A payroll register is a report filled with employee information and payroll figures for a specific payroll cut-off and payout period. A payroll register is composed of the following:
In every country, there are different labor rules and regulations that need to be followed. In the Philippines, to get the net pay of employees, employees’ basic rates should be identified initially using the factor suggested and determined in the Handbook on Workers’ Statutory Monetary Benefits (WSMB). The following are the common equivalent number of days per year:
First, identify the factor to be used in calculating the daily and hourly rates. Second, compute the employee’s daily and hourly basic rates by multiplying the monthly salary by 12 to get the annual salary, then divide it by the factor. Then, divide the daily rate by 8 regular working hours to get the hourly rate.
For example, A works from Monday to Saturday, earning PHP 15,000.00. Since A is working six days a week and has an unpaid rest day, his factor is 313 days per year.
Calculation: Daily rate: (15,000 * 12) / 313 = PHP 575.00
Hourly rate: PHP 575/8 = PHP 71.88
The amount of tardiness, undertime, and absences are to be deducted from the employees’ semi-monthly/monthly basic salary. To compute the hourly rate, multiply the hourly rate by the number of hours of tardiness, undertime, and absences.
When calculating the employees’ overtime pay, night shift differential pay, premium pay, and holiday pay, basic rates are required. The WSMB determines the rates to be used, which will be discussed in another article. The determined amount will be added to the net basic pay to get the gross compensation for employees.
Gross compensation less non-taxable compensation equals net taxable compensation is the standard formula used to determine the withholding tax on remuneration. Unless otherwise excluded by the Code, gross compensation refers to all actual payments made by the employer for services rendered by an employee under an employment contract. Non-taxable compensation enumerated in BIR Form 2316 will be tackled in another article. Net taxable compensation will be the basis for calculating the employee’s withholding tax on the compensation.
Figure 1: 2023 Revised Withholding Tax Table
Figure 1 illustrates the withholding tax table that is composed of the mode of payment, compensation range, and the prescribed withholding tax. Employees are exempt from withholding tax on compensation if their annual taxable income is PHP 250,000 or less, and if exceeded, they are subject to tax rates ranging from 15% to 35% based on the withholding tax table.
Figure 2: 2023 Annual Revised Withholding Tax Table
Figure 2 illustrates the tax table used for annualization or during the calculation of the annual withholding tax of employees. The same rationale applies to Figure 1, except for the timing of the calculation of withholding tax. More details about the annualization will be discussed in another article.
When calculating the net pay, the normal equation is gross compensation less the total deduction. Total deductions would include some of the following:
The different components are based on the different rules and regulations of payroll-related government agencies. Understanding these components will help generate an accurate and reliable payroll register for company and employee use.
By: Hergie Anne C. De Guzman, CPA
The compliance for the filing of expanded withholding taxes does not end with the monthly and quarterly filings. At year end, an Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax or the BIR Form 1604-E should be filed by the taxpayers.
What are the covered transactions for BIR Form 1604-E?
Basically, the return is a summary of the expanded withholding taxes for the year, the amount of remittance made, including penalties, if any, and the date of remittance. It is only an information return, hence, no tax due is computed for this.
The information return covers the transactions relating to the expanded withholding taxes on certain income payments specified in Section 2.57.2 of Revenue Regulations (RR) No. 2-1998:
How to file BIR Form 1604-E in Philippines?
The return has two (2) parts.
Part I is the background information of the taxpayer as follows:
Part II is the summary of the remittances per BIR Form 1601-EQ and BIR Form 1606. The following details are needed for the summary:
The return was modified in 2019 through Revenue Memorandum Circular No. 73-2019 to include additional background information such as the TWA status (Field 8A) and to reflect the quarterly reporting based on the new expanded withholding tax returns. However, up to the date of writing this article, the modified return is still not yet available in the eBIR Forms and eFPS.
Required Attachments
The information return has required attachments as follows:
Deadline for Filing
The deadline for filing the return and the related attachments is on or before March 1 of the following year.
