPPM and not PICOP. The merger took effect after the claim for the taxable year. Second, the losses were from borrowing funds and not from RPPM’s registered operations.

SC did not allow the deduction because in effect it would permit PICOP to purchase tax deduction and allow RPPM to peddle its accumulated operating losses. Moreover, there is no statutory basis and it does violence to the legislative intent of the tax incentive granted under RA 5186.

The general rule is that net operating losses cannot be carried over. Losses must be deducted against current income in the taxable year when such losses were incurred. Moreover, such losses may be charged off only against income earned in the same taxable year when the losses were incurred.

In RA 5186, net operating loss carry-over is a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations.

o RA 5186: Net Operating Loss Carry-over – a net operating loss incurred in any of the first ten years of operations may be carried over as a deduction from taxable income for the six years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the six 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 five years.

RR 14-01 (27 Aug 2001)

IRR for §34(D)(3) of the Tax Code; NOLCO deduction will not apply for any

net loss incurred in a taxable year which the corporation is exempt from

income tax and no substantial change in the ownership of the business (not

less than 75% of nominal value of outstanding issued shares or of the paid

up capital; NOLCO deduction is allowed only for the next 3 consecutive

years after the loss; different for mines, other than oil and gas wells under

EO 226 (Omnibus Investments Code of 1987)

NOLCO shall apply regardless of the change in ownership.

NOLCO cannot be transferred or assigned unless provided for.

The 75% Rule applies only in net operating losses as a result from merger or

consolidation with another person. NOLCO may only be deducted if the

transferor/ assignor gains control at least 75%.

An individual cannot claim OSD and NOLCO simultaneously. Further, OSD

shall not interrupt the 3 year period of NOLCO.

The following are not entitle to claim NOLCO deduction:

o Offshore Banking Unit of a foreign banking corporation

o Foreign Currency Deposit Unit of a domestic or foreign banking

corporation

o Enterprise registered with BOI with respect to its registered

activities enjoying the Income Tax Holiday incentive; net operating

losses on such periods cannot qualify for purposes of NOLCO.

o PEZA registered enterprise.

o BCDA registered enterprise

o Foreign corporations engaged in international shipping or air

carriage business in the Philippines

o Any person enjoying income tax exemption

NOLCO is restricted from 01 Jan 1998 onwards

BIR Ruling 30-00 (10 Aug 200)

SGV is requesting ruling for its clients Republic Cement, Fortune Cement and

Blue Circle Philippines, on the tax implications of their proposed integration

plan. There are share swaps but in effect there was no change of ownership

greater than 25% of either the nominal value of the outstanding issued

shares or of the paid-up capital.

BIR held that there is no substantial change in the ownership of Republic,

Fortune, Mindanao or Iligan.

Forex losses

BIR Ruling 206-90 (30 Oct 1990)

Porcelana Mariwasa (PMI) has existing US dollar loans from Noritake and

Toyota. They have agreed to convert the loan into pesos at the prevailing

exchange rate on 30 Jun 1989.

Such exchange rate would mean losses on the part of PMI. Hence, PMI

sought to deduct it.

BIR held that the losses cannot be deducted. Same with income that it must

first be realized before it can be taxed, the losses must also be realized. It is

deductible only for the year it is actually sustained.

BIR Ruling No. 144-85 (26 Aug 1985)

Foreign exchange losses sustained as a result of devaluation of peso vis-à-vis

the foreign currency, but which remittance of scheduled amortization

consisting of principal and interests payments on a foreign loan has not

actually been made are not deductible from gross income.

Bad Debts Philex v. CIR (16 Apr 2008)

Philex entered into a contract with Baguio Gold Mining Company for the

management of Sto. Nino mine in Benguet. It stipulated that Philex would manage

the mine and have 50% share in the profits. It also stipulated that advances of Philex

shall be entitled to the retirn of a proportionate share of the mine assets.

Later on, Baguio incurred “debt” to Philex due to the advances made, the

compensation for the management and the liabilities assumed by Philex as

guarantor. The two entered into a compromise agreement for the payment.

Philex subsequently deducted from its gross income the amount of 112M as loss on

settlement of receivables from Baguio Gold. BIR rejected it claiming that Baguio

Gold is still existing and has not filed for bankruptcy.

SC held that the agreement was actually a partnership. Hence, there was no debtor-

creditor relationship. There was no stipulation that Baguio gold to actually repay the

petitioner for its advances. It provides that Philex is only entitled to proportionate

share in the mine assets. Further, its compensation is too big to be a salary. It was

deemed by the court as share in the profits.

Philippine Refining Company v. CA (08 May 1996)

Petitioner deducted bad debts based on the testimony of its financial adviser or

accountant (Masagana). CIR disallowed the deduction as there was no documentary

evidence.

SC denied the petition.

Requisites for worthlessness of a debt

o Valid and subsisting debt

o Debt must be actually ascertained to be worthless and uncollectible during

the taxable year

o Debt must be charged off during the taxable year

o Debt must arise from business of the taxpayer

Steps to prove diligent effort to collect debt

o Sending of statement of accounts

o Sending of collection letters

o Giving the account to a lawyer for collection

o Filing a collection case in court

Fernandez Hermanos, Inc. v. CIR (30 Sep 1969)

Fernandez Hermanos, Inc. (FHI) is a domestic corporation engaged in investments. It

was assessed for deficiency in income taxes by the BIR. Among such disallowances in

deduction is bad debt.

FHI provided cash to Palawan Manganese Mines, which is also owned by FHI. The

cash was to enable PMM to resume its mining operations. Their agreement

stipulated that PMM would pay FHI 15% of its net income in exchange for the

financial assistance. Later on, FHI assessed PMM that it can no longer pay for the

advances. Hence, it FHI deemed it as bad debt.

SC held that the financial assistance is not debt, hence it is not deductible. FHI never

expected it to be repaid. If there is no profits, PMM could not pay as stipulated in

the 15% payment from net profits. Thus, there is no debt and no bad debt. Such

advances were deemed as investments and not loans.

RR 5-99 (10 Mar 1999)

To implement Bad Debt deduction

Requisites

o Existing debt due and demandable

o Debt is connected to business

o Must not be between parties under §36(B), Tax Code

o Actual charge in the books of account

o Must be worthless and uncollectible

Tax Benefit Rule: Should a bad debt be paid, it shall be considered as part of gross

income.

Exception is the banks which the BSp, through MB, shall determine worthlessness

and uncollectibility of bad debts but must still comply with first 4 requisites.

For receivables from insurance or surety company, it must be declared closed by the

Insurance Commissioner

Depreciation Basilan Estates, Inc v. CIR (05 Sep 1967)

Limpan Investment Corporation v. CIR (26 Jul 1966)

RR 12-2012

Depletion Consolidated Mines v. CTA (29 Aug 1974)

Charitable and other Contributions BIR Ruling 19-01 (10 May 2001)

Research and Development 3M Philippines v. CIR (26 Sep 1988)

Additional requirements for deductibility RMO 38-83 (14 Nov 1983)

3.1 An amount claimed as deduction on which a tax is supposed to have

been withheld under Sections 54 and 93 shall be allowed if in the course of his

audit and/or investigation, the examiner discovers that:

3.1/1 No withholding of creditable or final tax was made but the

payee reported the income and the withholding agent/taxpayer pays

during the original audit and investigation the surcharges, interest and

penalties incident to the failure to withhold the tax.

3.1/2 No withholding of creditable or final tax was made and the

recipient-payee failed to report the income on due date thereof, but the

withholding agent pays during the original audit and investigation the

amount supposed to have been withheld, inclusive of surcharges,

interest and penalties incident to his failure to withhold.

3.1/3 The withholding agent erroneously underwithheld the tax but

pays during the original audit and investigation the difference in the

amount supposed to have been withheld, inclusive of surcharges,

interest and penalties incident to such error.

3.2 Items of deductions disallowed due to non-compliance with Section 30

(1), the deficiency income tax assessment for which had been issued before the

effectivity of this Revenue Memorandum Order may be allowed upon payment

not later than May 15, 1984 of the withholding tax required and supposed to

have been withheld and/or surcharges, interest and penalties. However, no

refund or credit arising from such re-allowance of a previously disallowed

deduction shall be granted.

Optional Standard Deduction §34 (L), Tax Code as amended by RA 9504

In lieu of the deductions allowed under the preceding Subsections, an

individual subject to tax under Section 24, other than a nonresident alien,

may elect a standard deduction in an amount not exceeding forty percent

(40%) of his gross sales or gross receipts, as the case may be.

In the case of a corporation subject to tax under Sections 27(A) and

28(A)(1), it may elect a standard deduction in an amount not exceeding

forty percent (40%) of its gross income as defined in Section 32 of this Code.

Unless the taxpayer signifies in his return his intention to elect the optional

standard deduction, he shall be considered as having availed himself of the

deductions allowed in the preceding Subsections.

o Such election when made in the return shall be irrevocable for the

taxable year for which the return is made:

o Provided, That an individual who is entitled to and claimed for the

optional standard deduction shall not be required to submit with his

tax return such financial statements otherwise required under this

Code:

o Provided, further, That except when the Commissioner otherwise

permits, the said individual shall keep such records pertaining to his

gross sales or gross receipts, or the said corporation shall keep such

records pertaining to his gross income as defined in Section 32 of

this Code during the taxable year, as may be required by the rules

and regulations promulgated by the Secretary of Finance, upon

recommendation of the Commissioner.

RR 2-2010 (18 Feb 2010)

Amended RR 16-2008

Type of deductions of GPP and partners must be the same

RR 16-2008 (26 Nov 2008) (§1 to 5 only)

See de Leon pp. 147-149

Premium Payments on health and/or hospitalization insurance

Non-deductible expenses §36, Tax Code – Items not deductible

(A) General Rule. — In computing net income, no deduction shall in any case be

allowed in respect to —

(1) Personal, living or family expenses;

(2) Any amount paid out for new buildings or for permanent

improvements, or betterments made to increase the value of any

property or estate;

This Subsection shall not apply to intangible drilling and

development costs incurred in petroleum operations which are

deductible under Subsection (G)(1) of Section 34 of this Code.

(3) Any amount expended in restoring property or in making good the

exhaustion thereof for which an allowance is or has been made; or

(4) Premiums paid on any life insurance policy covering the life of any

officer or employee, or of any person financially interested in any trade

or business carried on by the taxpayer, individual or corporate, when

the taxpayer is directly or indirectly a beneficiary under such policy.

(B) Losses from Sales or Exchanges of Property. — In computing net income, no

deduction shall in any case be allowed in respect of losses from sales or

exchanges of property directly or indirectly —

(1) 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

(2) Except in the case of distributions in liquidation, between an

individual and a corporation more than fifty percent (50%) in value of

the outstanding stock of which is owned, directly or indirectly, by or for

such individual; or

(3) Except in the case of distributions in liquidation, 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, if either one of such corporations, with respect to the

taxable year of the corporation preceding the date of the sale or

exchange was, under the law applicable to such taxable year, a personal

holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or

(5) 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

(6) Between a fiduciary of a trust and a beneficiary of such trust.

ESSO STANDARD EASTERN, INC. V. CIR (07 JUL 1989)

Petitioner was requesting refund of overpaid income taxes which were

denied by CTA and CIR.

Esso claimed expenses for drilling and exploration of its petroleum

concessions as deductions. This was disallowed by the CIR because the

expenses should be capitalized and it may only be deducted as a loss when a

“dry hole” should result. Esso amended its return and claimed refund for

the abandonment of its dry holes. CIR allowed this claim but partial amount

only.

Esso also claimed refund for margin fees it paid to the Central Bank on its

profit remittances to its New York head office. CIR disallowed the margin

fees.

Esso was later on assessed with deficiencies due to the deduction of margin

fees.

ISSUE: Whether or not margin fees are taxes – NO; whether it could be

deducted - NO

SC held that margin fees are used to regulate the international reserve to

stabilize the currency. Hence, margin fees are not taxes.

SC held that Esso cannot deduct margin fees. These are expenses incurred in

the disposition of income. Further, the remittance was not made in

furtherance of its own trade or business. Esso assumed that all corporate

expenses are necessary and appropriate. It is not an ordinary and necessary

expense paid or incurred in carrying its own trade or business.

§119-122, RR 2

§119. Personal, living, and family expenses are not deductible. Insurance

paid on a dwelling owned and occupied by a taxpayer is a personal expense

and not deductible. Premiums paid for life insurance by the insured are not

deductible. In the case of a professional man who rents a property for

residential purposes, but incidentally receives his clients, patients, or callers

in connection with his professional work (his place of business being

elsewhere), no part of the rent is deductible as a business expense. If

however, he uses part of the house for his office, such portion of the rent as

is properly attributable to such office is deductible. Where the father is

legally entitled to the services of his minor children, any allowances which

he gives them, whether said to be in consideration of services or otherwise,

are not allowable deductions in his return of income. Alimony, and an

allowance paid under a separation agreement are not deductible from gross

income.

§121. Any amounts paid for premiums on any life insurance policy covering

the life of an officer or employee or of any person financially interested in

the business of the taxpayer when the taxpayer is directly or indirectly a

beneficiary under such policy are not deductible.

