NRTC TRJ Study-on-Strengthening-the-Withholding-Tax-System-on-Individual-Taxpayers.pdf

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NTRC Tax Research Journal Volume XXIII.2 March – April 2011

Study on Strengthening the Withholding Tax System on Individual Taxpayers 1

I. INTRODUCTION

1. The withholding tax system or the method of collecting the tax in advance or

upon the receipt of income by the tax authority is an important feature of the income tax

administration in the Philippines. It is designed to ensure the continuous and steady

collection of revenues for the government. Among the advantages of this scheme are: (a) it

makes tax administration more efficient by improving the collection of tax revenues; (b) it

encourages tax compliance and minimizes tax evasion and avoidance practices; (c) it relieves

the taxpayer from financial difficulties in raising the entire amount of tax when it falls due;

and (d) it provides the government a continuous cash flow to finance its services.

2. At present, the withholding tax is applied on the following1:

a. Employment income;

b. Dividends from a domestic corporation;

c.

Royalties (in general and those on books, other literary works and musicalcompositions);

d. Share in the distributable net income after tax of a partnership;

e. Interest income (Philippine currency bank deposits and deposit substitutes, long-

term deposits pre-terminated before the fifth year, and foreign currency bank

deposits);

* Prepared by Roselyn C. Domo, Senior Tax Specialist, reviewed by Donaldo M. Boo, OIC, Direct

Taxes Branch NTRC.

1

National Tax Research Center, Department of Finance, Short Guide to Philippine Taxes, Manila, pp. 25-31.

*




Study on Strengthening the Withholding Tax System on Individual Taxpayers2

f. Prizes exceeding P10,000 and winnings (except sweepstakes and lotto winnings)

g. Gains from sale of shares of stock and real property classified as capital asset;

h. Informer’s reward;

i. Other fixed or determinable gains, profit and income;

j. Income derived from contracts from service contractors engaged in petroleum

operations;

k. Disposition of real property classified as capital asset to the government or any of

its political subdivisions;

l. Gross income by nonresident cinematographic film owners, lessors or

distributors;

m. Professional fees and talent fees;

n. Rentals of real property used in business;

o. Income payments made to resident individuals and corporate cinematographic

film owners, lessors or distributors;

p. Income payments made to general engineering, building, specialty and other

contractors;

q. Commissions paid to certain brokers and agents;

r. Commissions of independent and exclusive distributors, medical/technical and

sales representatives, and marketing agents of multi-level marketing companies;

s. Income distributed to the beneficiaries of estates and trust (except such income

subject to FWT and tax exempt income);

t. Income payments to partners of general professional partnerships (GPPS);

u. Additional income of government personnel from importer, shipping and airline

companies, or their agents;

v. Payments made by the government to its local/resident supplier of goods and

local/resident supplier of services other than those covered by other rates of

withholding tax (except any single purchase of P10,000 and below);

w. Payments made to embalmers for services rendered to funeral companies;

x. Payments made by pre-need companies to funeral parlors;

y. Payments made to suppliers of agricultural products;

z. One-half of the gross amount paid by credit card companies to any business entity

representing the sales of goods/services to cardholders;

aa. Amount paid to the seller/owner for the sale, exchange or transfer or real property

classified as ordinary asset; and

bb. MERALCO Payments as refund arising from Supreme Court Case GR No. 14814

and interest income on the refund of meter deposit.





3. While the withholding tax system facilitates the collection of taxes, several

instances of abuses and leakages have been identified, exposing the weaknesses of the

system. In the case of individual income taxes, these practices range from non-reporting

or under-reporting of income to irregularities in the claims of tax credits. The situation is

further aggravated by the lack of reliable data on the total number of individualtaxpayers.

4. This paper discusses the present withholding tax system on individual

taxpayers. It identifies the abuses and leakages that weaken the system and recommends

ways to strengthen the system.

