Withholding taxes on income payments consist of two types: final withholding taxes and creditable withholding taxes.

Under the final withholding tax system, the amount of tax withheld by the withholding agent represents the full and final payment of the income tax due from the recipient of income. Thus, the taxpayer is no longer required to file a tax return for the particular income, or to include such income as part of the taxable income that he will be reporting under in his annual income tax return. On the other hand, under the creditable withholding tax system, the income recipient is still required to file an income tax return to report the income and to pay the difference between the tax due on the income and the tax withheld, if any.

These withholding taxes are required to be deducted from the payment due to the recipient of income. The following persons are constituted as withholding agents, and thus, must withhold the applicable taxes on certain income payments 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.

1. An individual engaged in business. However, even individuals not engaged in business are required to withhold taxes when they buy real property.

1. All government offices including government-owned or controlled corporations.

The obligation of the withholding agent to deduct and withhold the tax arises at the time an income is paid or payable, whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable.

The withholding agent must pay the creditable withholding taxes it has deducted with the Authorized Agent Banks (AAB) located within the Revenue District Office (RDO) having jurisdiction over its residence or principal place of business.

The withholding tax return covering both creditable and final withholding taxes, must be filed and the taxes paid within 10 days after the end of each month, except for taxes withheld for December which should be filed on or before January 25 of the following year. However, the return for final withholding taxes on interest from bank deposits and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements is required to be filed and the payment made within twenty five (25) days from the close of each calendar quarter.

For taxpayers classified as Large Taxpayers, the filing of the return and the payment of tax 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 located at the BIR National Office.

The withholding agent will be liable for the withholding tax that should have been collected, together with the applicable penalties, i.e., the 25% surcharge and 20% interest on the total amount due.

In addition, unless he pays such withholding taxes, his claim for the deductibility of such payments against his gross income will be disallowed.

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

Creditable withholding taxes will be applied on the following items of income payments made by persons residing in the Philippines:

The creditable taxes withheld from the income of a taxpayer are allowed as tax credit against his income tax liability in the quarter(s) of the taxable year in which the income (subjected to withholding tax) was earned or received.

In case the total creditable withholding taxes that were deducted during the year from the taxpayer exceed his income tax due for the year, at his option, the excess creditable withholding taxes may

1. Automatically be applied as a credit against his income tax due for the taxable quarters/years immediately succeeding the taxable quarters/years in which the excess credit arose. However, the taxpayer is required to submit with his income tax return a copy of the first page of his income tax return for the previous taxable period, showing the amount of his excess withholding tax credits. Such tax return must show that he has not opted for a cash refund or tax credit, or

1. He may request from the BIR for a cash refund or a tax credit certificate for use in payment of his other national internal revenue tax liabilities. A written request therefor must be submitted to the BIR within two (2) years after the payment of the tax.

 Withholding Tax on Compensation

In general, the withholding of tax on compensation income will apply to all employed individuals, whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. An "employee" is an individual performing services under an employer-employee relationship. An employer-employee relationship exists when the person for whom the 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, but also as to the details and means by which such results are accomplished. No distinction is made between classes or grades of employees. Thus, superintendents, managers and officers are considered as employees.

However, employees whose total annual compensation does not exceed the statutory minimum wage of P5,000 monthly or annual salary of P60,000, whichever is higher, may exercise any of these options:

1. His compensation income will be subjected to withholding tax, but he would not be required to file the income tax return, or

1. His compensation income would not be subject to a withholding tax but he will file his annual income tax.

Where the employee has chosen to have his compensation income subjected to withholding, he must execute a waiver in a prescribed BIR form of his exemption from withholding. This would constitute as the authority for the employer to apply withholding tax on his compensation.

Non-resident citizens are taxable only on their income derived from Philippine sources. Thus, their income from sources outside the Philippines are not taxable, and hence, not subject to withholding tax.

