Frequently Asked Questions and Answers

REVENUE REGULATIONS NO. 2-98

WITHHOLDING TAXES ON INCOME PAYMENTS, COMPENSATION

AND CREDITABLE VAT AND PERCENTAGE TAXES

Q: What is a withholding tax?

A: A withholding tax is a tax that is collected at the time when the income is paid. The person or the organization that pays the income is given the responsibility of withholding the tax from the income payments and remitting it to government.

 

Q: Who are required to withhold taxes?

A: The following persons are designated as withholding agents. They are required to withhold a tax on specified income payments that they make:

    1. Corporations, association, partnerships, non-profit organizations, cooperatives, and other entities registered with the Securities and Exchange Commission and other government agencies mandated to register such entities.
    2. An individual who is engaged engaged in business.
    3. An individual who purchases a piece of real property.
    4. All government offices including government-owned or controlled corporations.

 

Q: When should a tax be withheld?

A: The tax should be withheld when income is paid or becomes payable, whichever comes first. The term "payable" refers to the date when the obligation becomes due, demandable or legally enforceable.

Thus, the obligation to withhold a tax starts on the date when the salary of an employee is payable, and not on the date when it is actually paid.

 

Q: What is the responsibility of withholding agents with respect to the taxes that have been withheld?

A: In General:

The withholding agent must remit the taxes to the BIR through a bank which has been authorized by the Revenue District Office (RDO) where the business has its residence.

A withholding tax return must be filed and the taxes should be paid within 10 days after the end of each month. Taxes which were withheld in December should be paid on or before January 25 of the following year.

Special Cases:

1. Withheld taxes on interest from bank deposits and yield or any other monetary benefit from eposit substitutes, trust funds and similar arrangements should be paid within twenty five (25) days from the close of each calendar quarter. The tax return should also be filed within the said date.

2. Withheld taxes from "Large taxpayers" should be made within twenty five (25) days after the end of each month. Payment must be made with the branch of the Land Bank of the Philippines or Development Bank of the Philippines which is located at the BIR National Office.

 

Q: What is the liability of the withholding agent who fails to withhold the required tax?

A: The withholding agent is liable for the withholding tax that should have been collected, in addition to the penalties i.e. a 25% surcharge and 20% interest on the total amount due.

In addition, he cannot claim a deduction for income payment which he made unless the taxes were withheld and paid to the BIR.

Q: What is the difference between a final withholding tax and creditable withholding tax?

A: A final tax represents the full and final payment of the income tax that is due from a taxpayer. Thus, the taxpayer is no longer required to file a tax return for the income where a final tax had been withheld.

A creditable tax is a preliminary payment of the tax liability of the taxpayer. Thus, he is required to file an income tax return to report the income and pay the difference between what is due and what was withheld. He is entitled to a refund from the BIR if what was withheld was bigger than what is due.

Q: What payments are subject to final withholding tax?

A: The following forms of income will be subject to final withholding tax at the rates specified.

Income Payment

Tax Rate

Payee

Interest from peso bank deposit

20%

  • Citizen or resident alien individual
  • Non-resident alien engaged in trade or business
  • Domestic corporation
  • Resident foreign corporation

 

25%

  • Non-resident alien not engaged in trade or business

 

33% in 1999

32% in 2000 and thereafter

  • Non-resident foreign corporation

Interest income from a depository bank under the foreign currency deposit system

7.5%

  • Resident citizen or alien individual
  • Domestic corporation
  • Resident foreign corporation

 

Exempt

  • Non-resident alien
  • Non-resident foreign corporation

Yield from deposit substitutes and trust funds; royalties, in general; prizes exceeding P10,000; other winnings, except PCSO and lotto winnings

20%

  • Citizen or resident alien individual
  • Non-resident alien engaged in trade or business
  • Domestic corporation
  • Resident foreign corporation

 

25%

  • Non-resident alien not engaged in trade or business

 

33% in 1999;

32% in 2000 and thereafter

  • Non-resident foreign corporation

Royalties on books, other literary works and musical compositions

10%

  • Citizen or resident alien individual
  • Non-resident alien engaged in trade or business