II. BACKGROUND INFORMATION

A. Withholding Tax System in the Philippines

A.1 Historical Background

1. The withholding tax system was first proposed on May 2, 1950 under

House Bill (HB) No. 1127.2 The two main justifications for the proposal were

that: “first, it will provide a convenient manner for meeting the employee’s

income tax liability on wages and, second, it will assure the Government of the

collection of the income tax on wages which otherwise would have been lost or

substantially reduced through failure of the employees concerned to file the

corresponding income tax returns.”3 The proponents deemed it necessary to put

the system in place for the reason that there are a large number of cases where

an employee fails to file an income tax return (ITR) and/or pay the income tax

for the “simple reason that he/she did not set aside from his/her income

sufficient amounts to meet his/her tax liability payable the following year.”4

Withholding of the tax on wages when these are earned was seen as the solution

to the problem. In addition, an approximately P 18 million in additional income

tax was expected to be collected by the system. The authors also noted that the

system is already in force and is receiving the full cooperation of all concerned

in other countries with modern tax collection methods such as the United States,

Great Britain and Australia and is commonly referred to as ‘pay-as-you-earn’(PAYE) or ‘pay-as-you-go’ (PAYG). The Philippines adopted the system four

months after it was introduced by virtue of Republic Act (RA) No. 590 5 which

took effect on January 1, 1951.

2Introduced by then Congressman Ferdinand E. Marcos and Congressman Tito V. Tizon.

3Congressional Record, House of Representatives, Second Congress of the Republic, First Session,

Vol. I No. 74, May 10, 1950, Consideration of House Bill No. 1127 , p. 2227.

4Congressional Record, House of Representatives, May 10, 1950, loc. cit.

5

Entitled, “An Act to Amend Certain Sections of Commonwealth Act Numbered Four Hundred andSixty-Six, As Amended, Otherwise Known as the National Internal Revenue Code, and to Add to Title II





2. The withholding tax system is said to have improved the revenue intake

of the government. Based on available data, collection from withholding tax on

wages for Fiscal Year (FY) 1952 (covering July 1, 1951 to June 30, 1952)

amounted to P 11.2 million and accounted for 27% of total individual income tax

collection for that fiscal year. As contained in the FY 1952 BIR Annual Report,the first and second quarter collections in 1952 which amount to P 5.3 million is

7.5% higher than those collected during the same period in 1951 despite a

decrease in the number of employers for that FY.6 Due, however, to data

constraints, no comparison can be made with respect to the collections prior to the

introduction of the withholding tax system.

3. Under the withholding tax system, the person or the organization that

pays the income is given the responsibility of withholding the tax from the

income payments and then remitting the same to the government. The tax should

be withheld when income is paid or becomes payable

7

, whichever comes first.Thus the obligation to withhold a tax starts on the date when the salary of an

employee is payable, and not on the date when it is actually paid.8

A.2 Kinds of Withholding Tax

1. There are two basic kinds of withholding tax: creditable and final.

Creditable withholding tax (CWT) is the tax withheld from income payments

which is allowed to be credited against the taxpayer’s final tax liability which is

then adjusted accordingly. The amount withheld is only an estimate of the income

tax that should be paid. In this regard, the payee is still required to file an incometax return on that particular income but needs to pay only the difference between

the estimated amount withheld and the actual amount of tax due. On the other

hand, a final withholding tax (FWT) is a tax wherein the payer withholds an

amount from the payee’s income, and pays this amount to the government on

behalf of the payee. The payee then no longer needs to file an income tax return

for this income.

Thereof a Supplement Providing for the Withholding of the Income Tax on Wages, and For Other Purposes”,approved, September 22, 1950. Except for the provision on the withholding tax (Section 12), other provisions

of the law became effective on January 1, 1950. Alongside the introduction of the withholding tax system was

the creation of the Withholding Tax Unit by virtue of Memorandum Order No. V-188. The unit was placed

under the Income Tax Division of the Assessment Department. (http://www.bir.gov.ph)

6The Annual Report of the Collector of Internal Revenue for Fiscal Year Ending June 30, 1952,

Manila: Bureau of Printing, pp. 79-80. (As gathered from the Philippine National Library)

7 The term ‘payable’ refers to the date when the obligation becomes due, demandable or legally

enforceable.