Penalty for Non-filing
The taxpayer would be subjected to PhP1,000.00 for each failure to file.
By: Garry S. Pagaspas, CPA
Tax Reform for Acceleration and Inclusion (TRAIN) or Republic Act No. 10963 (RA 10963) which has been effective January 1, 2018 has introduced reforms in withholding taxes in the Philippines. Implementing rules and regulations of TRAIN RA 10963 Philippines or Revenue Regulations No. 11-2018 (RR 11-18) further amending Revenue Regulations No. 2-1998 (RR 2-98, as amended) has not only provided guidelines on such tax reforms, but went beyond by compiling and consolidating such items subject to expanded withholding tax in Philippines under Section 2.57.2, Revenue Regulations No. 2-1998, as amended, from 29 (Sec.2.57.2(A) to AA) items to 21 items (Section 2.57.2(A) to U). Items of professional fees in the Philippines is one of those consolidated and this is what we will tackle here.
Withholding tax rates of professional fees under TRAIN RA 10963 Philippines
Under RR 11-18 amending Section 2.57.2 of RR 2-98, as amended, the following are the withholding tax rates on professional fees, promotional, talent fees, or for any other form of remuneration:
To avail of the 5% for individuals or 10% for non-individuals, the payee taxpayer would need to provide a Bureau of Internal Revenue (BIR) sworn statement – Annex “B-1” of RR 11-18 for individuals, or Annex “B-3” for non-individuals, along with Certificate of Registration in Philippines or BIR Form No. 2303 to withholding agents or payors not later than January 15 of each year or at least prior to the initial payment. For those exceeding P3M individuals, Annex “B-2” of RR 11-18 is applicable.
Who are covered by withholding tax on professional fees under TRAIN RA 10963 Philippines
Payments for professional fees, promotional, talent fees, or for any other form of remuneration to the following are subject to expanded withholding tax on professional fees under TRAIN RA 10963 Philippines:
Professional fees covered above includes per diems, allowances, and other form of income payments. It also includes amounts paid to them 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.
Obligations of the withholding agent of professional fees under TRAIN RA 10963 Philippines
Withholding agents or income payors of professional fees subject to withholding tax are required to do the following:
For hospitals, clinics, HMO’s or similar establishments, keep on file a sworn declaration that no professional fee was charged by medical practitioners and patient or representative (Annex ‘A” of RR 11-18 amending RR 2-98) forming part of its records for future reference during BIR tax assessment, and report to BIR within 10 days refusal of such medical practitioners, if any.. It is also required to submit a list containing the names and addresses of medical practitioners whose professional fee was paid by patients directly to hospitals and clinics, and practitioners who did not charge professional fees.
Failure to comply with the above obligations of withholding tax agent on withholding taxes of professional fees under TRAIN RA 10963 Philippines is subject to applicable penalties.
Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about fifteen (15) years now helping out taxpayers on securing BIR Rulings, appeal of BIR Ruling denials, company registrations in Philippines, tax compliance, tax savings, tax assessments, tax refunds, and other related professional tax services. He has been helping out some foreign clients determine the most appropriate legal entity to register in the Philippines based on intended operations, the eventual registration of such legal business entity and other related professional services. He is presently a frequent speaker of Tax and Accounting Center, Inc. and you may send him mail at garry.pagaspas(@)taxacctgcenter.ph.
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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To implement the tax reforms on Creditable or Expanded Withholding Tax (EWT) in the Philippines under the Tax Reform for Acceleration and Inclusion (TRAIN) or Republic Act No. 10963 (RA 10963) effective January 1, 2018, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 11-2018 dated January 31, 2018 (RR 11-18) in Philippines amending Revenue Regulations No. 2-1998 (RR 2-98). Below are the 20 items subject to creditable withholding tax in the Philippines under TRAIN or RA 10963):
1. Withholding tax on professional fees, talent fees, etc. for services rendered – 5% /10% individuals or 10%/ 15% corporations (Sec. 2.57.2(A), RR 2-98)
By implications of the tax reforms under TRAIN RA 10963 in Philippines, withholding tax on professional fees is now 5% of gross income if annual income not exceeding PhP3M, otherwise, 10% of gross income for individuals, while professional fees to juridical entities is 10% of gross income if annual gross income or receipts does not exceed P720K, otherwise, 15%. To apply 5% for individuals or 10% for corporations, the payee individual or corporation may have to file with BIR a sworn declaration of receipts with a copy of BIR Certificate of Registration not later than January 15 of the current year or prior to receiving any professional fees.
