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FINAL WITHHOLDING TAXATION AND CAPITAL GAINS TAXATION

The Withholding Tax Systems in the Philippines: Concept Structure

TIMING OF WITHHOLDING: Per RR 2-98, it is the earliest among:

 Accrual
 Recording in the books as asset/expense
 Payment

PERSONS CONSTITUTED AS WITHHOLDING AGENTS:

1.) Any juridical entity (whether engaged in business or not)
2.) Individual:
2a.) engaged in trade or business; OR
2b.) in relation to the purchase/exchange/transfer or Real property
3.) The Government [local and national], including GOCC’s

DESCRIPTION ON THE WITHHOLDING SYSTEMS IN THE PHILIPPINES:

 Essentially a manner of collection
 To promote convenience on the part of the taxpayer and the government
 To ensure collection of taxes
 To improve government’s cash flows
 Territorial in character in that only income earned WITHIN the Philippines are subject to withholding.
 The withholding payor has the liability to remit the tax to the government.

FINAL WITHHOLDING TAX CREDITABLE WITHHOLDING TAX

Tax withheld constitutes full and final payment of tax Tax withheld constitutes approximate payment of tax
Payee [income-recipient] does not need to file ITR/pay the tax Payee [income-recipient] still needs to pay tax (self-assessment)
Cannot be claimed as credit against regular tax liability Can be claimed as credit against regular tax liability
Limited in scope as it applies only to certain passive income General in scope as it applies to almost every kind of income
payment
KINDS:
1. Expanded Withholding tax (EWT)
2. Withholding tax on Compensation (WTC)
3. Withholding VAT (WVAT)
4. Withholding Percentage Tax (WPT)

WITHHOLDING TAX RETURNS AND ATTACHMENTS:

QUARTERLY (by the withholding agent)

FORM NAME BIR RETURN FREQUENCY DEADLINE

Quarterly Remittance Return of 1601-EQ Quarterly End (last day) of month
Creditable Income Taxes following end of quarter
Withheld (Expanded)
Quarterly Remittance Return of 1602Q Quarterly End (last day) of month
Final Taxes Withheld on Interest following end of quarter
Paid on Deposits and Yield on
Deposit Substitutes/Trusts/ Etc.
Quarterly Remittance Return of 1603Q Quarterly End (last day) of month
Final Taxes Withheld on Fringe following end of quarter
Benefits Paid to Employees
Other than Rank and File
Quarterly Remittance Return of 1601-FQ Quarterly End (last day) of month
Final Income Taxes Withheld following end of quarter
Required Attachment: Quarterly Alphalist of Payees (QAP).

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2

MONTHLY (by the withholding agent)

FORM NAME BIR RETURN FREQUENCY DEADLINE

Monthly Remittance Form for 0619-E Monthly Gen. Rule: 10th day from end of
Creditable Income Taxes month
Withheld (Expanded) Except: eFPS filers
Monthly Remittance Form for 0619-F Monthly Gen. Rule: 10th day from end of
Final Income Taxes Withheld month
(Final) Except: eFPS filers
Monthly Remittance Form for 1601-C Monthly Gen. Rule: 10th day from end of
Creditable Income Taxes month
Withheld on Compensation Except: eFPS filers

Per RR 26-2002, due dates of eFPS filers shall be based on business industry classification:

INDUSTRY CLASSIFICATION DEADLINE

GROUP A 15th day from end of month
GROUP B 14th day from end of month
GROUP C 13th day from end of month
GROUP D 12th day from end of month
GROUP E 11th day from end of month

ANNUAL INFORMATION RETURNS (by the withholding agent)

FORM NAME BIR RETURN FREQUENCY DEADLINE

Annual Information Return on 1604-C Annual On or before Jan 31 following
Income Taxes Withheld on end of calendar year
Compensation
Annual Information Return on 1604-F Annual On or before Jan 31 following
Income Payments Subjected to end of calendar year
Final Withholding Taxes
Annual Information Return of 1604-E Annual On or before March 1 following
Creditable Taxes Withheld end of calendar year
(Expanded)/ Income Payments
Exempt from Withholding Tax
Required Attachment: Annual Alphabetical List of Payees

