1 TAXATION 2 – Atty.
Justice Aurelio-Yap
March 1, 2019
TYPES OF WITHHOLDING TAX
1. Withholding tax on compensation
(WTC) – applies to all employed
individuals whether citizens or aliens
deriving income from compensation for
services rendered in the Philippines.
If your income exceeds 250, 000 annually, then
you are subject to withholding tax. If not
exceeding 250, 000 then your income is not
subject to WTC, you are exempted.
2. Expanded withholding tax (EWT) - a
kind of withholding tax which is
prescribed only for certain payors and is
creditable against the income tax due of
the payee for the taxable quarter year.
Before, withholding tax refers to compensation
only. But now there is this EWT which increases
the coverage of WT including other income
payments, i.e. Rental income.
The Secretary of Finance may, upon the
recommendation of the Commissioner, require
the withholding of tax on the items of income
payable to natural or juridical persons residing in
the Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than
one percent (1%) but not more than thirty-two
percent (32%), which shall be credited against
the income tax liability of the taxpayer for the
taxable year.
3. Final withholding tax
Example: You are a private supplier who is a
VAT registered taxpayer. Now you enter into a
contract with the government, the government is
required to withhold a final withholding tax upon
the VAT of 5%.
RECALL: The rate of VAT is 12%
Out of the 12%, the government will withhold
5%, which is a final withholding tax.
4. Withholding Tax on Government
Money Payments – withheld by
government offices and
instrumentalities, including government-
owned or controlled corporations and
local government units, before making
any payments to private individuals,
corporations, partnerships and/or
associations
i. Percentage Taxes – taxes withheld by
National Government Agencies (NGAs) and
instrumentalities, including government-
owned and controlled corporations (GOCCs)
and local government units (LGUs), before
making any payments to non-VAT-registered
taxpayers/suppliers/payees
ii. Value Added Taxes (VAT) – taxes withheld by
National Government Agencies (NGAs) and
instrumentalities, including government-
owned and controlled corporations (GOCCs)
and local government units (LGUs), before
making any payments to VAT-registered
taxpayers/suppliers/payees on account of
their purchases of goods and services.
Difference between the WTC and EWT
from the final withholding tax
WTC and EWT are creditable withholding tax
(CWT) not final, while final withholding tax
(FWT) is final.
Creditable withholding tax is a WT which can be
used to credit whatever tax you paid.
Example: In your annual income tax return,
pwede nimo icredit didto ang imong nabayad na
na tax.
Withholding tax is a medium of collecting taxes,
it is not a tax in itself.
If the withholding tax has already been withheld
from you, you can use that amount withheld to
be credited from your total income tax liability.
But your final withholding tax cannot be
credited. In the example above, the 5% withheld
by the government from the 12% VAT is a final
withholding tax, it cannot be credited. So the
taxpayer will declare only 7% VAT, since the 5%
has already been finally withheld by the
government. The taxpayer does not need to
declare the 5%.
Under the FWT system, the amount of income
tax withheld by the withholding agent is
constituted as a full and final payment.
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2 TAXATION 2 – Atty. Justice Aurelio-Yap
If CWT, it can be used to credit from your tax
liability. But if you say FWT, it cannot be used
against your tax liability, and it shall be the final
tax that you paid. And since the FWT cannot be
credited, you are not anymore required to
declare that since that is already final.
EXPANDED WITHHOLDING TAX UNDER
THE TRAIN LAW
Expanded Withholding Tax (EWT) is a kind of tax
that is taken in advance by the buyer
(withholding agent) from the seller’s income, on
behalf of the government.
If you’re a withholding agent, you’re required to
collect withholding tax on behalf of the
government, in order to avoid unnecessary
penalties.
The tax withheld is used as a deduction to the
Income tax of the seller.
Example 1: The buyer bought goods from the
seller. Upon payment for those goods, the buyer
will automatically deduct withholding tax. The
buyer now becomes the withholding agent. He
will pay the tax in behalf of the seller.
