Tax Law H. Withholding Taxes; Concept (R.A. No. 8424, as amended, sec. 76) Flashcards
H. Withholding Taxes; Concept (R.A. No. 8424, as amended, sec. 76)
Mechnsm under wc
payor w/holds tax & remit tge same to govt
- timely tax collctn
- reduces tax evasn
advance payment for the payee’s final tax liability.
Withholding Taxes in the Philippines under RA 8424
Withholding taxes, as defined by the Tax Reform Act of 1994 (RA 8424) and interpreted through Philippine jurisprudence, are a mechanism where a third-party acts as a collecting agent for the government by deducting a specific amount of tax from a payment made to another entity and remitting it directly to the Bureau of Internal Revenue (BIR).
Benefits of Withholding Taxes:
Ensures timely tax collection: By taking a portion upfront, the government receives tax revenue throughout the year, improving cash flow.
Reduces taxpayer burden: Distributing tax payments throughout the year makes it easier for taxpayers to manage their finances.
Minimizes tax evasion: Withholding taxes make it harder for individuals or businesses to avoid paying taxes altogether.
How Withholding Taxes Work:
1) The Payor Withholds the Tax: A company (payor) making a payment to another entity (payee) withholds a specific percentage of tax from the payment amount. This percentage is mandated by the BIR depending on the type of income.
2) Payee Receives Reduced Amount: The payee receives the payment amount minus the withheld tax.
3) Payor Remits Withheld Tax: The company (payor) is responsible for remitting the withheld tax to the BIR within a designated timeframe.
Example:
A company pays its employee, John, a monthly salary of ₱50,000.
Based on Philippine tax brackets, let’s assume John falls under the 20% income tax bracket.
The company, as the payor, withholds ₱10,000 (20% of ₱50,000) from John’s salary as income tax.
John receives a net salary of ₱40,000 (₱50,000 - ₱10,000 withheld tax).
The company then remits the withheld ₱10,000 to the BIR on John’s behalf.
Remember:
Withholding tax is an advance payment towards the payee’s final tax liability.
At the end of the year, John will file an income tax return and may be entitled to a tax refund or owe additional tax depending on his total income and deductions.
Understanding withholding taxes is crucial for both businesses (payors) who are responsible for withholding and remitting taxes, and individuals (payees) who receive their income with tax already deducted.
H. Withholding Taxes; Concept (R.A. No. 8424, as amended, sec. 76)
What types of income are subject to withholding tax?
* Compensation income:
- Interest income:
- Dividends:
- Rental income:
- Royalties:
Withholding Taxes in the Philippines (R.A. No. 8424, Sec. 76)
Withholding Tax is a mechanism where a payor (person or entity making the payment) withholds a certain percentage of the income before releasing it to the payee (recipient of the income). This withheld amount is then remitted directly to the Bureau of Internal Revenue (BIR) on behalf of the payee. It serves as an advance payment of income tax owed by the payee.
Here are the key points of Withholding Taxes under R.A. No. 8424 (Tax Code), Sec. 76, as amended, with examples:
- Who is required to withhold tax?
* Payors: Businesses, government agencies, and other entities making payments considered income to the payee are generally required to withhold tax.
Example:
Company A hires a freelance graphic designer (individual) to create a logo. Company A, as the payor, needs to withhold income tax from the designer’s fee before releasing the payment. - What types of income are subject to withholding tax?
* Compensation income:
Salaries, wages, fees, bonuses, and other forms of professional fees paid to individuals.
* Interest income:
Interest earned on deposits, loans, and other financial instruments.
* Dividends:
Income received by shareholders from a corporation’s profits.
* Rental income:
Income received from leasing property.
* Royalties:
Payments for the use of intellectual property like patents, copyrights, or trademarks.
Example:
Bank B pays interest on a deposit account held by a customer. Bank B, as the payor, needs to withhold tax on the interest income before crediting it to the customer’s account. - What are the withholding tax rates?