8

Comprehensive Tax Reform Program, Implementing Rules & Regulations (IRR), Questions andAnswers in English. A project of the Department of Finance, undertaken by AQY & Associates, p. 6.

http://www.bir.gov.ph/








2. The CWT includes the expanded withholding tax and compensation

income tax. Incomes that are subject to the CWT are incomes from employment

(compensation income), and fees such as professional fees, talent fees, rental

income, service income, etc. The FWT is usually applicable to income from

dividends, interest, royalties, capital gains from sale of property, etc., and income of foreign companies and their employees. It is to be noted however, that in the case

of individual taxpayers with only one employer, their withholding tax on

compensation becomes a final tax for the reason that the amount of tax that is

withheld from the taxpayer is equal to the amount of tax that is due him or her for

the year.9

B. Trends and Developments in Withholding Tax

1. In recent years, the withholding tax system has ensured a consistent supply of

revenues for government. Based on available data from the Bureau of Internal Revenue(BIR), during the last ten (10) years (2000 to 2009), collections on withholding taxes

generally increased as follows: withholding taxes on wages by P 47.8 billion or 74.6%;

creditable withholding tax (expanded) by P 2.4 billion or 59.3%, and other withholding

taxes at source by P 2.3 billion or 100.3% (Table 1). Similarly, the scheme has greatly

facilitated tax compliance. With respect to the number of withholding tax returns filed

for the period 2000 to 2009, the same went up as follows: Form 1601-C (Monthly

Remittance Return of Income Taxes Withheld on Compensation) by 228,652 returns or

11.4%, Form 1601-E [Monthly Remittance Return of Creditable Income Taxes

Withheld (Expanded)] by 2,406,718 returns or 400.2%, and Form 1601-F (Monthly

Remittance Return of Final Income Taxes Withheld) by 45,769 returns or 90.1%.

(Table 3)

2. To strengthen the withholding tax system, the BIR has established ties with

national government agencies (NGAs) and local government units (LGUs) for the

prompt remittance of withholding taxes. In the year 2000, a Memorandum of

Agreement (MOA) was signed with NGAs in collaboration with the Department of

Finance (DOF), the Department of Budget and Management (DBM) and the

Commission on Audit (COA). Consequently, DOF-DBM-COA Joint Circular No. 1-

200010 was issued in January 3, 2000 setting the guidelines in the use of the Tax

Remittance Advice (TRA)11 as a new mode of payment for taxes withheld by NGAs.

9See Annex A for a summary of withholding tax rates for individuals.

10This was amended by Joint Circular No. 1-2000A dated July 31, 2001 specifically on the guidelines

in the use of the revised TRA.

11TRA, as defined under RMO No.16-2000, as amended by RMO No. 02-2007, refers to a serially

numbered document to be distributed by the BIR to NGAs. It shall be accomplished by the NGAs and attached

to every Withholding Tax Return (WTR) filed for payment of taxes withheld, duly certified by the Chief

Accountant and approved by the Head of the concerned NGA or his/her duly authorized representative. This

shall be the basis for the BIR and Bureau of Treasury (BTr) to record the collection in their respective books of

accounts.





Revenue Memorandum Order (RMO) No. 16-200012, on the other hand, implemented

the said Joint Circular providing for the policies and procedures for the processing and

monitoring of withholding tax payments from NGAs. This was later amended by RMO

Nos. 27-200113 and 02-200714.

3. In March 2001, Revenue Memorandum Circular (RMC) No. 21-200115

circularized the MOA16 entered into by and among the DOF, the BIR, the Department of

Interior and Local Government (DILG), League of Provinces of the Philippines (LPP),

League of Cities of the Philippines (LCP), League of Municipalities of the Philippines

(LMP) and the Liga ng mga Barangay sa Pilipinas (LBP). The MOA’s objectives are to:

(a) increase tax collections by increasing the taxpayer base and collecting internal

revenue taxes from concerned taxpayers; (b) implement continuing Tax Campaign

programs in order to increase the level of tax compliance as well as for the fast, efficient

and courteous delivery of service to the taxpaying public; (c) recognize the importance

of a collaboration effort among the concerned groups in meeting the national and localtax collection targets; and (d) ensure compliance by all LGUs with the pertinent

provisions of internal revenue tax laws, rules and regulations.

4. Under the MOA, the DILG will help the BIR in facilitating compliance of

LGUs with withholding tax laws and regulations, as well as in the remittance of the

withheld taxes on time. The LGUs, on the other hand, shall help Revenue District

Offices (RDOs) in tracking down unregistered and delinquent taxpayers. They shall

likewise allow the BIR to gain access to their tax records, among others. In return, it is

the BIR’s responsibility to provide LGUs with the annual revenue tax collections and to

facilitate the issuance of copies of certificates needed by LGUs, among others. In July

13, 2006, RMO No. 13-2006 was issued to ensure the efficient compliance by

designated withholding agents in the LGUs with existing withholding tax laws, rules

and regulations and other related issuances and to ensure the efficient implementation

and monitoring of monthly withholding tax collections from LGUs.17

12Issued on April 3, 2000.