Example 2: You are a lessee, and you pay rents
for 10, 000/month. The withholding tax on rent
is 5%. The payment you make to your lessor
should have been deducted the WT upon
payment. So instead of paying the whole 10, 000
to the lessor, you pay him 9, 500 and you
withhold the 500 (5% of 10, 000).
But upon payment, you should give your lessor
BIR form 2307 as an evidence that you withheld
P500.
Q: What is the use of the BIR form 2307?
A: Such form shall be used by the lessor once he
declares his annual income tax. Upon his
declaration of his annual income tax, he will
include the fact that he received 10, 000 from
his property leased. Then his income tax liability
shall be computed. From that income tax
liability, he will deduct the 500 withheld by his
lessee.
Withholding tax is like an advance payment.
Kuhaan na ka daan sa imong income para sure
payment gyud sa tax.
CONSEQUENCES IF THE WITHHOLDING
AGENT FAILS TO WITHHOLD TAXES
If the withholding agent fails to withhold
expanded withholding tax, he/she will need to
pay penalties amounting to:
1. 25%-50% surcharge based on tax
unpaid;
2. 12% annual interest based on tax
unpaid;
3. Compromise Penalty P1, 000 – 25,000
every time you fail to withhold
If the government will know that you have
income payments to suppliers, sellers, lessors or
professionals and you did not withhold tax, you
are liable for interest and penalties.
The bases for those penalties are those
withholding taxes which you supposedly
withheld.
As mentioned, not all taxpayers are required to
withhold taxes.
There are only a few certain taxpayers who are
required to withhold taxes, those who are
included in the top 20, 000 taxpayers. Once you
are included in the top taxpayers, you will be
given a notification by the BIR that you are now
required to withhold taxes.
WHO ARE REQUIRED TO FILE AND PAY
EXPANDED WITHHOLDING TAX?
Not everyone is a withholding agent. You will be
a Withholding Agent only if your payment is
included in the list of Income Payments subject
to Expanded Withholding Tax.
I have mentioned earlier that only the top
taxpayers are required to withhold.
However, there is also a list of Income Payments
subject to Expanded Withholding Tax which is
required to be withheld. These are the standard
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3 TAXATION 2 – Atty. Justice Aurelio-Yap

income payments required to be withheld by seller/transferor is habitually

everyone, not only by the top taxpayers. engaged in the real estate
business:
With a selling price of five hundred 1.5%
thousand pesos (P500,000.00) or
INCOME PAYMENTS SUBJECT TO less
EXPANDED WITHHOLDING TAX [TRAIN With a selling price of more than five 3.0%
hundred thousand pesos
LAW, RR No. 11-2018]
(P500,000.00) but not more than
1. PROFESSIONAL FEES, TALENT FEES, two million pesos (P2,000,000.00)
With selling price of more than two 5.0%
ETC. FOR SERVICES RENDERED
million pesos (P2,000,000.00)
3. Where the seller/transferor is 6.0%
not habitually engaged in the
Income Payments subject to Tax
real estate business
Expanded Withholding Tax Rate
G) Gross Additional income payments to 15%
A) Professional fees, talent fees, etc. for -
government personnel from
service rendered
importers, shipping and airline
1. Individual Payee - companies, or their agents
Gross Income for the current year 5% H) On one-half (1/2) of the gross 1%
did not exceed P3m amounts paid by any credit card
Gross income is more than P3m 10% company in the Philippines
2. Non-individual Payee - I) Income payments made by any of
Gross income for the current year 10% the top withholding agents
didn’t exceed P720k 1. Supplier of goods 1%
Gross income is more than P720k 15% 2. Supplier of services 2%
B) Gross Rentals or Lease of: J) Income payments, except any single
1. Real Properties 5% purchase which is P10,000 and
2. Personal Properties 5% below, which are made by a
3. Poles, Satellites, and 5% government office
Transmission Facilities 1. Supplier of goods 1%
4. Billboards 5% 2. Supplier of services 2%
5. Cinematographic film rentals and 5% K) On the gross processing/tolling fees 5%
other payments paid for the conversion of molasses
C) Gross payments to certain 2% to its by-products and raw sugar to
Contractors refined sugar
1. General Engineering Contractors 2% L) Gross payments made by pre-need 1%
2. General Building Contractors 2% companies to funeral parlors for
