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7 Features of Withholding Tax System in the Philippines _ Tax and Accounting

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  7 Features of Withholding Tax System in the Philippines > Tax and Accounting Center Inc. « Tax and Accounting Center, Inc.http://taxacctgcenter.org/features-of-withholding-tax-system-in-the-philippines/[6/4/2014 12:54:57 PM] Landline : (+632)523-0066 ã(+632)348-2193 Mobile : (+63)922-856-2358 ã(+63)917-822-2358 Email : info@taxacctgcenter.org Announcements HomeAbout UsServicesClientsArticlesForumBlogContact Us We offer In-house tax and accounting training, and seminars. We also offer a one-on-one tutorials for your tax and accounti  03 JULY 2 Comments 7 Features of Withholding Tax System in thePhilippines Withholding tax is the most basic tax type that each and every taxpayer engaged in trade orbusiness or in the practice of profession must learn. Upon registration of their respectivebusiness entities, withholding tax type is a must and it may come in three (3) tax types as subclassifications as follows:1. Expanded withholding tax (EWT) or Creditable withholding tax (CWT)  undermonthly 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 partof annual BIR Form No. 1604CF with Alphalist of Employees;3. Final withholding tax (FWT)  under monthly BIR Form No. 1601F and part of annual BIRNo. 1604CF with Alphalist of Employees/Payees;To develop a deeper understanding of the withholding tax system in the Philippines, let usdiscuss 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 bylaw to withhold, whether he likes it or not. Non-resident foreign corporations and non-residentalien payors are not included because of obvious logical reasons – Philippine government doesnot have jurisdiction over them, and could not run after in case of non-compliance. Specificitems of income payments are enumerated in the regulations and once the payment is madeupon such items, withholding taxes applies. Example, if a taxpayer pays a rental for its officespace, 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, incometaxes are paid upon filing. However, with the withholding tax, the government gets the incometax on the 10 day of the month following the month of payment or accrual, ahead of thequarterly payment of payees income. Example, Company A pays Atty. A professional feesamounting to P100,000 on January 2012 and the applicable withholding tax of 15% or P15,000was withheld. Atty. A is required to file and pay quarterly income tax (BIR Form No. 1701Q) onApril 15, 2012, but, before he could file and pay, the government already collected in advancethe P15,000 that was remitted by A Company not later than February 10, 2012 (BIR Form1601E). 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 thewithholding agent shall be held as a special fund in trust for the government until paid to thecollecting officers. The withholding agent, as trustee of the funds withheld cannot use the fundsin 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 estimatepayee”s income tax liability depending on the industry type and nature of payment. This is thereason why withholding tax rates are varying and is challenging to memorize for properapplication. Upon filing of quarterly and/or annual income tax of the payee, the amountwithheld will be deducted from its income tax liabilities and there would be fewer amounts duebecause of the withholding tax duly supported by creditable withholding tax certificates – BIRForm No. 2307/2316. On the other hand, final withholding taxes are the same rates imposed inthe Tax Code for specific payments. As such, they constitute full payment of payees income taxand no additional tax liabilities would arise under final withholding tax on top of the amountwithheld. 5. Check and balance mechanism  Monthly withholding tax returns of the payor attaches a monthly alphalist of payees (MAP) withthe details of the payee and the income payments – the name address of payee, and theamounts of income payment and corresponding tax withheld. When the payee files a quarterlyand 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 easilydetermine whether or not the payee declared the income payment, or whether or not the payorcorrectly declared the expense. As such, this becomes an easy tool in the third party Search for: Follow Us!Seminar Schedules MAY 2014May 15-16, 2014  - BasicBusiness Accounting and BIR VATCompliance May 23-24, 2014  - BasicBusiness Accounting and BIR Non- VAT Compliance May 30, 2014  - WithholdingTaxes, Subjects & Application JUNE 2014June 6, 2014 - BIR Examination:Their Procedures and OurDefenses June 19, 2014  - Compensation:Computations and Must KnowExemptions June 27, 2014  - Value AddedTax In and Out JULY 2014July 3-4, 2014  - Basic BusinessTaxation Simplified July 10-11, 2014  - BasicBusiness Accounting and BIR VATCompliance Contact us Online Your Name (required)Your Email (required)Your Contact No. (required) Your SubjectYour Message th SearchSend  7 Features of Withholding Tax System in the Philippines > Tax and Accounting Center Inc. « Tax and Accounting Center, Inc.http://taxacctgcenter.org/features-of-withholding-tax-system-in-the-philippines/[6/4/2014 12:54:57 PM] Comments 1.2k Like 2  Tweet 0 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 towithholding tax, it will not be allowed as a deduction for income tax unless it could be shownthat withholding taxes has been paid to the BIR. This explains why assessment of withholdingtax has a dual effect – disallowance of expense deduction in income tax computation for failureto 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 incomepayments subject to creditable withholding tax. Enumeration of expanded withholding taxtherein is exclusive and whatever is not included is deemed not subject to creditablewithholding 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 FiveThousand Individuals duly selected and notified as such by the BIR. On top of thoseenumerated in