Individuals §24 (as amended by RA 9504) & §25, Tax Code

See de Leon pp. 231, 237-238

Income Tax Base Rate

Not over 10K 0 5%

Over 10K but not over 30K 500 10% of the excess of over 10K

Over 30K but not over 70K 2,500 15% of the excess of over 30K

Over 70K but not over 140K 8,500 20% of the excess of over 70K

Over 140K but not over 250K 22,500 26% of the excess of over 140K

Over 250K but not over 500K 50,000 30% of the excess of over 250K

Over 500K 125,000 32% of the excess of over 500K

Separate returns for married individuals

Minimum wage earners are exempt from income tax including:

Holiday pay

Overtime pay

Night shift differential pay

Hazard pay

Tax Rate on Passive Income

20% - Interest, royalties, prizes and other winnings

10% - royalties except: books, literary works and musical

composition

Except prizes worth 10K or less

Except PCSO and lotto winnings

10% - Cash and/or property dividends

0.5% on gross selling price of stocks if through PSE

5% for first 100K; 10% in excess of 100K - Capital gains from sales of shares

of stock not traded in the exchange

6% capital from sale of real property

Except: gains were used as principal residence by natural persons

within 18 months from date of sale/ disposition

CIR must be notified within 30days

Can only be availed once every 10 years

If proceeds not fully utilized, subject to capital gains tax

Tax Rate on NRA Individual

25% NRA not engaged in trade or business

15% salaries of alien employees (including Filipinos) of:

Regional and area headquarters and regional operating

headquarters of MNC

Offshore banking units

Foreign petroleum service contractors and subcontractors

NRA, regardless of engagement, are subject to the same tax rate of citizens

on capital gains from sales of shares of stock and real property

Ordinary Income

Passive Income §22(T) to (Y), Tax Code

(T) The term 'securities' means 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.

(U) The term 'dealer in securities' means a merchant of stocks or securities,

whether an individual, partnership or corporation, with an established place of

business, regularly engaged in the purchase of securities and the resale thereof

to customers; that is, one who, as a merchant, buys securities and re-sells them

to customers with a view to the gains and profits that may be derived

therefrom.

(V) The term 'bank' means every banking institution, as defined in Section 2 of

Republic Act No. 337, as amended, otherwise known as the General Banking

Act. A bank may either be a commercial bank, a thrift bank, a development

bank, a rural bank or a specialized government bank.

(W) The term 'non-bank financial intermediary' means a financial intermediary,

as defined in Section 2(D)(c) of Republic Act No. 337, as amended, otherwise

known as the General Banking Act, authorized by the Bangko Sentral ng Pilipinas

(BSP) to perform quasi-banking activities.

(X) The term 'quasi-banking activities' means borrowing funds from twenty (20)

or more personal or corporate lenders at any one time, through the issuance,

endorsement, or acceptance of debt instruments of any kind other than

deposits for the borrower's own account, or through the issuance of certificates

of assignment or similar instruments, with recourse, or of repurchase

agreements for purposes of relending or purchasing receivables and other

similar obligations: Provided, however, That commercial, industrial and other

non-financial companies, which borrow funds through any of these means for

the limited purpose of financing their own needs or the needs of their agents or

dealers, shall not be considered as performing quasi-banking functions.

(Y) The term 'deposit substitutes' shall mean an alternative form of obtaining

funds from the public (the term 'public' means borrowing from twenty (20) or

more individual or corporate lenders at any one time), other than deposits,

through the issuance, endorsement, or acceptance of debt instruments for the

borrower's own account, for the purpose of relending or purchasing of

receivables and other obligations, or financing their own needs or the needs of

their agent or dealer. These instruments may include, but need not be limited to

bankers' acceptances, promissory notes, repurchase agreements, including

reverse repurchase agreements entered into by and between the Bangko

Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of

assignment or participation and similar instruments with recourse: Provided,

however, That debt instruments issued for interbank call loans with maturity of

not more than five (5) days to cover deficiency in reserves against deposit

liabilities, including those between or among banks and quasi-banks, shall not

be considered as deposit substitute debt instruments

RR 14-2012 (07 Nov 2012)

Prescribe proper tax treatment of interest income earnings on financial

instruments and other related transactions

Government debt instruments and securities are deemed as “deposit

substitutes” and liable to final withholding tax (20%, 25% or 30%)

Long-term deposit or investment are exempt from income tax under §24(B)(1)

and 25(A)(2) of NIRC of 1997, provided:

o Depositor is an individual citizen or an alien engaged in trade or

business in the Philippines

o Deposits must be under the name of the individual

o Must be evidenced by certificates

o Must be issues by banks only

o Maturity of not less than 5 years

o Must be in denominations of 10K or as prescribed by BSP

o Not terminated before 5 years otherwise tax:

5% - 4 years to less than 5 years

12% - 3 years to less than 4 years

20% - less than 3 years

o Gains from trading, forex are not covered by income tax exemption

Tax treatment of interest income from deposit/ substitutes/ trust funds

o 20% general

o 25% NRA not engaged in trade or business

o 30% NR foreign corporation unless interest income is from foreign loans

contracted on or after 01 Aug 1986 which will be 20%

Tax treatment of interest income under Expanded Foreign Currency Deposit

System

o FWT 7.5% in general

o Exempt if from non-residents whether individuals or corporations

o If joint under non-resident citizen and resident, 50% is exempt, 50%

subject to 7.5%

o Exempt if income derived by depository bank from foreign currency

transactions with non-residents, offshore banking units in the

Philippines, local commercial banks, banks under expanded foreign

currency deposit system

o 10% for others in preceding paragraph

Tax treatment of interest income from offshore banking units

o FWT 10% on foreign currency loans to residents except offshore banking

units or local commercial banks

o Exempt if income from non-residents

If not stated anywhere else, CWT of 20%

Capital Gains Tax §22(X) and 39(B), Tax Code

§22 (X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or

more personal or corporate lenders at any one time, through the issuance,

endorsement, or acceptance of debt instruments of any kind other than deposits for the

borrower's own account, or through the issuance of certificates of assignment or similar

instruments, with recourse, or of repurchase agreements for purposes of relending or

purchasing receivables and other similar obligations: Provided, however, That

commercial, industrial and other non-financial companies, which borrow funds through

any of these means for the limited purpose of financing their own needs or the needs of

their agents or dealers, shall not be considered as performing quasi-banking functions.

§39(B) Percentage Taken into Account. — In the case of a taxpayer, other than a

corporation, only the following percentages of the gain or loss recognized upon the sale

or exchange of a capital asset shall be taken into account in computing net capital gain,

net capital loss, and net income:

(1) One hundred percent (100%) if the capital asset has been held for not more

than twelve (12) months; and

(2) Fifty percent (50%) if the capital asset has been held for more than twelve

(12) months;

SUPREME TRANSLINER, INC. V. BPI FAMILY SAVINGS BANK, INC. (23 FEB 2011)

RR 8-98 (25 Aug 1998)

RR 4-99 (09 Mar 1999)

RR 13-99 (26 Jul 1999)

RR 14-2000 (20 Nov 2000)

RR 06-2008 (22 Apr 2008)

RMC 37-2012 (03 Aug 2012)

BIR Ruling DA 029-08 (23 Jan 2008)

BIR Ruling DA 287-07 (08 May 2007)

OCWs/ Senior Citizens/ Disabled M.E. HOLDINGS CORPORATION V. CIR & CTA (03 MAR 2008)

RR 1-2009 (09 Dec 2008)

RR 7-2010 (20 Jul 2010)

RR 1-2011 (24 Feb 2011)

Personal and additional exemptions/ PERA §35(A),(B),(C), and (D), Tax Code

RA10165, §3-5 & 22-24

RA9504

RA9505

PANSACOLA V. CIR (16 NOV 2006)

RR 17-2011 (27 Oct 2011)

Partnerships §26 & 73(D), Tax Code

o §26. Tax Liability of Members of General Professional Partnerships. — A general

professional partnership as such shall not be subject to the income tax imposed under

this Chapter. Persons engaging in business as partners in a general professional

partnership shall be liable for income tax only in their separate and individual capacities.

For purposes of computing the distributive share of the partners, the net income of the

partnership shall be computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or

constructively received, in the net income of the partnership.

o §73. Distribution of Dividends or Assets by Corporations. —

(D) Net Income of a Partnership Deemed Constructively Received by Partners.

— The taxable income declared by a partnership for a taxable year which is

subject to tax under Section 27(A) of this Code, after deducting the corporate

income tax imposed therein, shall be deemed to have been actually or

constructively received by the partners in the same taxable year and shall be

taxed to them in their individual capacity, whether actually distributed or not.

RR 2-2010 (18 Feb 2010)

Regulation of OSD/ Itemized Deduction in GPPs and its Partners

GPP is not subject to income tax imposed under Title II.

GPP may claim either (1) itemized deductions under §34(A)-(J), Tax Code or (2) OSD not

exceeding 40% of its gross income.

Individual partners may still claim deductions if GPP opted for itemized deductions.

o Partner cannot claim same expenses claimed by GPP.

Individual partners may no longer claim itemized deductions if GPP opted for OSD.

GPP and its partners must have the same type of deduction.

For other sources of income outside of GPP, the mode of deduction will be based on the

GPP.

Partner must signify OSD in his first quarter income tax return.

o It is irrevocable for the whole taxable year.

o An individual who claims OSD is not required to submit financial statements

o A corporation is required to submit financial statements

Corporations §27(A) & (D), and 28, Tax Code as amended by RA 9294 & RA 9337

§27(A). Rates of Income Tax on Domestic Corporations. —

(A) In General. — Except as otherwise provided in this Code, an income tax of thirty-

five percent (35%) is hereby imposed upon the taxable income derived during each

taxable year from all sources within and without the Philippines by every corporation, as

defined in Section 22(B) of this Code and taxable under this Title as a corporation,

organized in, or existing under the laws of the Philippines: Provided, That effective

January 1, 2009, the rate of income tax shall be thirty percent (30%).

In the case of corporations adopting the fiscal-year accounting period, the taxable

income shall be computed without regard to the specific date when specific 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 corporate income tax rate shall be applied on the amount computed by multiplying

the number of months covered by the new rate within the fiscal year by the taxable

income of the corporation for the period, divided by twelve.

Provided, further, That the President, upon the recommendation of the Secretary of

Finance, may, effective January 1, 2000, allow corporations the option to be taxed at

fifteen percent (15%) of gross income as defined herein, after the following conditions

have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);

(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;

(3) A VAT tax effort of four percent (4%) of GNP; and

(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial

Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose

ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five

percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable for

three (3) consecutive taxable years during which the corporation is qualified under the

scheme.

For purposes of this Section, the term 'gross income' derived from business shall be

equivalent to gross sales less sales returns, discounts and allowances and cost of goods

sold. 'Cost of goods sold' shall include all business expenses directly incurred to produce

the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods sold' shall include 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.

For a manufacturing concern, 'cost of goods manufactured and sold' shall include 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 taxpayers engaged in the sale of service, 'gross income' means gross

receipts less sales returns, allowances and discounts.

§27(D). Rates of Tax on Certain Passive Incomes. —

(1) Interest from Deposits and Yield or Any Other Monetary Benefit from

Deposit Substitutes and from Trust Funds and Similar Arrangements, and

Royalties. — A final tax at the rate of twenty percent (20%) is hereby imposed

upon the amount of interest on currency bank deposit and yield or any other

monetary benefit from deposit substitutes and from trust funds and similar

arrangements received by domestic corporations, and royalties, derived from

sources within the Philippines: Provided, however, That interest income derived

by a domestic 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 1/2%) of such interest income.

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock

Exchange. — A final tax at the rates prescribed below shall be imposed on net

capital gains realized during the taxable year from the sale, 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%

Amount in excess of P100,000 10%

(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%).

Any income of nonresidents, whether individuals or corporations, from

transactions with depository banks under the expanded system shall be exempt

from income tax.

(4) Intercorporate Dividends. — Dividends received by a domestic corporation

from another domestic corporation shall not be subject to tax.

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands

and/or Buildings. — A final tax of six percent (6%) is hereby imposed on the

gain presumed to have been realized on the sale, exchange or disposition of

lands and/or buildings which are not actually used in the business of a

corporation and are treated as capital assets, based on the gross selling price or

fair market value as determined in accordance with Section 6(E) of this Code,

whichever is higher, of such lands and/or buildings.

§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, 2009,

the rate of income tax shall be thirty percent (30%).

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 corporate income tax rate shall be applied on the amount

computed by multiplying the number of months covered by the new

rate 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 ½%) on its

'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.

(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 recommendation 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.

(5) Tax on Branch Profits Remittances. — Any profit remitted by a

branch to its head office shall be subject to a 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 Sections 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 Deposit 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 1/2%) 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 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%).

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%

On 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 subparagraph

5(c): Provided, That effective January 1, 2009, the rate of income tax

shall be thirty percent (30%).

(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 1/2%) 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 1/2%) of gross rentals

or fees. TDEASC

(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,

1986;

(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 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%),

which represents the difference between the regular income

tax of thirty-five percent (35°%) and the fifteen percent (15%)

tax on dividends as provided in this subparagraph: Provided,

That effective January 1, 2009, the credit against the tax due

shall be equivalent to fifteen percent (15%), which represents

the difference between the regular income tax of thirty percent

(30%) and the fifteen percent (15%) tax on dividends; AcHaTE

(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%

On any amount in excess of P100,000 10%"

(1) Domestic Corporations

Ordinary Income

o Corporations are subject to income tax rate of 30% on taxable income.

o It may be lowered to 15% of gross income (Gross Income Tax Option) if:

Stated by the President

Upon recommendation of Secretary of Finance

With the following conditions

Tax effort ration 20% of GNP

A ratio of 40% of income tax collection to total tax revenues

A vat tax effort of 4% of GNP

A 0.9% ratio of the Consolodiated Public Sector Financial

Position (CPSFP) to GNP

Available only to firms with Ratio of cost of sales to gross sales or

receipts from all sources does not exceed 55%

Election of this by the corporation is irrevocable for 3 consecutive

taxable years during which the corporation is qualified

Passive Income

Interest Income and Royalties

o Final tax rate of 20% for interest income

o 20% also for royalties but from sources within the Philippines

o 7.5% for interest income if:

Derived by a domestic corporation

From a depository bank under the foreign currency deposit

system

Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange

o Final tax of:

5% for the first 100K

10% for the excess of 100K

Tax on Income derived under the Expanded Foreign Currency Deposit

o Requisites:

Income derived by a depository bank under expanded foreign

currency deposit system

From foreign currency transactions

With

Non-residents

OBU in the Philippines

Local commercial banks

o Includes branches of foreign banks authorized

by BSP to transact with expanded foreign

currency system units

Other depository banks under the expanded foreign

currency deposit

o Exempt from ALL taxes

o EXCEPTION: net income from such transactions as may be specified by

the Secretary of Finance, upon recommendation of MB to be subject to

regular income tax payable by banks

EXCEPTION TO EXCEPTION: 10% final tax rate on:

Interest income

From foreign currency loans

Granted by such depository banks under the expanded

system

To residents other than

o OBU in the Philippines or

o Other depository banks under the expanded

system

o Interest income of non-residents from transactions with depository

banks under the expanded system are exempt from income tax

Intercorporate dividends

o Dividends received by a domestic corporation from another domestic

corporation shall not be subject to tax.

Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or

Buildings

o Final tax of 6% on the gain presumed to have been realized

o Applies to lands and/or buildings

Not actually used in business and

Treated as capital assets

o Based on GSP or FMV whichever is higher

Capital Gains Tax

RR 4-99 (09 mar 1999)

Relates to capital gains on foreclosed properties

If right of redemption is exercised, no capital gains tax.

If right is not exercised, it is subject to capital gains tax but is due after

one year or the expiration of the right of redemption

RR 06-2008 (22 Apr 2008)

About tax on sale, barter, exchange or other disposition of shares of

stock held as capital assets

Persons liable to the tax:

o Individual

o Corporation

o Other taxpayers such as estates, trusts, trust funds and other

pension funds

Persons not liable to the tax

o Dealers in securities (one who buys/ sells stocks on his own

account)

o Investors of mutual fund

o Other persons exempt under the law

Transaction through stock exchange

o Tax rate of 0.5% on GSP or gross value in money of the stock

sold

IPO transactions (for primary and secondary offering)

o Tax rate based on proportion of disposed shares / outstanding

shares (proportion – tax rate)

Up to 25% - 4%

Over 25% but not over 33 1/3% - 2%

Over 33 1/3% - 1%

o Tax base is GSP or gross value in money of the stocks

o Determination of person liable

Primary offering – issuer corporation

Secondary offering – selling shareholder

Applicable when first shareholder sells at the

time of IPO

o Succeeding offering of unissued shares are not subject to this

rule but subject to DST

o Sale of another primary shareholder subsequent to the IPO shall

be tax similar to transaction through stock exchange

Transactions outside of stock exchange

o 5% for the first 100K and 10% in excess of 100K

o Tax base in net capital gains realized

Determination of selling price

Cash sale – total consideration

Mixed – money + FMV of property

Property only – FMV

If total consideration involving property > FMV

of shares, excess is considered as gift subject to

donor’s tax

Determination of FMV of stocks

Last closing price if stock is traded in stock

exchange but transacted outside

Book value if not listed

If unit of participation in any association,

recreation or amusement club, it will be FMV or

bid price nearest to the date of sale as

published in newspaper whichever is higher

Taxation of surrender of shares by investor upon dissolution of the

corporation and liquidation of assets and liabilities of said corporation.

o Gain/ loss = FMV of shares – cash/ property received

o If the investor is individual, rule on holding period shall apply.

Tax rate is based on the length of the holding period of the

shares.

o Gain or loss from this transaction is subject to regular income

tax rate under the Tax Code, as amended

Taxation of shares redeemed for cancellation or retirement

o Subject to regular income tax rates

o Does not apply to voluntary buy back of shares. It shall be

subject to tax on transaction through stock exchange or

transactions not listed in the stock exchange (0.5%; 5-10% rates)

Collection

o Transaction in the stock exchange

Stock broker collects

Remits to collecting bank/ RDO within 5 banking days

Submit a return every Monday to the secretary of the

stock exchange

The secretary of the stock exchange reconciles and

submits the weekly reports to the RDO on or before

every 15th of the following month

o Tax on IPO

Corporate issuer will pay to the RDO within 30 days of

the listing accompanied by a copy of the instrument of

sale

If through secondary offering, procedure is same with

transaction in the stock exchange

o Transaction outside of stock exchange

File a return within 30 days

Final consolidated return of all transactions for the

taxable year on or before the 15th day of the 4th Month

of the following taxable year

Individual – calendar year

Corporate – either calendar or fiscal year basis

RMC 55-2010 (28 Jun 2010)

About “Build-to-Own” transactions

Contractors are trustees receiving management fee which in effect, the

transfer is from trustee to the trustor and evading income tax and VAT

HLURB declared the scheme as contrary to public policy

Still subject to capital gains tax

BIR Ruling DA 455-07 (17 Aug 2007)

Regarding non-taxability of “Build-to-Own”

Overruled by subsequent BIR issuance

(2) Resident Foreign Corporations §28(A), Tax Code as amended by RA 9294

In general

Minimum Corporate Income Tax on resident foreign corporations

o 2% of gross income as prescribed in §27(E), under same conditions

under paragraph (1) of this Subsectui.

International carrier

OBUs

Tax on Branch Profits remittances

Regional or Area Headquarters and Regional Operating Headquarters or MNC

Tax on certain incomes received by a resident foreign corporation

o Similar to passive income under domestic corporations without

disposition of land and/or building

In general

30% of taxable income from sources within the Philippines

Has the option with Gross Income Tax Option (15%) on the same conditions

under §27(A), Tax Code

International Carrier

International carriers ding business in the Philippines - 2.5% on Gross Philippine

Billings

o Gross Philippine Billings (International Carrier)

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 dopcument

PROVIDED that, ticket revalidated, exchange, 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, if there transhipment outside the

Philippines, only a part of the cost of ticket corresponding to the

leg flown from the Philippines to the point of transhipment shall

form part of Gross Philippine Billings

o Gross Philippine Billings (International Shipping)

Must originate from the Philippines to final destination

Regardless of the place of sale or payment

AIR NEW ZEALAND V. CIR (CTA CASE, 30 JAN 2008)

CIR V. BOAC (30 APR 1987)

UNITED AIRLINES, INC. V. CIR (29 SEP 2010)

RR 15-2002 - § 1-5 only

o

OBUs/ FCDUs

RR 14-2012 (07 Nov 2012)

Branch Profit Remittance Tax

BANK OF AMERICA NT & SA V. CA (21 JUL 1994)

COMPANIA GENERAL DE TABACOS DE FILIPINAS V. CIR (CTA CASE NO. 4141, 23 AUG

1993; AND 4451, 17 NOV 1993)

o cannot find

ITAD BIR Ruling No. 018-90 (23 Jun 2009)

Regional or Area Headquarters and ROHQs

§22(DD) & (EE), Tax Code

(DD) The term 'regional or area headquarters' shall mean a branch

established in the Philippines by multinational companies and which

headquarters do not earn or derive income from the Philippines and

which act as supervisory, communications and coordinating center for

their affiliates, subsidiaries, or branches in the Asia-Pacific Region and

other foreign markets.

(EE) The term 'regional operating headquarters' shall mean a branch

established in the Philippines by multinational companies which are

engaged in any of the following services: general administration and

planning; business planning and coordination; sourcing and

procurement of raw materials and components; corporate finance

advisory services; marketing control and sales promotion; training and

personnel management; logistic services; research and development

services and product development; technical support and maintenance;

data processing and communication; and business development.

RR 11-2010 (26 Oct 2010)

(3) Nonresident Foreign Corporations §28(B) Tax, Code

GENERAL: 30% of gross income from all sources in the Philippines

Non-resident cinematographic film owner, lessor or distributor: 25% of gross

income from all sources in the Philippines

Non-resident owner or lessor of vessels chartered by Philippine nationals: 4.5%

of gross rentals, lease or charter fees from leases or charters to Filipino citizens

or corporations as approved by the Maritime Industry Authority

Non-resident owner or lessor of aircraft, machineries and other equipment:

7.5% of gross rentals or fees

Certain Incomes

o Interest on foreign loans: 20% of interest as final withholding tax

o Intercorporate dividends: 15% of cash/ property dividends received

from domestic corporation

Provided that the country in which the non-resident corporation

is domiciled, shall allow a credit against the tax due from the

non-resident foreign corporation taxes deemed to have been

paid in the Philippines equivalent to 15%

It represents the difference between the regular income tax of

30% and 15% tax on dividends

o Capital gains from sale of shares of stock not traded in the Stock

Exchange

Final tax of 5% for first 100K

10% for excess of 100K

In general

CIR V. S.C. JOHNSON AND SON, INC. (25 JUN 1999)

MARUBENI CORPORATION V. CIR (14 SEP 1989) (MISSING)

N.V. REEDERIJ “AMSTERDAM” AND ROYAL INTEROCEAN LINES V. CIR (23 JUN 1988)

Special non-resident foreign corporations

Tax on Certain Incomes of Non-resident Foreign Corporations

Interest on foreign loans

Intercorporate dividends

§28(B)(5)(b), Tax Code, as amended by RA 9337

CIR V. PROCTER & GAMBLE PHILIPPINES (02 DEC 1991)

P&G Phil declared dividends to P&G USA. P&G Phil withheld

35% as tax from the dividends. Later on, P&G Phil claimed

tax refund as it erroneously paid the tax. The tax rate should

have been 15%.

SC held that 15% tax rate on dividends should be applied to

P&G USA and it can be claimed by P&G Phil as agent.

The condition in the §28(B)(5)(b) of the tax Code meant that

the USA “shall allow” to P&G USA a tax credit for “taxes deemed

paid in the Philippines” applicable against the US taxes of P&G

USA. NIRC only requires that the foreign country “shall allow”

the non-resident corporation a “deemed paid” tax credit in an

amount equivalent to 20% (15% now) waived by the Philippines.

Further, there was a tax treaty between US and Philippines that

warranted 15%.

INTERPUBLIC GROUP OF COMPANIES V. CIR (CTA CASE NO. 7796, 21 FEB

2011)

Petitioner is a non-resident corporation based in Delaware,

USA. It owns shares of stock in McCann, a domestic corporation.

McCann declared cash dividends. McCann withheld 35% of

petitioner’s dividends and remitted it to the BIR.

Later on, petitioner established RHQ in the Philippines and it

was converted to ROHQ after.

Petitioner is claiming that the tax rate should be only 15%.

Petition was granted based on P&G case.

BIR Ruling DA-145-07 (08 Mar 2007)

SMIC is inquiring about the tax on cash dividends to Asia

Opportunities, a British Virgin Island corporation.

BIR held that “if the country where the non-resident foreign

corporation is domiciled allows a credit against the tax due from

the non-resident corporation taxes deemed to have been paid

in the Philippines in an amount equivalent to 20% of such

dividend, or does not subject such dividend to taxation, then

dividend paid to such non-resident foreign corporation are

taxed only at the rate of 15%.”

British Virgin Islands does not impose any tax on dividend

received from foreign sources. Thus, Asia Opportunities tax rate

is 15%.

Income covered by Tax Treaties

MIRANT (PHILIPPINES OPERATIONS CORPORATION V. CIR (CTA EB CASE NO.

40, 07 JUN 2005 AS AFFIRMED BY SC MINUTE RESOLUTION, 18 FEB 2008)

Petitioner is a domestic corporation based in Quezon. It is

engaged in energy business.

Petitioner withheld final taxes from VHL Enterprises and

WES World-wide Education Service, both foreign

corporations based in USA and UK respectively. Petitioner

claimed that it erroneously withheld taxes instead of 5%

expanded/ creditable withholding taxes.

There is a tax treat with US and UK that would make such

corporations treated as resident foreign corporation and be

subject to the 5% creditable withholding tax.

Petitioner contended that the 2 corporations created a

permanent establishment although there are no fixed places

of business because of the series of transactions in more

than 183 days in 12 month period.

The treaty requires that the corporation have a permanent

establishment. It includes rendition of services for more

than 183 days. Profits will only be taxable if there is

permanent establishment.

Court held that the corporations have permanent

establishment based on the services rendered.

Creation of permanent establishment does not automatically

convert the status to resident foreign corporations. Still, the

2 corporation are taxed as non-resident foreign corporations

pursuant to §28(B) of the Tax Code.

32% rate was held but Tax Code was amended to make it

30% now.

RMO 072-10 (25 Aug 2010)

Guidelines on the Processing of Tax Treaty Relief Applications

(TTRA) Pursuant to Existing Philippine Treaties

Documentary guidelines

To be filed at International Tax Affairs Division (ITAD).

Filing should always be made before the transaction.

Failure to file will have the effect of disqualifying the TTRA

under this RMO.

ITAD Ruling 102-02 (28 May 2002)

Energizer, a domestic corporation, entered into a contract with

Eveready, a non-resident corporation based in US. Energizer will

pay royalties to Eveready.

“Most-favoured nation” - The tax imposed on royalties derived

by a resident of the US from sources within the Philippines shall

be the lowest rate of Philippine tax that may be imposed an

royalties of the same kind paid under similar circumstances to a

resident of a third State.

The royalty payments are subject to 15% preferential tax rate

based on the gross amount pursuant to the “most favoured

nation” provision of the RP-US tax treaty in relation to the RP-

Netherlands tax treaty.

Withholding Tax §22(K), Tax Code

(K) The term 'withholding agent' means any person required to deduct and

withhold any tax under the provisions of Section 57.

