Posts Tagged ‘expanded withholding tax’
By: Tax and Accounting Center Philippines
Withholding tax of top 20,000 corporations in the Philippines notified by the Bureau of Internal Revenue (BIR or Tax Authorities) is the most misunderstood tax rule in the Philippines. As such, let us drop some lines and share our understanding of the withholding tax rules in the Philippines for top 20,000 taxpayers (TTC).
Withholding tax on regular items
The tax rules and regulations has provided withholding tax rules in the Philippines applicable to all taxpayers engaged in business or practice of profession with respect to certain income payments that they claim as deductible expense for income tax purposes. These rules apply also to top 20,000 corporations and the same rates are required to be withheld upon payment or accrual of top 20,000 corporations. Hereunder are some of them enumerated in Revenue Regulations No. 2-98, as amended:
- Rental or lease payments – 5%
- Professional fees – 10%/15%;
- Payments to contractors – 2%
- Payments to advertising agencies – 2%
- Payments to specialty contractors – 2%
Special rates for top 20,000 taxpayers
For top 20,000 taxpayers, the tax rules in the Philippines provided an additional withholding tax obligation. For expenses or income payments to others that are not listed in the specific income payments subject to withholding taxes under Revenue Regulations No. 2-98, as amended, they are required to withhold as follows:
- Purchase of goods – 1%
- Purchase of services – 2%
The above rates apply to purchases from their regular supplier of goods or services or from those whom they had at least six (6) transactions during the taxable year. It likewise applies to casual purchases or single transaction from non-regular supplies worth at least P10,000.00. Please note that the supplier or sellers to top 20,000.00 need not be a top-20,000.00 in themselves. What is being referred to in here as subject to withholding taxes are the payments of top 20,000.00 taxpayers to be subject to withholding tax. Payments to top-20,000 taxpayer from a non-top 20,000 or from another top 20,000 is another thing so please do not be confused.
Withholding tax exemptions of top 20,000 taxpayers
Exemptions from withholding tax in the Philippines could apply in two (2) ways – payments BY top 20,000 taxpayer, or payments TO top twenty thousand corporations. In general, the following payments by top twenty thousand corporations are exempt from withholding tax in the Philippines:
- Payments that does not constitute income on the part of the payee (e.g. reimbursable expenses)
- Payments to government agencies;
- Payments to income tax exempt entities
We hope the above simply laid rules will help you in your compliance with the withholding tax for top 20,000 corporations.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at email@example.com.
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Withholding tax is the most basic tax type that each and every taxpayer engaged in trade or business or in the practice of profession must learn. Upon registration of their respective business entities, withholding tax type is a must and it may come in three (3) tax types as sub classifications as follows:
- Expanded withholding tax (EWT) or Creditable withholding tax (CWT) under monthly BIR Form No. 1601E and annual BIR Form No. 1604E with Alphalist of Payees;
- Withholding tax on compensation (WC) under monthly BIR Form No. 1601C and part of annual BIR Form No. 1604CF with Alphalist of Employees;
- Final withholding tax (FWT) under monthly BIR Form No. 1601F and part of annual BIR No. 1604CF with Alphalist of Employees/Payees;
To develop a deeper understanding of the withholding tax system in the Philippines, let us discuss some of its basic features.
1. Automatic constitution of resident payor of income as withholding agents.
By force of the law, a Philippine resident payor of specific income payments are mandated by law to withhold, whether he likes it or not. Non-resident foreign corporations and non-resident alien payors are not included because of obvious logical reasons – Philippine government does not have jurisdiction over them, and could not run after in case of non-compliance. Specific items of income payments are enumerated in the regulations and once the payment is made upon such items, withholding taxes applies. Example, if a taxpayer pays a rental for its office space, it is mandated to withhold 5% of the gross rental payment.
2. A system of advance collection of payee’s income tax liability
What is withheld is the income tax liability of the payee upon actual payment or upon accrual. Income tax returns are filed quarterly and annual and under pay-as-you-file system, income taxes are paid upon filing. However, with the withholding tax, the government gets the income tax on the 10th day of the month following the month of payment or accrual, ahead of the quarterly payment of payees income. Example, Company A pays Atty. A professional fees amounting to P100,000 on January 2012 and the applicable withholding tax of 15% or P15,000 was withheld. Atty. A is required to file and pay quarterly income tax (BIR Form No. 1701Q) on April 15, 2012, but, before he could file and pay, the government already collected in advance the P15,000 that was remitted by A Company not later than February 10, 2012 (BIR Form 1601E).
3. Amount withheld is a trust fund for the government
At provided in Section 57(A) of the Tax Code, 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 withholding agent, as trustee of the funds withheld cannot use the funds in any other purpose, but should remit the same to the Bureau of Internal Revenue (BIR) through the authorized agent banks (AABs) or other payment facilities.
4. Amount withheld is creditable or final income tax due of the payees.
Expanded withholding tax rates are carefully studied and crafted to reasonably estimate payee”s income tax liability depending on the industry type and nature of payment. This is the reason why withholding tax rates are varying and is challenging to memorize for proper application. Upon filing of quarterly and/or annual income tax of the payee, the amount withheld will be deducted from its income tax liabilities and there would be fewer amounts due because of the withholding tax duly supported by creditable withholding tax certificates – BIR Form No. 2307/2316. On the other hand, final withholding taxes are the same rates imposed in the Tax Code for specific payments. As such, they constitute full payment of payees income tax and no additional tax liabilities would arise under final withholding tax on top of the amount withheld.
