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CPAR Income Tax of Individuals (Batch 93) - Handout
CPAR Income Tax of Individuals (Batch 93) - Handout
Atty. C. Llamado
An income tax is one levied on the income from property or an occupation. It is a direct
tax upon the thing called income.1
4. A direct tax – It is payable by the person upon whom it is directly imposed by law. It
cannot be shifted or passed on to others.
5. In general, a progressive tax for individual taxpayers – It is based upon one’s ability
to pay. The higher the taxable net income of the individual, the higher the marginal tax
rate.3
6. The income tax system is a comprehensive system. – It adopts the citizen principle,
the residence principle, and the source principle.
However, there are some types of taxable income like passive income and certain
capital gains which are classified into different categories, and are accorded different
tax treatments. Each category of income has its own schedule of tax rates. This is
known as the schedular tax system (or gross income tax system).
1
Cooley on Taxation.
2
Madrigal v. Rafferty & Concepcion, 38 Phil. 414.
3
However, individual taxpayers who earn self-employment income, under certain conditions, may
choose to be taxed at an 8% tax rate.
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May 2023
Meaning of Income
- Income means all wealth which flows into the taxpayer other than a mere return of
capital. Income is a gain derived from:
a) The use or employment of labor or capital, or both labor and capital; and/or
b) From the sale or other disposition of assets or property (both ordinary and
capital).
Capital is a fund, income is a flow. Capital is wealth, while income is the service (or fruit)
of wealth. Capital is the tree, income the fruit.4
Under the doctrine of severance test of income, in order that income may exist, it is
necessary that there be a separation from capital of something of exchangeable value.
The following are examples which do not give rise to income nor to a realization of gain,
and therefore no income tax shall be imposed:
1) Stock dividends;
2) Mere increase in the value of property.
For income tax purposes, the word “source” refers to the activity, or property, or labor that
gave rise or produced the income.
4
Madrigal v. Rafferty, 38 Phil. 414.
5
Vol. 1 Mertens, Sec. 5.06, p. 17.
6
Sec. 42, NIRC.
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May 2023
(7) Dividend
A. From Domestic Corp. Income within
(10) Income from transportation and Partly within and partly without
other services rendered partly
within and partly without the
Philippines
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May 2023
Situs of Income
The situs of the income is the place of taxation of the income or the country which has
jurisdiction to impose the tax. For income tax purposes, income may be taxed in one or
more or all of the following places or countries –
The income tax system of the Philippines may be characterized under two general
categories, namely:
1. Gross income taxation, whereby a final tax is imposed on the gross amount of specified
types of income, such as interest income, royalty, prizes, dividends, and capital gains.
This is also known as the schedular system of taxation.
2. Net income taxation, whereby certain deductions are allowed and subtracted from the
aggregate of incomes not subject to final tax, and the tax computed is based on the
resulting net income therefrom. This is also known as the global system of taxation.
7
Income to be included in the Income Tax Return of an individual taxpayer.
8
Other capital assets refer to capital assets other than the capital assets whose sales give rise to a
CGT.
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May 2023
EXC: NRANETB
Step 3: Actual Gross Income xxx Passive income x “Capital gains” x
Computation Less: Deductions (xxx) FT rate CGT rate
Net taxable income xxx
then
Compute Tax (using
9
graduated rate table)
Definition
1. Resident Under Sec. 1, Art IV of the 1987 Constitution, the following are citizens of
Citizen the Philippines:
(1) Those who are citizens at the time of the adoption of the 1987
Constitution; or
(2) Those whose fathers and mothers are citizens; or
(3) Those born before January 17, 1973 of Filipino mothers, and who elect
Philippine citizenship upon reaching majority age; or
(4) Those who are naturalized in accordance with law.
AND
Whose residence is within the Philippines
2. Non-Resident a. Citizen who establishes the fact of his physical presence abroad with a
Citizen (Note definite intention to reside therein;
1) b. Citizen who leaves for abroad either as an immigrant, or for employment
on a permanent basis;
c. Citizen who derives income from abroad which requires him to be
physically present abroad most of the time (≥ 183 days) during the year
(Sec. 22(E))
3. OCW/OFW a) Citizen working or deriving income from abroad. Must be registered
with the POEA;
b) Seaman who is a citizen and works as a member of the complement of a
vessel engaged exclusively in international trade (Sec. 22(F))
4. Resident Not a citizen but whose residence is within the Philippines.
Alien - His purpose in coming to the Philippines requires an extended stay
in the country, and makes his home temporarily in the Philippines
(ex. expatriates or those employed in the Philippines).
- Not a mere transient or sojourner as determined by his intention
regarding the nature and length of stay.
5. Non-resident Not a citizen, not a resident of the Philippines
alien
a) ETB - If stay in the Philippines is for > 180 days during the year
(Note 2)
9
In the ITR, an individual taxpayer may avail of the 8% tax rate on gross sales/receipts plus non-
operating income if they qualify and elect to do so, in lieu of the graduated rates.
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May 2023
b) NETB - If stay in the Philippines is for ≤ 180 days during the year (Sec. 25(A)(1))
6. Special a) Non-resident alien cinematographic film owner, lessor, or distributor
Individual b) Subcontractor, whether citizen, resident alien, or NRAETB, of service
taxpayers contractors engaged in petroleum operations
c) Alien individual employed by offshore gaming licensees or their service
providers
d) Qualified individuals availing of the Income Tax Holiday under special
laws or under Section 294 of the Tax Code
e) Qualified individuals availing of the 5% gross income tax (GIT)
incentive under special laws or under Section 294 of the Tax Code
f) Individual registered as a BMBE
7. MWEs Worker, whether in the public or private sector, who is paid not more than
the statutory minimum wage (Sec. 22 (HH)).
Notes:
1) A non-resident citizen who arrives in the Philippines at any time during the taxable year
to reside permanently in the Philippines shall be treated as a non-resident citizen for the
taxable year in which he arrives in the Philippines with respect to his income from
sources abroad until the date of his arrival in the Philippines.