13Issued on October 22, 2001.

14Issued on March 19, 2007.

15Issued on March 21, 2001.

16Signed in March 2001 by then DILG Secretary Jose D. Lina, Jr., DOF Secretary Alberto G. Romulo,

BIR Commissioner Rene G. Bañez and the Presidents of the four (4) major leagues of LGUs, namely: Governor

Hilario De Pedro III, for the League of Provinces of the Philippines; Mayor Alipio Fernandez, Jr., for the

League of Cities of the Philippines; Mayor Jinggoy Estrada, for the League of Municipalities of the Philippines

and James Marty Lao Lim, for the Liga ng mga Barangay sa Pilipinas.

17The underlying basis for the issuance of RMO 13-2006 are the reports made by field personnel and

the number of abatement cases filed by designated officials of LGUs required to withhold and remit taxes with

the Technical Working Committee on Abatement. It has been gathered that a number of LGUs have been

remiss and/or are delayed in remitting withheld taxes, thereby resulting in the non-compliance by the LGUswith the withholding tax rules and regulations.

















III. COMMENTS AND OBSERVATIONS

1. Despite its substantial contribution in facilitating tax compliance, the

withholding tax system still suffers from weaknesses that diminish its role as an effective taxcollection mechanism. According to a National Tax Research Center (NTRC) Study18, the

estimated individual income tax gap from 2002 to 2006 averaged P37.17 billion annually. A

substantial part of potential income taxes that remained uncollected came from self-

employed and professionals (i.e., P26.12 billion or 64.5%). Uncollected taxes from

compensation earners averaged P11.06 billion annually. The estimated gap may be

attributed to the following weaknesses in the present withholding tax system:

a. Non-Collection or Non-Remittance of Withholding Tax by Employers/Withholding

Agents

There are instances when the person required to make the withholding does

not do so, or in the event the withholding is made, the collection is not remitted to the

BIR at all. With the requirement to file Income Tax Returns (ITRs) already

dispensed with under Revenue Regulations (RR) No.19-2002 (Substituted Filing of

ITRs)19 particularly for those whose income tax has been withheld correctly (i.e., tax

due equals tax withheld), there is greater possibility of employers as withholding

agents continuing with the said practice. In this case, the BIR should be keen on

monitoring claims for deduction on wages by withholding agents or employers. An

employer acting as withholding agent cannot claim a deduction for income payments

made to an employee unless the taxes were withheld and paid to the BIR 20. In

addition to the withholding agent not being allowed to claim such deduction, he/she is

liable for the withholding tax that should have been collected plus the corresponding

penalties which include a 25% surcharge and 20% interest on the total amount due.

b. Nonreporting of multiple employment income of certain individuals

When an employee has more than one source of employment income,

problems in withholding also arise. In this case, the total amount of tax withheld will

be accurate only if the principal employer knows the details of the employment

income paid by others. While in some cases this may be possible, an employee may

not wish to disclose the existence of other employment income to his or her primary

18National Tax Research Center, Estimate of the Income Tax Gap, CY 2002 to 2006 , January 11, 2008.

19An individual taxpayer receiving purely compensation income from only one employer is no longer

required to file the Annual Income Tax Return (Form 1700) if the income tax has been correctly withheld by

the employer. The Annual Information Return of Income Taxes Withheld on Compensation and Final

Withholding Taxes filed by the employers shall be equivalent to the substituted filing of income tax returns by

said employees.

20Section 34(K), National Internal Revenue Code (NIRC) of 1997.





employer 21 in order to avoid being taxed for such other income. It should be

mentioned that the present withholding tax system is not capable of putting in

safeguards to prevent this practice of not disclosing secondary and other sources of

income.

c. Fictitious Claims of Personal and Additional Exemption Allowances and Premium

Payments on Health and/or Hospitalization Income

c.1 Many taxpayers at present, are able to deduct from their gross income

amounts of personal and additional exemption allowances that are more

than what they are entitled to for the reason that the system does not provide

for a strict monitoring and verification of claims for such allowances.