* Withholding tax rates vary depending on the type of income, the payee’s tax status (resident/non-resident), and specific circumstances outlined in the Tax Code and BIR regulations.
Example:
The withholding tax rate for salaries of resident employees is typically based on a graduated tax table, while the rate for royalties paid to a non-resident corporation might be a fixed percentage. - How are withheld taxes reported and settled with the BIR?**
* Payors are required to file BIR withholding tax returns and submit the withheld amounts within prescribed deadlines.
Court Rulings and Withholding Taxes:
Court rulings can sometimes clarify or modify the application of withholding tax provisions in specific situations. While citing specific rulings is beyond the scope of this explanation, it’s important to be aware that these can impact withholding tax practices.
Remember:
Withholding taxes are just an advance payment.
Payees are still responsible for filing their income tax returns and may need to pay additional tax or receive a refund depending on their overall tax liability.
- A foreign company, X Ltd., based in Singapore, provides online advertising services to a Philippine corporation, Y Inc. X Ltd. does not have any physical presence in the Philippines. Is Y Inc. obligated to withhold taxes on the payments made to X Ltd. for the advertising services?
A. Yes, Y Inc. must withhold income tax on the entire payment to X Ltd.
B. Yes, Y Inc. must withhold income tax on a portion of the payment based on the nature of the service.
C. No, Y Inc. is not obligated to withhold any taxes on the payment to X Ltd.
D. The answer depends on whether X Ltd. is registered with the Philippine tax authorities.
Based on the principle of tax sovereignty, the Philippines can only tax income derived from sources within its jurisdiction.
Answer: C. No, Y Inc. is not obligated to withhold any taxes on the payment to X Ltd.
Explanation:
This scenario involves a non-resident foreign corporation (X Ltd.) providing services to a resident Philippine corporation (Y Inc.). Based on the principle of tax sovereignty, the Philippines can only tax income derived from sources within its jurisdiction. Since X Ltd. has no physical presence in the Philippines, the advertising services are not considered sourced from the Philippines. Therefore, Y Inc. is not obligated to withhold any taxes on the payment under Philippine tax laws (Section 24, RA 8424).
- Maya Corporation pays dividends to its shareholders, including a non-resident foreign individual residing in the United Kingdom. At what rate should Maya Corporation withhold tax on the dividends paid to the non-resident shareholder?
A. 25% - the regular income tax rate for individuals.
B. 0% - there is no withholding tax on dividends paid to non-residents.
C. The withholding tax rate depends on the tax treaty between the Philippines and the UK.
D. The withholding tax rate is determined by the nature of the business conducted by Maya Corporation.
Answer: C. The withholding tax rate depends on the tax treaty between the Philippines and the UK.
Explanation:
While there is a 25% withholding tax on dividends paid to non-resident aliens under Philippine tax law (Section 24, RA 8424), tax treaties may supersede domestic law and provide reduced withholding tax rates or even exemptions for specific types of income, including dividends. Therefore, Maya Corporation needs to consult the relevant tax treaty between the Philippines and the UK to determine the applicable withholding tax rate on the dividends paid to the non-resident shareholder.
- Marco, a self-employed professional, receives professional fees from various clients throughout the year. He is unsure whether he is required to register as a withholding agent and withhold taxes on the fees he receives. What factors should Marco consider in making this decision?
A. The total amount of professional fees he receives from each individual client in a year.
B. The type of professional services he provides.
C. Whether his clients are individuals or corporations.
D. All of the above factors are relevant.
Answer: D. All of the above factors are relevant.
Explanation:
Under Philippine tax regulations, certain professionals who receive payments exceeding a specific threshold from individuals or corporations are required to register as withholding agents and withhold income tax at the source of income.
Threshold: The current threshold for registration as a withholding agent for professional services is ₱500,000 in gross receipts per year (Revenue Regulations No. 11-2022).
Type of services: The specific types of professional services that qualify for withholding tax are outlined in the Tax Regulations and may be subject to change.
Client type: Withholding tax can apply to payments received from both individuals and corporations, depending on the specific circumstances.