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May 2023
I. “Returnable” Income
Source of Type of
Individual Returnable
Taxable Tax Base Tax Rate
Taxpayer Income
Income
Within and
Taxable
1. Resident citizen Without the
Compensation Compensation Graduated Rates
Philippines
Income Income (a) (last page of
handout)
2. Non-resident Within the
citizen Philippines Taxable Net
Within the Income (b) Graduated Rates
3. OCWs/OFWs Income from
Philippines
Business, Trade, OR
Within the or Practice of Gross
4. Resident Alien
Philippines Profession Sales/Receipts10 8%
Plus Non-
operating Income
5. Non-resident Within the
(c), (d)
alien ETB Philippines
Non-Taxable/Exempt Income includes: (1) SMW, holiday pay, overtime pay, night shift
differential, and hazard pay of an MWE;
(2) First ₱90,000 of 13th Month Pay and Other
Benefits;
(3) De minimis fringe benefits;
(4) Employee’s share of SSS, GSIS, Philhealth, and
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PAG-IBIG contributions; and
(5) Union dues.
10
“Gross sales”, for purposes of the 8% income tax, shall be the total sales, net of the following: (1)
sales returns and allowances; and (2) discounts determined and granted at the time of sale.
“Gross receipts”, for purposes of the 8% income tax, refers to the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental or royalty, including the
amount charged for materials supplied with the services, and deposits and advance payments, actually
or constructively received during the taxable period for the services performed or to be performed for
another person, except for returnable security deposits. (RR 8-2018).
11
Employee’s share of mandatory contributions and union dues are actually DEDUCTIONs.
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May 2023
(c) Purely self-employed individuals or mixed earners can avail of the 8% income tax rate if the
gross sales/receipts from their business/profession plus non-operating income does not exceed
the VAT threshold of ₱3,000,000.
The 8% tax is in lieu of (1) the graduated rates and (2) the OPT under Section 116 of the Tax
Code.
(d) Net of ₱250,000 if individual taxpayer is a self-employed individual earning income purely from
self-employment or practice of profession. Mixed income earners are not allowed this
₱250,000 deduction.
12
Section 116 of the Tax Code provides for the imposition of a 3% percentage tax on the sales/receipts
of persons engaged in VAT-taxable transactions, but who are not VAT-registered, and whose annual
sales or receipts do not exceed the threshold of ₱3,000,000.
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May 2023
In computing the 25% final tax, gross income shall include, whether in cash or in
kind, the following items received from an offshore gaming licensee or service
provider: (1) basic salary/wage; (2) annuities; (3) compensation; (4) remuneration;
and (5) other emoluments such as honoraria and allowances.
Note: Any income of such alien employee from all other sources within the
Philippines shall not be subject to a 25% final tax, but shall be subject to the
pertinent income taxes in the Tax Code.
13
Sec. 25(G), NIRC as inserted by R.A. No. 11590.
14
Regardless of residency, and of term and class of working or employment permit or visa (Sec. 25(G),
NIRC).
15
Offshore gaming licensee shall refer to an offshore gaming operator, whether organized abroad or in the
Philippines, duly licensed and authorized to conduct offshore gaming operations, including the acceptance of
bets from offshore customers (Sec. 22(II), NIRC).
16
An accredited service provider to an offshore gaming licensee shall be a natural person (regardless of
citizenship or residence) or a juridical person, wherever duly organized, which provides ancillary services to
an offshore gaming licensee or to any gaming licensee or operator with licenses from other jurisdictions. Such
ancillary services include but shall not be limited to customer and technical relations and support, information
technology, gaming software, data provision, payment solutions, and live and streaming services (Sec. 27(G),
NIRC).
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May 2023
All registered individuals shall be granted the ITH incentive to the extent they are
engaged in a preferred area of investment as declared by the Board of Investments
(BOI) under E.O. No. 226 (Omnibus Investments Code).
17
Rule I, Sec. 1(i), IRR of E.O. No. 226.
18
“Pioneer Enterprise" shall mean a registered enterprise:
(1) Engaged in the manufacture, processing or production, and not merely in the assembly or packaging
of goods, products, commodities or raw materials that have not been or are not being produced
in the Philippines on a commercial scale; or
(2) Which uses a design, formula, scheme, method, process or system of production or transformation
of any element, substance or raw materials into another raw material or finished goods which is
new and untried in the Philippines; or
(3) Engaged in the pursuit of agricultural, forestry and mining activities and/or services including the
industrial aspects of food processing whenever appropriate, pre-determined by the BOI, in
consultation with the appropriate Department, to be feasible and highly essential to the attainment
of the national goal, in relation to a declared specific national food and agricultural program for
self-sufficiency and other social benefits of the project; or
(4) Which produces non-conventional fuels or manufactures equipment which utilize non-
conventional sources of energy, or uses or converts to coal or other non-conventional fuels or
sources of energy in its production, manufacturing or processing operations.
Provided:
(a) that the final product in any of the foregoing instances, involves or will involve substantial use
and processing of domestic raw materials, whenever available, taking into account the risks and
magnitude of investment; and
(b) that the foregoing definitions shall not in any way limit the rights and incentives granted to less-
developed-area enterprises provided under Title V, Book I of E.O. No. 226 (Art. 17, E.O. No.
226).
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May 2023
(2) New registered non-pioneer19 firms – for 4 years from commercial operations.
(3) Expanding firms – for 3 years from commercial operations of the expansion.
In exceptional cases, existing firms undertaking new activities distinct from existing
operations may qualify as new projects subject to the setting up of separate books of
account. In such cases, only sales of such registered products shall be entitled to the
ITH exemption.
Export traders and service exporters shall be entitled to the ITH if they will export
products and services which are new exports for the Philippines, or will serve new
export markets.
For new registered firms, the ITH incentive may be extended for an extra year for
each of the following cases, but in no case to exceed the total period of eight (8)
years for pioneer registered enterprises.
(1) If the average cost of indigenous raw materials used in the manufacture of the
registered product is at least fifty percent (50%) of the total cost of raw materials
for the preceding years prior to the extension unless the BOI prescribes a higher
percentage; or
(2) If the annual or average net foreign exchange savings or earnings (“NFEE”)
amount to at least US$500,000.00 during the first three (3) years of operations
to be determined by the BOI at the end of such three-year period.
19
“Non-Pioneer Enterprise” shall include all registered producer enterprises other than pioneer
enterprises (Art. 18, E.O. No. 226).
20
Philippine Economic Zone Authority.