WITHHOLDING TAX CERTIFICATES GIVEN TO PAYEES/EMPLOYEES

FORM NAME BIR RETURN FREQUENCY DEADLINE

Certificate of Final Tax Withheld
at Source
Certificate of Creditable Tax
Withheld at Source
Certificate of Compensation
Payment/ Tax Withheld for
Compensation Payment with or
without Tax Withheld
2306 Annual/Upon payee’s request Issue to payee: On or before
Jan. 31 (OR)
Simultaneously with income
payment
2307 Quarterly/Upon payee’s request Issue to payee: On or before
20th day of month following end
of taxable quarter (OR)
Simultaneously with income
payment
2316 Annual Issue to employee: On or before
Jan. 31 (OR)
In case of termination, same
day on the payment of last
wages

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3

FINAL INCOME TAXATION

FINAL INCOME TAXATION: NATURE and CONCEPT STRUCTURE

1.) Tax withheld at source.

2.) Territorial in character
3.) Withholding constitutes full and final payment of the tax.
4.) Limited in scope
5.) No filing of ITR needed; thus, not creditable against regular tax liability.

SCOPE OF FINAL TAXES IN A NUTSHELL CERTAIN PASSIVE INCOME EARNED WITHIN THE
PHILIPPINES
INCOME EARNED BY:
(1) NRA-NETB
(2) NRFC

1.) Final Tax on Certain Passive Income

(A) INTEREST: CONCEPT STRUCTURE

Interest must arise from: (1) LOCAL CURRENCY BANK DEPOSITS, (2) DEPOSIT SUBSTITUTES, (3) TRUST FUND or (4) any similar
arrangements.

Short-Term 20% FIT

Peso deposits EXEMPT; except

Individual when there is pre-
termination
Long-Term
Corporation 20% FIT

[Synthesis] Note the following key concepts:

 For this purpose, short-term and long-term classification shall be based on the taxpayer’s HOLDING PERIOD. Short-term are those
whose holding period is less than 5 years. Conversely, long-term are those whose holding period is AT LEAST 5 years.
 Note that interest income which arise from a long-term bank deposit, deposit substitute, or trust fund by an INDIVIDUAL taxpayer
shall generally be exempt from final taxes. However, the same may be subjected to final tax in case of early pre-termination.
 In the case of pre-termination of the contract, there will be ‘taxation of the untaxed exempt income” in the sense that any previously
untaxed interest income (since incidentally related to a loan which was held long-term) shall be subject to the following applicable
final taxes, based on the holding period as of the pre-termination date:

HOLDING PERIOD FINAL TAX RATE

5 years or more EXEMPT
4 years to less than 5 years 5%
3 years to less than 4 years 12%

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4

Less than 3 years 20%

INTEREST INCOME FROM FOREIGN CURRENCY DEPOSIT SUBSTITUTES (FCDS): CONCEPT STRUCTURE

Resident 15% FIT

FCDS
Non-
EXEMPT
resident

[Synthesis] Note that interest income from FCDS are taxable to resident persons while exempt for non-resident persons (be they individuals or
corporations). In case of joint accounts, the exemption shall only cover the portion of the account corresponding to the non-resident.

(B) ROYALTIES: CONCEPT STRUCTURE

Royalties must be earned/exercised in the Philippines. Royalties, to be subjected to final taxes, must be passive in nature. Otherwise, active
royalties shall be taxable at regular rates.

General Rule: 20% FIT

Passive
Royalties Exception:
Literary Works, Books, 10% FIT
and Musical Composition
of Individuals

(C) PRIZES: CONCEPT STRUCTURE

Prizes, as differentiated from winnings, must come from chance.