Therefore, Marco needs to consider all three factors mentioned above to determine whether he is required to register as a withholding agent and withhold taxes on the professional fees he receives.
- ABC Company is a Philippine corporation with a branch office in Vietnam. The branch office in Vietnam incurs expenses related to salaries for Vietnamese employees and rent for the office space. Can ABC Company withhold taxes on these expenses at the source in Vietnam?
A. Yes, ABC Company can withhold taxes on these expenses in Vietnam if it complies with Vietnamese tax regulations.
B. No, ABC Company cannot withhold taxes on these expenses in Vietnam, as they are incurred by a foreign branch.
C. The answer depends on whether ABC Company has a double taxation treaty with Vietnam.
D. The
Answer: B. No, ABC Company cannot withhold taxes on these expenses in Vietnam, as they are incurred by a foreign branch.
Explanation:
The withholding tax mechanism generally applies to payments made within a country’s jurisdiction. While ABC Company is a Philippine corporation, the branch office in Vietnam operates as a separate legal entity for tax purposes. Therefore, expenses incurred by the Vietnam branch, such as salaries and rent, are subject to Vietnamese tax regulations.
ABC Company cannot unilaterally withhold taxes on these expenses in Vietnam. They need to comply with the tax laws and regulations of Vietnam regarding payroll taxes and other applicable levies on the branch’s operational expenses.
- Leo, a resident taxpayer in the Philippines, receives royalties from a book published in the United States. Is Leo required to pay withholding tax on the royalties he receives?
A. Yes, Leo needs to pay withholding tax on the entire amount of royalties received.
B. No, Leo is not required to pay any withholding tax on the royalties.
C. Leo needs to pay withholding tax at a rate of 25% on the royalties.
D. The answer depends on whether the US has a withholding tax treaty with the Philippines.
Answer: B. No, Leo is not required to pay any withholding tax on the royalties.
Explanation:
While royalties are generally subject to income tax in the Philippines, there is an exemption for royalties received from foreign sources. This exemption is based on the territoriality principle of Philippine tax law, which only taxes income derived from sources within the Philippines. Royalties from a book published in the United States are not considered sourced from the Philippines. Therefore, Leo does not need to pay any withholding tax on the royalties he receives.
LIST ALL WITHHOLDING TAXES
CRIED
Here are the main categories of withholding taxes in the Philippines as of 2023:
- Withholding Tax on Compensation Income (Income Tax Withholding Tax - IWT):
Applies to salaries, wages, bonuses, allowances, fees, commissions, pensions, and other emoluments received by individuals for services rendered.
Withholding tax rates are based on a graduated tax table for resident employees and specific rates for non-resident employees or independent contractors. - Withholding Tax on Interest Income:
Applies to interest earned on deposits, loans, bonds, and other financial instruments.
Withholding tax rate is typically 20% for both resident and non-resident payees. - Withholding Tax on Dividends:
Applies to income received by shareholders from a corporation’s profits distributed as dividends.
Withholding tax rate is generally 20% for resident and non-resident shareholders, with potential exemptions or lower rates depending on tax treaties. - Withholding Tax on Rental Income:
Applies to rental income earned from leasing property (residential, commercial, etc.).
Withholding tax rate is typically 20% for both resident and non-resident lessors. - Withholding Tax on Royalties:
Applies to payments for the use of intellectual property like patents, copyrights, or trademarks.
Withholding tax rate can vary depending on the type of royalty, residency of the payee, and possible tax treaty benefits. Rates can range from 25% to non-residents without a treaty to potentially lower rates for residents or those covered by tax treaties. - Expanded Withholding Tax (EWT):
Applies to certain transactions involving specific goods, services, or payments made by government agencies and corporations.
Aims to improve tax collection efficiency by withholding tax at the source of income.
Withholding tax rates and applicable transactions vary depending on BIR regulations. - Percentage Tax on Stock Transactions:
Applies to the sale, exchange, or transfer of shares of stock listed on a Philippine Stock Exchange.