21
Also called Special Economic Zones (SEZs), are selected areas with highly developed or which have
the potential to be developed into agro-industrial, industrial, tourist/recreational, commercial,
banking, investment, and financial centers. An ECOZONE may contain any or all of the following:
Industrial Estates; Export Processing Zones; Free Trade Zones; Tourist/Recreational Centers; and
IT Parks.
22
Export enterprise – engages in manufacturing, assembling or processing activity, and resulting in
the exportation of 100% of its production, unless a lower percentage is prescribed by PEZA.
23
Free Trade enterprise – engages in the tax and duty-free importation of goods or merchandise within
the restricted or free trade area of an ECOZONE for immediate trans-shipment, or for storage,
repacking, sorting, mixing, or manipulation, and subsequent exportation unless the PEZA allows the
sale of the same in the Customs Territory.
24
Rule XV, Sec. 1, IRR of RA 7916; Art. 78, E.O. 226.
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May 2023
2) Five (5%) on Gross Income (“5% GIT”) – 5% of the gross income25 earned
by the business enterprise within the ECOZONE shall be paid and remitted as
follows:26
a) Three percent (3%) to the National Government;
b) Two percent (2%) which shall be directly remitted by the business
establishments to the treasurer’s office of the municipality or city where
the enterprise is located.
The 5% GIT shall be in lieu of all other taxes (national27 or local28), except for
real property taxes on land owned by an ECOZONE developer/operator.
25
“Gross Income” refers to gross sales or gross revenues derived from business activity within the
ECOZONE, net of sales discounts, sales returns and allowances, and minus costs of sales or direct
costs but before any deduction is made for administrative expenses or incidental losses during a
given taxable period (Rule I, Sec. 2 (nn), IRR of R.A. No. 7916).
26
Sec. 24, R.A. No. 7916.
27
National taxes shall mean all internal revenue taxes including: (1) Regular Income Tax; (2) VAT;
(3) OPT; (4) DST; (5) Excise Tax; and (6) Customs duties and import charges.
28
Local taxes shall include: (1) Business taxes; (2) Real Property Tax, except on lands owned by an
ECOZONE Developer or IT Park/Building Developer; and (3) Other taxes, fees, and charges
imposed by Local Government Units (LGUs). (BIR Ruling DA-326-07)
29
Developer/Operator – develops, operates, and maintains an ECOZONE, and the required
infrastructure facilities and utilities such as light and power systems, water supply and distribution
systems, sewerage and drainage systems, pollution control devices, communication facilities, paved
road network, administration building and other facilities as may be required by the PEZA.
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May 2023
Notes:
(a) The exemption from all other taxes under the ITH and 5% GIT regimes does
not include the following:
These taxes are not the taxes of a PEZA-registered entity. Instead, these are
taxes of a PEZA-registered entity’s payees which are withheld and remitted
by the PEZA-registered enterprise.
(b) On the other hand, income payments received from its customers related to
its registered activities, by a PEZA-registered enterprise, whether availing the
ITH or 5% GIT incentive, are exempt from the withholding tax.34
(c) Income derived by an individual registered with the PEZA from its registered
activities shall be subject to such treatment as may be specified in its terms of
registration, i.e. (a) the ITH where such income shall be exempt from the regular
income tax; or (b) the 5% preferential GIT, if the same has been approved.
However, the following shall be subject to the regular internal revenue taxes
(i.e., regular individual income taxes; final taxes on bank deposits, capital gains
taxes, etc.):
(1) Income realized by registered individuals from activities which are not
registered;
30
Domestic Market Enterprise - engages in manufacturing, assembling or processing activities
resulting in the sale of its finished products (1) in the Customs Territory, or (2) in the non-restricted
or authorized areas within the ECOZONE in its entirety, or (3) if exporting a portion of its
production, it continually fails to export at least 50% thereof for a period of 3 years without any
justifiable reason.
31
Utilities Enterprise – engages in power generation and distribution, water production and
distribution, and telecommunication services within the ECOZONE.
32
Facilities Enterprise – owner and/or operator of buildings, warehouses, and other structures and
facilities leased out to PEZA-registered export producers and other locators (in the ECOZONE).
33
Tourism Enterprise – engages in the establishment and operation of tourist-oriented
accommodations, restaurants operated as an integral part of a tourism facility (e.g., hotels, resorts,
recreational centers), or sports and recreational facilities within the ECOZONE.
34
BIR Ruling Nos. 422-14, October 23, 2014; DA-(C-020) 091-10, June 10, 2010.
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May 2023
(2) Income of all other persons and entities which are not registered (i.e.
income payments to entities in the Customs Territory35, to shareholders,
and to non-registered creditors, etc.)
(3) Income of Service Enterprises or providers (e.g. those providing
customs brokerage, transportation, parcel, janitorial, restaurant, banking,
insurance services, etc.) which are required by locator enterprises but
which need not be physically based inside the ECOZONE.
New (4) Registered individuals subject to ITH under Sec. 294 of the Tax Code
ITH for 4 to 7 years depending on the location and industry priorities specified in
Section 296 of the Tax Code.
Note: To qualify for the ITH, the registered individual must comply with the
requirements of Section 304 of the Tax Code.36
New (5) Registered individual taxpayers subject to the 5% GIT under Sec. 294 of
the Tax Code
Effective July 1, 2020, a qualified registered enterprise shall pay an income tax
equivalent to 5% of gross income, in lieu of all national and local taxes.
For the purpose of the 5% tax on gross income earned, local taxes shall not include
fees and charges as defined under Section 131(l) and (g), respectively, of the Local
Government Code of 1991.37
Note: To qualify for the 5% GIT, the registered enterprise must comply with the
requirements of Section 304 of the Tax Code.
Moreover, only those considered export enterprises38 may avail of the 5% tax
on gross income.
35
Customs Territory refers to areas in the Philippines where the Philippine customs and tariff laws are
enforced.
36
A registered business enterprise must:
(a) Be engaged in a project or activity included in the Strategic Investment Priority Plan;
(b) Meet the target performance metrics after the agreed time period;
(c) Install an adequate accounting system that shall identify the investments, revenues, costs, and
profits or losses of each registered project or activity; or establish a separate corporation for
each registered project or activity;
(d) Comply with the e-receipting and e-sales requirements of Section 237 of the Tax Code; and
(e) Submit annual reports of beneficial ownership of the organization and related parties (Sec. 304,
NIRC).