Professional fees subject to expanded withholding tax in Philippines under TRAIN or RA 10963 covers those payments to licensed professionals under Professional Regulation Commission (PRC) (e.g. CPAs, medical practitioners, engineers, architects, real estate service practitioners, etc.) and Supreme Court (lawyers), professional entertainers, professional athletes, directors and producers of movie and TV, insurance agent and adjusters, management and technical consultants, bookkeeping agents and agencies, other recipients of talent fees, directors of corporations who are not employees, and commissions of independent sales representatives and marketing agents.
2. Withholding tax on rentals of real and personal properties – 5% of gross rental (Sec. 2.57.2(B), RR 2-98)
Rental payments for the use or possession without taking title of real properties used in business; personal properties in excess of P10,000 annually, except those under finance lease (R.A. No. 8556); rentals of poles, satellites, and transmission facilities; rentals of billboards and similar spaces for advertising in the Philippines; and cinematographic film rentals to resident individual/ corporate owners of cinematographic films, lessors and distributors.
3. Withholding tax on income payments to certain contractors – 2% of gross payments (Sec. 2.57.2(C), RR 2-98)
This applies to payments to certain contractors in the Philippines such as to general engineering constructions, general building contractors, specialty contractors, and other contractors as specifically enumerated in RR 11-2018 amending RR 2-98 under TRAIN or RA 10963 in Philippines. Please refer to RR 2-98, as amended, for the list.
4. Withholding tax on income payments to beneficiaries of estates – 15% of income distribution (Sec. 2.57.2(D), RR 2-98)
This applies to distribution of income earned by estates of deceased persons through their authorized representative (e.g. administrators, administratrix, etc.) to their legal heirs or beneficiaries prior to or during the distribution of such estates either extrajudicial or through the judicial system.
5. Withholding tax on income payments to partners of general professional partnerships – 10% if annual income not exceeding PhP720K, otherwise, 15% of gross income (Sec. 2.57.2(E), RR 2-98)
Partners of general professional partnerships (GPP) do not have salaries as what they get from the GPP are their share in the net income of such GPP either through drawing, advances, sharing, allowances, stipends, etc., and they are subject to 10% if the partner’s current gross income does not exceed P720,000, otherwise, 15% applies.
6. Withholding tax on sales of real properties – 1.5% of gross selling price to 6% (Sec. 2.57.2(F), RR 2-98)
Withholding tax on sale of real property other than capital asset (asset not used in trade or business) is based on classification: exempted from expanded withholding tax if the seller is exempt such as HLURB socialized housing, 6% if the seller or transferor is not habitually engaged in real estate business, or if seller or transferor is habitually engaged in trade or business (e.g. registered with HLURB or HUDCC, or had at least 6 realty transactions on previous year), then, expanded withholding tax on real property in Philippines would depend on the gross selling price or total amount of consideration or fair market value under Section 6(E) of the Tax Code, as amended – 1.5% if up to P500k, 3% if more than P500k to P2M, or 5% if more than P2M.
7. Withholding tax on income payments of importers to government personnel – 15% of gross additional payments (Sec. 2.57.2(G), RR 2-98)
This applies to additional payment of importers, shipping and airline companies or their agents to government personnel for overtime services authorized by law.