All compensation paid to the employee is subject to withholding tax. Compensation includes all 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:

• Salaries,
• Wages,
• Emoluments and honoraria,
• Allowances
• Commissions
• Fees, including director’s fees if the director us at the same time an employee of the employer
• Taxable bonuses
• Fringe benefits, except those which are subject to the fringe benefits tax
• Taxable pensions and retirement pay

Remuneration for services is considered compensation even if the employer-employee relationship no longer exists at the time when the payment is made. Thus, it is subject to withholding.

The following payments or benefits paid or provided by the employer are tax-exempt, and thus, not subject to withholding tax:

1. Retirement benefits received under Republic Act 7641 and those received by officials and employees of private firms under a reasonable private benefit plan maintained by the employer which meets the following requirements:

1. The plan must be reasonable;
2. The benefit plan must be approved by the BIR;
3. The retiring official 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
4. The retiring official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or another employer.

1. Any amount received by an employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of said employee, such as retrenchment, redundancy or cessation of business. Amounts received by reason of involuntary separation will be exempt from income tax even if 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.

1. Social security benefits, retirement gratuities, pensions and other similar benefits received by residents or non-resident citizens or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public.

1. Payment of benefits under the law of the United States administered by the United States Veterans Administration.

1. Payment of benefits made under the Social Security System Act of 1954.

1. Benefits received from the GSIS Act of 1937, and the retirement gratuity received by government officials and employees.

1. Remuneration paid for agricultural labor

1. Remuneration paid for domestic services. However, the services of household personnel furnished by the employer to an employee who is holding managerial or supervisory position, shall be subject to the Fringe Benefits Tax.

1. Remuneration paid for labor which is occasional, incidental or irregular, and does not promote or advance the employer’s trade or business

1. Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization

1. Actual, moral, exemplary and nominal damages in connection with a final judgment or compromise agreement arising out of or related to an employer-employee relationship.

1. Life insurance proceeds paid to the heirs or beneficiaries upon death of the employee. However, interest payments agreed under the policy for the amounts which are held by the insured will be included in the gross income.

1. Amounts received by the insured as a return of premium

1. Compensation for injuries or sickness

1. Income exempt under any treaty obligation binding upon the Philippine government

1. Facilities or privileges are of relatively small value which are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employees. Thus, if living quarters or meals are furnished to an employee for the convenience of the employer, the value of such benefits need not be included as part of compensation income.

1. Advances or reimbursements for travelling, representation and other ordinary and necessary expenses incurred by the employee in the performance of his duties, if the employee is required to account/liquidate for said expenses. The excess of actual expenses over advances made shall be treated as taxable income if such amount is not returned to the employer.

1. The monetized value of unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the year.

1. GSIS, SSS, Medicare and Pag-ibig contributions and union dues of individual employees

1. Thirteenth (13^th) month pay and other benefits such as Christmas bonus, productivity incentive bonus, loyalty awards, gifts and other benefits of similar nature to the extent that the total amount thereof does not exceed P30,000.

 Computation of Withholding Tax

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

Withholding tax on compensation is due when the employer pays such compensation. Hence, the BIR has provided four (4) types of withholding tables that would suit the payroll period being followed by the employer - daily, weekly, semi-monthly, and monthly.

The following procedure is followed in computing for the amount of tax to be withheld:

1. Use the appropriate tables for the payroll period: monthly, semi-monthly, weekly or daily, as the case may be.

1. Determine the total monetary and non-monetary compensation paid to an employee for the payroll period, segregating gross benefits which includes thirteenth (13^th) month pay, productivity incentives, Christmas bonus, and other benefits received by the employee per payroll period. Gross benefits in the amount of thirty thousand pesos (P30,000) or less shall be exempted from income tax and from withholding tax.

1. Segregate the taxable compensation from the non-taxable income paid to the employee for the payroll period. The taxable income refers to all remuneration paid to an employee not otherwise exempted by law from income tax, while the non-taxable income are those which are specifically exempted from income tax by the Tax Code or by other special laws.

1. Segregate the taxable compensation income into regular taxable compensation income and supplementary compensation income. Regular compensation includes basic salary, fixed allowances for representation, transportation and other allowances paid to an employee per payroll period. Supplementary compensation includes payments to an employee in addition to the regular compensation, with or without regard to a payroll period.