37
Fee means a charge fixed by law or ordinance for the regulation or inspection of a business or
activity (Sec. 131(l), LGC).
Charges refer to pecuniary liability, as rents or fees against persons or property (Sec. 131(g),
LGC).
38
Export enterprise is one which results in:
(1) Direct exportation; and/or
(2) Sale of its manufactured, assembled, or processed product or information technology/business
process outsourcing services to another registered export enterprise that will form part of the
final export product or export service of the latter,
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May 2023
Registration
The Department of Trade and Industry (“DTI”), through the Negosyo Center in
the city or municipality, shall have the sole power to issue the Certificate of
Authority for BMBEs to avail of the benefits under R.A. No. 9178.
Upon approval of registration of the BMBE, the Negosyo Center shall issue the
Certificate of Authority which shall be renewable every two (2) years. The DTI,
It shall also exclude services rendered by juridical persons such as partnerships or corporations
engaged in consultancy, advisory, and similar services where the performance of such services are
essentially carried out through licensed professionals (DOF D.O. 17-04).
40
A business enterprise shall be considered “barangay-based” if:
(i) the majority of its employees are residents of the municipality where its principal place of
business is located; or
(ii) its principal activity consists in the application/use of a particular skill peculiar to the locality
or of raw materials predominantly sourced from the area; or
(iii) its business operations are confined within the territorial jurisdiction of the municipality or
LGU in which its principal place of business is located:
Provided, however, that the enterprise may establish warehouses, buying stations, sales outlets, and
booking or administrative offices anywhere in the Philippines, subject to pertinent rules and
registration requirements of the concerned LGUs and other government agencies where such
warehouses, outlets, stations or offices are established.
41
It shall be considered “micro-business in nature and scope” if:
(i) its principal activity is primarily for livelihood, or determined by the Small and Medium
Enterprises Development (SMED) Council or DTI as a priority area for development or
government assistance;
(ii) the enterprise is not a branch, subsidiary, division or office of a large-scale enterprise; and
(iii) its policies and business modus operandi are not determined by a large-scale enterprise or by
persons who are not owners or employees of the enterprise (i.e. franchises) (DOF D.O. No. 17-
04).
42
Valuation of Assets – Cash consisting of Philippine currency shall be valued at actual currency value;
if in foreign currency, it shall be valued at the official exchange rate as prescribed by the Bangko
Sentral ng Pilipinas. Other assets shall be generally valued at acquisition or historical cost, net of a
reasonable amount for depreciation as determined under GAAP if the asset is depreciable, or book
value, whichever is higher. Real property shall be valued at acquisition cost, net of depreciation;
however, if no sufficient proof is submitted as to its acquisition cost, the same shall be valued at
current zonal value as established by the BIR (DOF D.O. No. 17-04).
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May 2023
through the Negosyo Center, may charge a fee therefor which shall not be more
than One Thousand Pesos (₱1,000) to be remitted to the National Government.
Fiscal Incentives
(1) Income tax exemption from income arising from the operations of the
enterprise;
A duly registered BMBE shall be exempt from income tax on income arising
purely from its operations as such BMBE.
Provided:
(i) the income tax exemption shall not apply to (a) income subject to final
taxes, (b) capital gains subject to the capital gains tax, and (c)
compensation income (of employees) (d) income from practice of a
profession received directly from clients or from a general
professional partnership; and (e) other income not effectively
connected with the operations of the BMBE.
(ii) The exemption also does not extend to business taxes (VAT or OPT).
(iii) The exemption does not extend to local taxes. However, the LGUs
are encouraged either to reduce the amount of local taxes, fees and
charges imposed or to exempt the BMBEs from local taxes, fees and
charges.
(2) Exemption from the coverage of the Minimum Wage Law. BMBE
employees will still receive the same social security and health care benefits
as other employees;
(3) Priority to a special credit window set up specifically for the financing
requirements of BMBEs; and
MWEs shall be exempt from the payment of income tax on their statutory
minimum wage. Holiday pay, overtime pay, night shift differential pay, and
hazard pay received by such minimum wage earner shall likewise be exempted
from income tax.
Note: An employee who has 2 or more employers each paying him an SMW, shall
remain to be an MWE exempt from income tax and withholding tax on the SMW
he receives from each employer.
43
MWEs are workers in the private or public sector who are paid the statutory minimum wage (SMW).
The SMW shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board
(“RTWPB”). The RTWPB of each region shall determine the wage rates in the different regions based
on established criteria and shall be the basis of exemption from income tax for this purpose.
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May 2023
However, the Following Income Payments to MWEs are Taxable and Subject
to Withholding:
1) Additional compensation received from his employer, other than the SMW, holiday
pay, overtime pay, hazard pay, and night shift differential pay, such as (a)
commissions, (b) honoraria, (c) fringe benefits, (d) benefits in excess of the
allowable statutory amount of “13th month pay and other benefits” of ₱90,000, (e)
taxable allowances, and (f) other taxable income.
(a) An individual whose taxable income does not exceed ₱250,000 under the graduated
rates of Section 24(A)(2)(a) of the Tax Code.
EXC.
44
The employee shall sign BIR Form No. 2316 (Certificate of Compensation Payment and Tax
Withheld) and return the same to the employer. The employer shall, in turn, submit a duplicate copy
to the BIR not later than February 28 of the succeeding year with the accompanying Certified List of
Employees Qualified for Substituted Filing of ITR. This list, when stamped “RECEIVED” by the BIR
shall be tantamount to the substituted filing of ITR by the qualified employees.
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May 2023
spouse does not qualify for substituted filing, must file an income tax return
covering the income of both spouses.
(c) An individual whose sole income has been subjected to final withholding tax
pursuant to Section 57 (A) of the Tax Code.
(d) A minimum wage earner as defined in Section 22(HH) of the Tax Code or an
individual who is exempt from income tax pursuant to the provisions of this Code
and other laws, general or special.
Notes:
(2) The foregoing notwithstanding, any individual not required to file an income tax
return may nevertheless be required to file an information return pursuant to rules
and regulations.
Married individuals shall file a joint return to include the income of both spouses, but
where it is impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall be consolidated by the BIR for
purposes of verification for the taxable year.
The income of unmarried minors derived from property received from a living parent
shall be included in the return of the parent, except:
(1) When the donor’s tax has been paid on such property; or
(2) When the transfer of such property is exempt from donor’s tax.