8. Withholding tax on income payments of credit card companies to establishments – 50% of 1% of gross payments (Sec. 2.57.2(H), RR 2-98)
Cardholders are using credit cards to acquire goods and services and they are not paying the establishments from whom goods and services are acquired. Instead, it is the credit card company who pays the establishments and required to withhold 50% of 1% of such payments. Cardholders paying credit card companies may be subject to withholding tax in the Philippines is another provision of RR 2-98, as amended.
9. Mandatory withholding of top withholding agents – 1% on goods, 2% on services (Sec. 2.57.2(I), RR 2-98)
The current rules identified those top taxpayers mandated to withhold from local resident regular suppliers of goods (excluding agricultural products under Sec. 2.57.2(N), RR 2-98) or services in Philippines (including those they had at least 6 transactions in the previous or current year) or for casual purchase of casual purchase of P10,000 or more – 1% for purchases of goods, or 2% for services by such top withholding agents – large taxpayers (RR 1-98), top-twenty thousand corporations (RR 6-09), Top 5,000 individuals (RR 6-09), taxpayers identified and notified as medium and those under TAMP.
10. Withholding tax on government money payments to suppliers – 1% on goods, 2% on services (Sec. 2.57.2(J), RR 2-98)
This applies to payments of government offices, agencies, instrumentalities, and GOCCs on purchases from local/resident suppliers of goods at 1%, or of services at 2% of such gross payments.
11. Withholding tax on tolling fees paid to refineries – 5% of tolling fees (Sec. 2.57.2(K), RR 2-98)
This applies to processing or tolling fees for the conversion of molasses to its by-products and raw sugar to refined sugar.
12. Withholding tax on pre-need company payments to funeral parlors – 1% (Sec. 2.57.2(L), RR 2-98)
This applies to payments of pre-need companies to funeral parlors for funeral services.
13. Withholding tax on income payments to embalmers – 1% (Sec. 2.57.2(M), RR 2-98)
This one relates to payments for embalming services rendered to funeral companies.
14. Withholding tax on income payments to agricultural products suppliers – 1% (Sec. 2.57.2(N), RR 2-98)
This applies to payments of establishments (e.g. hotels, restaurants, resorts, caterers, food processors, canneries, supermarkets, agricultural product dealers, etc.) to agricultural suppliers for agricultural, forest and marine food and non-food products, livestock and poultry, breeding stock, etc. Amount subject to withholding tax is the excess of cumulative amount of P300k within same taxable year.
15. Withholding tax on payments for minerals, mineral products, and quarry resources – 5% or 1% for BSP (Sec. 2.57.2(O), RR 2-98)
This applies to purchases of minerals, mineral products, and quarry resources (e.g. silver, gold, marble, granite, gravel, sand, boulders, etc.), except for BSP payments required withholding tax of 1% on gross payments.
16. MERALCO refund/interest payments – 25% / 32% on refunds; 10%/20% interest on meter deposits (Sec. 2.57.2(P), RR 2-98)
This is in relation to MERALCO refunds under Supreme Court case G.R. No. 14814 last 2003 – 25% if with active contracts or 32% if without active contracts, and on interest income on meter deposits – 10% for residential and general service customers, 20% for non-resident service customers.
17. Withholding tax on refund by other electric distribution utilities – 10% / 20% (Sec. 2.57.2(Q), RR 2-98)
This is in reference to ERC Resolution No. 8, series of 2008, dated June 4, 2008, in relation to the mandates of Article 8 of the Magna Carta for Residential Electricity Consumers and Article 3.4.2 of DSOAR, exemption all electricity consumers from payment of meter deposits.
18. Withholding tax on political contributions – 5% of gross contribution (Sec. 2.57.2(R), RR 2-98)
This refers to income payments of political parties or candidates on campaign expenditures, and juridical or individual persons on purchase of goods and services as campaign contributions to political parties and candidates.
19. Withholding tax on interest income other than from deposit substitutes – 20% (Sec. 2.57.2(S), RR 2-98)
This refers to payments for interest income from any other debt instruments other than from “deposit substitutes” defined under the Tax Code, as amended.