Although the present system of registration of taxpayer information and its

update has greatly minimized incidence of fictitious claims for dependents,

there are still taxpayers who are able to claim additional exemptionallowance for dependents who are either non-existent or not qualified. The

fact also that personal exemption allowances have been made uniform

regardless of status may be of great help in removing incidence of fictitious

claims as to status.

c.2 Similarly, a number of taxpayers are able to claim the P 2,400 annual

premium payments on health/and or hospitalization insurance deduction

although their annual family income exceeds P 250,000. This provision is

not also strictly monitored by the system.

c.3 It should be mentioned that although this problem is not specifically aboutthe withholding tax system, this practice has an impact on the system

particularly on collection. This is because the base of the withholding tax is

not maximized, that is, the taxable income of individual taxpayers is

reduced by the amounts of false claims for deductions.

d. Non-filing of Returns Among Self-Employed Individuals

There is apparent inequity in the current tax system which makes fixed

income earners contribute more to the total individual income tax collection than the

self-employed and/or professionals. The said inequity exists because unlike fixedincome earners who are subject to a withholding tax system that effectively captures

their total tax due, the self-employed and/or professionals are subject to an

incomplete withholding tax system that gives them the opportunity not to pay their

full tax due at the end of the year. This situation, however, is not really the fault of

self-employed individuals and/or professionals but more of the system as they are

allowed to claim deductions from their gross income which in the first place is not a

fixed amount, hence it is impossible for them to compute their final tax due which

would be the basis of withholding. Hence, a more efficient and effective system must

21

Victor Thuronyi, Tax Law Design and Drafting, Vol. 2 (Washington D.C.: External RelationsDepartment, Publication Services International Monetary Fund, 1998), p.560.





be put in place in order to lessen the incidence of non-reporting or underreporting of

income of said taxpayers and thus improve tax compliance among them and enable

them to give their due share in total individual income tax collection.

e. Irregularities in the Claims for Tax Credits

A withholding tax statement/certificate is an important document that is

required to be presented when a taxpayer claims for a tax credit. There are cases,

however, when the person from whom the taxes were withheld does not bother to get

a copy of the said document or, there are instances when the withholding agent

himself/herself fails to furnish the income recipient a copy of the said document,

whether intentionally or unintentionally. It should be noted, however, that despite the

lack of necessary attachments, some taxpayers are still able to claim tax credits.

2. While there are penalties imposed for violation of the withholding tax provisionsunder pertinent sections of the NIRC and Sec. 2.80 of Revenue Regulations (RR) 2-98,

compromise penalties for violation of withholding tax provisions by a government officer

only range from P5,000 to P50,000 while fines for violation of other provisions of the Code

or regulations in general for which the law does not provide specific penalty are not more

than P1,000.22 In these cases, the amounts of fines and compromise penalties may be too

small and may have to be increased.

3. Another issue relates to the lack of reliable data on the number of individual

taxpayers which has made more difficult the simulations and analysis for purposes of

reforming the withholding tax system. In the case of compensation earners, there is a hugegap of over 4 million employees between the number of compensation income earners per

BIR records vis-à-vis the number of salaried employees as suggested by the records of the

Social Security System (SSS), the Government Service Insurance System (GSIS), the

Department of Labor and Employment, (DOLE), the Armed Forces of the Philippines (AFP)

and the Philippine National Police (PNP). Also, the BIR data do not tally with third party

data such as the number of taxable families from the National Statistics Office (NSO) and

other indicators of income such as the number of privately-owned vehicles and motorcycles

registered with the Land Transportation Office (LTO). These third party indicators can

somehow give an idea on the number of individual taxpayers.23

4. In many developing countries, it has been observed that small and medium

enterprises (SMEs) employ the majority of taxpayers. However, many SMEs remain to be in

22These violations are also subject to criminal penalties.

23Other third party data that Cong. Herminio G. Teves suggests that the BIR should look into are the

names of car/truck owners, number of cars/trucks owned, list of business establishments and the amount of

sales tax paid to LGUs and assessed value of properties and real property tax paid; list of sugar mills, list of

farmers/planters whose share for the crop is 300 per 50 kilobags or more; and owners of fishing vessels. He

also recommends mandating the RDO to submit to the Commissioner and the Secretary of Finance on or before

15th

of March their projections as to the number of individuals income tax filers, the projected revenue and the

percentage increase in the number of tax filers and the tax that will be collected. [Herminio G. Teves, Ways and Means for Tax Collection Efficiency (Quezon City: House of Representatives, 2006), pp. 24 to 25.]





the informal sector for reasons such as lack of sufficient resources, administrative concerns

and accounting sophistication to comply with government tax regulations. Because these

taxpayers cater largely to the population for cash, withholding tax from their income is not

practicable. For this reason, one of the measures being employed in order to capture the

income of these taxpayers who lack financial transparency is the system of presumptiveincome taxation. Under this method, income is no longer assessed from accounting records

but from certain indicators such as the value of a farmer’s land, gross turnover of an SME, or

signs of individual wealth.