5. Required Attachments
(a) BIR Form No. 2316 (Certificate of Compensation Payment/Tax Withheld) – for
individuals earning compensation income.
(b) BIR Form No. 2307 (Certificate of Creditable Tax Withheld at Source) – for self-
employed individuals, estates and trusts.
(c) Summary Alphalist of Withholding Agents of Income Payments Subjected to
Withholding Tax at Source (“SAWT”)
(d) Audited Financial Statements Which Must be Attached to the Annual Income Tax
Return Upon Filing45
45
If an individual taxpayer is computing his tax under the Graduated Rates, and is itemizing deductions,
his Financial Statements (whether audited or not) shall be required as an attachment even if his gross
sales/receipts plus non-operating income is less than ₱3.0 Million. If the same exceeds ₱3.0 Million,
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May 2023
If the gross sales, earnings, receipts, or output from business for the year exceed
₱3,000,000:
(1) Balance Sheet and Profit and Loss Statement certified by an independent CPA.
(2) Comparative profit and loss statements for the current and preceding taxable
years.
(3) Schedule of income producing properties and corresponding incomes
therefrom.
(a) The annual return must be filed on or before the fifteenth (15th) day of April of
each year covering income for the preceding taxable year;
his annual income tax return shall be accompanied by Audited Financial Statements. If he claims the
OSD, or if he avails of the 8% income tax rate option, the Financial Statements are not required
to be attached (Rev. Reg. No. 8-2018).
46
AABs have been instructed to accept out-of-district returns (i.e. returns filed outside the jurisdiction
of the RDO where the taxpayer is registered) whose due dates fell within the ECQ period.
47
BIR Form No. 1701Q (Quarterly ITR for Self-Employed Individuals, Estates, and Trusts)
48
BIR Form No. 1700 (Annual ITR for Individuals Earning Purely Compensation Income)
BIR Form No. 1701 (Annual ITR for Individuals (Including MIXED Income Earner), Estates and
Trusts)
BIR Form No. 1701A (Annual ITR for Individuals Earning Income PURELY from
Business/Profession: Those under the graduated rates with OSD as mode of deduction OR those
who opted to avail of the 8% income tax rate)
49
RR No. 8-2018. However, under the Tax Code as amended by the TRAIN Law, the final adjusted
ITR shall be filed on or before May 15 of the following year. For purposes of the CPALE, we will
follow RR No. 8-2018.
Professionals and other suppliers of services deriving gross receipts of ₱250,000 or less in any 12-
50
month period and who (1) are hired under a job order or service contract with the departments and
19
May 2023
(1) From the sale or exchange of shares of stock not traded thru a local stock
exchange: Form No. 1707 shall be filed within thirty (30) days after each
transaction, and a final consolidated return, Form No. 1707-A shall be filed on
or before April 15 of each year covering all stock transactions of the preceding
taxable year; and
(2) From the sale or disposition of real property classified as a capital asset:
Form No. 1706 shall be filed within 30 days following each sale or other
disposition.
Option (c) is the default choice. Once the taxpayer opts to carry-over and apply the
overpayment against the income tax due for the succeeding taxable year, no application
for cash refund, or issuance of a tax credit certificate shall be allowed.
9. Installment Payment -
When the tax due in the annual ITR is in excess of Two Thousand Pesos (₱2,000), the
taxpayer, other than a corporation, may elect to pay the tax in two (2) equal installments,
in which case, the first installment shall be paid at the time the return is filed, and the
second installment, on or before October 1551 following the close of the calendar year.
If any installment is not paid on or before the date fixed for its payment, the whole
amount of the tax unpaid becomes due and payable, together with the delinquency
penalties.
A return may be modified, changed, or amended within (3) years from the date such
return is filed provided no notice for audit or investigation of such return has, in the
meantime, been actually served upon the taxpayer.
agencies of the government, local government units (“LGUs”), state colleges and universities, including
GOCCs and government financial institutions (“GFIs”), and (2) receive income from a LONE PAYOR
with no other source of income, shall be exempt from filing quarterly ITRs. Such professional or
supplier of service shall file only an annual ITR (RMC No. 51-2018).
51
Before the TRAIN, the second installment should be paid on or before July 15 following the close
of the calendar year.
20
May 2023
1) Cumulative Filing. This means that the 1st Quarterly ITR will involve financial data for
the 1st quarter only. The 2nd Quarterly ITR shall include data for the 1st and 2nd quarters of
the year. The 3rd Quarterly ITR shall include data for the 1st, 2nd, and 3rd quarters of the
year. The Annual ITR, which is the final ITR for the taxable year, shall include data for the
1st, 2nd, 3rd, and 4th quarters of the year.
2) Compensation income from being an employee is included only in the Annual ITR.
Business income, gain from sale of ordinary assets, net capital gains from sale of “other
capital assets”, and other taxable income not subject to FT, shall be included in all 3
quarterly ITRs and in the annual ITR.
3) An individual taxpayer shall be filing on a calendar year basis. The deadlines for filing
the ITRs are as follows:
21
May 2023
Notes:
1. To be subject to the final withholding tax (“FWT”), (a) the income must be taxable by
the Philippine government and (b) the payor must be under the jurisdiction of the BIR.
This means that such income must necessarily be sourced within the Philippines.
2. The payor of the income must withhold the tax. In the case of interest income on a
bank deposit, the bank must withhold the tax.
3. The income subject to final WT is not returnable. This means that the interest income
in number (2) does not have to be reported or included in the ITR of the taxpayer.
52
Sec. 25(A)(2), NIRC as amended by R.A. No. 11534 which took effect April 11, 2021.
53
Before January 1, 2018, the FT rate was 7.5%.
22
May 2023
Notes:
1. Deposit substitutes – alternative form of obtaining funds from the public other than
deposits. “Public” means borrowing from 20 or more lenders at any one time. Exs.
Banker acceptances, PNs, repurchase agreements, government debt instruments and
securities.54
- If the debt instrument is not a deposit substitute, interest income shall not be subject
to a final withholding tax. Instead, the interest income shall be included in the
taxpayer’s ITR, and the same shall be subject to CWT.