Interest income from long-term deposit or investment in savings, trust funds, deposit substitutes based on the length of time instrument was held by taxpayer

More than 5 years - Exempt

4 to 5 yrs. - 5%

3 to less

than 4 yrs. - 12%

Less than

3 yrs. - 20%

  • Citizen or resident alien individual
  • Non-resident alien engaged in trade or business

Cash and/or property dividends from domestic corporation, joint stock company, insurance or mutual fund companies or share in distributable net income of partnership

6% in 1998;

8% in 1999

10% in 2000

and thereafter

  • Citizen or resident alien individual

 

20%

  • Non-resident alien engaged in trade or business

 

25%

  • Non-resident alien not engaged in trade or business

 

33% in 1999;

32% in 2000 and thereafter

  • Non-resident foreign corporation

Sale, exchange or other disposition of real property located in the Philippines classified as capital asset

 

6% on the gross selling price or fair market value, whichever is higher

  • Citizen or resident alien
  • Non-resident alien engaged in trade or business
  • Non-resident alien not engaged in trade or business
  • Domestic corporation

Compensation income, except income subject to fringe benefit tax

15%

 

 

 

 

 

 

Alien employees and Filipinos employees occupying the same position as those of alien employed by

  • Regional or area headquarters
  • Regional Operating headquarters
  • Representative offices
  • Offshore banking units
  • Foreign Petroleum Service Contractors and Sub-contractors

Income derived from foreign currency transactions with residents, including local commercial banks, branches of foreign banks, and other FCDUs/OBUs

10%

FCDUs

OBU

Profit remitted by Philippine branch, except those registered with PEZA, SBMA and CDA.

15%

Head office of foreign corporation

Gross income from all sources within the Philippines

25%

Non-resident cinematographic film owners, lessors or distributors

Gross rentals, lease and charter fees

4.5%

Non-resident owner of lessor of vessels from leases or charters to Filipino citizens or corporations

Gross rentals, charter and other fees

7.5%

Non-resident lessor of aircraft, machinery and other equipment

Interest on foreign loans contracted on or after August 1, 1986

20%

Non-resident foreign corporation

Dividends from a domestic corporation

15%

Non-resident foreign corporation

Fringe benefits granted or furnished by the employer

34% in 1998;

33% in 1999;

32% in 2000 and thereafter

  • Citizen or resident alien individual
  • Non-resident alien engaged in trade or business

 

 

 

25%

Non-resident alien not engaged in trade or business

Fringe benefits granted or furnished by the employer

15%

Alien employees and Filipinos employees occupying the same position as those of alien employed by

  • Regional or area headquarters
  • Regional Operating headquarters
  • Representative offices
  • Offshore banking units
  • Foreign Petroleum Service Contractors and Sub-contractors

Informer’s reward

10%

Persons instrumental in the discovery of violations of Tax Code and discovery and seizure of smuggled goods

Q: What payments are subject to creditable withholding tax?

A: A creditable withholding tax is collected wen the following income are paid by persons residing in the Philippines:

Income Payment/Payee

Tax Rate

Professional, promotional and talent fees for the services rendered by the following individuals

  • Individuals engaged in the practice of profession
  • Professional entertainers
  • Professional athletes
  • Directors in movies, stage, radio, television and musical productions
  • Insurance agents and insurance adjusters
  • Management and technical consultants
  • Bookkeeping agents and agencies
  • Other recipients of talent fees
  • 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. (These payments were previously not subject to withholding.)

10%

Professional fees, talent fees or other forms of remuneration to taxable juridical persons

5%

Rentals paid to lessors of real property used in business

(Previous minimum lease of P5,000 was deleted.)