Revenue Regulations 2-98, as amended, they are mandated to withhold onincome payments to regular supplies of goods – 1% or of services – 2%, and from casualpurchases amounting to P10,000 in a single transaction.Failure of the taxpayer to comply the obligation to withhold would expose a taxpayer-agentwith the following consequences:Non-deductibility of a business expense for income tax computation for failure to withholduntil 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 beenwithheld;Compromise penalties ranging from P200 to P50,000 based on the amount of basicwithholding tax that should have been withheld;Or worst, criminal prosecution and imprisonment for willful neglect or fraudulent filing of withholding tax returnsYou would not enjoy paying the above penalties, and wasting your hard earned money fromyour business undertakings and simple ignorance of the above obligation. It’s the proper timenow to educate and you have all the time and opportunity to do it before it is too late. D isclaim er   : This article is for general conceptual guidance only and is not a substitute for anexpert opinion. Please consult your preferred tax and/or legal consultant for the specific detailsapplicable to your circumstances. Related ServicesQuality Seminars, Trainings and Workshops.  We conduct tax seminars and workshops onwithholding 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 amonth Tax Management and Compliance Consultancies. With our tax services, we can assist youensure tax compliance and in the management of such continuing compliance. Propercompliance would bring about tax savings form avoiding being penalized to tax minimizationstrategies. Likewise, we could assist you in securing a BIR ruling confirming the applicable taxexemptions.(Post viewed 11374 times) Recommend Tags: Alphalist of employees, BIR Form No. 1601C, BIR Form No. 1601E, BIR Form No. 1601F, BIR Form No. 1604CF, BIR Form No. 1604E, BIR Form No. 2307, BIR Form No. 2316, BIR seminars 2012, creditable withholding tax, expanded withholding tax, final withholding tax, MAP, SAWT, withholding tax, withholding tax on compensation Newsletter Sign Up Get the latest updates and newsdirect to your mailbox! Blog & Updates Penalties for Failure to Pay TaxPhilippinesNew 2013 Income Tax Returns –ITR Philippines2014 Filing of Audited FinancialStatements with SEC PhilippinesVan and Car for Rent PhilippinesRequirements for BIR TaxExemption of Non-stock, Non-profit in Philippines Recent Discussions Overview of Value Added Tax inthe Philippines | Kelvin Hulseboson Overview of Value Added Taxin the PhilippinesTaxAcctgCenter on PersonalExemptions for Income Tax in thePhilippinesanne on Personal Exemptions forIncome Tax in the PhilippinesTaxAcctgCenter on BIR AuditedFinancial Statements, whenmandatory?RPB on BIR Audited FinancialStatements, when mandatory? Share243 Buy and Sell @ AyosDito ayosdito.ph The Philippines' Marketplace.Easy, Simple And Free. Try ItNow! Email Subscribe  7 Features of Withholding Tax System in the Philippines > Tax and Accounting Center Inc. « Tax and Accounting Center, Inc.http://taxacctgcenter.org/features-of-withholding-tax-system-in-the-philippines/[6/4/2014 12:54:57 PM]   Also post on Facebook Posting as Sonny Morillo (Not you?) Christian Parone Teomera  · NDMCHello.. After the remittance of the expanded withholding tax from ourpayment to a non resident alien not engage in trade in Phil, howwould we encode this to the alpha list data where there is a need toput the TIN of the payee?Reply · Like · Follow Post · April 14 at 1:28pm Posting as Sonny Morillo (Not you?)  TaxAcctgCenter   says: July 7, 2012 at 12:26 am Seminar schedule on July 11, 2012 for Withholding Taxes, Subjects and Applications Arwin   says: November 27, 2012 at 5:37 am Hello,If a company A (included in the Top 20,000) purchase goods from another company B (notincluded in the Top 20,000), does company A need to withhold 1% to that purchase? thankyou very much. TaxAcctgCenter   says: November 28, 2012 at 3:25 am Yes Arwin. Top 20,000 buyers are required even if suppliers are not Tp 20,000. Arwin   says: November 28, 2012 at 4:00 am How about the other way around, Company B (not included in Top 20,000) Company A (Top 20,000)., does company B required to withheld? thank you TaxAcctgCenter   says: November 28, 2012 at 7:25 am Yes, required on specific expenses (e.g. 5% rental) only but the supplier does not apply. Mike   says: November 28, 2012 at 1:17 am hi., regarding the inclusion to top 20,000 corporation, if a company satisfies atleast one of the criteria for inclusion in the top 20,000 corporation under RR 14-2008, but not yet notifiedby the BIR, is the company required now to withhold 1%/2% to their purchases? or will waituntil notify by the BIR? thank you and more power. TaxAcctgCenter   says: November 28, 2012 at 3:23 am It is not automatic Mike. BIR will notify the taxpayer and they will decide who will beconsidered as a top twenty thousand corpporation. Martin   says: November 28, 2012 at 8:28 am hi to all, i have something to ask. our company is a non-vat registered entity, and have rentto a vat registered entity., and as i read in other post, input tax will become part of cost, myquestion is, what will be the basis of our 5 % withholding tax., the amount gross of VAT(with input tax) or the amount net of VAT (before input tax)? thank you very much..very informative website and keep updating us.. thank you. TaxAcctgCenter   says: November 28, 2012 at 8:42 am 5% should be based on amount excluding VAT.thanks Martin. © 2009 Tax and Accounting Center, Inc. | Theme designed by: Dual M ConceptsPowered by: Wordpress Comment Comment Add a comment... LikeReply Reply Add a Reply...  7 Features of Withholding Tax System in the Philippines > Tax and Accounting Center Inc. « Tax and Accounting Center, Inc.http://taxacctgcenter.org/features-of-withholding-tax-system-in-the-philippines/[6/4/2014 12:54:57 PM]  Powered by FireStats
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