Sports when sanctioned by the appropriate national sports association

Exempt

Received without effort and for good causes

Prizes Amount is greater

20% FIT
than 10K
Individuals
Amount is 10k or
RIT
less
Taxable

Corporations RIT

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(D) WINNINGS: CONCEPT STRUCTURE

Winnings, as differentiated from prizes, require that the amount (winning) received must arise from an undertaking, other than those
exempted by law/ subject to other tax regimes.

Individuals 20% FIT

In general

Corporations RIT

Winnings
Amount is
20% FIT
greater than 10k
Individuals and
PCSO Winnings
Corporations
Amount is 10k or
EXEMPT
less

(E) TAX INFORMER’S REWARD

The final income tax is 10% of the reward. Under the NIRC, the cash reward is whichever is lower between: (1) 10% of the collection/recovery
or (2) One Million pesos. The information must be first-hand.

However, this is not available to:

 BIR employees/officials
 Other Public officials/employees
 Relatives of above within the 6th degree of Consanguinity

(F) DIVIDENDS: CONCEPT STRUCTURE

Dividends are taxable upon declaration. Usually, cash and property dividends are taxable while stock and liquidating dividends are not*.

In general at 10%
FIT
Received by
Individuals
For NRA-ETB at
20% FIT
Dividends from
DOMESTIC
which are EXEMPT - INTER-
CORPORATION
Domestic/Resident CORPORATE
Corporations DIVIDENDS
Received by
Corporations As a rule - 25%
FIT
which are Non-
Resident Foreign
Corporations Exception: TAX
SPARING RULE**
- 15% FIT

*Cases where stock and liquidating dividends become taxable:

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6

STOCK DIVIDEND Stock dividend may be taxable when:

(A) A corporation declared stock dividends and immediately called

the stock dividends for cancellation and redemption.

(B) If such leads to substantial alteration in ownership in the

corporation
LIQUIDATING DIVIDEND Liquidating dividend may be taxable when the amount received by
an investor from liquidation is MORE THAN the cost of his
investment (a capital gain subject to regular income tax).

**Tax Sparing Rule: A 15% tax sparing rate applies on dividends if the country of residence of the nonresident foreign corporation (NRFC)
allows a “deemed paid” tax credit against the tax due from the NRFC equivalent to the tax waived by the Philippines. The reduced rate also
applies in case the foreign country does not tax the dividends coming from the Philippines.

Question: What is the tax treatment of the share of a partner in a business partnerships / associations / taxable joint ventures?

Answer: It should be treated under the above rules on dividend. Under the Tax Code, partnerships (no matter how created or organized) except
GPPs, are taxed like corporations. Thus, the partner’s share in the net income of the partnership should be taxed at 10%/20% dividend FIT,
whichever is applicable.

(G) FRINGE BENEFITS TAX

Essentially a tax on employees who are NOT rank-and-file but is withheld by the employer to be remitted to the government. This will be further
elaborated on the next topics.

(H) INCOME FROM FOREX LOANS OR RECEIVABLES WITH RESIDENTS OTHER THAN FCDU’s/OBU’s

The final tax is 10%.

(I) INCOME PAYMENTS TO OIL/EXPLORATION SERVICE CONTRACTORS/SUBCONTRACTORS

The final tax due is 8% of the Gross Income from such contract which is in lieu of national and local taxes.

(J) FINAL TAX ON TAX-FREE COVENANT BONDS

The final tax is imposed only on individuals (regardless of classification) at 30% FIT. Only regular income taxes can be applied to corporations.