Final Withholding Tax at Source §57(A), Tax Code

o Withholding of Final Tax on Certain Incomes. — Subject to rules and

regulations the Secretary of Finance may promulgate, upon the

recommendation of the Commissioner, requiring the filing of income tax

return by certain income payees, the tax imposed or prescribed by Sections

24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D),

25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),

28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a),

28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of

income shall be withheld by payor-corporation and/or person and paid in

the same manner and subject to the same conditions as provided in Section

58 of this Code.

o 24(B)(1),

o 24(B)(2),

o 24(C),

o 24(D)(1);

o 25(A)(2),

o 25(A)(3),

o 25(B),

o 25(C),

o 25(D),

o 25(E);

o 27(D)(1),

o 27(D)(2),

o 27(D)(3),

o 27(D)(5);

o 28(A)(4),

o 28(A)(5),

o 28(A)(7)(a),

o 28(A)(7)(b),

o 28(A)(7)(c),

o 28(B)(1),

o 28(B)(2),

o 28(B)(3),

o 28(B)(4),

o 28(B)(5)(a),

o 28(B)(5)(b),

o 28(B)(5)(c);

o 33; and

o 282

CIR VS. SMART COMMUNICATION, INC. (25 AUG 2010)

o Smart entered into 3 agreements for Programming and Consultancy

Services with Prism, a non-resident corporation based in Malaysia.

o Smart withheld $137K as 25% royalty tax under RP-Malaysia Tax Treaty

thinking that it constitutes royalties.

o This was later claimed for refund through ITAD.

o Issue: whether Smart has the right to file the claim; if there is, whether

the payments to Prism constitutes business profits or royalties

o SC held that withholding agent may file a claim for refund. Pursuant to

§204(c) and 209 of Tax Code, the person entitled to claim a tax refund is

the taxpayer. However, in case the taxpayer does not file a claim for

refunds, the withholding agent may file the claim. The withholding

agent will also be liable for deficiencies should the amount withheld be

less than required under the law.

o Withholding agent is agent of both the government and taxpayer. No

relationship is required.

o The 2 payments constituted business profits and 1 royalty. SDM (Service

Download Manager) is an intellectual property right and subject to 25%

withholding tax. The CM (Channel Manager) and SIM Applications

agreements must have refund.

§2.57. (A) & 25.7.1., RR 2-98 (17 Apr 1998)

o IRR of Tax Code relative to the withholding on income subject to expanded

withholding tax and final withholding tax, withholding of income tax on

compensation, withholding of creditable Vat and other percentage taxes.

o §2.57. (A): Final Withholding Tax. — Under the final withholding tax system

the amount of income tax withheld by the withholding agent is constituted

as a full and final payment of the income tax due from the payee on the said

income. The liability for payment of the tax rests primarily on the payor as a

withholding agent. Thus, in case of his failure to withhold the tax or in case

of under withholding, the deficiency tax shall be collected from the

payor/withholding agent. The payee is not required to file an income tax

return for the particular income.

o The finality of the withholding tax is limited only to the payee's income tax

liability on the particular income. It does not extend to the payee's other tax

liability on said income, such as when the said income is further subject to a

percentage tax. For example, if a bank receives income subject to final

withholding tax, the same shall be subject to a percentage tax.

o §2.57.1 Income Payments Subject to Final Withholding Tax. – The following

forms of income shall be subject to final withholding tax at the rates herein

specified:

(A) Income payments to a citizen or to a resident alien individual;

(1)Interest from any peso bank deposit, and yield or any other

monetary benefit from deposit substitutes and from trust funds

and similar arrangements; royalties (except on books as well as

other literary works and musical compositions), prizes (except

prizes amounting to ten thousand pesos (P10,000.00) or less

which shall be subject to tax under Sec. 24 (A) of the Code) and

other winnings (except Philippine Charity Sweepstakes winnings

and lotto winnings) derived from sources within the Philippines

— Twenty percent (20%).

(2)Royalties on books, as well as other literary works and

musical compositions — Ten percent (10%).

(3)Interest income received by a resident individual taxpayer

from a depository bank under the Foreign Currency Deposit

System — Seven and one-half percent (7.5%).

(4)Interest income from long-term deposit or investment in the

form of savings, common or individual trust funds, deposit

substitutes, investment management accounts and other

investments evidenced by certificates in such form prescribed

by the Bangko Sentral ng Pilipinas which was pre-terminated by

the holder before the fifth (5th) year at the rates herein

prescribed to be deducted and withheld from the proceeds

thereof based on the length of time that the instrument was

held by the taxpayer —

Holding Period Rate

Four (4) years to less than five (5) years 5%

Three (3) years to less than four (4) years 12%

Less than three (3) years 20%

(5) Cash and/or property dividends actually or constructively

received from a domestic corporation, joint stock company,

insurance or mutual fund companies or on the share of an

individual partner in the distributable net income after tax of a

partnership (except general professional partnership) or on the

share of an individual in the net income after tax of an

association, a joint account or a joint venture or consortium of

which he is a member or a co-venturer.

6% - beginning January 1, 1998

8% - beginning January 1, 1999 and

10% - beginning January 1, 2000 and thereafter

The tax on cash and property dividends shall only be

imposed on dividends which are declared from profits

of corporations made after December 31, 1997.

(6) On capital gains presumed to have been realized from the

sale, exchange or other disposition of real property located in

the Philippines, classified as capital assets, including pacto de

retro sales and other forms of conditional sales based on the

gross selling price or fair market value as determined in

accordance with Sec. 6(E) of the Code (i.e. the authority of the

Commissioner to prescribe the real property values), whichever

is higher — Six percent (6%).

In case of dispositions of real property made by individuals to

the government or any of its political subdivisions or agencies or

to government-owned or controlled corporations, the tax to be

imposed shall be determined either under Section 24(A) of the

Code for normal income tax for individual citizens and residents

or under Section 24(D)(1) of the Code for the final tax on capital

gains from sale of property at six percent (6%), at the option of

the taxpayer.

(B) Income Payment to Non-resident Aliens Engaged in Trade or

Business in the Philippines. — The following forms of income derived

from sources within the Philippines shall be subject to final withholding

tax in the hands of a non-resident alien individual engaged in trade or

business within the Philippines, based on the gross amount thereof and

at the rates prescribed therefor:

(1) On Certain Passive Income — A tax of twenty (20%) percent

is hereby imposed on certain passive income received from all

sources within the Philippines.

(a) Cash and/or property dividend from a domestic

corporation or from a joint stock company, or from an

insurance or mutual fund company or from a regional

operating headquarter of a multinational company;

(b) Share in the distributable net income after tax of a

partnership (except general professional partnership) of

which he is a partner, or share in the net income after

tax of an association, a joint account, or a joint venture

of which he is a member or a co-venturer;

(c) Interests from any currency bank deposit and yield

or any other monetary benefit from deposit substitutes

and from trust funds and similar arrangements;

(d) Royalties (except royalties on books, as well as other

literary works and musical compositions which shall be

subject to 10% final withholding tax);

(e) Prizes (except prizes amounting to ten thousand

pesos (P10,000.00) or less subject to tax under Sec. 25

(A) (1) of the Code for the normal rates of income tax

for individuals) and other winnings (except Philippine

Charity Sweepstakes winnings and lotto winnings);

(2) Interest income derived from long-term deposit or

investment in the form of savings, common or individual trust

funds, deposit substitutes, investment management accounts

and other investments evidenced by certificates in such form

prescribed by the Bangko Sentral ng Pilipinas which was pre-

terminated by the holder before the fifth (5th) year at the rates

herein prescribed to be deducted and withheld from the

proceeds thereof based on the length of time that the

instrument was held by the taxpayer —

Holding Period Rate

Four (4) years to less than five (5) years 5%

Three (3) years to less than four (4) years 12%

Less than three (3) years 20%

(3) On capital gains presumed to have been realized from the

sale exchange or other disposition of real property located in

the Philippines, classified as capital assets, including pacto de

retro sales and other forms of conditional sales based on the

gross selling price or fair market value as determined in

accordance with Sec. 6(E) of the Code (i.e. the authority of the

Commissioner to prescribe zonal values), whichever is higher —

Six percent (6%).

In case of dispositions of real property made by individuals to

government or any of its political subdivisions or agencies or to

government-owned or controlled corporations, the tax to be

imposed shall be determined either under Section 24(A) of the

code for the normal rate of income tax for individual citizens

and residents or under Section 24(D)(1) of the Code for the final

tax on capital gains from sale of property at six percent (6%), at

the option of the taxpayer.

(C) Income Derived from All Sources Within the Philippines by a Non-

resident Alien Individual Not Engaged in Trade or Business Within the

Philippines. — The following forms of income derived from all sources

within the Philippines shall be subject to a final withholding tax in the

hands of a non-resident alien individual not engaged in trade or

business within the Philippines based on the following amounts and at

the rates prescribed therefor:

(1) On the gross amount of income derived from all sources

within the Philippines by a non-resident alien individual who is

not engaged in trade or business in the Philippines as interest,

cash and/or property dividends, rents, salaries, wages,

premiums, annuities, compensation, remuneration,

emoluments, or other fixed or determinable annual or periodic

or casual gains, profits and income and capital gains — Twenty

five percent (25%).

(2) On capital gains presumed to have been realized from the

sale, exchange or other disposition of real property located in

the Philippines, classified as capital assets, including pacto de

retro sales and other forms of conditional sales based on the

gross selling price or fair market value as determined in

accordance with Sec. 6(E) of the Code (i.e. the authority of the

Commissioner to prescribe the real property values), whichever

is higher — Six percent (6%).

In case of dispositions of real property made by individuals to

government or any of its political subdivisions or agencies or to

government-owned or controlled corporations, the tax to be

imposed shall be determined either under Sec. 24(a) of the

Code for the rates of income tax for individual citizens and

residents or under Sec. 24(D)(1) of the Code for the final tax on

capital gains from sale of property at six percent (6%), at the

option of the taxpayer.

(D) Income Derived by Alien Individuals Employed by Regional or Area

Headquarters and Regional Operating Headquarters of Multinational

Companies. — A final withholding tax equivalent to fifteen percent

(15%) shall be withheld by the withholding agent from the gross income

received by every alien individual occupying managerial and technical

positions in regional or area headquarters and regional operating

headquarters and representative offices established in the Philippines

by multinational companies as salaries, wages, annuities, compensation,

remuneration, and other emoluments, such as honoraria and

allowances, except income which is subject to the fringe benefits tax ,

from such regional or area headquarters and regional operating

headquarters.

The same tax treatment shall apply to Filipinos employed and occupying

the same as those of alien employed by these multinational companies.

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

engaged in international trade with its affiliates or subsidiaries or

branch offices in the Asia Pacific Region and other foreign markets.

(E) Income Derived by Alien Individuals Employed by Offshore Banking

Units. — A final withholding tax equivalent to fifteen (15%) shall be

withheld by the withholding agent from the gross income of alien

individuals occupying managerial or technical positions in offshore

banking units established in the Philippines, as salaries, wages,

annuities, compensations, remuneration and other emoluments such as

honoraria and allowances, received from such offshore banking units.

The same tax treatment shall apply to Filipinos employed and occupying

the same positions as those of aliens who are employed by these

offshore banking units.

(F) Income of Aliens Employed by Foreign Petroleum Service Contractors

and Subcontractors. — A final withholding tax equivalent to fifteen

percent (15%) shall be withheld from the gross income of an alien

individual who is a permanent resident of a foreign country but who is

employed and assigned in the Philippines by a foreign service contractor

or by a foreign service subcontractor who is engaged in petroleum

operations in the Philippines. His gross income includes salaries, wages,

annuities, compensation, remuneration and other emoluments, such as

honoraria and allowances, received from such contractor or

subcontractor.

The same tax treatment shall apply to Filipinos who are employed and

occupying the same positions as those of aliens employed by a foreign

petroleum service contractor or subcontractor.

(G) Income Payment to a Domestic Corporation. — The following items

of income shall be subject to a final withholding tax in the hands of a

domestic corporation, based on the gross amount thereof and at the

rate of tax prescribed therefor:

(1) Interest from any currency bank deposit and yield or any

other monetary benefit from deposit substitutes and from trust

fund and similar arrangements derived from sources within the

Philippines — Twenty Percent (20%).

(2) Royalties derived from sources within the Philippines —

Twenty percent (20%).

(3) Interest income derived from a depository bank under the

Expanded Foreign Currency Deposit System, otherwise known

as a Foreign Currency Deposit Unit (FCDU) — Seven and one-

half percent (7.5%).

(4) Income derived by a depository bank under the Expanded

Foreign Currency Deposit System from foreign transactions with

local commercial banks including branches of foreign banks that

may be authorized by the Bangko Sentral ng Pilipinas (BSP) to

transact business with Foreign Currency Deposit System Units

and other depository banks under the expanded foreign

currency deposit system including interest income from foreign

currency loans granted by such depository bank under the said

expanded foreign currency deposit system to residents — Ten

percent (10%).

(5) On capital gains presumed to have been realized from the

sale, exchange or other disposition of real property located in

the Philippines classified as capital assets, including pacto de

retro sales and other forms of conditional sales based on the

gross selling price or fair market value as determined in

accordance with Sec. 6(E) of the Code, whichever is higher — Six

percent (6%).

(H) Income Payment to a Resident Foreign Corporation. — The

following forms of income shall be subject to a final withholding tax in

the hands of a foreign corporation, based on the gross amount thereof

and at the rate of tax prescribed therefor:

(1) Offshore Banking Units — On income derived by offshore

banking units authorized by the Bangko Sentral ng Pilipinas

(BSP) from foreign currency transactions with local commercial

banks and branches of foreign banks that may be authorized by

the BSP to transact business with offshore banking units and

other OBUs including interest income derived from foreign

currency loans granted to resident — Ten percent (10%).

(2) Tax on Branch Profit Remittances — On any profit remitted

by the Philippine branch of a foreign corporation to its head

office abroad based on the total profits applied or earmarked

for remittance without any deduction for the tax component

thereof except those registered with the Philippine Economic

Zones Authority (PEZA) and other companies within the special

economic zones such as Subic Bay Metropolitan Authority

(SBMA) and Clark Development Authority (CDA) — Fifteen

percent (15%).