5. Presumptive income taxation is said to be the optimal method of curbing

widespread noncompliance among a specific group of taxpayers without necessarily

imposing excessive government tax revenue measures. Broadening the tax base or enabling

taxpayers (individuals and businesses) to enter the formal tax net from the informal sector, is

what may be considered as the foremost goal of presumptive taxation. It is likewise often

argued to help reduce corruption in tax administration. The two forms of assessment beingused by countries that employ presumptive taxation in estimating income and assessing tax

liability are the standard and estimated assessments.

6. Under the standard assessments method, lump-sum taxes are assigned to taxpayers

on the basis of occupation or business activity. In addition to being less equitable than

estimated assessments and less open to corruption, this method is also said to broaden the tax

base with limited disincentives. This method, however, can be poor in mobilizing revenue if

the fixed payments are not indexed to inflation (or increased regularly) and if taxpayers are

not moved to categories as their taxable income increases over time. It can likewise be

regressive by imposing equal tax on individuals in the same category with different incomes

because it does not take into account the specific conditions of a taxpayer such as family size

or losses. The estimated assessment method, on the other hand, estimates individually

taxpayer’s income using indicators or proxies of wealth specific to a given profession or

economic activity (e.g., location of property or numbers of skilled employees, value of gross

assets or gross turnover). The tachshiv of Israel is widely referred as the most elaborate

standard assessment method. France’s forfait (contractual method), on the other hand, is

recognized as the most elaborate estimated assessment method.24 These two countries are

recognized as having the most highly developed presumptive tax regimes.

7. The use of presumptive taxation in the country may be explored for the purpose of

estimating the income of taxpayers in the hard-to-tax group thereby determining what their correct tax dues should be. However, in introducing the scheme, the following factors must

be taken into consideration.

a. The scheme must be properly structured and overall administrative environment

and capacity in the tax administration must be considered. This is for the reason

that although this scheme is meant to address the problem of corruption in tax

24Valevich, Y., Klesewetter, D. and Chubrik, A., 2004, IPM Research Center, Proposals for Further

Improvement of the System of Presumptive Income Taxation of Individual Entrepreneurs in Belarus , viewed onMarch 11, 2009, <http://pdc.ceu.hu/archive/00002169/.>.

http://pdc.ceu.hu/archive/00002169/







administration, the same may still allow and even increase corrupt practices in a

worst case scenario because of the discretionary powers given to tax officials.

b. Methods of estimating income must be well-thought of and planned in order to

analyze the profitability of various economic activities and the indexes that will

effectively calculate presumptive incomes. This is primarily intended to avoid

unfair and ineffective taxation of taxpayers, such as small businesses.

c. The probability of taxpayers remaining under the presumptive tax regime must

also be avoided. As earlier mentioned, presumptive taxation seeks to broaden the

tax base by enabling taxpayers in the informal sector to enter the tax net.

However, as experienced by countries that applied the presumptive taxation, such

as in Israel, what happened is that taxpayers either remain in the presumptive

taxation scheme or revert from formal taxation to presumptive taxation schemes

because the taxpayers realize that they are levied a lower tax burden under thelatter. The taxpayers either underreported their income or simply pretended that

they do not keep accurate records of their income in order to remain in the

presumptive income regime and enjoy its benefits. 25

IV. CONCLUSION AND RECOMMENDATIONS

1. The withholding tax system as institutionalized is an effective and convenient

means to facilitate the collection and payment of taxes. This is because under this system,

the tax is collected in advance by the taxing authority. With the withholding tax system, the

tax evasion and avoidance practices particularly of compensation income earners have been

kept minimal.

2. The problem on the non-remittance of withholding taxes of employers/withholding

agents can be remedied by establishing a database of information in the BIR where historical

information of taxpayers and their respective employers/withholding agents can be verified

in order to check if taxes withheld from taxpayers are continuously being remitted to the

BIR. The BIR should likewise be strict in monitoring claims for deduction on wages or

income payments made by employers to an employee. Such claims must not be allowed and be considered void if the withholding agent or employer has no proof of remitted

withholding taxes on such payments.