1. Fix the compensation level as follows:

1. Determine the line (horizontal) corresponding to the status and number of qualified dependent children using the appropriate symbol for the taxpayer status.

1. Determine the column to be used by taking into account only the total amount of taxable regular compensation income. The compensation level is the amount indicated in the line and column to which the regular compensation income is equal to or in excess, but not to exceed the amount in the next column of the same line.

1. Compute the withholding tax due by adding the tax predetermined in the compensation level indicated at the top of the column, to the tax on the excess of the total regular and supplementary compensation over the compensation level, which is computed by multiplying the excess by the rate also indicated at the top of the column.

When the employer-employee relationship is terminated before the end of the year, or at the end of the year, the employer is required to determine the amount of tax that still has to be withheld from the total compensation that he has paid to the employee.

To compute for the final adjustment, the following procedures will be observed:

1. Determine the total taxable regular and supplementary compensation paid to the employee during the year.

1. If the employee has previous employment/s within the year, add the amount of taxable regular and supplementary compensation paid to the employee by the previous employer, if any.

1. Deduct from the aggregate amount of compensation the amount of the total personal and additional exemptions of the employee.

1. Deduct the amount of premium payments on health and/or hospitalization insurance of employees who have presented evidence that they have paid during the taxable year premium payments (the deductible amount shall not exceed P2,400 or P200 per month, whichever is lower) and that their family’s total gross income does not exceed P250,000 for the calendar year.

1. Compute the amount of tax on the difference in accordance with the following table:

In the computation of the withholding tax due from compensation paid to an employee, the employer must consider the personal and additional exemptions that such employee is entitled to. In order to receive the benefit of such exemptions, the employee must file the Application for Registration (BIR Form No. 1902) upon employment. To report changes in his exemption, he must file a Withholding Compensation and Exemption Certificate (Form No. 2305).

Beginning January 1, 1998, each employee shall be allowed to claim the following amount of exemptions:

Withholding taxes on compensation are creditable. The employee is still required to report in his individual income tax return the compensation subjected to withholding by his employer as part of his gross income and, using this as basis, compute his total income tax liability. He is then allowed to claim as tax credit the withholding taxes deducted by his employer, and pay only the remaining balance of the income tax.

An "employer" is a person for whom an individual performs or performed any service, of whatever nature, under an employer-employee relationship. The term also refers to the person having control of the payment of the compensation in cases where the person for whom the services were performed does not exercise such control. A person paying compensation on behalf of a non-resident alien individual or foreign corporation, which is not engaged in business in the Philippines, is also considered as employer.

The amount of any tax withheld by the employer is a special fund held in trust for the government. Any person who expects to make payment of compensation in the amount of P60,000 or more during the year, or P5,000 monthly, to any single employee must register by filing with the Revenue District Office where his legal residence or place of business is located an Application for Registration as withholding agent not later than ten (10) days after becoming an employer.

The employer shall make a return and pay such tax on or before the 10^th day of the month following the month in which the withholding was made to any AAB within the Revenue District Office where the employer’s place of business or legal residence is located. However, taxes withheld from the last compensation for the year shall be paid to the BIR not later than January 25 of the succeeding year. For large taxpayers, the withholding taxes must be remitted on or before the 25^th day of the following month.

The employer is required to furnish every employee from whose compensation taxes have been withheld the Certificate of Income Tax Withheld on Compensation (Form No. 2316, formerly Form No. W-2). The certification must be issued to the employee on or before January 31 of the following year, or if his employment is terminated before the close of the year, on the day on which the last payment of compensation is made.

On or before January 31^st of the following year, the employer is required to file with the BIR the Annual Information Return of Income Tax Withheld on Compensation (BIR Form No. 1604), together with an alphabetical list of employees, both in duplicate copies.

