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NTRC Tax Research Journal Volume XXIII.

2 March – April 2011

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 musical
compositions);
d. Share in the distributable net income after tax of a partnership;
e. Interest income (Philippine currency bank deposits and deposit substitutes,
longterm 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.

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

1
National Tax Research Center, Department of Finance, Short Guide to Philippine Taxes, Manila,
pp. 25-31.

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.

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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 individual taxpayers.

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. 1127.1 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.”2 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.”3 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 4 which took
effect on January 1, 1951.

1
Introduced by then Congressman Ferdinand E. Marcos and Congressman Tito V. Tizon.
2
Congressional 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.

3
Congressional Record, House of Representatives, May 10, 1950, loc. cit.

4
Entitled, “An Act to Amend Certain Sections of Commonwealth Act Numbered Four Hundred and
Sixty-Six, As Amended, Otherwise Known as the National Internal Revenue Code, and to Add to Title II

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

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 payable7, 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 income tax 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)

6
The 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
and Answers in English. A project of the Department of Finance, undertaken by AQY & Associates, p. 6.

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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.5

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. 120006
was issued in January 3, 2000 setting the guidelines in the use of the Tax Remittance
Advice (TRA)7 as a new mode of payment for taxes withheld by NGAs.
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
5
See Annex A for a summary of withholding tax rates for individuals.
6
This was amended by Joint Circular No. 1-2000A dated July 31, 2001 specifically on the guidelines in
the use of the revised TRA.
7
TRA, 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.

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

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 local
tax 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

12
Issued on April 3, 2000.

13
Issued on October 22, 2001.

14
Issued on March 19, 2007.

15
Issued on March 21, 2001.

16
Signed 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.

17
The 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 LGUs with the withholding tax rules and regulations.

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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 tax collection
mechanism. According to a National Tax Research Center (NTRC) Study 8, 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 selfemployed 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)9 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 BIR10. 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 employer11 in order to
avoid being taxed for such other income. It should be mentioned that the present

8
National Tax Research Center, Estimate of the Income Tax Gap, CY 2002 to 2006, January 11, 2008.
9
An 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.
10
Section 34(K), National Internal Revenue Code (NIRC) of 1997.
11
Victor Thuronyi, Tax Law Design and Drafting, Vol. 2 (Washington D.C.: External Relations
Department, Publication Services International Monetary Fund, 1998), p.560.
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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 exemption allowance 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 about the
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 fixed income 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 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

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

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 provisions under
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 P1,000.12 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 huge gap 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.13

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 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 presumptive income taxation.
Under this method, income is no longer assessed from accounting records but from certain

12
These violations are also subject to criminal penalties.
13
Other 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 15 th
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.]
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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 being used 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.14 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
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.

14
Valevich, 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 on
March 11, 2009, <http://pdc.ceu.hu/archive/00002169/.>.

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

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 the latter. 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. 15

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 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 personal 16 and additional
exemption allowances may be prevented by requiring taxpayers to submit authenticated

15
World 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.>
16
Fictitious claims for personal exemption are deemed corrected already by RA 9504 which provides
for a P 50,000 personal exemption, regardless of the status of the taxpayer.
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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.

Annex A

SUMMARY OF WITHHOLDING TAX RATES FOR INDIVIDUALS*

Non-resident
Resident Non-resident Aliens Not
Citizen or Aliens Engaged Engaged in
Type of Income
Alien in Trade or
Trade or
Individuals Business
Business
Dividends from a domestic
10% final 20% final 25% final
corporation

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

Royalties (In general)


20% final 20% final 25% final
Royalties on books, other
literary works and musical 10% final 10% final 25% final
compositions
Share in the distributable net
income after tax of a --- 20% final 25% final
partnership
Interest on Philippine
currency bank deposits and 20% final 20% final 25% final
deposit substitutes
Interest income on long-term
deposits pre-terminated
before
the fifth year
Holding period
- 4 years to less than 5 years 5% final 5% final ---
- 3 years to less than 4 years 12% final 12% final ---
- less than 3 years 20% final 20% final ---
Interest on foreign currency
bank deposits 7.5% final Exempt Exempt

Prizes exceeding P10,000 &


winning (except Sweepstakes 20% final 20% final 25% final
and Lotto Winnings)
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.