3. In order to solve the problems on the non-reporting of the multiple employment

income of some individuals, the full cooperation of withholding agents should be required as

they will be responsible for reporting changes in the tax status of taxpayers, and in effecting

25World Bank, Presumptive Direct Taxes, viewed on March 11, 2009, <http://web.worldbank.org/

WBSITE/EXTERNAL/TOPICS/EXXTPUBLICSECTORANDGOVERNANCE/EXTPUBLICFINANCE/0..

contentMDK:20233950~isCURLY:Y~menuPK:1747624~pagePK:148956~piPK:216618~theSitePK:1339564,00.html.>

http://web.worldbank.org/%20WBSITE/EXTERNAL/TOPICS/EXXTPUBLICSECTORANDGOVERNANCE/EXTPUBLICFINANCE/0..%20contentMDK:20233950~is










the collection and remittance of withheld taxes. The BIR should be able to verify from the

list furnished by schools, insurance and realty companies, etc. as withholding agents, whether

the taxpayers/s under their employ disclosed or filed a separate tax return for their secondary

source of income.

4. On the other hand, the problem of fictitious claims for personal26 and additional

exemption allowances may be prevented by requiring taxpayers to submit authenticated

documents to support their claims, particularly for dependent/s, which, although required at

present, is barely being utilized since the ITRs of fixed income earners are not prioritized for

audit. Fictitious claims for premium payments on health/and or hospitalization insurance

deduction may be avoided by checking the income of the spouse and/or other family

members to make sure that the annual family income requirement is met.

5. The possibility of employing presumptive taxation can partially address the

problem of taxing businessmen and professionals. The objective is to estimate the income of business and professional income earners for use as benchmark income or basis for checking

the accuracy of declared income.

6. Opportunities for irregularities in the claim for tax credit, on the other hand, may

be minimized or precluded if the procedures in processing claims for tax credits would be

strictly adhered to, particularly the need to attach the necessary documents that would prove

the veracity of the claim for a tax credit.

7. There may also be a need to upgrade the fines and compromise penalties for

violation of the withholding tax provisions to deter violators thereof.

8. Finally, the BIR must consider third party indicators such as those earlier

mentioned to be able to come up with a better picture on the number of individual taxpayers

which is a major data requirement for purposes of introducing reforms in the withholding tax

system.

26

Fictitious claims for personal exemption are deemed corrected already by RA 9504 which providesfor a P 50,000 personal exemption, regardless of the status of the taxpayer.





Annex A

SUMMARY OF WITHHOLDING TAX RATES FOR INDIVIDUALS*

Type of Income

Resident

Citizen or

Alien

Individuals

Non-resident

Aliens Engaged

in Trade or

Business

Non-resident

Aliens Not

Engaged in Trade

or Business

Dividends from a domestic

corporation 10% final 20% final 25% final

Royalties (In general)20% final 20% final 25% final

Royalties on books, other

literary works and musicalcompositions

10% final 10% final 25% final

Share in the distributable net

income after tax of a

partnership--- 20% final 25% final

Interest on Philippine

currency bank deposits and

deposit substitutes20% final 20% final 25% final

Interest income on long-term

deposits pre-terminated beforethe fifth year

Holding period

- 4 years to less than 5 years

- 3 years to less than 4 years

- less than 3 years

5% final

12% final

20% final

5% final

12% final

20% final

---

---

---

Interest on foreign currency

bank deposits 7.5% final Exempt Exempt

Prizes exceeding P10,000 &

winning (except Sweepstakesand Lotto Winnings) 20% final 20% final 25% final

Gains from sale of shares of

stock 5% -10% final 5% -10% final 25% final

__________________ * The withholding tax rates are those provided under RR 2-98, as amended.Source: National Tax Research Center, 2010. Short Guide to Philippine Taxes. Department of

Finance, Manila, pp. 24-31.