2.) INCOME PAYMENTS TO (1) NON-RESIDENT ALIENS NOT ENGAGED IN TRADE/BUSINESS AND (2) NON-RESIDENT
FOREIGN CORPORATIONS: CONCEPT STRUCTURE

NRA-NETB NRFC
GENERAL RULE: 25% FIT 25% FIT
EXCEPTIONS:
CGT on DC stocks directly sold 15% CGT 15% CGT
to the buyer
Rentals on Cinematographic 25% FIT 25% FIT
Films
Rentals on Vessels 25% FIT 4.5% FIT
Rentals on Aircrafts, Machineries, and 25% FIT 7.5% FIT
Equipment
Interest Income under FCDS EXEMPT EXEMPT
Interest on Foreign Loans N/A 20% FIT
Dividends 25% FIT Gen rule: 25% FIT but 15% FIT when Tax
Sparing Rule applies
Tax on Tax-free Covenant Bonds 30% FIT 30% FIT

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7

CAPITAL GAINS TAXATION

CAPITAL GAINS TAXATION: CONCEPT STRUCTURE

CAPITAL GAINS TAXATION CGT ON REAL PROPERTY LOCATED IN 6% CGT

THE PHILIPPINES
CGT ON DC STOCKS DIRECTLY TO THE 15% CGT
BUYER

Concept of Capital and Ordinary Assets

Under the Tax Code, only ordinary assets were given descriptions. Capital assets, therefore, are residually defined.

Sec. 39 of the Tax Code states that the term ‘capital assets’ means property held by the taxpayer (whether or not connected with his trade or
business). But does not include [the following descriptions relate to ORDINARY ASSETS]:

 stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand
at the close of the taxable year or
 property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or
 property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F)
of Section 34; or
 real property used in trade or business of the taxpayer.

[Synthesis] For better recall, ordinary assets are (1) inventories and (2) PPEs and other tangible assets used in trade/business. Capital assets
are assets which are not ordinary assets. Classifying assets into ordinary and capital is vital in understanding capital gains taxation (and regular
income taxation) because capital gains taxes will only attach to the disposition/transfer of TWO CAPITAL ASSETS: namely, Real Property in
the Philippines held as CAPITAL ASSET and Shares of stocks by a Domestic Corporation held as a CAPITAL ASSET sold directly to the
buyer. Capital assets other than these two shall be subject to regular rates.

PECULIAR RULES IN ASSET CLASSIFICATION FOR INCOME TAXATION PURPOSES

General consideration: Asset classification is based on the (1) TAXPAYER’S NATURE OF BUSINESS and (2) USAGE of the property in
the business.
(a) The asset is previously used in the business (PAST) For a taxpayer engaged in Real Estate business: classified as
an ORDINARY ASSET
For a taxpayer NOT engaged in Real Estate business:
GENERALLY, AN ORDINARY ASSET.

EXCEPTION (when it will become a CAPITAL ASSET):

Converted to capital asset upon showing proof that the same
has NOT BEEN USED IN THE BUSINESS FOR MORE THAN 2
YEARS.

(b) The asset is to be used in the business (FUTURE)
(c) Transfer from taxpayer to another taxpayer
(d) Properties used by EXEMPT CORPORATIONS
ORINDARY ASSET, regardless of the nature of the business of
the taxpayer
Asset classification shall be based on the intention of the
transferee.
Depends on the activity to which the property is used:
(a) ORDINARY ASSET – if used in taxable activities
(b) CAPITAL ASSET – if used in exempt activities

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(e) Change in business from real estate to non-real estate business Shall not change the asset classification of the ordinary assets
previously held.

Nature of CGT: Concept Structure

 Territorial in nature in that the situs of properties must be within the Philippines
 Limited in scope
 Regarded by law as final taxes

(A) 6% CAPITAL GAINS TAXES ON: (1) SALE, (2) EXCHANGE, OR (3) OTHER DISPOSITION OF REAL PROPERTY LOCATED IN
THE PHILIPPINES HELD AS A CAPITAL ASSET

[Synthesis] The 6% CGT applies to almost every onerous disposition of Real Properties located in the Philippines held as capital assets,
even in an expropriation sale and pacto-de-retro sales. The basis thereof does not regard actual gains for it to be taxable. Selling price or
Fair Value (whichever is higher) is the basis of 6% CGT, as follows:

Basis of the 6% CGT: Concept Structure

WHICHEVER IS HIGHER BETWEEN: SELLING PRICE (or)

FAIR VALUE Fair Value under the Tax Code is
whichever is HIGHER between:
(1) Zonal Value (CIR)
(2) Fair Value per
provincial/city assessors

Essentially, the 6% CGT applies to every sale, disposition, or transfer of Real Properties in the Philippines held as capital assets. However, the
Tax Code and other special laws provide for relief to taxpayers through exemptions or alternative taxation scheme.