3. Specialty Contractors 2% funeral services rendered
4. Other Contractors 2% M) On the gross payments made to 1%
D) Income Distribution to the 15% embalmers for embalming services
beneficiaries of estates and trust rendered to funeral companies
E) Income Payments to partners of - N) Income payments made to suppliers 1%
General Professional Partnerships of agricultural products
1. If the gross income exceeds 15% O) Income payments on purchases of 5%
P720K minerals, mineral products and
2. If the gross income does note 10% quarry resources
exceeds P720k P) MERALCO Payments
F) Gross selling price or total amount of - 1. Refund given by MERALCO to 25%
consideration or its equivalent paid customers with active contract
to the 2. Refund given by MERALCO to 32%
seller/owner for the sale, exchange, customers with terminated
or transfer of real property classified contract
as Q) Interest income on the refund paid
ordinary asset either through direct payment or
1. Where the seller/transferor is Exempt application against customers’
exempt from the creditable billings by other electric Distribution
withholding tax in accordance Utilities (DUs)
with Sec. 2.57.5 of these 1. Resident Customers 10%
regulations 2. Non-resident Customers 20%
2. Upon the following values of real - R) Income payments made by political 5%
property, where the parties and candidates of local and

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4 TAXATION 2 – Atty. Justice Aurelio-Yap
national elections on all their
purchase of goods and services
related to campaign expenditures
S) Interest income derived from any 20%
other debt instruments not within the
coverage of ‘deposit substitutes’ and
Revenue Regulations 14-2012
T) Income payments to Real Estate 1%
Investment Trust (REIT)
U) Income payments on sugar 1%
Q: In the withholding tax for compensation, who
is the withholding agent?
A: Employer
That is also creditable. If you are a mixed
income earner, you are required to file an annual
income tax return. But if you are a purely
compensation earner, you are not required to
file an annual income tax return. Because the
BIR Form 2316 prepared by the Er, that will
constitute your income tax return.
[BAR Q] Substituted filing is when the
employer’s annual return may be considered as
the “substitute” ITR of employee inasmuch as
the information provided in his income tax return
would exactly be the same information contained
in the employer’s annual return.
So your BIR Form 2316 will be the substitute for
your ITR.
If you are a mixed income earner, you are not
allowed to avail of the substituted filing. You
have a BIR Form 2316 at the end of the year,
and at the same time you are required to file an
ITR.
Since as a mixed income earner, all your income
will be collated, the tax withheld from your
compensation by your employer is creditable.
You attach the Form 2316 in your ITR, and have
it deducted from your ITR. And you only pay for
the remaining.
Withholding tax is only a method to ensure the
collection of taxes. The burden to collect is given
to the withholding agent who will collect in
behalf of the government.
Withholding tax is not a tax, but manner of
collecting.
ACCOUNTING PERIOD AND METHODS OF
ACCOUNTING
Section 43. General Rule. - The taxable income shall
be computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the
case may be) in accordance with the method of
accounting regularly employed in keeping the books
of such taxpayer, but if no such method of accounting
has been so employed, or if the method employed
does not clearly reflect the income, the computation
shall be made in accordance with such method as in
the opinion of the Commissioner clearly reflects the
income. If the taxpayer's annual accounting period is
other than a fiscal year, as defined in Section 22(Q),
or if the taxpayer has no annual accounting period, or
does not keep books, or if the taxpayer is an
individual, the taxable income shall be computed on
the basis of the calendar year.
Fiscal accounting period is the taxable period
adopted by corporations using the “fiscal year”
which is a period of twelve (12) months ending
on the last day of any month other than
December.
Calendar accounting period is the taxable
period adopted by individuals or corporations
using the “calendar year,” which is a period of
12 months starting from January 1 and ending
on December 31.