Pre-termination of investment
If the deposit or investment is pre-terminated before the 5th year, the entire income shall
be subject to final tax to be withheld by the depositary bank from the proceeds of the
long-term deposit or investment based on the holding period of the taxpayer:
Ex. A long-term investment instrument with a maturity of 30 years was bought by Mr.
A from a bank. The instrument was sold successively to other investors. The
holding periods of the investors are as follows:
54
Government debt instruments and securities shall be considered deposit substitutes irrespective of the
number of lenders at the time of origination, if the same are to be traded or exchanged in the secondary
market.
23
May 2023
An OCW shall be exempt from the 15% final tax on interest income from a foreign
currency bank deposit in the Philippines. However, if the deposit account is jointly in
the name of an OCW and another individual (spouse or dependent) who is a Philippine
resident, only 50% of the interest income shall be exempt, while the other 50% shall be
subject to the 15% FWT.
4. Interest income from savings and time deposits of members with their credit
cooperative , and interest income from cooperative members’ fixed deposits (i.e.
paid-up capital) – exempt from tax.
Monthly Remittance (Form Filed not later than the 10th day of the month
0619F) following the month when withholding was
made. Filed for the first two (2) months of each
calendar quarter.
Quarterly Remittance (Form Filed not later than the last day of the month
1601FQ) following the close of the quarter during which
withholding was made.
Quarterly Remittance of FTs Filed not later than the last day of the month
Withheld on Interest paid on following the close of the quarter.
Deposits/Deposit
Substitutes/Trusts/Etc (Form
1602Q)
55
Sec. 24 (B) (1), NIRC.
56
These forms are also used to pay the following final taxes: (a) 25% FT on income from film leasing
and distribution within the Philippines of NRA cinematographic film owner, lessor, or distributor; (b)
8% FT on income derived by subcontractors in petroleum operations; (c) 10% FT on informer’s
reward; and (d) 25% FT on income paid to NRANETBs.
24
May 2023
If received by:
RC NRC, RA, NRAETB NRANETB
EXC: When dividend 100% of dividend Part without shall be Part without shall be
is sourced partly is included in the exempt exempt
within and partly ITR
without Part within shall be Part within shall be
included in the ITR subject to a 25% FT
25
May 2023
III. Capital Gains Subject to Final Tax (also known as “Capital Gains Tax”)
(a) Tax Base – Net capital gain which is the excess of the amount realized on the sale
(selling price) over the basis or adjusted basis of the shares.
Selling price – the total consideration of the sale consisting of the sum of money
and/or the fair market value of property received, if any.
Adjusted basis – the basis of the shares sold plus expenses of sale/disposition
(c) Withholding agent – The payor of the income who, in this case, is the buyer.
(d) Who are subject? All individual taxpayers, except the following:58
(1) Dealers in securities. The gains from such sales by dealers shall be included as
ordinary income in their income tax returns;
(3) All other persons, whether natural or juridical, who are specifically exempt from
national internal revenue taxes under existing investment incentives and other
special laws.
(e) The sale, barter, or exchange of stock options is treated as a sale, barter, or
exchange of shares of stock not listed on the stock exchange.59
Form 1707 Filed within thirty (30) days after each transaction
Form 1707-A (Final Filed on or before April 15 of each year covering all
Consolidated Return) stock transactions of the preceding year.
57
Before January 1, 2018, the FT was 5% on the first ₱100,000 of gain plus 10% on any gain in excess
of ₱100,000.
58
Rev. Reg. No. 6-2008.
59
RMC No. 79-2014.
26
May 2023
2. Shares of stock listed and traded thru the local stock exchange60
(a) Rate and Base – Six-tenths of one percent (6/10 of 1%)61 of the gross selling price
or gross value in money of the shares of stock sold.
(b) Withholding agent – The tax must be deducted and withheld by the stockbroker who
effected the sale at the stock exchange.
(c) Who are subject? All individual taxpayers, except the following:62
(3) All other persons, whether natural or juridical, who are specifically exempt from
national internal revenue taxes under existing investment incentives and other
special laws.
(5) Sellers of shares of stock in the stock exchange where the transaction excludes
the public by pre-arranging the sale or pre-determining the buyers. Ex. Block
sale - subject to the 15% capital gains tax.
(d) Kind of tax – Business tax. The sale in the local stock exchange of traded domestic
shares held as capital assets does not give rise to an income tax event. In other
words, such a transaction is exempt from income tax. The 6/10 of 1% tax on the
selling price is a tax on the sales transaction and not on the income or gain from
such sale.
(e) BIR Form to be filed by the Stockbroker who effected the sale:
Form No. 2552 Filed within five (5) banking days from the date of collection
Notes:
(1) Tax on traded shares – The tax on the sale of shares traded at the stock exchange
is not an income tax, but a business tax (i.e. a tax on the sales transaction). It is in
the form of a percentage tax on the selling price under Section 127(A) of the Tax
Code, which is also called a stock transaction tax. However, the imposition of a
60
Sec. 127(A), NIRC.
61
Before January 1, 2018, the FT was ½ of 1% of the gross selling price.
62
Rev. Reg. No. 6-2008.
63
MPO – the minimum percentage of outstanding shares held by the public or public float. It also
refers to the portion of outstanding shares of the company which are freely available and tradeable
in the market. Currently the MPO is 20%.
27
May 2023
percentage tax on the selling price of traded shares has the effect of a final tax
because any gain on the sale is not returnable.
(2) Effect of Non-Payment of Tax – The sale or exchange cannot be registered in the
books of the corporation unless the receipts of payment of the tax imposed is filed
with and recorded by the stock transfer agent or secretary of the corporation. Any
stock transfer agent or secretary of the corporation or the stockbroker, who caused
the registration of transfer of ownership or title on any share of stock in violation of
the aforementioned requirement shall be punished in accordance with the provisions
of the Tax Code.64
1. Transaction subject – Sale, transfer, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro sales and other forms
of conditional sales.
2. Rate and Base of Tax – Six percent (6%) of the gross selling price or current fair market
value of the property, whichever is higher. The fair market value of the property is the
higher of zonal value or assessor’s value.
3. Final Tax – The tax to be withheld by the payor (buyer) is a final tax and the capital
gain from the sale is not returnable.
5. Forced Sale to the State Under Eminent Domain – If the sale is made to the government
or any of its political subdivisions or agencies, or to government-owned or –controlled
corporations, the taxpayer may choose either (a) to have the gain included and taxed in
the ITR or (b) to be subject to the capital gains tax under Section 24(D).