Interests, dividends, rents, royalties (including remunerations

for technical services), salaries, wages, premiums, annuities,

emoluments or other fixed or determinable annual periodic or

casual gains, profits, income and capital gains received by a

foreign corporation during each taxable year from all sources

within the Philippines shall not be considered as branch profits

unless the same are effectively connected with the conduct of

its trade or business in the Philippines.

(3) Interest on any currency bank deposit and yield or any other

monetary benefit from deposit substitutes and from trust funds

and similar arrangements and royalties derived from sources

within the Philippines — Twenty percent (20%).

(4) Interest income derived from a Depository Bank under the

Expanded Foreign Currency Deposit system — Seven and one-

half percent (7.5%).

(5) Income derived by a depository bank under the expanded

foreign currency deposit system from foreign currency

transactions with local commercial banks including branches of

foreign banks that may be authorized by the Bangko Sentral ng

Pilipinas to transact business with foreign currency deposit

system units and other depository banks under the expanded

foreign currency deposit system including interest income from

foreign currency loans granted by such depository banks under

the said expanded foreign currency deposit system to resident

— Ten percent (10%).

(I) Income Derived From all Sources Within the Philippines by Non-

Resident Foreign Corporation. — The following shall be subject to final

withholding tax based on the gross amount of income and at the rate of

tax prescribed therefor:

(1) In general — On gross income derived from all sources

within the Philippines such as interests, dividends, rents,

royalties, salaries, premiums (except reinsurance premiums),

annuities, emoluments, or other fixed or determinable annual,

periodic or casual gains, profits and income and capital gains

(except capital gains realized from sale, exchange, disposition of

shares of stock in any domestic corporation which is subject to

capital gains tax under Sec. 28(B)(5)(c) — at the following rates:

34% - beginning January 1, 1998

33% - beginning January 1, 1999 and

32% - beginning January 1, 2000 and thereafter

(2) Gross income from all sources within the Philippines derived

by non-resident cinematographic film owners, lessors or

distributors — Twenty five percent (25%).

(3) On the gross rentals, lease and charter fees, derived by non-

resident owner or lessor of vessels from leases or charters to

Filipino citizens or corporations as approved by the Maritime

Industry Authority — Four and one-half percent (4.5%).

(4) On the gross rentals, charter and other fees derived by non-

resident lessor of aircraft, machineries and other equipment —

Seven and a half percent (7.5%).

(5) Interest on foreign loans contracted on or after August 1,

1986 — Twenty percent (20%).

(6) Dividends received from a domestic corporation — Fifteen

percent (15%) of the cash and/or property dividends received

from a domestic corporation subject to the condition that the

country in which the nonresident foreign corporation is

domiciled (a) shall allow a credit against the tax due from the

said nonresident foreign corporation which are equivalent to

taxes deemed to have been paid in the Philippines equal to

twenty percent (20%) for 1997, nineteen percent (19%) for

1998, eighteen percent (18%) for 1999 and seventeen percent

(17%) thereafter, which represents the difference between the

regular income tax of thirty-five percent (35%) in 1997, thirty

four percent (34%) in 1998, thirty three percent (33%) in 1999,

and thirty two percent (32%) thereafter on corporations and the

fifteen percent (15%) tax on dividends as herein provided; or,

(b) does not impose any income tax on dividends received from

a domestic corporation.

(J) Fringe Benefits Granted to the Employee (Except Rank and File

Employee) . — There shall be imposed a final tax of 34% beginning

January 1, 1998; 33% beginning January 1, 1999 and 32% beginning

January 1, 2000 and thereafter, on the grossed-up monetary value of

fringe benefits, granted or furnished by the employer to his employees

(except rank and file as defined in the Code). Fringe benefits however,

which are required by the nature of or necessary to the trade, business

or profession of the employer, or where such fringe benefit is for the

convenience and advantage of the employer shall not be subject to the

fringe benefits tax.

The term fringe benefit means any good, service or other benefit

furnished or granted in cash or in kind by an employer to an individual

employee (except rank and file employees) such as but not limited to,

the following:

(1) Housing;

(2) Expense account;

(3) Vehicle of any kind;

(4) Household personnel, such as maid, driver and others;

(5) Interest on loan at less than market rate to the extent

of the difference between the market rate and actual rate

granted;

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

the employer for the employee in social and athletic clubs or

other similar organizations;

(7) Expenses for foreign travel;

(8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his

dependents; and

(10) Life or health insurance and other non-life insurance

premiums or similar amounts in excess of what the law allows.

Fringe benefits granted to the following employees and taxable under

Sec. 25 (B), (C), (D) and (E) shall also be subject to the fringe benefit tax

to wit:

Sec. 25(B) Non-resident alien individual not engaged in trade or

business in the Philippines.

Sec. 25(C) Alien individual employed by regional or area

headquarters and regional operating headquarters of a

multinational company, including any of its Filipino employees

employed and occupying the same position as those of its

aforesaid alien employees;

Sec. 25(D) Alien individual employed by an offshore banking

unit of a foreign bank established in the Philippines, including

any of its Filipino employees employed and occupying the same

position as those of its aforesaid alien employees;

Sec. 25(E) Alien individual employed by a foreign service

contractor and subcontractor engaged in petroleum operations

in the Philippines, including any of its Filipino employees

employed and occupying the same position as those of its

aforesaid alien employees.

The computation and the scheme for withholding the tax on

fringe benefits shall be governed by such revenue orders that

the Commissioner shall issue as guidelines and clarifications for

its proper and consistent implementation.

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

Violations of the National Internal Revenue Code and the Discovery and

Seizure of Smuggled Goods. — The following rewards shall be subject to

a final withholding tax at the rate of ten percent (10%):

(1) Those given to persons, except an internal revenue official or

employee, or other public official or employee or his relative

within the sixth degree of consanguinity, who voluntarily gives

definite and sworn information not yet in the possession of the

BIR, leading to the discovery of frauds upon the Internal

Revenue Laws or violations of any of the provisions thereof,

thereby resulting in the recovery of revenues, surcharges and

fees and/or the conviction of the guilty party and/or imposition

of any fine or penalty.

(2) Those given to an informer where the offender has offered

to compromise the violation of law committed by him and his

offer has been accepted by the Commissioner and collected

from the offender.

The amount of reward shall be equivalent to ten percent (10%)

of the revenues, surcharges or fees recovered and/or fine or

penalty imposed and collected or one million pesos

(P1,000,000.00) per case whichever is lower.

The reward shall be paid under the rules and regulations issued

by the Secretary of Finance, upon the recommendation of the

Commissioner. However, such person shall not be entitled to a

reward, should no revenue, surcharges or fees be actually

recovered or collected nor shall apply to a case already pending

or previously investigated or examined by the Commissioner or

any of his deputies or agents or examiners, or the Secretary of

Finance or any of his deputies or agents.

(3) Those given to persons instrumental in the discovery and

seizure of such smuggled goods.

The amount of reward shall be equivalent to ten percent of the

market value of the smuggled and confiscated goods or one

million pesos (P1,000,000.00) per case whichever is lower.

Creditable Withholding Tax §57(B), Tax Code

o Withholding of Creditable Tax at Source. — The Secretary of Finance may, upon

the recommendation of the Commissioner, require the withholding of a tax on

the items of income payable to natural or juridical persons, residing in the

Philippines, by payor-corporation/persons as provided for by law, at the rate of

not less than one percent (1%) but not more than thirty-two percent (32%)

thereof, which shall be credited against the income tax liability of the taxpayer

for the taxable year.

FILIPINAS SYNTHETIC FIBER CORPORATION VS. COURT OF APPEALS (12 OCT 1999)

o Petitioner, a domestic corporation, was assessed for deficiency in

withholding tax at source. The withholding taxes were from interest loans,

royalties and guarantee fees paid by petitioner to non-resident foreign

corporations. It claimed that the liability is at the time of accrual and not at

the time of actual payment.

o The law is silent as to when does the duty to withhold the taxes arise.It is

the right to receive income and not the actual receipt that determines when

to include the amount in gross income.

o Requisites of accrual method of accounting

o The right to receive the amount must be valid, unconditional and

enforceable

o The amount must be reasonably susceptible of accurate estimate

o There must be reasonable expectation that the amount will be paid

in due course.

o Petitioner had already deducted the interests due to the foreign

corporation as business expense for this reason, the tax is already due. The

petitioner adopted accrual method of accounting in reporting its income.

o Since petitioner has claimed it as deductions from gross income, it should

withhold the tax on interest due to foreign corporations.

§2.57. (B) & 25.7.2., RR 2-98 (17 Apr 1998)

§2.57. (B) Creditable Withholding Tax. — Under the creditable withholding tax

system, taxes withheld on certain income payments are intended to equal or at

least approximate the tax due of the payee on said income. The income

recipient is still required to file an income tax return, as prescribed in Sec. 51

and Sec. 52 of the NIRC , as amended, to report the income and/or pay the

difference between the tax withheld and the tax due on the income. Taxes

withheld on income payments covered by the expanded withholding tax

(referred to in Sec. 2.57.2 of these regulations) and compensation income

(referred to in Sec. 2.78 also of these regulations) are creditable in nature.

§25.7.2. Income Payment Subject to Creditable Withholding Tax and Rates

Prescribed Thereon. — Except as herein otherwise provided, there shall be

withheld a creditable income tax at the rates herein specified for each class of

payee from the following items of income payments to persons residing in the

Philippines:

(A) Professional fees, talent fees, etc., for services rendered by

individuals — On the gross professional, promotional and talent fees or

any other form of remuneration for the services of the following

individuals — Ten percent (10%);

(1) Those individually engaged in the practice of professions or

callings: lawyers; certified public accountants; doctors of

medicine; architects; civil, electrical, chemical, mechanical,

structural, industrial, mining, sanitary, metallurgical and

geodetic engineers; marine surveyors; doctors of veterinary

science; dentist; professional appraisers; connoisseurs of

tobacco; actuaries; and interior decorators;

(2) Professional entertainers such as but not limited to actors

and actresses, singers and emcees;

(3) Professional athletes including basketball players, pelotaris

and jockeys;

(4) All directors involved in movies, stage, radio, television and

musical productions;

(5) Insurance agents and insurance adjusters;

(6) Management and technical consultants;

(7) Bookkeeping agents and agencies;

(8) Other recipients of talent fees;

(9) Fees of directors who are not employees of the company

paying such fees, whose duties are confined to attendance at

and participation in the meetings of the board of directors.

The amounts subject to withholding under this paragraph shall

include not only fees, but also per diems, allowances and any

other form of income payments. In the case of professional

entertainers, athletes, and all recipient of talent fees, the

amount subject to withholding tax shall also include amounts

paid to them in consideration for the use of their names or

pictures in print, broadcast, or other media or for public

appearances, for purposes of advertisements or sales

promotion.

(B) Professional fees, talent fees, etc. for services of taxable juridical

persons — On the gross professional, promotional and talents fees, or

any other form of remuneration enumerated in the preceding

subparagraph for the services of taxable juridical persons — Five

percent (5%).

(C) Rentals — On gross rental for the continued use or possession of

real property used in business which the payor or obligor has not taken

or is not taking title, or in which he has no equity — Five percent (5%).

(D) Cinematographic film rentals and other payments — On gross

payments to resident individuals and corporate cinematographic film

owners, lessors or distributors — Five percent (5%).

(E) Income payments to certain contractors — On gross payments to the

following contractors, whether individual or corporate — One percent

(1%).

(1) General engineering contractors — Those whose principal

contracting business in connection with fixed works requiring

specialized engineering knowledge and skill including the

following divisions or subjects:

(a) Reclamation works;

(b) Railroads;

(c) Highways, streets and roads;

(d) Tunnels;

(e) Airports and airways;

(f) Waste reduction plants;

(g) Bridges, overpasses, underpasses and other similar

works;

(h) Pipelines and other systems for the transmission of

petroleum and other liquid or gaseous substances;

(i) Land leveling;

(j) Excavating;

(k) Trenching;

(l) Paving; and

(m) Surfacing work.

(2) General Building contractors — Those whose principal

contracting business is in connection with any structure built,

for the support, shelter and enclosure of persons, animals,

chattels, or movable property of any kind, requiring in its

construction the use of more than two unrelated building trades

or crafts, or to do or superintend the whole or any part thereto.

Such structure includes sewers and sewerage disposal plants

and systems, parks, playgrounds, and other recreational works,

refineries, chemical plants and similar industrial plants requiring

specialized engineering knowledge and skills, powerhouse,

power plants and other utility plants and installation, mines and

metallurgical plants, cement and concrete works in connection

with the 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. cdasia

(4) Other contractors —

(a) Filling, demolition and salvage work contractors and

operators of mine drilling apparatus;

(b) Operators of dockyards;

(c) Persons engaged in the installation of water system,

and gas or electric light, heat or power;

(d) Operators of stevedoring, warehousing or

forwarding establishments;

(e) Transportation contractors which include common

carriers for the carriage of goods and merchandise of

whatever kind by land, air or water, where the gross

payments by the payor to the same payee amounts to

at least two thousand pesos (P2,000) per month,

regardless of the number of shipments during the

month ;

(f) Printers, bookbinders, lithographers and publishers

except those principally engaged in the publication or

printing of any newspaper, magazine, review or bulletin

which appears at regular intervals, with fixed prices for

subscription and sale;

(g) Messengerial, janitorial, private detective and/or

security agencies, credit and/or collection agencies and

other business agencies;

(h) Advertising agencies, exclusive of gross payments to

media;

(i) Independent producers of television, radio and stage

performances or shows;

(j) Independent producers of "jingles";

(k) Labor recruiting agencies

(l) Persons engaged in the installation of elevators,

central air conditioning units, computer machines and

other equipment and machineries and the maintenance

services thereon;

(m) Persons engaged in the sale of computer services;

(n) Persons engaged in landscaping services;

(o) Persons engaged in the collection and disposal of

garbage;

(p) TV and radio station operators on sale of TV and

radio airtime; and

(q) TV and radio blocktimers on sale of TV and radio

commercial spots.