20. Withholding tax on income payments to REIT – 1%. (Sec. 2.57.2(T), RR 2-98)
This applies to income payments made to corporate taxpayers registered as Real Estate Investment Trust (REIT) under R.A. No. 9856 implemented by RR No. 13-2011.
21. Withholding tax on income payments on locally produced sugar – 1% (Sec. 2.57.2(U), RR 2-98)
This applies to income payments of proprietors or operators of sugar mills or refineries on their mill share, and direct buyers of Quedans or Molasses Storage Certificates from sugar planters on locally produced raw sugar and mollasses.
Notably, expanded withholding tax in the Philippines under TRAIN or RA 10963 is not applied to exempt income or income tax exempt institutions and the amount withheld in the Philippines is normally treated as tax credit in the hands of payee based on BIR Form No. 2307 under TRAIN or RA 10963 in Philippines duly issued to the payee either within 20 days from the end of the quarter or every after payment. Payment of expanded or creditable withholding tax in Philippines under the TRAIN or R.A. No. 10963 is to be made not later than 10 days following the end of applicable month using BIR Form No. 0619 under TRAIN or RA 10963 in Philippines for the first 2 months of the quarter, and BIR Form No. 1601EQ under TRAIN or RA 10963 in Philippines for the 3rd month of the calendar quarter along with the attached Quarterly Alphalist of Payees (QAP) under TRAIN or RA 10963 in Philippines. For further details of how each withholding tax rule is being applied, please refer to Revenue Regulations No. 11-2018 and/or the related revenue regulations amended Revenue Regulations 2-98.
Updates on expanded withholding tax (EWT) Philippines
Revenue Regulations No. 2-1998, as amended, has been further amended by Revenue Regulations No. 14-2023 on expanded withholding tax in Philippines of joint ventures and joint venturers, and Revenue Regulations No. 16-2023 on expanded withholding tax in Philippines of electronic marketplace operators and digital financial services providers and accordingly, the list continues as follows:
22. Withholding tax on income payments made by joint ventures/ consortiums – 1% (goods)/ 2% services. (Sec. 2.57.2(V), RR 2-98)
This applies to income payments of joint ventures or consortiums, whether incorporated or not, taxable or non-taxable, to their local suppliers of goods and services. This is somehow similar to expanded withholding tax of top withholding agents (TWA) in Philippines.
22. Withholding tax on distributive shares of co-venturers/members of joint ventures/ consortiums not taxable as corporations -15%. (Sec. 2.57.2(W), RR 2-98)
This applies to the income distribution of joint ventures or consortiums not taxable as corporations to the co-venturers or members prior to actual or constructive distribution.
23. Withholding tax on remittances of electronic marketplace operators and digital financial services providers – 1% of 1/2 of gross remittance (Sec. 2.57.2(X), RR 2-98)
This applies to (a) digital service platform operators connecting buyers and sellers online using their platform and collecting payment of online buyers on behalf of online merchants, and (b) financial technology of digital financial service providers offering online financial services to the public through e-wallet with respect to their remittances to online merchants relative to their online transactions. This withholding tax applies if the annual total gross income of online merchants is more than PhP500,000 during the past taxable year and that the cumulative gross remittance of platform operator or digital financial service provider to online merchants exceeded PhP500,000 during the taxable year. In other words, this seems to apply to larger online selling operations.
Implications of Republic Act No. 11976 or Ease of Paying Taxes Act in Philippines
Under Republic Act No. 11976 (RA 11976), otherwise known as Ease of Paying Taxes Act in Philippines, Section 34(K) of the Tax Code, as amended, on withholding tax as a requirement for deductibility of certain expenses subject to withholding tax from gross income for income tax computation has been repealed. Accordingly, effective January 2024, expenses subject to withholding tax could be deducted in computing for taxable income subject to income tax even if the taxpayer failed to withhold applicable withholding tax on them such expenses.