(a) Sale of raw lands to be used for “socialized housing” projects, or sold under the
Community Mortgage Program (CMP).65
(b) Land transfers under the Comprehensive Agrarian Reform Law of 1988.
64
Sec. 11, Rev. Regs. No. 6-2008.
65
R.A. No. 7279.
66
Sec. 24(D)(2), NIRC.
28
May 2023
Proceeds of sale not fully utilized – If the proceeds of the sale are not fully utilized
in the purchase or construction of a new residence in 6(c) above, the portion of
the gain presumed to have been realized on the sale shall be subject to capital
gains tax. The following formula is used to arrive at the taxable portion:
Form 1706 Filed within thirty (30) days following each sale, exchange, or
disposition of real property.
Informer – person (except a BIR employee, or other public employee, or his relative
within the 6th degree of consanguinity) who gives information that leads to the
discovery of frauds or violations of tax laws, which results in the recovery of taxes, or
in the conviction of the tax evader, or in a compromise agreement with the BIR.
Reward = LOWER of (a) Ten percent (10%) of the revenues, surcharges, or fees
recovered and/or fine, or penalty imposed and collected, or the value of
smuggled and confiscated goods, OR (b) One million pesos (₱1,000,000)
per case.
29
May 2023
TWO TYPES
Creditable Withholding Tax (“CWT”) or EWT
a) On compensation income
b) On certain income payments (EWT)
a) For the income payment to be subject to the CWT and to the FWT, the following must
concur:
(1) The income payment must be taxable to the payee; and
(2) The BIR must have jurisdiction over the payor of the income (in most cases, this means
that the income must be sourced within the Philippines).
b) Not all income payments are subject to creditable WT. Only those payments specified
or enumerated in the law or internal revenue regulations are subject to the creditable
withholding tax system.
c) The income subject to FWT is not returnable, i.e. not included in the ITR of the recipient of
the income.
On the other hand, the income subject to CWT shall be included in the ITR of the payee of
the income. The amount to be reported by the payee shall be gross of the CWT.
d) The CWT withheld by the payor shall be allowed as a tax credit against the income tax
liability of the payee in the taxable year or quarter in which the income was earned or
received.
There is no need for the taxpayer-claimant to prove actual remittance by the withholding
agent to the BIR.67 As long as the taxpayer-claimant receives the BIR Form No. 2307 from
his customer/client and attaches the same to his ITR, the former can avail of a tax credit
equivalent to the amount reflected therein as tax withheld.
f) Income payments subject to CWT (see list on pages 31-33). The payor of such incomes
must withhold the CWT thereon. Otherwise, such payor cannot use such payments as
deductions against gross income in computing the net taxable income in the ITR.
67
The withholding of the income tax and the remittance thereof are the responsibility of the
withholding agent and not of the taxpayer-claimant. The latter therefore has no control over the
remittance of the taxes withheld from its income by the withholding agent or payor. (McKinsey Co.
vs. CIR, CTA Case No. 9332, May 28, 2019.)
30
May 2023
Types of CWTs
CWT on Compensation CWT on Other Income (Expanded WT)
Employer - Files a Form 1601-C68 monthly Customer or Client - Files a Form 0619E and
and remits the WT to the BIR. remits the WTs within ten (10) days after the
end of the month in which the withholding
At the end of the year, employer files a Form was made. This is filed for the first two (2)
1604-C,69 which lists the total WTs on months of each calendar quarter.
compensation from all its employees for the
taxable year.
- Shall also attach an Alphalist of Files a Form 1601-EQ quarterly not later
Employees containing compensation than the last day of the month following the
income of each employee, and taxes close of the quarter during which the
withheld from each. withholding was made. In such form, the
amount payable shall be equal to the total
taxes withheld during the quarter less the
amounts paid in the first 2 months of the
quarter.
Attachment: Quarterly Alphalist of Payees
and WTs (QAP).
Will receive from his employer at the end of Will receive a Form 2307 from the customer
the year a Form 2316 stating his total gross or client showing the tax withheld from the
taxable compensation income, non-taxable income payment within 20 days from the
payments made by the employer, and the close of the quarter, or upon request of the
total taxes withheld by the employer. payee.
A complete list of income payments to
individual payees which are subject to the
Expanded Withholding Tax (“EWT”) is
found in the next 2 pages.
68
For the months of January to November, Form 1601C shall be filed on or before the tenth (10th) day
of the following month in which the withholding was made. For taxes withheld in December, Form
1601C shall be filed not later than January 15 of the succeeding year.
69
Form 1604-C shall be filed on or before January 31 of the following year.
31
May 2023
Note: The EWT rates with stars are those rates which students must be familiar with for the
board exams.