CONCEPT STRUCTURE:

ALTERNATIVE TAXATION AT THE OPTION OF INDIVIDUAL EXEMPTION FROM CGT

TAXPAYER (CGT OR RIT) UNDER THE NIRC UNDER SPECIAL LAWS
REGARDING PRINCIPAL
RESIDENCE

1.) Alternative Taxation at the Option of the Individual Taxpayer (CGT or RIT): Requisites

 The taxpayer-seller is an Individual.

 The buyer is the Government (essentially in an expropriation act by the Government)
 At the option of the taxpayer, he may be taxed at 6% CGT or Regular Income Tax (tax table)
Rationale: The government is exercising the power of eminent domain over the property. In effect, the taxpayer-seller generally would have no
choice but to sell the property to the government. Thus, he will be given an option to be taxed at regular rates because should he incur loss from
such sale, he may claim the loss as a deduction against other gains from capital assets.

2.) Exemption from CGT under the NIRC:

The requisites for exemption under this item may be learned through a mnemonic. Hope this will help.

“6 x 30 = 18 x 10”
 6 percent CGT must have been held in an escrow account in favor of the Government
 30 days within the date of sale that the taxpayer notify the BIR of his intention to avail of the exemption
 18 months from the date of sale that the taxpayer must reacquire a new principal residence
 This exemption can only be availed of once every 10 years
 The symbol “=” means that the taxpayer must have disposed of his OLD PRINCIPAL RESIDENCE to reacquire a NEW PRINCIPAL
RESIDENCE. Therefore, ideally, the COST/BASIS of the OLD PRINCIPAL RESIDENCE should be carried over to the NEW PRINCIPAL
RESIDENCE ACQUIRED.

IDEAL SCENARIO exists when the taxpayer has fully complied with the above requisites and proceeds from disposing the old principal residence is fully

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9

utilized to acquire the new principal residence such that: (1) The taxpayer be exempted from payment of the 6% CGT (and) (2) The basis/cost of the OLD
PRINCIPAL RESIDENCE equals NEW PRINCIPAL RESIDENCE (plus any out-of-pocket costs incurred).

However, when there is partial utilization of proceeds, the taxpayer should pay 6% CGT and the cost of old principal residence should not be fully carried
over to the cost of new principal residence.

In the case where there is partial utilization, the computation of the CGT and the tax basis of the new principal residence shall be as follows:

For the 6% CGT: [6% CGT x Portion of the Proceeds which is NOT utilized / Total Proceeds from sale of OLD Principal Residence]

For the COST of New Principal Residence: [COST/BASIS of OLD Principal Residence x Portion of the Proceeds which is UTILIZED / Total Proceeds from
sale of OLD Principal Residence] + out-of-pockets costs incurred

3.) Exemption under Special Laws

(A) Sale of Land under the Comprehensive Agrarian Reform Program
(B) Sale of Socialized Housing Units by the National Housing Authority

ADMINISTRATIVE REQUIREMENTS REGARDING 6% CGT

 The BIR Form used for the 6% CGT is BIR Form 1706 – Final Capital Gains Tax Return (For Onerous Transfer of Real Property
Classified as Capital Assets -Taxable and Exempt)
 The Capital Gains Tax Return (BIR Form No. 1706) shall be filed and paid within thirty (30) days following the sale, exchange or
disposition of real property, with any Authorized Agent Bank (AAB) or Revenue Collection Officer (RCO) of the Revenue District
Office (RDO) having jurisdiction over the place where the property being transferred is located. [RDO OF THE LOCATION OF THE
PROPERTY].