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Filing 2017 year-end tax compliance requirements – e.g. 2017 income tax returns with attached 2017 audited financial statements in the Philippines is fast approaching as the filing dates are unfolding comes April 15, 2018. This is a busy season for accountants, auditors, entrepreneurs, finance and accounting personnel, and taxpayers in the Philippines, in general. During 2017 tax seasons in the Philippines, the following tax mistakes on the audited financial statements (AFS) and annual income tax returns (ITR) in the Philippines should be avoided:
1. Excessive Retained earnings subject to 10% IAET in Philippines
Improper accumulation of earnings after tax is subject to 10% improperly accumulated earnings tax (IAET) and an indicator of the same on the face of the audited financial statements is the glaring excessive free retained earnings that is more than the paid-up capitalization. Under Section 43 of the Corporation Code of the Philippines, as amended, domestic corporations are not allowed to maintain free retained earnings more than 100% of paid-up capitalization and violation is penalized. In Section 29 of the Tax Code, as amended, a 10% improperly accumulated earnings tax is being imposed and this could be avoided with proper tax planning. In case caught up with such scenario, consult with your tax consultant on how to do about it as their could be a number of remedies.
2. Improper claim of creditable withholding tax credits in the Philippines
Taxes withheld by your suppliers evidenced by BIR Form No. 2307 are tax credits or deductions from 2017 annual income tax liability. As such, it is treated as an asset on books. In some instance, financial statements would show such material asset amount that should have been used. However, in some instances, such asset reflected in the financial statements are without proper BIR Form 2307 documentations, or if there is, the same would pertain to prior years, or without original copies available.
3. Claim of deductible expenses without withholding applicable taxes
Under Section 34(k) of the Tax Code, as amended, if an expense is subject to withholding tax, the same shall not be deductible until after the applicable withholding taxes has been made. To ensure that you only deduct expenses properly withheld, double checking is made with alphalists of payees and employees duly filed with the BIR and seeing to it that justifications are available to those expenses not withheld taxes. At any rate, in case you deducted an expense without the required withholding tax, the present rules now allow deduction upon payment of the required withholding tax even after filing 2017 annual income tax returns in Philippines.
4. Failure to consider tax deductible NOLCO
Net operating loss carry-over (NOLCO) is another tax asset some simply disregards. To avail NOLCO deduction for taxpayers claiming itemized deductions, it must have been properly stated on the prior year financial statements, and income tax returns. Note that it could be claimed within three (3) taxable years from the year of loss on a first-in, first-out basis.
5. Failure to consider MCIT credits
Minimum corporate income tax (MCIT) of prior year or years is another tax credit some would fail to consider. Like NOLCO, could be claimed within three (3) taxable years from the year of MCIT during the year when the corporation becomes liable to the 30% normal corporate income tax. During the year of MCIT payment, please ensure that the MCIT is indicated in the annual income tax return and on the audited financial statements in the Philippines.
6. Taxing the non-taxable income
As you will note on books of accounts and on the financial income, other income is one line item. Please do not be misled to conclude that the same is automatically subject to 30% corporate income tax or includible in the 2% MCIT computations. Verify and check each item in such other income account is indeed, taxable ordinary income to avoid misapplication if the same is not such as those capital gains subjected to capital gains tax, unrealized gains, and the likes.
7. Incomplete BIR mandated notes to financial statements
Notes to financial statements is not the sole mandate of the rules and regulations of the Securities and Exchange Commission (SEC) Philippines. BIR has also requires some items and details on taxes to be indicated in the financial statements such as those in Revenue Regulations No. 15-2010, Revenue Memorandum No. 19-2011, and related BIR issuances thereafter. See to it that those notes appears in the Notes to the Audited Financial Statements.
8. Failure to account year-end DST on debt agreements
If you are on a group of companies, a cash cow company like the holding company is very common and intercompany mobility of funds are evident on year end balances appearing on the financial statements. See to it t hat you properly account for the documentary stamp tax (DST) on debt instruments imposed under Section 179 of the Tax Code, as amended.