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

the beneficiaries of estates and trust as determined under Sec. 60 of

the Code, except such income subject to final withholding tax and tax

exempt income — Fifteen percent (15%);

(G) Income payments to certain brokers and agents. — On gross

commissions of customs, insurance, real estate and commercial brokers

and fees of agents of professional entertainers — Five percent (5%);

(H) Income payments to partners of general professional partnerships .

— Income payments made periodically or at the end of the taxable year

by a general professional partnership to the partners, such as drawings,

advances, sharings, allowances, stipends, etc. — Ten percent (10%);

(I) Professional fees paid to medical practitioners. — Any amount

collected for and paid to medical practitioners by hospitals and clinics or

paid by patients to the medical practitioners through the hospital or

clinic — Ten percent (10%);

(J) Gross selling price or total amount of consideration or its equivalent

paid to the seller/owner for the sale, exchange or transfer of . — Real

property, other than capital assets, sold by an individual, corporation,

estate, trust, trust fund or pension fund and the seller/transferor is

habitually engaged in the real estate business in accordance with the

following schedule —

Those which are exempt from a withholding

tax at source as prescribed in Sec. 2.57.5 of

these regulations Exempt

With a selling price of five hundred thousand

pesos (P500,000.00) or less 1.5%

With a selling price of more than five hundred

thousand pesos (P500,000.00) but not more

than two million pesos (P2,000,000.00) 3.0%

With selling price of more than two million pesos

(P2,000,000.00) 5.0%

A seller/transferor must show proof of registration with HLURB

or HUDCC to be considered as habitually engaged in the real

estate business.

Real property, other than capital asset, by an individual, estate,

trust, trust fund or pension fund or by a corporation who is not

habitually engaged in the real estate business — Seven and one-

half percent (7.5%). LLphil

Gross selling price shall mean the consideration stated in the

sales document or the fair market value determined in

accordance with Section 6 (E) of the Code, as amended,

whichever is higher. In an exchange, the fair market value of the

property received in exchange, as determined in the Income Tax

Regulations shall be used.

Where the consideration or part thereof is payable on

installment, no withholding of tax is required to be made on the

periodic installment payments where the buyer is an individual

not engaged in trade or business. In such a case, the applicable

rate of tax based on the entire consideration shall be withheld

on the last installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether

a corporation or otherwise, the tax shall be deducted and

withheld by the buyer on every installment.

(K) Additional income payments to government personnel from

importers, shipping and airline companies, or their agents . — On gross

additional payments by importers, shipping and airline companies, or

their agents to government personnel for overtime services as

authorized by law — Fifteen percent (15%);

For this purpose, the importers, shipping and airline companies or their

agents, shall be the withholding agents of the Government;

(L) Certain income payments made by credit card companies. — On the

gross amounts paid by any credit card company in the Philippines to any

business entity, whether a natural or juridical person, representing the

sales of goods/services made by the aforesaid business entity to

cardholders — One half percent (1/2%);

(M) Income payments made by the top five thousand (5,000)

corporations. — Income payments made by any of the top five

thousand (5,000) corporations, as determined by the Commissioner, to

their local supplier of goods — One percent (1%);

(1) The term "goods" pertains to tangible personal property. It

does not include intangible personal property as well as real

property.

(2) The term "local suppliers of goods" pertains to a supplier

from whom any of the top five thousand (5,000) corporations,

as determined by the Commissioner, regularly makes its

purchases of goods. As a general rule, this term does not

include a casual purchase of goods, that is, purchases made

from non-regular suppliers and oftentimes involving single

purchases. However, a single purchase which involves one

hundred thousand pesos (P100,000.00) or more shall be subject

to a withholding tax.

(3) A corporation shall not be considered a withholding agent

for purposes of this Section, unless such corporation has been

determined and duly notified in writing by the Commissioner

that it has been selected as one of the top five thousand (5,000)

corporations.

(4) The withholding agent shall submit on a semestral basis a list

of its regular suppliers of goods to the Revenue District Office

(RDO) having jurisdiction over the withholding agent's principal

place of business on or before July 31 and January 31 of each

year.

(N) Income payments by government . — Income payments, except any

single purchase which is P10,000 and below, which are made by a

government office, national or local, including government-owned or

controlled corporations, on their purchases of goods from local

suppliers — One percent (1%);

A government-owned or controlled corporation which is listed as one of

the top five thousand (5,000) corporations shall withhold the tax in its

capacity as a government-owned or controlled corporation rather than

as one of the top five thousand (5,000) corporations.

RR 12-98 (14 Aug 1998)

o Amendment to Subsection (I) of §2.57.2 of RR 2-98

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 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.

(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 ."

Return and Payment of Tax §58, Tax Code

§58. Returns and Payment of Taxes Withheld at Source. —

(A) Quarterly Returns and Payments of Taxes Withheld. — Taxes

deducted and withheld under Section 57 by withholding agents shall be

covered by a return and paid to, except in cases where the

Commissioner otherwise permits, an authorized agent bank, Revenue

District Officer, Collection Agent, or duly authorized Treasurer of the city

or municipality where the withholding agent has his legal residence or

principal place of business, or where the withholding agent is a

corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be

held as a special fund in trust for the government until paid to the

collecting officers.

The return for final withholding tax shall be filed and the payment made

within twenty-five (5) days from the close of each calendar quarter,

while the return for creditable withholding taxes shall be filed and the

payment made not later than the last day of the month following the

close of the quarter during which withholding was made: Provided, That

the Commissioner, with the approval of the Secretary of Finance, may

require these withholding agents to pay or deposit the taxes deducted

or withheld at more frequent intervals when necessary to protect the

interest of the government.

(B) Statement of Income Payments Made and Taxes Withheld. — Every

withholding agent required to deduct and withhold taxes under Section

57 shall furnish each recipient, in respect to his or its receipts during the

calendar quarter or year, a written statement showing the income or

other payments made by the withholding agent during such quarter or

year, and the amount of the tax deducted and withheld therefrom,

simultaneously upon payment at the request of the payee, but not later

than the twentieth (20th) day following the close of the quarter in the

case of corporate payee, or not later than March 1 of the following year

in the case of individual payee for creditable withholding taxes. For final

withholding taxes, the statement should be given to the payee on or

before January 31 of the succeeding year.

(C) Annual Information Return. — Every withholding agent required to

deduct and withhold taxes under Section 57 shall submit to the

Commissioner an annual information return containing the list of

payees and income payments, amount of taxes withheld from each

payee and such other pertinent information as may be required by the

Commissioner. In the case of final withholding taxes, the return 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. This return, if made and

filed in accordance with the rules and regulations approved by the

Secretary of Finance, upon recommendation of the Commissioner, shall

be sufficient compliance with the requirements of Section 68 of this

Title in respect to the income payments.

The Commissioner may, by rules and regulations, grant to any

withholding agent a reasonable extension of time to furnish and submit

the return required in this Subsection.

(D) Income of Recipient. — Income upon which any creditable tax is

required to be withheld at source under Section 57 shall be included in

the return of its recipient but the excess of the amount of tax so

withheld over the tax due on his return shall be refunded to him subject

to the provisions of Section 204; if the income tax collected at source is

less than the tax due on his return, the difference shall be paid in

accordance with the provisions of Section 56.

All taxes withheld pursuant to the provisions of this Code and its

implementing rules and regulations are hereby considered trust funds

and shall be maintained in a separate account and not commingled with

any other funds of the withholding agent.

(E) Registration with Register of Deeds. — No registration of any

document transferring real property shall be effected by the Register of

Deeds unless the Commissioner or his duly authorized representative

has certified that such transfer has been reported, and the capital gains

or creditable withholding tax, if any, has been paid: Provided, however,

That the information as may be required by rules and regulations to be

prescribed by the Secretary of Finance, upon recommendation of the

Commissioner, shall be annotated by the Register of Deeds in the

Transfer Certificate of Title or Condominium Certificate of Title:

Provided, further, That in cases of transfer of property to a corporation,

pursuant to a merger, consolidation or reorganization, and where the

law allows deferred recognition of income in accordance with Section

40, the information as may be required by rules and regulations to be

prescribed by the Secretary of Finance, upon recommendation of the

Commissioner, shall be annotated by the Register of Deeds at the back

of the Transfer Certificate of Title or Condominium Certificate of Title of

the real property involved: Provided, finally, That any violation of this

provision by the Register of Deeds shall be subject to the penalties

imposed under Section 269 of this Code.

Withholding on Wages §78 – 83, Tax Code(Withholding on Wages)

SECTION 78. Definitions. — As used in this Chapter:

(A) Wages. — The term 'wages' means all remuneration (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 (½) or more of any payroll period of not

more than thirty-one (31) 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 (½) 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.

(B) Payroll Period. — The term 'payroll period' means a period for which

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, biweekly, semi-monthly, monthly, quarterly,

semi-annual, or annual period. cdtai

(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.

(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 service does not have control of the payment of the wages

for such services, the term 'employer' (except for the purpose of

Subsection A) means the person having control of the payment

of such wages; and

(2) In the case of a person paying wages on behalf of a

nonresident alien individual, foreign partnership or foreign

corporation not engaged in trade or business within the

Philippines, the term 'employer' (except for the purpose of

Subsection A) means such person.

SECTION 79. Income Tax Collected at Source. —

(A) Requirement of Withholding. — Except in the case of a minimum

wage earner as defined in Section 22(HH) of this Code, every employer

making payment of wages shall deduct and withhold upon such wages a

tax determined in accordance with the rules and regulations to be

prescribed by the Secretary of Finance, upon recommendation of the

Commissioner.

(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 penalty or

addition to the tax otherwise applicable in respect of such failure to

deduct and withhold.

(C) Refunds or Credits. —

(1) Employer. — When there has been an overpayment of tax

under this Section, refund or credit shall be made to the

employer only to the extent that the amount of such

overpayment was not deducted and withheld hereunder by the

employer.

(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 Section 24(A) of this Title. Refunds and credits in cases of

excessive withholding shall be granted under rules and

regulations promulgated by the Secretary of Finance, upon

recommendation of the Commissioner.

Any excess of the taxes withheld over the tax due from the

taxpayer shall be returned or credited within three (3) months

from the fifteenth (15th) day of April. Refunds or credits made

after such time shall earn interest at the rate of six percent (6%)

per annum, starting after the lapse of the three-month period

to the date the refund of credit is made.

Refunds shall be made upon warrants drawn by the

Commissioner or by his duly authorized representative without

the necessity of counter-signature by the Chairman,

Commission on Audit or the latter's duly authorized

representative as an exception to the requirement prescribed

by Section 49, Chapter 8, Subtitle B, Title I of Book V of

Executive Order No. 292, otherwise known as the

Administrative Code of 1987.

(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.

(2) Exemption Certificates. —

(a) When to File. — On or before the date of

commencement of employment with an employer, the

employee shall furnish the employer with a signed

withholding exemption certificate relating to the

personal and additional exemptions to which he is

entitled.

(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 or greater amount of exemption, the

employee shall, within ten (10) days from such change,

file with the employer a new withholding exemption

certificate reflecting the change.

(c) Use of Certificates. — The certificates 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 determined pursuant to Subsection (A) hereof.

(E) Withholding on Basis of Average Wages. — The Commissioner may,

under rules and regulations promulgated by the Secretary of Finance,

authorize employers to:

(1) estimate the wages which will be paid to an employee in any

quarter of the calendar year;

(2) determine the amount to be deducted and withheld upon

each payment of wages to such employee during such quarter

as if the appropriate average of the wages so estimated

constituted the actual wages paid; and

(3) 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.

(F) Husband and Wife. — When a husband and wife each are recipients

of wages, whether from the same or from different employers, taxes to

be withheld shall be determined on the following bases:

(1) The husband shall be deemed the head of the family and

proper claimant of the additional exemption in respect to any

dependent children, unless he explicitly waives his right in favor

of his wife in the withholding exemption certificate.

(2) Taxes shall be withheld from the wages of the wife in

accordance with the schedule for zero exemption of the

withholding tax table prescribed in Subsection (D)(2)(d) hereof.

(G) Nonresident Aliens. — Wages paid to nonresident alien individuals

engaged in trade or business in the Philippines shall be subject to the

provisions of this Chapter.

(H) 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 tax due from each employee

on taxable compensation income for the entire taxable year in

accordance with Section 24(A). The difference between the tax due

from the employee for the entire year and the sum of taxes withheld

from January to November shall either be withheld from his salary in

December of the current calendar year or refunded to the employee not

later than January 25 of the succeeding year.

SECTION 80. Liability for Tax. —

(A) Employer. — The employer shall be liable for the withholding and

remittance of the correct amount of tax required to be deducted and

withheld under this Chapter. If the employer fails to withhold and remit

the correct amount of tax as required to be withheld under the

provision of this Chapter, such tax shall be collected from the employer

together with the penalties or additions to the tax otherwise applicable

in respect to such failure to withhold and remit.

(B) Employee. — Where an employee fails or refuses to file the

withholding exemption certificate or willfully supplies false or

inaccurate information thereunder, the tax otherwise required to be

withheld by the employer shall be collected from him including

penalties or additions to the tax from the due date of remittance until

the date of payment. On the other hand, excess taxes withheld made by

the employer due to:

(1) failure or refusal to file the withholding exemption

certificate; or

(2) false and inaccurate information shall not be refunded to the

employee but shall be forfeited in favor of the Government.