Resident Non-resident Non-resident


Citizen or Aliens Engaged Aliens Not
Type of Income Engaged in Trade
Alien in Trade or
Individuals Business or Business

Gains from sale of real


property classified as capital 6% final 6% final 6% final
asset
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NTRC Tax Research Journal Volume XXIII.2 March – April 2011

Informer’s reward
10% final --- ---

Other fixed or determinable


--- --- 25% final
gains, profit and income
Income derived from
contracts from Service
Contractors engaged in 8% final 8% final ---
petroleum operations
Disposition of real property
classified as capital asset to the 6% final or 5% 6% final 6% final
government or any of its - 32%
political subdivisions
Gross income by nonresident
cinematographic film owners, --- 25% final ---
lessors or distributors
Professional fees, talent fees of
the following individuals:

a. lawyers; certified public 15% creditable --- ---


accountants; doctors of if the gross
medicine; architects; civil, income for the
current year
electrical, chemical,
exceeds
mechanical, structural, P720,000; and
industrial, mining, sanitary, 10% if
metallurgical and geodetic otherwise
engineers; marine
surveyors; 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

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

Resident Non-resident Non-resident


Citizen or Aliens Engaged Aliens Not
Type of Income Engaged in Trade
Alien in Trade or
Individuals Business or Business
Professional Regulations
Commission, Supreme
Court

b. actors and actresses; 20% creditable


singers; lyricists; if the gross
composers; emcees; income for the
professional athletes; current year --- ---
directors and producers; exceeds
and other recipients of P720,000; and
talent fees 10% if
otherwise

Rentals of real or personal


property used in business,
poles, satellites and 5% creditable --- ---
transmission facilities, and
billboards
Income payments made to
resident individuals and
corporate cinematographic 5% creditable --- ---
film owners, lessors or
distributors
Income payments made to
general engineering, building, 2% creditable --- ---
and specialty and other
contractors
Commissions paid to certain
brokers and agents 10% creditable --- ---

Commissions of independent
and exclusive distributors,

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

medical/technical and sales 10% creditable --- ---


representatives, and marketing
agents of multi-level
marketing companies

Resident Non-resident Non-resident


Citizen or Aliens Engaged Aliens Not
Type of Income Engaged in Trade
Alien in Trade or
Individuals Business or Business

Income distributed to the


beneficiaries of estates and
trust (except such income 15% creditable --- ---
subject to FWT and tax
exempt income)
Income payments to partners 15% creditable
of General Professional if the gross
Partnerships income for the
current year --- ---
exceeds
P720,000; and
10% if
otherwise
Additional Income of
Government Personnel from
importers, shipping and airline 15% creditable --- ---
companies, or their agents

Payments made by the 1% creditable to


government to its supplier of
local/resident supplier of goods; 2%
creditable to --- ---
goods and local/resident
supplier of
supplier of services other than
services
those covered by other rates of
withholding tax (except any
single purchase of P10,000
and below)
Payments made to embalmers
for services rendered to funeral 1% creditable --- ---
companies

Payments made by pre-need

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

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

Payments made to suppliers of


agricultural products 1% creditable --- ---

Resident Non-resident Non-resident


Citizen or Aliens Engaged Aliens Not
Type of Income Engaged in Trade
Alien in Trade or
Individuals Business or Business

One-half (1/2) of the gross


amount paid by credit card
companies to any business 1% creditable --- ---
entity representing the sales of
goods/services to cardholders

Payment on purchases of
minerals, mineral products 10% creditable --- ---
and quarry resources

MERALCO Payments on:

a. MERALCO Refund arising 25% for --- ---


from Supreme Court Case customers with
GR No. 14814 active contract;
32% for
customers with
terminated
contract

b. Interest income on the 10% creditable; --- ---


refund of meter deposit and 20% if
nonresidential
customers with
monthly
electricity
consumption of
more than 200
kwh

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

Amount paid to the


seller/owner for the sale,
exchange or transfer of real
property classified as ordinary
asset:

a. Where the seller/transferor Exempt --- ---


is exempt from creditable
withholding tax

b. Where the seller/transferor


is habitually engaged in the

Resident Non-resident Non-resident


Citizen or Aliens Engaged Aliens Not
Type of Income Engaged in Trade
Alien in Trade or
Individuals Business or Business

real estate business and the


selling price of real property
is:

- P500,000 or less 1.5% creditable --- ---

- more than P500,000 but 3.0% creditable --- ---


less than P2,000,000

- more than P2,000,000 --- ---


5.0% creditable
c. Where the seller/transferor
is not habitually engaged in 6.0% creditable --- ---
the real estate business

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

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