Electronic Alphalist of Employees and Payees in Philippines

By: Garry S. Pagaspas

In another effort to enhance tax compliance in the Philippines, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 1-2014 dated December 17, 2013 on submission of alphabetical list or alphalist of employees and list of payees on income payments subject to withholding taxes in the Philippines.

Amendment to Revenue Regulations No. 2-98

Revenue Regulations No. 1-2014 (RR No. 1-2014) was issued to amend Revenue Regulations No. 2-98, as last amended by Revenue Regulations No. 10-2008 on submission of alphabetical list or alphalist of employees and list of payees on income payments subject to withholding taxes in the Philippines. Specifically, RR No. 1-2014 amended Section 2.83.3 of Revenue Regulations No. 2-98 on requirements for the list of payees.

Mandatory Electronic Submission 

Under RR No. 1-2014, all withholding agents (regardless of the number of employees and payees, and whether employees or payees are exempt or not) are required to attach an alphabetical list or alphalist as an integral part of the following tax returns

• BIR Form No. 1604-CF or annual information return on compensation and final withholding taxes;
• BIR Form No. 1604-E or annual information return on expanded withholding tax;
• BIR Form No. 1601-E or monthly remittance return on expanded withholding tax;
• BIR Form No. 1601-C or monthly remittance return on withholding tax on compensation;
• BIR Form No. 1601-F or monthly remittance return on final withholding tax

Submission of alphalist of employees or alphalist of payees in the Philippines shall be made under the following modes:

• As an attachment in the electronic filing and payment system (EFPS)
• Through electronic submission using the BIR website address at es*********@*****ov.ph, and
• Through electronic mail (email) at dedicated BIR address using prescribed CSV data file format, the details of which shall be issued in separate revenue issuance.

In case the taxpayer does not have own internet facility or unavailability of commercial establishments with internet connection within the location, the taxpayer may make use of the electronic mail through the e-lounge of the BIR.

Mandatory requirement for tax expense deduction

Submission of alphalist of employees and alphalist of payees in the Philippines that does not conform with the prescribed format resulting to the unsuccessful uploading into the BIR system shall be deemed as not received and shall not qualify as a deductible expense for income tax purposes. Submission of alphalist with income payments lumped into one single amount such as “various employees”, “various payees”,  “PCD payees”, or “Others” are not allowed and deemed as non-compliance.

Effectivity of electronic submission in the Philippines

Manual submission of alphabetical list with less than 10 payees or employees under Revenue Regulations No. 2-98, as amended by Revenue regulations No. 10-2008 for annual information returns or BIR Form No. 1604-CF and BIR Form No. 1604-E shall be discontinued beginning January 31, 2014 and March 1, 2014, respectively, and every year thereafter. RR No. 1-2014 is to take effect within fifteen (15) days from publication. It was published last January 13, 2014 with Manila bulletin.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about ten (10) years now helping out taxpayers on tax compliance, tax savings, tax assessments, tax refunds, financial statements audit, and other related professional accounting services. He is presently a frequent speaker of Tax and Accounting Center, Inc. and you may send him mail at garry.pagaspas(@)taxacctgcenter.org.

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 also please send mail at info(@)taxacctgcenter.org, or you may post a question at Tax and Accounting Center Forum and participate therein.

Withholding tax on compensation is an approximate of income tax liability on compensation required to be withheld by the employer upon every payment or accrual or recording of salaries and wages in its books of accounts. It has been said that withholding tax has been a good contributor of internal revenue in the level of individual taxpayers perhaps because the employer automatically deducts the tax upon every payroll and that most sole proprietors are on small scale and once it grows, corporate entity conversion comes into play.

For you to further understand the withholding tax on compensation, let us discuss some of its features to serve as a guide for your application.

1. Applies to employer-employee relationship.

For this withholding tax on compensation to apply, you must establish the fact that there is an employer-employee relationship between the payor and the payee. In its absence, other tax type may apply such as expanded withholding taxes or final withholding tax.

Example: Mr. A rendered personal services to Company B who paid P100,000.00. What tax would apply? If Mr. A is an employee, withholding tax on compensation applies at the rate of 20% – 35% (previously 5-32% before the TRAIN Law) . If Mr. A is an independent contractor, then expanded withholding tax will apply at 5%/10% (previously 10%/15% before the TRAIN Law) if services rendered refer to a professional service, or 2% if a prime contractor. If Mr. A is a non-resident alien and services were rendered in the Philippines, then, 25% final withholding tax applies.

Under the Labor Code of the Philippines, the following are the elements of employer-employee relationship:

• Selection and hiring of employees by the employer;
• Payment of wages by the employer at agreed intervals and basis – hourly, daily, weekly, monthly, by piecework, or at any reasonable basis;
• Power of dismissal by the employer under established criteria and upon valid grounds; and,
• Power of control of the employer as to the means and methods of doing the work

In the absence of any of the four (4) elements, there could be no such employer-employee relationship and you cannot apply withholding tax on compensation. Common examples of this are the freelancers, online writers, and independent service providers.