9. Failure to account withholding tax on accruals
Under the accrual basis of accounting, expenses incurred during the year are deductible expenses, though, unpaid as of year-end cut-off. When making accruals of expenses, please ensure that you properly account withholding taxes so as to fully comply with tax rules on deductibility of expenses. Example of this is accruals for audit fees, legal fees, management bonus, and the likes.
10. Failure to consider limitations on some expenses
Please not also on the three (3) expenses subject to limitations – interest expense with respect to the reduction of 33% of interest income subjected to final tax under “tax arbitrage”, the 1% (services) or 0.5% (goods) on representation expenses, and 5% (corporation) or 10% (individual) on charitable contributions.
Conclusion
While each one of us would want to beat the tax filing timeline for 2017 annual income tax returns with attached audited financial statements in the Philippines, we are likewise bound to ensure that we do it in a manner in accord with the rules and regulations to avoid tax risks during tax examinations.
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 info(@)taxacctgcenter.org.)
Comes 2014 calendar year filing season, taxpayers, accountants, and tax agents in the Philippines are on their respective schedules for the filing of the annual income tax returns with attached audited financial statements not later than April 15, 2015. During tax seasons in the Philippines, the following tax mistakes on the audited financial statements (AFS) and annual income tax returns (ITR) in the Philippines should be avoided:
1. Excessive Retained earnings subject to 10% IAET
Improper accumulation of earnings after tax is subject to 10% and an indicator of the same on the face of the audited financial statements is the glaring free retained earnings more than the paid-up capitalization. Under Section 43 of the Corporation Code of the Philippines, as amended, domestic corporations are not allowed to maintain free retained earnings more than 100%. In Section 29 of the Tax Code, as amended, a 10% improperly accumulated earnings tax is being imposed. This 10% tax could be avoided with proper tax planning. In case caught up with such scenario, consult with your tax consultant on how to do about it as their could be a number of remedies.
Taxes withheld by your suppliers evidenced by BIR Form No. 2307 are tax credits or deductions from income tax liability. As such, it is treated as an asset on books. In some instance, financial statements would show such material asset amount that should have been used. However, in some instances, such asset reflected in the financial statements are without proper BIR Form 2307 documentations, or if there is, the same would pertain to prior years. For large taxpayers, please note the new 2307 requirements under Revenue Regulations No. 2-2015 for attachments.
Under Section 34(k) of the Tax Code, as amended, if an expense is subject to withholding tax, the same shall not be deductible until after the applicable withholding taxes has been made. To ensure that you only deduct expenses properly withheld, double checking is made with alphalists of payees and employees duly filed with the BIR and seeing to it that justifications are available to those expenses not withheld taxes.
As you will note on books of accounts and on the financial income, other income is one line item. Please do not be mislead to conclude that the same is automatically subject to 30% corporate income tax or includible in the 2% MCIT computations. Verify and check each item in such other income account is indeed, taxable ordinary income to avoid misapplication if the same is not such as those capital gains subjected to capital gains tax, unrealized gains, and the likes.
Notes to financial statements is not the sole mandate of the rules and regulations of the Securities and Exchange Commission (SEC) Philippines. BIR has also requires some items and details on taxes to be indicated in the financial statements such as those in Revenue Regulations No. 15-2010 and Revenue Memorandum No. 19-2011. See to it that those notes appears in the Notes to the Audited Financial Statements.
While each one of us would want to beat the tax filing timeline, we are likewise bound to ensure that we do it in a manner in accord with the rules and regulations to avoid tax risks during tax examinations.
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 in**@ta************.org.)
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:
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:
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:
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 in**@ta************.org.
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Onsite Training: How to analyze Financial Statements Accounting for Correct Business Decision Making?
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Revenue Regulations No. 001-2025
Revenue Regulations No. 18- 2024
REPUBLIC ACT NO. 12066 – CREATE MORE ACT
Revenue Memorandum Circular No. 116-2024
Revenue Memorandum Circular No. 115-2024
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