11) Cinematographic film rentals, and other payments to resident individuals and corporate
cinematographic film owners, lessors, or distributors. 5%
12) Income payments to certain contractors 2%
13) Income distribution to the beneficiaries of estates and trusts 15%
14) Gross commissions or service fees of customs, insurance, stock, immigration and commercial
brokers; fees of agents of professional entertainers and real estate service practitioners (RESPs)
(i.e. real estate consultants, real estate appraisers, and real estate brokers)
- If gross income of payee for the current year did not exceed ₱3M 5%
- If gross income of payee is more than ₱3M, or payee is VAT-registered regardless of amount 10%
15) Professional fees paid to Medical Practitioners (includes doctors of medicine, doctors of
veterinary science, and dentists) by hospitals and clinics or paid directly by Health Maintenance
Organizations (HMOs) and/or similar establishments
- If gross income of payee for the current year did not exceed ₱3M 5%
- If gross income of payee is more than ₱3M, or payee is VAT-registered regardless of amount 10%
16) Payments by a General Professional Partnership (GPP) to its partners
32
May 2023
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
17) Income Payments made by Credit Card Companies 0.5%
18) Income Payments made by the Government and government-owned and controlled corporations
(GOCCs)
- To its local/resident suppliers of goods other than those covered by other rates of withholding tax 1%
- To its local/resident suppliers of services other than those covered by other rates of withholding tax 2%
19) Additional Income Payments to Government Personnel from importers, shipping and airline
companies or their agents for overtime services 15%
20) Income Payments made by Top Withholding Agents70, 71
- To their local/resident suppliers of goods other than those covered by other rates of withholding tax 1%
- To their local/resident suppliers of services other than those covered by other rates of withholding tax 2%
21) Commissions, Rebates, Discounts and Other Similar Considerations Paid/Granted to
Independent and/or Exclusive Sales Representatives and Marketing Agents and Sub-Agents of
Companies, including Multi-Level Marketing Companies
- If gross income of payee for the current year did not exceed ₱3M 5%
- If gross income of payee is more than ₱3M, or payee is VAT-registered regardless of amount 10%
22) Gross Payments to Embalmers by Funeral Parlors 1%
23) Payments by Pre-Need Companies to Funeral Parlors 1%
24) Tolling Fees Paid to Refineries 5%
25) Income Payments Made To Suppliers of Agricultural Products in Excess of Cumulative Amount
of ₱300,000 Within the Same Taxable Year 1%
26) Income Payments on Purchases of Minerals, Mineral Products, and Quarry Resources, such as
but not limited to silver, gold, marble, granite, gravel, sand, boulders, and other mineral 5%
products except purchases by the Bangko Sentral ng Pilipinas
27) Income Payments on Purchases of Minerals, Mineral Products, and Quarry Resources by the
Bangko Sentral ng Pilipinas from Gold Miners/Suppliers under P.D. No. 1899, as amended by 1%
R.A. No. 7076
28) On Gross Amount of Refund Given by MERALCO to Customers with Active Contracts as
Classified by MERALCO 15%
29) On Gross Amount of Interest on the Refund of Meter Deposit Whether Paid Directly to the
Customers or Applied Against the Customer's Billings of Residential and General Service
Customers Whose Monthly Electricity Consumption Exceeds 200 KWH as Classified by 10%
MERALCO
70
Under RR No. 31-2020, top withholding agents shall refer to those taxpayers whose gross
sales/receipts or gross purchases during the preceding year taxable year shall fall under the minimum
thresholds determined according to the existing group classifications of Revenue District Offices
where they are duly registered, as follows:
Regular suppliers are defined as suppliers with whom the taxpayer-buyer has at least six (6)
transactions, regardless of amount, either in the previous year or current taxable year.
33
May 2023
30) On Gross Amount of Interest on the Refund of Meter Deposit Whether Paid Directly to the
Customers or Applied Against the Customer's Billings of Non-Residential Customers Whose 15%
Monthly Electricity Consumption Exceeds 200 KWH as Classified by MERALCO
31) On Gross Amount of Interest on the Refund of Meter Deposit Whether Paid Directly to the
Customers or Applied Against the Customer's Billings of Residential and General Service
10%
Customers Whose Monthly Electricity Consumption Exceeds 200 KWH as Classified by Other
Electric Distribution Utilities (DUs)
32) On Gross Amount of Interest on the Refund of Meter Deposit Whether Paid Directly to the
Customers or Applied Against the Customer's Billings of Non-Residential Customers Whose
Monthly Electricity Consumption Exceeds 200 KWH as Classified by Other Electric Distribution 15%
Utilities (DUs)
33) Income Payments Made by Political Parties and Candidates of Local and National Elections on
all their Purchases of Goods and Services Related to Campaign Expenditures, and Income
Payments made by Individuals or Juridical Persons for their Purchases of Goods and Services 5%
Intended to be Given as Campaign Contributions to Political Parties and Candidates
34) Interest Income Derived from any Debt Instrument Not Within the Coverage of Deposit
Substitutes and Rev. Reg. No. 14-2012. 15%
Notes to EWT:
(a) For income payments numbers 1 to 9, 14, 15, and 21, two withholding rates are prescribed,
5% or 10%.
The payor/withholding agent shall withhold the higher rate of 10% if:
(1) the payee fails to provide the income payor/withholding agent of the required
declaration72; or
(2) the income payment exceeds ₱3.0 Million, despite receiving the sworn declaration
from the income payee.73
(b) For number 9, if the director is also an employee, the fees shall form part of compensation
income subject to the WT on compensation.
72
Income Payee’s Sworn Declaration of Gross Receipts/Sales (for Self-Employed and/or Engaged in
the Practice of Profession with Several Income Payors) that his gross receipts will not exceed ₱3.0
Million and that he is not VAT-registered (Annex B-1 of Rev. Reg. No. 11-2018).
Individual payees whose gross receipts/sales in a taxable year shall not exceed ₱3.0 Million, are
required to submit such Sworn Declaration of Gross Receipts/Sales, together with a copy of his
Certificate of Registration (“COR”), to all the income payors/withholding agents not later than
January 15 of each year or at least prior to the initial payment of the professional
fees/commissions/talent fees, etc in order for them to be subject to five percent (5%).
73
Sec. 2.57.3 of Rev. Reg. No. 2-98, as amended by Rev. Reg. No. 11-2018.
74
Income Payee’s Sworn Declaration of Gross Receipts/Sales (for Self-Employed and/or Engaged in
the Practice of Profession with Lone Income Payor) (Annex B-2 of Rev. Reg. No. 11-2018)
34
May 2023
declaration shall be submitted to the lone income payor before the initial payment of
income on or before January 15 of each year, whichever is applicable.
In the event that the individual payee’s cumulative gross receipts in a year exceed
₱250,000, the income payor/withholding agent shall withhold the prescribed withholding
tax based on the amount in excess of ₱250,000, despite the prior submission of the
individual income payee’s sworn declaration. On the other hand, if the individual income
payee failed to submit an income payee’s sworn declaration to the lone income
payor/withholding agent, the income payment shall be subject to the applicable
withholding tax even though in a taxable year the income payment is ₱250,000 and
below.75
(d) The income payors/withholding agents shall subsequently execute a sworn declaration76
stating the number of payees who have submitted the income payees’ sworn declarations
with the accompanying copies of their CORs. Such declaration of the income
payors/withholding agents shall be submitted, together with the list of payees, to the
concerned BIR office where registered on or before January 31 of each year or fifteen (15)
days following the month when a new income recipient has submitted the payee’s sworn
declaration.
75
Sec. 2.57.3 of Rev. Reg. No. 2-98, as amended by Rev. Reg. No. 11-2018.
76
Annex C of Rev. Reg. No. 11-2018.
35
May 2023
36