1. Failure to Withhold. Every person who is required to withhold the tax from the compensation of an employee is liable for the payment of such tax to the BIR. In addition to the tax required to be paid, a penalty equivalent to 25 per cent of the amount due shall be imposed in the following cases:

1. Failure to file any return and pay the tax due thereon as required under the Tax Code or regulations on the date prescribed; or
2. Filing a return with the wrong BIR office
3. Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment;
4. Failure to pay the full or part of the amount of tax shown on any return required to be filed, or the full amount of tax due for which no return is required to be filed, or before the date prescribed for its payment; or
5. In case of willful neglect to file the return within the period prescribed, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be 50% of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud.

2. Filing of Certain Information Return. For every failure to file an information return, statement or list, or keep any record or supply any information required, the employer shall subject to penalty of P1,000. However, the aggregate amount to be imposed for all such failures during a calendar year will not exceed P25,000.

3. Failure to refund excess tax withheld on Compensation. Any employer who fails or refuses to refund excess withholding tax not later than January 25 of the succeeding year shall be liable to a penalty equal to the total amount of refunds which was not refunded to the employee.

Every employee is required to register as a taxpayer. For this purpose, he must accomplish the Application for Registration for Individuals Earning Compensation Income (BIR Form No. 1902) with the following information:

• Name
• Taxpayer’s Identification Number (TIN)
• Address
• Status of employee - Single/Legally Separated/Widow or widower with no dependent child/ Married/Head of Family
• Status of spouse of the employee
• Qualified dependents - name and date of birth
• Claimant of exemption for children

The following forms, if applicable, are required to be attached to the application:

• Marriage contract
• Court decision of legal separation
• Birth Certificate of each qualified dependent
• Certificate of employment of the husband if he is working abroad
• Waiver of exemptions of children by the husband in case wife is claiming the additional exemptions of the children
• Waiver from exemption on withholding tax of taxpayers whose total compensation income in a year does not exceed P60,000
• Medical certificate of dependent if physically or mentally incapacitated
• Court decision of legal adoption of children
• Death certificate
• Current certificate of income tax exemption of qualified senior citizen

The employer with whom the employee’s Application for Registration is filed must indicate the date when he received the form and accomplish Part V of the application pertaining to Employer’s information such as TIN, registered name and other relevant information.

All employees who have not filed the application for registration as of December 31, 1997 shall accomplish and file the application with their employers not later than April 30, 1998. New employees shall accomplish and file the application within ten (10) days from the start of employment. All applications must be transmitted by the employer to the Revenue District Officer where the employer has his legal residence or place of business within 30 days from receipt thereof.

If an employee fails or refuses to file an Application for Registration, the employer shall compute the withholding tax under the schedule for zero exemption. In case the employee fails to update his Exemption Certificate, the employer will withhold taxes based on the reported personal exemptions existing prior to the change of status.

In general, VAT due on sales of goods and services are not subject to withholding since the tax is not determinable at the time of sale. However, gross payments made by the government to sellers of goods and services would be subject to withholding to wit:

The withholding agents shall accomplish the Monthly VAT Tax declaration (BIR form 2550M) and pay the amount withheld with the authorized agent bank located within the Revenue District Office (RDO) having jurisdiction over the place where the government office is located. The return shall be filed and payments made within ten (10) days following the end of the month the withholding was made, except taxes withheld for the 3^rd month of the quarter which would be remitted through a Quarterly VAT Tax return (BIR Form 2550Q) to be filed not later than the 25^th day after the end of the calendar quarter.

The withholding agent is required to furnish each seller of goods and services from whom taxes has been deducted, the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate copies. The first three copies will be given to the seller not later than the 15^th of the following month, while the fourth copy will be retained by the withholding agent.

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

Taxes deducted and withheld will be covered by the Monthly Return of Internal Revenue Taxes withheld on Government Money payments (BIR Form 1600) which should be filed and payments made within ten (10) days following the end of the month the withholding was made.

 Effectivity

The regulations shall be applicable to compensation income paid beginning January 1, 1998. No penalties will be imposed until May 15, 1998 for non-compliance of these regulations that implement new provisions of the Code.