SECTION 81. Filing of Return and Payment of Taxes Withheld. — Except as the

Commissioner otherwise permits, taxes deducted and withheld by the employer

on wages of employees shall be covered by a return and paid to an authorized

agent bank, Collection Agent, or the duly authorized Treasurer of the city or

municipality where the employer has his legal residence or principal place of

business, or in case the employer is a corporation, where the principal office is

located.

The return shall be filed and the payment made within twenty-five (25) days

from the close of each calendar quarter: Provided, however, That the

Commissioner may, with the approval of the Secretary of Finance, require the

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.

The taxes deducted and withheld by employers shall be held in a special fund in

trust for the Government until the same are paid to the said collecting officers.

SECTION 82. Return and Payment in Case of Government Employees. — If the

employer is the Government of the Philippines or any political subdivision,

agency or instrumentality thereof, the return of the amount deducted and

withheld upon any wage shall be made by the officer or employee having

control of the payment of such wage, or by any officer or employee duly

designated for the purpose.

SECTION 83. Statements and Returns. —

(A) Requirements. — Every employer required to deduct and withhold a

tax shall furnish to each such employee in respect of his employment

during the calendar year, on or before January thirty-first (31st) of the

succeeding year, or if his employment is terminated before the close of

such calendar year, on the same day of which the last payment of wages

is made, a written statement confirming the wages paid by the

employer to such employee during the calendar year, and the amount

of 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 wage shall contain such other information, and shall be

furnished at such other time and in such form as the Secretary of

Finance, upon the recommendation of the Commissioner, may, by rules

and regulations, prescribe.

(B) Annual Information 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 (31st) of the succeeding year, submit to

the Commissioner an annual information return containing a list of

employees, the total amount of compensation income of each

employee, the total amount of taxes withheld therefrom during the

year, accompanied by copies of the statement referred to in the

preceding paragraph, and such other information as may be deemed

necessary. This return, if made and filed in accordance with rules and

regulations promulgated by the Secretary of Finance, upon

recommendation of the Commissioner, shall be sufficient compliance

with the requirements of Section 68 of this Title in respect of such

wages.

(C) Extension of Time. — The Commissioner, under such rules and

regulations as may be promulgated by the Secretary of Finance, may

grant to any employer a reasonable extension of time to furnish and

submit the statements and returns required under this Section.

§2.78, RR 2-98 (17 April 1998)

SECTION 2.78. Withholding Tax on Compensation. — The withholding of tax

on compensation income is a method of collecting the income tax at source

upon receipt of the income. It applies to all employed individuals whether

citizens or aliens, deriving income from compensation for services rendered in

the Philippines. The employer is constituted as the withholding agent.

SECTION 2.78.1. Withholding of Income Tax on Compensation Income. —

(A) Compensation Income Defined. — In general, the term

"compensation" means all remuneration for services performed by an

employee for his employer under an employer-employee relationship,

unless specifically excluded by the Code.

The name by which the remuneration for services is designated is

immaterial. Thus, salaries, wages, emoluments and honoraria,

allowances, commissions (e.g. transportation, representation,

entertainment and the like); fees including director's fees, if the director

is, at the same time, an employee of the employer/corporation; taxable

bonuses and fringe benefits except those which are subject to the fringe

benefits tax under Sec. 33 of the Code; taxable pensions and retirement

pay; and other income of a similar nature constitute compensation

income.

The basis upon which the remuneration is paid is immaterial in

determining whether the remuneration constitutes compensation.

Thus, it may be paid on the basis of piece-work, or a percentage of

profits; and may be paid hourly, daily, weekly, monthly or annually.

Remuneration for services constitutes compensation even if the

relationship of employer and employee does not exist any longer at the

time when payment is made between the person in whose employ the

services had been performed and the individual who performed them.

(1) Compensation paid in kind. — Compensation may be paid in

money or in some medium other than money, as for example,

stocks, bonds or other forms of property. If services are paid for

in a medium other than money, the fair market value of the

thing taken in payment is the amount to be included as

compensation subject to withholding. If the services are

rendered at a stipulated price, in the absence of evidence to the

contrary, such price will be presumed to be the fair market

value of the remuneration received. If a corporation transfers to

its employees its own stock as remuneration for services

rendered by the employee, the amount of such remuneration is

the fair market value of the stock at the time the services were

rendered .

(2) Living quarters or meals. — If a person receives a salary as

remuneration for services rendered, and in addition thereto,

living quarters or meals are provided, the value to such person

of the quarters and meals so furnished shall be added to the

remuneration paid for the purpose of determining the amount

of compensation subject to withholding. However, if living

quarters or meals are furnished to an employee for the

convenience of the employer, the value thereof need not be

included as part of compensation income.

(3) Facilities and privileges of a relatively small value. —

Ordinarily, facilities and privileges (such as entertainment,

medical services, or so called "courtesy" discounts on

purchases), furnished or offered by an employer to his

employees generally, are not considered as compensation

subject to withholding if such facilities or privileges are of

relatively small value and are offered or furnished by the

employer merely as a means of promoting the health, goodwill,

contentment, or efficiency of his employees.

Where compensation is paid in property other than money, the

employer shall make necessary arrangements to ensure that the

amount of the tax required to be withheld is available for

payment to the Commissioner.

(4) Tips and gratuities. — Tips or gratuities paid directly to an

employee by a customer of the employer which are not

accounted for by the employee to the employer are considered

as taxable income but not subject to withholding.

(5) Pensions, retirement and separation pay. — Pensions,

retirement and separation pay constitute compensation subject

to withholding, except those provided under Subsection B of

this section.

(6) Fixed or variable transportation, representation and other

allowances —

(a) IN GENERAL, fixed or variable transportation,

representation and other allowances which are received

by a public officer or employee or officer or employee

of a private entity, in addition to the regular

compensation fixed for his position or office, is

compensation subject to withholding.

(b) Any amount paid specifically, either as advances or

reimbursements for travelling, representation and other

bonafide ordinary and necessary expenses incurred or

reasonably expected to be incurred by the employee in

the performance of his duties are not compensation

subject to withholding, if the following conditions are

satisfied:

(i) It is for ordinary and necessary travelling and

representation or entertainment expenses paid

or incurred by the employee in the pursuit of

the trade, business or profession; and

(ii) The employee is required to

account/liquidate for the foregoing expenses in

accordance with the specific requirements of

substantiation for each category of expenses

pursuant to Sec. 34 of the Code. The excess of

actual expenses over advances made shall

constitute taxable income if such amount is not

returned to the employer. Reasonable amounts

of reimbursements/advances for travelling and

entertainment expenses which are pre-

computed on a daily basis and are paid to an

employee while he is on an assignment or duty

need not be subject to the requirement of

substantiation and to withholding.

(7) Vacation and sick leave allowances. — Amounts of

"vacation allowances or sick leave credits" which are paid to an

employee constitute compensation. Thus, the salary of an

employee on vacation or on sick leave, which are paid

notwithstanding his absence from work, constitutes

compensation. However, the monetized value of unutilized

vacation leave credits of ten (10) days or less which were paid

to the employee during the year are not subject to income tax

and to the withholding tax .

(8) Deductions made by employer from compensation of

employee. — Any amount which is required by law to be

deducted by the employer from the compensation of an

employee including the withheld tax is considered as part of the

employee's compensation and is deemed to be paid to the

employee as compensation at the time the deduction is made.

(9) Remuneration for services as employee of a nonresident

alien individual or foreign entity. — The term "compensation"

includes remuneration for services performed by an employee

of a nonresident alien individual, foreign partnership or foreign

corporation, whether or not such alien individual or foreign

entity is engaged in trade or business within the Philippines. Any

person paying compensation on behalf of a non-resident alien

individual, foreign partnership, or foreign corporation which is

not engaged in trade or business within the Philippines is

subject to all provisions of law and regulations applicable to an

employer.

(10) Compensation for services performed outside the

Philippines. — Remuneration for services performed outside

the Philippines by a resident citizen for a domestic or a resident

foreign corporation or partnership, or for a non-resident

corporation or partnership, or for a non-resident individual not

engaged in trade or business in the Philippines shall be treated

as compensation which is subject to tax.

A non-resident citizen as defined in these regulations is taxable

only on income derived from sources within the Philippines. In

general, the situs of the income whether within or without the

Philippines, is determined by the place where the service is

rendered.

(B) Exemptions from withholding tax on compensation. — The

following income payments are exempted from the requirement of

withholding tax on compensation:

(1) Remunerations received as an incident of employment, as

follows:

(a) Retirement benefits received under Republic Act

under 7641 and those received by officials and

employees of private firms, whether individual or

corporate, under a reasonable private benefit plan

maintained by the employer which meet the following

requirements:

(i) The plan must be reasonable;

(ii) The benefit plan must be approved by the

Bureau;

(iii) The retiring official or employee must have

been in the service of the same employer for at

least ten (10) years and is not less than fifty (50)

years of age at the time of retirement; and

(iv) The retiring official or employee should not

have previously availed of the privilege under

the retirement benefit plan of the same or

another employer.

(b) Any amount received by an official or employee or

by his heirs from the employer due to death, sickness or

other physical disability or for any cause beyond the

control of the said official or employee, such as

retrenchment, redundancy, or cessation of business.

The phrase "for any cause beyond the control of the

said official or employee" connotes involuntariness on

the part of the official or employee. The separation

from the service of the official or employee must not be

asked for or initiated by him. The separation was not of

his own making. Whether or not the separation is

beyond the control of the official or employee, being

essentially a question of fact, shall be determined on

the basis of prevailing facts and circumstances. It shall

be duly established by the employer by competent

evidence which should be attached to the monthly

return for the period in which the amount paid due to

the involuntary separation was made.

Amounts received by reason of involuntary separation

remain exempt from income tax even if the official or

the employee, at the time of separation, had rendered

less than ten (10) years of service and/or is below fifty

(50) years of age.

Any payment made by an employer to an employee on

account of dismissal, constitutes compensation

regardless of whether the employer is legally bound by

contract, statute, or otherwise, to make such payment.

(c) Social security benefits, retirement gratuities,

pensions and other similar benefits received by

residents or non-resident citizens of the Philippines or

aliens who come to reside permanently in the

Philippines from foreign government agencies and

other institutions private or public;

(d) Payments of benefits due or to become due to any

person residing in the Philippines under the law of the

United States administered by the United States

Veterans Administration;

(e) Payments of benefits made under the Social Security

System Act of 1954 as amended ; and

(f) Benefits received from the GSIS Act of 1937, as

amended , and the retirement gratuity received by

government officials and employees.

(2) Remuneration paid for agricultural labor —

(a) Remuneration for services which constitute

agricultural labor and paid entirely in products of the

farm where the labor is performed is not subject to

withholding. In general, however, the term,

"agricultural labor" does not include services performed

in connection with forestry, lumbering or landscaping.

(b) Remuneration paid entirely in products of the farm

where the labor is performed by an employee of any

person in connection with any of the following activities

is excepted as remuneration for agricultural labor:

(i) The cultivation of soil;

(ii) The raising, shearing, feeding, caring for,

training, or management of livestock, bees,

poultry, or wildlife; or

(iii) The raising or harvesting of any other

agricultural or horticultural commodity. The

term "farm" as used in this subsection includes,

but is not limited to stock, dairy, poultry, fruits

and truck farms, plantations, ranches, nurseries

ranges, orchards, and such greenhouse and

other similar structures as are used primarily for

the raising of agricultural or horticultural

commodities.

(c) The remuneration paid entirely in products of the

farm where labor is performed for the following

services in the employ of the owner or tenant or other

operator of one or more farms is not considered as

remuneration for agricultural labor, provided the major

part of such services is performed on a farm:

(i) Services performed in connection with the

operation, management, conservation,

improvement, or maintenance of any such

farms or its tools or equipments; or

(ii) Services performed in salvaging timber,

or clearing land brush and other debris left by a

hurricane or typhoon.

The services described in (i) above may include for

example, services performed by carpenters, painters,

mechanics, farm supervisors, irrigation engineers,

bookkeepers, and other skilled or semi-skilled workers,

which contribute in any way to the conduct of the farm

or farms, as such, operated by the person employing

them, as distinguished from any other enterprise in

which such person may be engaged. Since the services

described in this paragraph must be performed in the

employ of the owner or tenant or other operator of the

farm, the exception does not extend to remuneration

paid for services performed by employees of a

commercial painting concern, for example, which

contracts with a farmer to renovate his farm properties.

(d) Remuneration paid entirely in products of the farm

where labor is performed by an employee in the employ

of any person in connection with any of the following

operations is not considered as remuneration for

agricultural labor without regard to the place where

such services are performed:

(i) The making of copra, stripping of abaca, etc.;

(ii) The hatching of poultry;

(ii) The raising of fish;

(iv) The operation or maintenance of ditches,

canals, reservoirs, or waterways used

exclusively for supplying or storing water for

farming purposes; and

(v) The production or harvesting of crude gum

from a living tree or the processing of such

crude gum into gum spirits or turpentine and

gum resin, provided such processing is carried

on by the original producer of such crude gum.

(e) Remuneration paid entirely in products of the farm

where labor is performed by an employee in the employ

of a farmer or a farmer's cooperative, organization or

group in the handling, planting, drying, packing,

packaging, processing, freezing, grading, storing or

delivering to storage or to market or to carrier for

transportation to market, of any agricultural or

horticultural commodity, produced by such farmer or

farmer-members of such organization or group, is

excepted as remuneration for agricultural labor.

Services performed by employees of such farmer or

farmer's organization or group in handling, planting,

drying, packaging, processing, freezing, grading, storing,

or delivering to storage or to market or to carrier for

transportation to market of commodities produced by

persons other than such farmer or members of such

farmer's organization or group are not performed "as an

incident to ordinary farming operation".

All payments made in cash or other forms other than

products of the farm where labor is performed, for

services constituting agricultural labor as explained

above, are not within the exception.