2. Employee must be a natural person.

In business law, you will remember that compensation is a legal term used to refer to the fee of the service provider from another person without regard to their personalities – natural or juridical. For tax purposes however, the payee or recipient must be a natural person only in order for the withholding tax on compensation to apply. The reason is that withholding tax on compensation is an advance income tax of individual taxpayers receiving compensation income. Corporations and juridical entities falls on another income taxpayer classification – corporate income taxpayer, so they could not be applied withholding tax on compensation. Instead, you may be subject to expanded withholding tax depending on the nature of payment and applicable tax rate.

3. Employer must be a resident of the Philippines.

The reason is simple, the Philippine tax authorities – Bureau of Internal Revenue (BIR) has no jurisdiction over non-resident aliens and non-resident foreign corporations. In case of non-compliance, BIR may not be able to go after them for the consequences despite the presence of some bilateral agreements the Philippines has entered into with some foreign governments and international bodies. Besides, income from services is taxable in the place where the service is rendered and employees rendering work in the Philippines are taxable herein so corresponding income tax should be collected in the Philippines by local employers. In the case of overseas manpower agencies, their employers are the foreign companies and as such you cannot require them to withhold taxes. In case of short-term employment of non-resident citizen, then, the employee himself is required to report and pay income taxes and the foreign employer is still not required to withhold Philippine withholding tax on compensation. This is, however, without prejudice to the obligation of the foreign employer to withhold the withholding tax imposed by their foreign government.

4.  Compensation must be paid or payable in cash or in kind.

For employers, obligation to withhold is upon payment of salaries and wages or upon accrual where they record the salaries expense in its books of accounts. For employees, however, taxability is upon actual receipt of the salaries, whether in cash or in kind. For employees, you follow the cash basis where you tax income from compensation upon receipt or collection so they will avoid making advances from personal funds for paying taxes on salaries not yet received.

5. Taxable amount is the gross compensation received in furtherance of employer-employee relationship.

As a general rule, gross taxable compensation comprises of anything that the employee receives by virtue of the employer-employee relationship and the name assigned to it is immaterial – salaries, wages, allowances, fees. Exception to this is those provided for by law – e.g.statutory minimum wage exemptions; or those provided by the rules and regulations – de minimis benefits; or provided by tax treaties with Philippines – e.g. the 90-day rule of the RP-US Tax Treaty. As long as there is employer-employee relationship, payments of the employer to the employee are presumed to be compensation, unless, proven otherwise like payment of advances, loans to employees, fringe benefits subject to fringe benefits tax, and the likes.

6. Amount withheld is deductible from employees income tax liability

As mentioned earlier, withholding tax on compensation every payroll is only a reasonable estimate of employees income tax liability and does not constitute accurate and full payment. At the end of the year, the employer is required to make annual computations of total compensation provided to each and every employee and the applicable total income tax liability to be compared to the total withholding taxes on compensation made during the year. If annual income tax due is higher over withheld taxes, employee is compensation as of January the following year is deducted by the entire amount of income tax due. For over withholding, the employee is refunded. I am pretty sure, employees would be happier for refund than additional tax liability.

If you are a pure compensation income earner, then, the employer’s annualization would constitute your annual income tax return under substituted filing. If you have other taxable income, such as from trade or business or practice of profession, then, you will have to file annual income tax returns where you will need to declare your compensation for income tax computations, and deduct the withheld taxes based on the BIR Form No. 2316 issued by your employer/s.

7. Employer is required to file tax returns and reports regularly

Since our tax system is based on voluntary compliance and pay-as-you-file (not pay as you like), employers are required to file monthly withholding tax returns-BIR Form No. 1601C, annual summary reports like BIR Form No. 1604CF with attached Alphalist of employees, and provide each employee a Certificate of Withholding Tax Withheld on Compensation (BIR Form No. 2316) annually or upon separation or termination of employment. Failures of the employer to comply the said reports are subject to penalties.

8. Withholding tax rates may vary depending on the tax classification of the employee

For citizens and resident alien employees, the withholding tax rates are based on the withholding tax table with rates ranging from 20%-32% on the taxable compensation income (previously 5% – 32% before the TRAIN Law after considering their annual personal exemptions – P50,000 basic personal exemptions regardless of status, and P25,000.00 for every qualified dependent child of not more than 21 years of age up to maximum of four (4) or P100,000. Note that personal exemptions are no longer applicable in the TRAIN Law). For non-resident aliens not engaged in trade or business, the rate is 25% based on gross compensation and the same is final withholding tax. (For special alien employees of special entities (ROHQ, RAHQ, OBU, etc), the rate is 15% based on gross compensation and the same is final tax. This special rate has been removed already in the TRAIN Law.)

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 also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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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:

1. 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;
2. Withholding tax on compensation (WC) under monthly BIR Form No. 1601C and part of annual BIR Form No. 1604CF with Alphalist of Employees;
3. 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 10^th 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. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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See how we can help you with our other professional services : company registrations; Ph Working Visa; and HR Services

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