5%

Cinematographic film rentals and other payments to resident individuals and corporate cinematographic film owners, lessors or distributors

5%

Gross payments to

  • General engineering contractors
  • General building contractors
  • Specialty contractors
  • Other contractors
  • filling, demolition and salvage work contractors and operators of drilling apparatus
  • operators of dockyards
  • persons engaged in the installation of water system, and gas or electric light, heat or power
  • operators of stevedoring, warehousing or forwarding establishments
    • transportation contractors
  • printers, bookbinders, lithographers and publishers
  • messengerial, janitorial, private detective and/or security agencies, credit and/or collection agencies and other business agencies
  • advertising agencies
  • independent producers of television, radio and stage performances or shows
  • independent producers of "jingles"
  • labor recruiting agencies

1%

  • persons engaged in the installation of elevators, air conditioning units, computer machines and other equipment and machineries and maintenance services thereon;
  • persons engaged in the sale of computer services, landscaping services and collection and disposal of garbage
  • TV and radio station operators on sale of TV and radio airtime
  • TV and radio blocktimers on sale of TV and radio commercial spots.

 

Income distribution to beneficiaries of estates and trusts, except such income subject to final withholding tax and tax-exempt income

15%

Gross commissions to customs, insurance, real estate and commercial brokers and fees of agents of professional entertainers

5%

Drawings, advances, sharings, allowances, stipends and other payments made by a general professional partnership to its partners

10%

Professional fees paid to medical practitioners by hospitals and clinics or by patients through the hospital or clinic

10%

Gross selling price or total amount of consideration for the sale, exchange or transfer of real property, other than capital assets, by an individual, corporation, estate, trust, trust fund or pension fund

 

  1. if habitually engaged in the real estate business

P500,000 or less

1.5%

More than P500,000 but not exceeding P2 M

3.0%

More than P 2 Million

5.0%

  1. Not habitually engaged in the real estate business

7.5%

Additional income payment to government personnel for overtime services from importers, shipping and airline companies, or their agents

15%

Gross amounts paid by credit card company to any business entity, natural or juridical person, representing sales of goods/services made to cardholders

½%

Income payments made by any of the top 5,000 corporations to their local supplier of goods

1%

Income payments made by a government office on their purchases of goods from local suppliers, except any single purchase which is P10,000 and below

1%

 

Q: Should employers withhold an income tax from all forms of compensation that are paid to employees?

A: In general, a withholding of tax is collected from all forms of compensation income that is earned from the Philippines.

However, an exemption is given to an employee whose salary is equal to the statutory minimum wage (P5,000 monthly or P60,000 a year). He is not however exempt from filing an income return every year.

The same individual can waive this exemption by filling out a BIR form. His income would be subject to a withholding tax and he is exempt from filing an income tax return annually.

 

Q: Aside from the employee’s basic salary, what other forms of compensation is subject to a withholding tax?

A: All compensation that is paid to an employee is subject to a withholding tax. Compensation includes all forms of remuneration for services performed by an employee for his employer under an employer-employee relationship.

The name by which the payment for employee’s services is called is immaterial. Thus, the following terms are considered as compensation income:

Under certain conditions, some items of income are non-taxable and thus, are not subject to a withholding tax.

 

Q: What are the forms of compensation which are not subject to a witholding tax?

A: The following forms of compensation are tax-exempt, and are not subject to a withholding tax:

    1. Facilities or privileges with small value that are provided by the employe to promote health, goodwill, contentment or efficiency of his employees.
    2. Advances or reimbursements for travelling, representation and other ordinary and necessary expenses that are incurred by the employee in the performance of his duties, if he is required to account for or liquidate the said expenses. (The excess of actual expenses over advances made by the employer is treated as taxable income if not returned to the employer).
    3. The monetized value of unutilized vacation leave credits of ten (10) days or less which was pid to the employee during the year.
    4. GSIS, SSS, Medicare and Pag-ibig contribution and union dues of individual employees.

    1. Thirteenth (13th) month pay and other benefits such as Christmas bonus, productivity incentive bonus, loyalty awards, gifts and other benefits of similar nature if their total amount is P30,000 or less.

 

Q: How are withholding taxes on compensation computed?

A: There is a prescribed table for computing the withholding tax on compensation, with the applicable rates depending on the amount of compensation and the personal and additional exemptions that an employee is entitled to.

Q: When should the employer withhold the tax on compensation?

A: The tax should be withheld when the employee has paid his salary. There are prescribed tables by the BIR to guide employers on how to compute the withholding tax.

Q: Is the withholding tax on compensation final or creditable in nature?