(3) Remuneration for domestic services. — Remuneration paid

for services of a household nature performed by an employee in

or about the private home of the person by whom he is

employed is not subject to withholding. However, the services

of household personnel furnished to an employee (except rank

and file employees) by an employer shall be subject to the

fringe benefits tax pursuant to Sec. 33 of the Code, as

amended.

A private home is the fixed place of abode of an individual or

family. If the home is utilized primarily for the purpose of

supplying board or lodging to the public as a business

enterprise, it ceases to be a private home and remuneration

paid for services performed therein is not exempted.

In general, services of a household nature in or about a private

home include services rendered by cooks, maids, butlers, valets,

laundresses, gardeners, chauffeurs of automobiles for family

use.

The remuneration paid for the services above enumerated

which are performed in or about rooming or lodging houses,

boarding houses, clubs, hotels, hospitals or commercial offices

or establishments is considered as compensation;

Remuneration paid for services performed as a private

secretary, even if they are performed in the employer's home is

considered as compensation;

(4) Remuneration for casual labor not in the course of an

employer's trade or business. — The term "casual labor"

includes labor which is occasional, incidental or regular. The

expression "not in the course of the employer's trade or

business" includes labor that does not promote or advance the

trade or business of the employer.

Thus, any remuneration paid for labor which is occasional,

incidental or irregular, and does not promote or advance the

employer's trade or business, is not considered as

compensation. cdasia

EXAMPLE: A's business is that of operating a sawmill. He

employs B, a carpenter, at an hourly wage to repair his home.

B's work is irregular and he spends, the greater part of two days

in completing the work. Since B's labor is casual and is not in the

course of A's business, the remuneration paid for such services

is exempted.

Any remuneration paid for casual labor, that is, labor which is

occasional, incidental or irregular, but which is rendered in the

course of the employer's trade or business, is considered as

compensation.

EXAMPLE: E is engaged in the business of operating a

department store. He employs additional clerks for a short

period. While the services of the clerks may be casual, they are

rendered in the course of the employer's trade or business and

therefore the remuneration paid for such services is considered

as compensation.

Any remuneration paid for casual labor performed for a

corporation is considered as compensation;

(5) Compensation for services by a citizen or resident of the

Philippines for a foreign government or an international

organization. — Remuneration paid for services performed as

an employee of a foreign government or an international

organization is exempted. The exemption includes not only

remuneration paid for services performed by ambassadors,

ministers and other diplomatic officers and employees but also

remuneration paid for services performed as consular or other

officer or employee of a foreign government or as a non-

diplomatic representative of such government.

(6) Damages. — Actual, moral, exemplary and nominal damages

received by an employee or his heirs pursuant to a final

judgment or compromise agreement arising out of or related to

an employer-employee relationship.

(7) Life Insurance. — The proceeds of life insurance policies paid

to the heirs or beneficiaries upon the death of the insured,

whether in a single sum or otherwise, provided however, that

interest payments agreed under the policy for the amounts

which are held by the insured under such an agreement shall be

included in the gross income.

(8) Amount received by the insured as a return of premium. —

The amount received by the insured, as a return of premium or

premiums paid by him under life insurance, endowment, or

annuity contracts either during the term or at the maturity of

the term mentioned in the contract or upon surrender of the

contract.

(9) Compensation for injuries or sickness. — Amounts received

through Accident or Health Insurance or under Workmen's

Compensation Acts, as compensation for personal injuries or

sickness, plus the amount of any damages received whether by

suit or agreement on account of such injuries or sickness.

(10) Income exempt under treaty. — Income of any kind to the

extent required by any treaty obligation binding upon the

Government of the Philippines.

(11) Thirteenth (13th ) month pay and other benefits. —

(a) Thirteenth (13th) month pay equivalent to the

mandatory one (1) month basic salary of officials and

employees of the government, (whether national or

local), including government-owned or controlled

corporations, and or private offices received after the

twelfth (12th) month pay; and

(b) Other benefits such as Christmas bonus, productivity

incentive bonus, loyalty award, gifts in cash or in kind

and other benefits of similar nature actually received by

officials and employees of both government and private

offices.

The above stated exclusions (a) and (b) shall cover

benefits paid or accrued during the year provided that

the total amount shall not exceed thirty thousand pesos

(P30,000.00) which may be increased through rules and

regulations issued by the Secretary of Finance, upon

recommendation of the Commissioner, after

considering, among others, the effect on the same of

the inflation rate at the end of the taxable year.

(12) GSIS, SSS, Medicare and other contributions. — GSIS, SSS,

Medicare and Pag-Ibig contributions, and union dues of

individual employees.

SECTION 2.78.2. Payroll Period . — The term "payroll period" means the period

of services for which a payment of compensation is ordinarily made to an

employee by his employer. It is immaterial that the compensation is not always

paid at regular intervals.

EXAMPLE: if an employer ordinarily pays the weekly wages of his employees at

the end of the week, but if for some reason a particular employee receives

payment of his salaries for the past week in the middle of the current week and

receives the remainder at the end of the same week, the payroll period is still

the calendar week; or if, instead, the employee is sent on a three (3)-week trip

by his employer and receives at the end of the trip a single compensation

payment for three (3)-week services, the payroll period is still the calendar

week, and the compensation payment shall be treated as though it were three

(3) separate weekly compensation payments. LLphil

For the purpose of determining the tax, an employee can have but one payroll

period with respect to the compensation paid by any one employer. Thus, if an

employee is paid a regular compensation for the weekly payroll and in addition

thereto is paid supplemental compensation (for example taxable bonuses)

determined with respect to a different period, the payroll period is the weekly

payroll period.

SECTION 2.78.3. Employee . — The term "employee" is an individual performing

services under an employer-employee relationship. The term covers all

employees, including officers and employees, whether elected or appointed, of

the Government of the Philippines, or any political subdivision thereof or any

agency or instrumentality.

In general, the relationship of the employer and employee exists when the

person for whom services were performed has the right to control and direct

the individual who performs the services, not only as to the result to be

accomplished by the work but also as to the details and means by which the

result is accomplished. An employee is subject to the will and control of the

employer not only as to what shall be done, but how it shall be done. In this

connection, it is not necessary that the employer actually directs or controls the

manner in which the services are performed. It is sufficient that he has the right

to do so.

The right to dismiss an employee is also an important factor indicating that the

person possessing that right is an employer. Other factors or characteristics of

an employer, which may not be necessarily present in every case, are furnishing

the tools and furnishing of a place to work, to the individual who performs the

services. In general, an individual is not considered an employee if he is subject

to the control or direction of another merely on to the result to be

accomplished by the work, and not on to the means and methods for

accomplishing the result.

In general, individuals who follow an independent trade, business, or

profession, in which they offer their services to the public, are not employees.

The measurement, method or designation of compensation is also immaterial if

the relationship of employer and employee in fact exists.

No distinction is made between classes or grades of employees. Thus

superintendents, managers, and others belonging to similar levels are

employees. An officer of a corporation is an employee of the corporation. An

individual, performing services for a corporation, both as an officer and director,

is an employee subject to withholding on compensation, including director's

fees.

SECTION 2.78.4. Employer. — The term employer means any person for whom

an individual performs or performed any service, of whatever nature, under an

employer-employee relationship. It is not necessary that the services be

continuing at the time the wages are paid in order that the status of employer

may exist. Thus for purposes of withholding, a person for whom an individual

has performed past services and from whom he is still receiving compensation is

an "employee".

(A) Person for whom the services are or were performed does not

have control. — The term "employer" also refers to the person having

control of the payment of the compensation in cases where the services

are or were performed for a person who does not exercise such control.

For example, where compensation, such as certain types of pensions or

retirement pay, are paid by a trust and the person for whom the

services were performed has no control over the payment of such

compensation, the trust is deemed to be the "employer".

(B) Person paying compensation on behalf of a nonresident. — The

term "employer" also means any person paying compensation on behalf

of a non-resident alien individual, foreign partnership, or foreign

corporation, who is not engaged in trade or business within the

Philippines.

It is the responsibility of the employer to withhold, pay, or refund the

tax and furnish the statements required under these Regulations. The

term "employer" as defined in (A) and (B) above is intended to

determine who is the withholding agent.

As a matter of business administration, certain mechanical details of the

withholding process may be handled by representatives of the

employer. Thus, in the case of a corporate employer with branch

offices, the branch manager or other representative may actually, as a

matter of internal administration, withhold the tax or prepare the

statements required under the law. Nevertheless, the legal

responsibility for withholding, paying and returning the tax and

furnishing such statements rests with the corporate employer.

An employer may be an individual, a corporation, a partnership, a trust,

an estate, a joint-stock company, an association, or a syndicate, group,

pool, joint venture, or other unincorporated organization, group or

entity. A trust or estate, rather than the fiduciary acting for or on behalf

of the trust or estate, is generally the employer.

The term "employer" embraces not only an individual and an

organization engaged in trade or business, but it also includes an

organization exempt from income tax, such as charitable and religious

organizations, clubs, social organizations and societes, as well as the

Government of the Philippines, including its agencies, instrumentalities,

and political subdivisions .

(C) Compensation paid on behalf of two or more employers. — If a

payment of compensation is made to an employee by an employer

through an agent, fiduciary, or other person who has the control,

receipt, custody, or disposal of, or pays the compensation payable by

another employer to such employee, the amount of tax required to be

withheld on each compensation payment made through such agent,

fiduciary, or person shall, whether the compensation is paid separately

on behalf of each employer or paid in lump-sum on behalf of all such

employers, be determined based on the aggregate amount of such

compensation payment or payments in the same manner as if such

aggregate amount had been paid by one employer. Hence, the tax shall

be determined based on the aggregate amount of the compensation

paid.

In any such case, each employer shall be liable for the return and

payment of a pro-rata portion of the tax so determined in accordance

with the ratio of the amount contributed by each employer relative to

the aggregate of such compensation.

A fiduciary, agent, or other person acting for two or more employers

may be authorized to withhold the tax under these regulations with

respect to the wages of the employees of such employers. Such

fiduciary, agent, or other person may also be authorized to make and

file returns of the tax withheld at source on such compensation and to

furnish the receipts required under these Regulations. Application for

the authorization to perform such act should be addressed to the

Commissioner or his duly authorized representative. If such authority is

granted by the Commissioner, all provisions of the law (including

penalties) and regulations prescribed in pursuance of the law applicable

in respect of an employer for whom such fiduciary, agent or other

person acts shall remain subject to all provisions of law (including

penalties) and regulations prescribed in pursuance of the law applicable

in respect of employers.

RR 1-2006 (29 Dec 2005)

o 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

o 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."

o SEC. 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.

o SEC. 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.

o SEC. 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.

RMC 39-2012 (03 Aug 2012)

o Withholding Tax on Backwages, Allowances, and Benefits Received by

Employees through garnishments of Debts or Credits Pursuant to a Labor

Dispute Award

o Employers and those in control of credit must withhold the award as this forms

part of the remuneration of the employee subject to withholding tax.

Withholding Tax by Government Agencies §25.7.2. (N), RR 2-98 (17 Apr 1998)

o See CWT above

Special Rules

(1) Minimum Corporate Income Tax §27 (E), and 28 (A)(2), Tax Code

CHAMBER OF REAL ESTATE BUILDERS’ ASSOCIATION, INC. VS. EXECUTIVE SECRETARY (09 MAR

2010)

COMMISSIONER OF INTERNAL REVENUE VS. PHILIPPINE AIRLINES , INC. (07 JUL 2009)

RR 9-98 (25 Aug 1998) – except Sec. 2.28 (E)(7) “Accounting treatment” – as amended by RR 12-

2007 (10 Oct 2007)

(2) Improperly Accumulated Earnings Tax Section 29, Tax Code

THE MANILA WINE MERCHANTS, INC. VS. COMMISSIONER OF INTERNAL REVENUE (20 FEB

1984)

CIR VS. TUASON (15 MAY 1989)

CYANAMID PHILIPPINES, INC. VS. CA (20 JAN 2000)

RR 2-01 (12 Feb 2001)

RMC 35-2011 (14 March 2011)

BIR Ruling 25-02 (25 Jun 2002)

(3) Fringe Benefits Tax §22(A) and 33, Tax Code

RR 3-98 (01 Jan 1998)

RR 8-00 (21 Aug 2000)

RR 10-00 (14 Dec 2000)

(4) Transfer Pricing §50, Tax Code

CIR VS. FILINVEST DEVELOPMENT CORPORATION (19 JUL 2011)

HER MAJESTY THE QUEEN VS. GLAXOSMITHKLINE INC., 2012 SCC 52 (SUPREME COURT OF

CANADA, COURT FILE 33874; OCTOBER 18, 2012)

RMC 026-08 (24 Mar 2008)

RMO 63-99 (19 Jul1999)

Special Entities

(1) Proprietary Educational Institutions and Hospitals Section 27 (B), Tax Code

COMMISSIONER OF INTERNAL REVENUE VS. ST. LUKE’S MEDICAL CENTER, INC. (26 SEP 2012)

RMC 76-03 (14 Nov 2003)

(2) GOCCs Section 27 (C), Tax Code as amended by Republic Act 9337

Republic Act 10026

PHILIPPINE AMUSEMENT AND GAMING CORPORATION VS. BUREAU OF INTERNAL REVENUE (15

MAR 2011)

(3) Exempt Corporations §30, Tax Code

Executive Order 226, Article 39

Republic Act 7916, §23 – 25

Republic Act 9178

Republic Act 9593, §4 & 86-88

Republic Act 9856

DUMAGUETE CATHEDRAL CREDIT COOPERATIVE VS. CIR (22 JAN 2010)

CIR VS. G. SINCO EDUCATIONAL CORP. (23 OCT 1956)

RR 13-2011 (25 Jul 2011)

RMC 35-2012 (03 Aug 2012)

(4) Insurance Companies §37, Tax Code