(B) 15% CAPITAL GAINS TAXES ON: (1) SALE, (2) EXCHANGE, OR (3) OTHER DISPOSITION OF DOMESTIC SHARES OF
STOCK HELD AS A CAPITAL ASSET DIRECTLY TO THE BUYER

[Synthesis] We can say that 15% CGT:

 Involves onerous disposition (even includes foreclosure, conditional sales, and pacto-de-retro sales)
 Refers to shares of stock/equity instruments of a DOMESTIC CORPORATION (e.g. Preferred shares, common shares, stock
rights, stock rights, stock warrants, unit of participation)
 The transaction should be an onerous transfer directly to the buyer
 It applies to all taxpayers (regardless of classification)

TRANSFER OF STOCKS: CONCEPT STRUCTURE

MEANS OF TRANSFER TYPE OF ASSET APPLICABLE TAX

ONEROUS TRANSFER OF DC STOCKS CAPITAL ASSET CAPITAL GAINS TAX (6% OF NET CAPITAL
DIRECTLY TO THE BUYER GAINS)
ONEROUS TRANSFER OF DC STOCKS CAPITAL ASSET STOCK TRANSACTION TAX (60% OF 1% OF
THROUGH THE LOCAL STOCK GROSS SELLING PRICE)
EXCHANGE
ONEROUS TRANSFER OF DC STOCKS ORDINARY ASSET REGULAR INCOME TAXATION
DIRECTLY TO THE BUYER
ONEROUS TRANSFER OF DC STOCKS ORDINARY ASSET REGULAR INCOME TAXATION
THROUGH THE LOCAL STOCK
EXCHANGE

15% CGT Model

Selling price* XXX

Less: Tax basis of stocks sold** (XXX)
Less: Other direct costs (XXX)

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10

Equals: Net gain XXX

Multiplied by: CGT rate 15%
CGT XXX
*For this purpose, selling price means:
(a) Cash sale – cash received

(b) Exchanges – FV of property

**For this purpose, tax basis of stocks sold means:

(a) PURCHASE – determined using specific identification or moving average method

(b) DEATH – Fair value at death

(c) GIFT – whichever is lower between:
 FV of donation at date of gift;
 Tax basis in hands of donor/ last preceding owner who have acquired it not through GIFT

(d) INADEQUATE CONSIDERATION – amount paid

(e) TAX-FREE EXCHANGES – substituted tax basis of shares

ADMINISTRATIVE REQUIREMENTS REGARDING 15% CGT

 Note that the 15% CGT is based on the actual net gains. Thus, should a transaction resulted to a loss, the taxpayer need not pay
15% on such sale.
 The BIR Forms used for 15% CGT are:
(A) 1707 – for transactional purposes
(B) 1707A – for annualization purposes
 The Capital Gains Tax Return (BIR Form No. 1707) [PER TRANSACTION] shall be filed and paid within thirty (30) days after each
sale, barter, exchange or other disposition of shares of stock not traded through the local stock exchange with any Authorized Agent
Bank (AAB) under the jurisdiction of the Revenue District Office (RDO) where the seller/transferor is required to register. [RDO OF
THE SELLER]
 For BIR Form 1707A [ANNUAL]. File the Capital Gains Tax return in triplicate (two copies for the BIR and one copy for the taxpayer)
with the Authorized Agent Bank (AAB) in the Revenue District where the seller or transferor of stocks is registered. In places where
there are no AAB, the return will be filed directly with the Revenue Collection Officer or Authorized City or Municipal Treasurer.
Note: For 1707A, the deadline is the same as that of the taxpayer’s Income Tax Return (04/15/20xx).
 Should there be losses in a calendar year, such may be offset against subsequent gains. The CGT payable/refundable is equal to
the net aggregate annual gains x 15% CGT rate vs. any amount of CGT paid within the year.

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