INSTANCES WHEN THE TAXABLE INCOME
shall be computed on the basis of the
CALENDAR YEAR:
1. If the taxpayer's annual accounting
period is other than a fiscal year, as
defined in Section 22(Q), or
2. If the taxpayer has no annual
accounting period, or
3. If the taxpayer does not keep books, or
4. If the taxpayer is an individual.
In no instance shall individual taxpayers be
authorized to establish a fiscal year as basis for
filing their returns and computing their income.
If the problem says that an individual started his
operations on February, it may appear that he
uses fiscal year since he did not start on
January. BUT since the law says that an
individual shall not use fiscal year, he should use
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5 TAXATION 2 – Atty. Justice Aurelio-Yap
calendar year. So his tax shall be computed for
the entire taxable year of February to December.
Section 44. Period in which Items of Gross
Income Included. - The amount of all items of
gross income shall be included in the gross income for
the taxable year in which received by the taxpayer,
unless, under methods of accounting permitted under
Section 43, any such amounts are to be properly
accounted for as of a different period. In the case of
the death of a taxpayer, there shall be included in
computing taxable income for the taxable period in
which falls the date of his death, amounts accrued up
to the date of his death if not otherwise properly
includible in respect of such period or a prior period.
Section 45. Period for which Deductions and
Credits Taken. - The deductions provided for in this
Title shall be taken for the taxable year in which 'paid
or accrued' or 'paid or incurred', dependent upon the
method of accounting the basis of which the net
income is computed, unless in order to clearly reflect
the income, the deductions should be taken as of a
different period. In the case of the death of a
taxpayer, there shall be allowed as deductions for the
taxable period in which falls the date of his death,
amounts accrued up to the date of his death if not
otherwise properly allowable in respect of such period
or a prior period.
Section 46. Change of Accounting Period. If a
taxpayer, other than an individual, changes his
accounting period from fiscal year to calendar year,
from calendar year to fiscal year, or from one fiscal
year to another, the net income shall, with the
approval of the Commissioner, be computed on the
basis of such new accounting period, subject to the
provisions of Section 47.
METHODS OF ACCOUNTING
(as previously explained)
Different accounting methods under the
Tax Code
1. CASH BASIS
In CASH METHOD, income is recognized only
upon actual or constructive receipt of cash
payments or property but no deductions are
allowed from the cash income unless actually
disbursed through an actual or constructive
payment in cash or property.
It depends on cash inflow or cash
outflow. You only recognize them as
expense upon actual payment.
2. ACCRUAL BASIS
In ACCRUAL METHOD, income is recognized in
the period it is earned, regardless of whether it
has been received or not. In the same manner,
expenses are accounted for in the period they
are incurred and not in the period they are paid
Say you bought goods, even if you did
not actually pay for them because they
were loaned; you still have to record
them as expense.
Example: I am leasing a building. I wasn’t able
to pay rentals for three months. Under accrual
method, the rental for three months is already
considered as expense even if they were not yet
paid. Because the transaction is recorded at the
time it was incurred.
When you say cash basis however, since I
wasn’t actually able to pay for the rentals for
three months, I will not record it as expense.
We will not delve into the details of these
concepts. You just have to understand that
depending on the method which the taxpayer
adopts, whether cash or accrual basis, you will
know how to compute your income tax at the
end of the taxable year; which income or
expenses to include or exclude.
Section 51. Individual Return. -
(A) Requirements. -
(1) Except as provided in paragraph (2) of this
Subsection, the following individuals are required
to file an income tax return:
(a) Every Filipino citizen residing in the
Philippines;
(b) Every Filipino citizen residing outside the
Philippines, on his income from sources within
the Philippines;
(c) Every alien residing in the Philippines, on
income derived from sources within the
Philippines; and
(d) Every nonresident alien engaged in trade or
business or in the exercise of profession in the
Philippines.
