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WITHHOLDING TAXES
Atty. Vic C. Mamalateo
July, 2011
Ateneo Law School
• INCOME TAX (TITLE II, NIRC)
BASICTAX PRINCIPLES
• LIFEBLOOD THEORY
– Taxation is the rule; exemption, the exception.
– In case of doubt, tax income or disallow
deductions and tax credits.
• Taxes are imposed by law (e.g., NIRC),
while financial accounting are based on
generally accepted accounting standards.
In case of conflict between tax rules and
accounting rules, the former shall prevail.
INCOME TAX
• INCOME TAX
– Tax on all yearly profits arising from property, professions, trades
or offices, or as a tax on a person’s income, emoluments, profits
and the like (Fisher v. Trinidad).
– Income tax is a direct tax on taxable actual or presumed income
(gross or net) of a taxpayer received, accrued or realized during
the taxable year.
• WITHHOLDING TAX
– It is not an internal revenue tax but a mode of collecting income
tax in advance on income of the recipient of income thru the
payor of income. [NOTE: Sec. 21, NIRC enumerates various
internal revenue taxes.]
– There are 2 types of withholding taxes, namely: (1) final
withholding tax; and (2) creditable withholding tax, including
expanded withholding tax.
FEATURES OF INCOME TAX
• It is a direct tax.
• It is a progressive tax, since the tax base
increases as the tax rate increases. It is
founded on the ability to pay of taxpayer.
• Phil adopted the most comprehensive system in
imposing income tax.
• Phil follows the semi-global or semi-schedular
income tax system.
• It is of American origin. Decisions of U.S. tax
authorities have peculiar and persuasive effects
for the Phil.
INCOME TAX SYSTEMS
• GLOBAL TAX SYSTEM
– Compensation income not subject to FWT
– Business and/or professional income
– Capital gains not subject to FWT
– Passive investment income not subject to FWT
– Other income not subject to FWT
• SCHEDULAR TAX SYSTEM
– Compensation income subject to FWT
– Capital gains subject to FWT
– Passive investment income subject to FWT
– Other income subject to FWT
• The Philippines adopted the semi-global or semi-schedular tax
system. Either the global or schedular system, or both systems,
may apply on income of a taxpayer.
• You apply the schedular tax system only when the income, gain or
profit is subject to FWT.
FINAL WITHHOLDING TAX
• Income payment is listed in Sec 57(A), NIRC, as subject to FWT.
• FWT withheld by the payor of income (e.g., 20% FWT on interest
income on bank deposits) represents FULL payment of income tax
due on such income of the recipient.
• Income payee (or recipient of income) does not report income
subjected to FWT in his income tax return, although income is
reflected in his audited financial statements for the year. However,
he is not allowed to claim any tax credit on income subjected to
FWT.
• Withholding agent (payor of income) files the withholding tax return,
which includes the FWT deducted from the income of payee, and
pays the tax to the BIR. There is no Certificate of Tax Withheld
issued to income payee.
• No Certificate of Tax Withheld (BIR Form 2307) is attached to the
income tax return of recipient of income because he does not claim
any tax credit in his tax return.
CRITERIA IN IMPOSING INCOME TAX
• Citizenship principle
– For Filipino citizens and domestic
corporations, who are entitled to Philippine
government protection wherever they are
situated.
• Residence principle
– For alien individuals and foreign corporations
• Source principle
– For alien individuals and foreign corporations
TYPES OF INCOME TAX
• 1. Graduated income tax on individuals;
• 2. Normal corporate income tax on corporations (RCIT);
• 3. Minimum corporate income tax on corporations (MCIT);
• 4. Special income tax on certain corporations (e.g., private educational
• institutions; foreign currency deposit units; international carriers)
• 5. Capital gains tax on sale or exchange of unlisted shares of stock of a
• domestic corporation classified as a capital asset;
• 6. Capital gains tax on sale or exchange of real property located in the
• Philippines classified as a capital asset;
• 7. Final withholding tax on certain passive investment incomes;
• 8. Final withholding tax on income payments made to non-residents
• (individual or corporation);
• 9. Fringe benefit tax (FBT);
• 10. Branch profit remittance tax (BPRT); and
• 11. Tax on improperly accumulated earnings (IAET).
FORMULA
• GLOBAL SYSTEM • SCHEDULAR SYSTEM
• Gross sales • Gross selling price or fair
• Less: Cost of sales market value, whichever
• Gross income is higher times applicable
tax rate = Tax due (real
• Less: Deductions property)
• PAE (for ind.) • Gross selling price less
• Net taxable income cost or adjusted basis =
• Multiplied by applicable Capital gain times
rate (graduated or flat) applicable tax rate = Tax
• Income tax due due (shares of dom corp)
• Less: Creditable WT • Gross income times
applicable rate = Tax due
• Balance (passive inv income;
income paid to non-
resident person)
KINDS OF TAXPAYERS
• INDIVIDUAL, including estate and trust
– CITIZEN
• Resident (RC) – Taxable on worldwide income
• Non-resident – immigrant, permanent worker, OFW (seamen)
– ALIEN
• Resident
• Non-resident
– Engaged in trade or business (more than 180 days in the Phil)
– Not engaged in trade or business (180 days or less stay in Phil)
• CORPORATION, including partnership
– DOMESTIC (DC) – Taxable on worldwide income
– FOREIGN
• Resident (e.g., Phil branch of foreign corporation)
• Non-resident
– TEST FOR TAX PURPOSES: Law of incorporation
• RULE: All taxpayers are taxed only on income from sources within
the Phil, except RC and DC.
PARTNERSHIPS
• EXEMPT
• General professional partnership (GPP)
• Joint venture undertaking construction activity or energy-
related activities with operating contract with the government
• TAXABLE
• Partnerships, no matter how created or organized
• RULES:
– If taxable, partnership is taxed like a corporation.
– If taxable partnership derives net income during the year, the
entire net income is deemed received by the partners in the year
it was earned by the partnership.
– If GPP adopts itemized deductions during the year, partners
must use itemized deductions during the same year.
RESIDENT FOREIGN CORPS
• TAXABLE: RCIT & BPRT
– Ordinary branch of a foreign corporation in the Phil: 30% x net income
from sources within the Phil
• PEZA- & SBMA-registered branch of foreign corporation is exempt
from 15% BPRT
– Regional operating headquarters (ROHQ): 10% x net income from
sources within the Phil
– Offshore banking unit (OBU) and foreign currency deposit unit (FCDU)
[ING Bank Manila v. CIR]: 10% x gross interest income on forex loan to
residents
– Foreign international carriers by air or water: 2.5% x GPB
– Foreign contractor or sub-contractor engaged in petroleum operations in
the Phil: 8% x gross income from sources within the Phil
• TYPES OF DIVIDENDS
– Taxable
• Cash dividend
• Property dividend
– Exempt
• Stock dividend (except when there is change in proportionate
interest among stockholders, or there is subsequent cancellation or
redemption of shares declared as stock dividend, which is
essentially equivalent to cash dividend)
Depreciation for the year = Cost less salvage value divided by the
estimated useful life (number of years) of the asset
Book value of the asset = Cost or adjusted basis less accumulated
depreciation.
DEDUCTIONS
• CHARITABLE CONTRIBUTIONS