A: The withholding taxes on compensation is creditable. The employee is required to file an income tax return where he should report all the incomes that he received during the year, including those payments where a tax had been withheld. He can claim tax credit equal to the amount of withheld taxes. This means that he can deduct the tax that was withheld from his salary from the income which is due from him.

For an employee with a single employer, the BIR has made the withholding tax simple. The amount of tax which is withheld from him is equal to the amount of his income tax for the year.

 

Q: What payments under the Value-Added tax (VAT) system is subject to a withholding tax?

A: Gross payments made by government to sellers of goods and services are subject to a withholding tax at the following rates:

 

Payments for purchases of goods

 

3%

 

Payments for services rendered

 

6%

 

Payments made to government public work contractors

 

8.5%

 

Payments for lease or use of property or property rights to non-resident owners

 

10%

 

Q: When should the withheld VAT be remitted to the BIR?

A: Remittance should be made to any agent bank authorized by the Revenue District Office (RDO) where the government office is located.

When?

In general, within 10 days from the end of the month when the tax was withheld.

Special Case

VAT withheld during the last month of each quarter (i.e. March, June, September, December).

The tax return and payment should be made within 25 days following the end of the quarter.

Required BIR forms:

* For monthly payment: Monthly VAT declaration - BIR form 2550M

* For quarterly payments: Quarterly VAT return - BIR Form 2550Q

Q: What other payments are subject to withholding of percentage taxes?

A: Money payments made by offices and instrumentalities of the government to private individuals, corporations, partnerships and/or associations are subject to withholding at the following rates:

 

Type of Income Payment/ Payee

 

Rate

 

Persons exempt from VAT for the reason that their annual gross sales or receipts do not exceed P550,000

 

3%

 

Domestic carriers and keepers of garages

 

3%

 

International air and shipping carriers

 

3%

 

Grantees of franchise on radio and or television broadcasting companies whose annual gross receipts of the preceding year does not exceed P10,000

 

3%

 

Grantees of franchise on electric, gas and water utilities

 

2%

 

Banks and non-bank financial intermediaries

 

 

 

On interest, commissions and discounts based on the remaining maturities of the instrument-

  1. Short-term (not exceeding 2 years)

 

 

 

5%

 

Medium-term (2 years - 4 years)

 

3%

 

Long-term maturity

4 years - 7 years

 

1%

 

Over 7 years

 

0%

 

  1. On dividends

 

0%

 

  • On royalties, rentals of property, profits from exchange and other gross income
  •  

    5%

     

    Finance companies and other financial intermediaries not performing quasi-banking functions

    1. On interest, discounts and other items of gross income paid to finance
    2. On interest, commissions and discounts paid from their loan transactions based on the remaining maturities of the instruments:

     

     

    5%

     

     

     

     

     

     

    Short-term (not exceeding 2 years)

    Medium-term (2 years - 4 years)

    Long-term maturity

    4 years - 7 years

    Over 7 years

     

    5%

    3%

    1%

    0%

     

    Life insurance companies

     

    5%

     

    Agents of foreign insurance companies

     

    10%/5%

     

    Proprietors, lessee or operator of

    1. cockpits
    2. cabarets, night and day clubs
    3. boxing exhibitions
    4. professional basketball games
    5. jai-alai and racetracks

     

     

     

    18%

    18%

    10%

    15%

    30%

     

    Sale, barter or exchange of shares of stock listed and traded through the local stock exchange

     

    ½ of 1% on the gross selling price

     

    Shares of stock sold or exchanges through initial public offering

    Not over 25%

    25% - 33 1/3%

    Over 33 1/3%

     

     

     

     

    4%

    2%

    1%

     

     

     

     

    Q: When should the withheld percentage taxes be remitted to the BIR?

    A: Payments should be made within ten (10) days following the end of the month when the withholding was made. The return should be filed together with the payment using BIR FORM 1600 - Monthly Return of Internal Revenue Taxes withheld on Government Money Payments.

     

    (Implementing Sec. 244 of the 1997 Tax Code, as amended by RA No. 8424; Date of Issue: April 17, 1998; Effective on January 1, 1998)



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