(2) The following individuals shall not be required
to file an income tax return;
(a) An individual whose taxable income does
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6 TAXATION 2 – Atty. Justice Aurelio-Yap
not exceed Two hundred fifty thousand pesos
(P250,000) under Section 24(A)(2)(a):
Provided, That a citizen of the Philippines and
any alien individual engaged in business or
practice of profession within the Philippines
shall file an income tax return, regardless of
the amount of gross income;
(b) An individual with respect to pure
compensation income, as defined in Section 32
(A)(1), derived from sources within the
Philippines, the income tax on which has been
correctly withheld under the provisions of
Section 79 of this Code: Provided, That an
individual deriving compensation concurrently
from two or more employers at any time
during the taxable year shall file an income tax
return: Provided, further, That an individual
whose compensation income derived from
sources within the Philippines exceeds Sixty
thousand pesos (P60,000) shall also file an
income tax return;
(c) An individual whose sole income has been
subjected to final withholding tax pursuant to
Section 57(A) of this Code; and
(d) An individual who is exempt from income
tax pursuant to the provisions of this Code and
other laws, general or special.
(NIRC, Sec. 51 as amended)
PERSONS LIABLE TO FILE ITR
a. Individual Taxpayers
GR: The following individuals are required
to file an income tax return:
1. Every Filipino citizen residing in the
Philippines;
2. Every Filipino citizen residing outside the
Philippines, on his income from sources
within the Philippines;
3. Every alien residing in the Philippines,
on income derived from sources within
the Philippines; and
4. Every nonresident alien engaged in
trade or business or in the exercise of
profession in the Philippines.
The following are also required to filed
ITR:
1. A citizen of the Philippines and any alien
individual engaged in business or
practice of profession within the
Philippines, regardless of the amount of
gross income;
2. An individual deriving compensation
concurrently from two or more
employers at any time during the
taxable year; and
3. An individual whose pure compensation
income derived from sources within the
Philippines exceeds Sixty thousand
pesos (P60, 000).
RECALL: If you are a non-resident citizen not
engaged in trade or business in the Philippines,
you are not required to file an ITR, BECAUSE
you pay 25% as FINAL TAX. So since the tax is
already final, you are not required to declare an
ITR.
That is the concept of “final tax.” Unlike in
creditable, wherein you declare all your income,
and deduct those withheld from you or credited.
If “final”, you are not required to declare and
you have nothing to credit.
Example: Taxes on passive income are also final
taxes. So the income from your bank deposits
need not be declared because they are already
subject to final tax.
This is also the reason why NRANETB is not
required to file an ITR, because he is subject to
final income tax.
Exceptions: The following individuals shall
NOT be required to file an income tax
return:
1. An individual whose taxable income does
not exceed Two hundred fifty thousand
pesos (P250,000) under Section
24(A)(2)(a): Provided, That a citizen of
the Philippines and any alien individual
engaged in business or practice of
profession within the Philippines shall file
an income tax return, regardless of the
amount of gross income
2. Individual taxpayer receiving purely
compensation income, regardless of
amount, from only one employer in
the Philippines for the calendar year, the
income tax of which has been withheld
correctly by said employer
(Substituted Filing);
Basis of Substituted Filing:
Sec. 51-A. Substituted Filing of Income
Tax Returns by Employees Receiving
Purely Compensation Income. —
Individual taxpayers receiving purely
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7 TAXATION 2 – Atty. Justice Aurelio-Yap
compensation income, regardless of amount,
from only one employer in the Philippines for
the calendar year, the income tax of which
has been withheld correctly by the said
employer (tax due equals tax withheld) shall
not be required to file an annual income tax
return. The certificate of withholding filed by
the respective employers duly stamped
‘received- by the BIR, shall be tantamount to
the substituted filing of income tax returns
by said employees. (NIRC, Sec. 51-A as
amended)
3. An individual whose sole income has
been subjected to final withholding tax;
Example: Passive Income and final tax imposed
on nonresident alien engaged in trade or
business.
4. A minimum wage earner or an individual
who is exempt from income tax (NIRC,
Sec. 51).