Type of Income

Resident

Citizen or

Alien

Individuals

Non-resident

Aliens Engaged

in Trade or

Business

Non-resident

Aliens Not

Engaged in Trade

or Business

Gains from sale of real

property classified as capital

asset6% final 6% final 6% final

Infor mer’s reward 10% final --- ---

Other fixed or determinable

gains, profit and income--- --- 25% final

Income derived from

contracts from ServiceContractors engaged in

petroleum operations

8% final 8% final ---

Disposition of real property

classified as capital asset to

the government or any of its

political subdivisions

6% final or 5%

- 32%6% final 6% final

Gross income by nonresident

cinematographic film owners,

lessors or distributors--- 25% final ---

Professional fees, talent fees

of the following individuals:

a. lawyers; certified public

accountants; doctors of

medicine; architects; civil,

electrical, chemical,

mechanical, structural,

industrial, mining, sanitary,

metallurgical and geodetic

engineers; marinesurveyors; doctors of

veterinary science; dentist;

professional appraisers;

connoisseurs of tobacco;

actuaries; and

interior decorators,

designers and all other

profession requiring

government licensure

examinations and/or

regulated by the

15% creditable

if the gross

income for the

current year

exceeds

P720,000; and

10% if

otherwise --- ---





Type of Income

Resident

Citizen or

Alien

Individuals

Non-resident

Aliens Engaged

in Trade or

Business

Non-resident

Aliens Not

Engaged in Trade

or Business

Professional Regulations

Commission, Supreme

Court

b. actors and actresses;

singers; lyricists;

composers; emcees;

professional athletes;

directors and producers;

and other recipients of

talent fees

20% creditable

if the gross

income for the

current year

exceeds

P720,000; and

10% if

otherwise

--- ---

Rentals of real or personal

property used in business,

poles, satellites and

transmission facilities, and

billboards

5% creditable --- ---

Income payments made toresident individuals and

corporate cinematographic

film owners, lessors or

distributors


Income payments made to

general engineering, building,

and specialty and other

contractors


Commissions paid to certain brokers and agents 10% creditable --- ---

Commissions of independent

and exclusive distributors,

medical/technical and sales

representatives, and marketing

agents of multi-level

marketing companies






Type of Income

Resident

Citizen or

Alien

Individuals

Non-resident

Aliens Engaged

in Trade or

Business

Non-resident

Aliens Not

Engaged in Trade

or Business

Income distributed to the

beneficiaries of estates and

trust (except such income

subject to FWT and tax

exempt income)


Income payments to partners

of General Professional

Partnerships

15% creditable

if the gross

income for the

current year

exceeds

P720,000; and

10% if

otherwise

--- ---

Additional Income of

Government Personnel from

importers, shipping and airline

companies, or their agents


Payments made by the

government to itslocal/resident supplier of

goods and local/resident

supplier of services other than

those covered by other rates

of withholding tax (except any

single purchase of P10,000

and below)

1% creditable to

supplier of goods; 2%

creditable to

supplier of

services

--- ---

Payments made to embalmers

for services rendered to

funeral companies


Payments made by pre-need

companies to funeral parlors 1% creditable --- ---

Payments made to suppliers of

agricultural products 1% creditable --- ---





Type of Income

Resident

Citizen or

Alien

Individuals

Non-resident

Aliens Engaged

in Trade or

Business

Non-resident

Aliens Not

Engaged in Trade

or Business

One-half (1/2) of the gross

amount paid by credit card

companies to any business

entity representing the sales of

goods/services to cardholders


Payment on purchases of

minerals, mineral products

and quarry resources


MERALCO Payments on:

a. MERALCO Refund arising

from Supreme Court Case

GR No. 14814

b. Interest income on the

refund of meter deposit

25% for

customers with

active contract;

32% for

customers with

terminated

contract

10% creditable;

and 20% if non-

residential

customers with

monthly

electricity

consumption of

more than 200

kwh

---

---

---

---

Amount paid to theseller/owner for the sale,

exchange or transfer of real

property classified as ordinary

asset:

a. Where the seller/transferor

is exempt from creditable

withholding tax

b. Where the seller/transferor

is habitually engaged in the

Exempt --- ---





Type of Income

Resident

Citizen or

Alien

Individuals

Non-resident

Aliens Engaged

in Trade or

Business

Non-resident

Aliens Not

Engaged in Trade

or Business

real estate business and the

selling price of real

property is:

- P500,000 or less

- more than P500,000 but

less than P2,000,000

- more than P2,000,000

c. Where the seller/transferor

is not habitually engaged in

the real estate business

1.5% creditable

3.0% creditable

5.0% creditable

6.0% creditable

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---

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Documents

NRTC TRJ Study-on-Strengthening-the-Withholding-Tax-System-on-Individual-Taxpayers.pdf