5. Check and balance mechanism
Monthly withholding tax returns of the payor attaches a monthly alphalist of payees (MAP) with the details of the payee and the income payments – the name address of payee, and the amounts of income payment and corresponding tax withheld. When the payee files a quarterly and annual income tax returns, it attaches the summary alphalist of withholding taxes (SAWT) with the details of the payor and the income payment. With these reports, the BIR could easily determine whether or not the payee declared the income payment, or whether or not the payor correctly declared the expense. As such, this becomes an easy tool in the third party information procedures of the BIR to catch up tax evaders.
6. A mandatory requirement for deductibility of an expense.
In effect, Section 34(K) of the tax Code, as amended, provides that if an expense is subject to withholding tax, it will not be allowed as a deduction for income tax unless it could be shown that withholding taxes has been paid to the BIR. This explains why assessment of withholding tax has a dual effect – disallowance of expense deduction in income tax computation for failure to withhold, and assessment for withholding tax liabilities. Upon payment of withholding taxes, the income tax assessment based on failure to withhold is automatically dropped.
7. Exclusive enumeration of items subject to withholding taxes.
Revenue Regulations 2-98, as amended, is the main regulation enumerating the income payments subject to creditable withholding tax. Enumeration of expanded withholding tax therein is exclusive and whatever is not included is deemed not subject to creditable withholding tax. This means to say that as a rule, not all expenses are subject to withholding. Exception to this rule is the rule on Top Twenty Thousand Corporation (TTC) or Top Five Thousand Individuals duly selected and notified as such by the BIR. On top of those enumerated in Revenue Regulations 2-98, as amended, they are mandated to withhold on income payments to regular supplies of goods – 1% or of services – 2%, and from casual purchases amounting to P10,000 in a single transaction.
Failure of the taxpayer to comply the obligation to withhold would expose a taxpayer-agent with the following consequences:
- Non-deductibility of a business expense for income tax computation for failure to withhold until after payment of the withholding tax and related penalties;
- Payment of the basic withholding tax that should have been withheld;
- One-time surcharge of 25%, or 50% for willful neglect or fraudulent filing;
- Interest on 20% on annual basis based on the basic withholding tax that should have been withheld;
- Compromise penalties ranging from P200 to P50,000 based on the amount of basic withholding tax that should have been withheld;
- Or worst, criminal prosecution and imprisonment for willful neglect or fraudulent filing of withholding tax returns
You would not enjoy paying the above penalties, and wasting your hard earned money from your business undertakings and simple ignorance of the above obligation. It’s the proper time now to educate and you have all the time and opportunity to do it before it is too late.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.
Quality Seminars, Trainings and Workshops. We conduct tax seminars and workshops on withholding tax such as the following:
- Withholding tax, Subjects and Applications - One day program once a month
- Compensation, Computations and Must Know Exemptions - One day program once a month
Tax Management and Compliance Consultancies. With our tax services, we can assist you ensure tax compliance and in the management of such continuing compliance. Proper compliance would bring about tax savings form avoiding being penalized to tax minimization strategies. Likewise, we could assist you in securing a BIR ruling confirming the applicable tax exemptions.(Post viewed 10837 times)
Under Section 23 of the Corporation Code of the Philippines, and hereunder we quote:
Section 23. The Board of Directors or Trustees. – Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is a no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified.
They are the brains and the wisdom of the corporation that their maneuvering greatly affects the success or failure of the corporate venture. In exchange their services as a member of the Board of Directors (BOD), directors may be given monetary considerations. They are not normally being compensated for serving as BOD because of the fact that their serving as BOD would inure to their personal benefit, they being major stakeholders who would share the portion of the corporate earnings in dividend declarations. Nevertheless, they may be given per diems for their attendance in board meetings, and conferences. This is normally referred as director’s fees in the corporate world.
This director’s fees constitute an income for the BOD, and as such, subject to income taxes. For tax purposes, the taxability would depend whether or not the BOD is being held out as an employee of the company, concurrently, such as Company President, Treasurer, Corporate Secretary, and other employment capacity. Hereunder are the tax rules applicable:
Director and employee, at the same time
The director’s fee is subject to withholding tax on compensation using the 5-32% withholding tax table based on gross amount. Likewise, its compensation as employee is subject to the same withholding tax rates. At the end of the year, if this is a single employment, then the director is no longer required to file an income tax return under the rules of “substituted filing’ premised on the fact that the BOD had been withheld the correct amount of tax. However, if BOD has other taxable income, like concurrent employment with other companies, business income, income from practice of profession, and other income subject to 5-32%, the director’s fees shall be included in his annual income tax return (BIR Form 1701) and the amount withheld shall be allowed as a deduction from the tax due to determine the net amount payable.
The director’s fee is subject to a creditable withholding tax (CWT) of 10% if gross income of the previous year does not exceed P720,000 as stated in the BIR required affidavit of declaration duly received by the BIR, otherwise, 15%. Said income shall be declared along with the director’s other income like income from concurrent employment with other companies, business income, income from practice of profession, and other income subject to 5-32%, in its annual income tax return (BIR Form 1701) and the amount withheld shall be allowed as a deduction from the tax due to determine the net amount payable.
In sum, if the director is at the same time an employee, then apply the withholding tax table on compensation. If not an employee of the corporation at the same time, then, apply the 15% rate based on gross amount of payment. They could also be provided fringe benefits on top of their salaries and director’s fees, and the same is subject to fringe benefits tax (FBT).
Revenue Regulations No. 2-98, as amended
Tax Management and Compliance Consultancies. With our tax services, we can assist you ensure tax compliance and in the management of such continuing compliance. Proper compliance would bring about tax savings form avoiding being penalized to tax minimization strategies. Likewise, we could assist you in securing a BIR ruling confirming the applicable tax exemptions.
Quality Seminars and Trainings. We conduct seminars, workshops and trainings on BIR income tax compliance such as the following:
- Basic Income Taxation for Sole Proprietorship and the New ITR
- Basic Income Taxation for Corporations and the New ITR
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