(B) Where to File. - Except in cases where the
Commissioner otherwise permits, the return shall be
filed with an authorized agent bank, Revenue District
Officer, Collection Agent or duly authorized Treasurer
of the city or municipality in which such person has
his legal residence or principal place of business in the
Philippines, or if there be no legal residence or place
of business in the Philippines, with the Office of the
Commissioner.
(C) When to File. -
(1) The return of any individual specified above
shall be filed on or before the fifteenth (15th) day
of April of each year covering income for the
preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of
stock not traded thru a local stock exchange as
prescribed under Section 24(c) shall file a
return within thirty (30) days after each
transaction and a final consolidated return on
or before April 15 of each year covering all
stock transactions of the preceding taxable
year; and
(b) From the sale or disposition of real
property under Section 24(D) shall file a return
within thirty (30) days following each sale or
other disposition.
“(30) days after each transaction”
The date of transaction is the date of
notarization.
(D) Husband and Wife. - Married individuals,
whether citizens, resident or nonresident aliens, who
do not derive income purely from compensation, shall
file a return for the taxable year 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 Bureau for purposes of
verification for the taxable year.
(E) Return of Parent to Include Income of
Children. - 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.
(F) Persons Under Disability. - If the taxpayer is
unable to make his own return, the return may be
made by his duly authorized agent or representative
or by the guardian or other person charged with the
care of his person or property, the principal and his
representative or guardian assuming the responsibility
of making the return and incurring penalties provided
for erroneous, false or fraudulent returns.
(G) Signature Presumed Correct. - The fact that
an individual's name is signed to a filed return shall be
prima facie evidence for all purposes that the return
was actually signed by him.
56.06
b. Corporate Taxpayers
General Professional Partnership (GPP)
Every GPP shall file, in duplicate, a return of its
income, except items excluded from gross
income, setting forth the items of gross income
and the deductions allowed, and the names,
TIN, addresses and shares of each of the
partners (NIRC, Sec. 55).
March 25, 2019
Any obligation after this death cannot be
counted as liabilities
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8 TAXATION 2 – Atty. Justice Aurelio-Yap
The liability was contracted in good faith for full
consideration in money or money’s worth.
So such claim must be proved.
Must be a debt valid in law and enforceable in
courts.
The indebtedness must not be condoned and the
action of the decedent must not have
prescribed.
Requisites for the deductibility:
1. The value of the claims against part of
the gross estate
2. And it must be shown that they are
insolvent
3. And the value of the claim must have
been added in the gross estate
Unpaid mortgages and indebtedness
1. Where the value should be included in
the value of the gross estat
2. The value of the property mortgage
must be included in the gross estate.
3. Verified that such debt was contracted in
good faith by the decedent during his
lifetime.
4. Substantiated by proff that such debt
exists
5. Should have been included as part of
the gross estate
Requisites for the
1. Said taxes must have accrued as of the
time of death
2. Remain unpaid at the time of death
Estate taxes are no
Income received after death or
Taxes on the income of such property
Property taxes not accrued before his death
Property previously taxed.
Vanishing deduction
Pg 703 Revenue Regulation No. 12-2018
1. Property involved must have been
transferred by a prior decedent to a
present decent through donation
2. Presentpresent decedent must have
3. Property can be identified from the one
received by the donor to the present
decedent
a. Through technical description
4. The property must have formed part of
the gross estate of the decedent
5. Donors tax on the gift or the inheritance
must have been paid
6. Said property must be situated in the
Philippines and now forms part of the
gross estate of the decedent
7. Amount of the deduction is the full
amount and the amount decutible id
diminished years upon
8. VD must not ave been claimed by the
previous estate involving the same
property
9.
The earlier the death of the
Transfers for public use
Disposition is in the last will and testament
In favour of the government
Exclusively for public purpose
And value of the property is included in gross
estate
Losses
1. Losses must be incurred during the
settlement of thee estate
2. Arose from fires or other casualties
3. Not compensated for by insurance
4. Not have been claimed for
5. Incurred not later than
The mentioned deductions are call ordinary
deductions.
Special Deductions
1. Family home
Place where family actually resides
The family home is deemed family home.
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Amounts received by heirs under RA 4967

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