A fixed withholding tax rate of 0.6% is applied to the gross selling price of the shares.
Challenging MCQs on Withholding Taxes in the Philippines (Bar Exam Prep)
Question 1: Influencer Marketing and Withholding Taxes
A popular social media influencer recently partnered with a local clothing brand to promote their new clothing line. The influencer received a significant payment for creating and posting promotional content. Does the clothing brand need to withhold tax on the influencer’s payment?
A. No, withholding tax does not apply to payments for services rendered through social media.
B. Yes, the clothing brand needs to withhold income tax on the influencer’s payment.
C. Withholding tax depends on whether the influencer is registered as a business.
D. The influencer needs to declare the income and pay the corresponding tax.
Answer: B. Yes, the clothing brand needs to withhold income tax on the influencer’s payment.
Legal Reasoning:
Section 76 of the Tax Code (R.A. No. 8424, as amended) requires withholding tax on compensation income. The influencer’s payment for creating promotional content can be considered a form of professional fee, falling under the category of compensation income.
- Option A is incorrect. Withholding tax can apply to income from services rendered through various channels, including social media.
- Option C is partially correct. While registration can influence tax filing, it doesn’t eliminate withholding tax obligations for the payor.
- Option D is true, but the clothing brand also has a responsibility to withhold tax at source.
Question 2: Esports, Streaming Platforms, and Withholding Taxes
A professional Filipino esports athlete competes in online tournaments broadcasted on a popular international streaming platform. The platform pays the athlete prize money for winning tournaments and a portion of advertising revenue generated during their streams. Does the streaming platform need to withhold tax on these payments?
A. Withholding tax only applies to prize money; ad revenue doesn’t require withholding.
B. The platform doesn’t need to withhold tax as the athlete likely pays tax in another country.
C. Withholding tax applies to both prize money and ad revenue, depending on the athlete’s residency.
D. The athlete needs to consult a tax professional to determine withholding tax obligations.
*
*Answer:** C. Withholding tax applies to both prize money and ad revenue, depending on the athlete’s residency.
Legal Reasoning:
- Prize money can be considered income for winning a competition, potentially subject to withholding tax.
- Ad revenue generated during the athlete’s streams might be seen as a form of royalty for using the platform, also potentially subject to withholding tax.
The key factor is the athlete’s residency:
- If the athlete is a resident of the Philippines, the platform might need to withhold tax on both prize money and ad revenue.
- If the athlete is a non-resident, withholding tax might still apply, but the rate could be different based on tax treaty provisions between the Philippines and the athlete’s home country.
- Option A is incorrect. Both types of income can be subject to withholding tax.
- Option B is partially correct. Residency determines withholding tax obligations, not the athlete’s tax payments in another country.
- Option D is true for the athlete, but the platform also has withholding tax responsibilities based on the athlete’s residency status.
Rise of the Gig Economy
The Philippines has seen a significant rise in freelance and gig economy workers in recent years. Many Filipinos utilize online platforms to offer various services, from graphic design and writing to coding and virtual assistance.
Question 1: Withholding Tax and Online Platforms
A popular online platform connects businesses with freelance graphic designers. When a business hires a designer through the platform, the platform processes the payment and deducts a service fee before sending the remaining amount to the designer. Is the platform required to withhold income tax on the designer’s payment?
A. No, the platform is not required to withhold tax as it’s simply facilitating the transaction.
B. Yes, the platform needs to withhold income tax on the designer’s entire payment.
C. Withholding tax depends on whether the designer is registered as a business.
D. The designer needs to declare the income and pay the corresponding tax.
Answer: C. Withholding Tax depends on whether the designer is registered as a business.
Legal Reasoning:
Section 76 of the Tax Code requires withholding tax on compensation income. However, how the platform treats the designer for withholding purposes depends on their registration status:
Freelancer (Not Registered as a Business): The platform likely acts as the payor and might need to withhold income tax on the designer’s entire payment (after deducting its service fee).
Registered Business: The designer becomes responsible for withholding taxes themselves, and the platform wouldn’t typically withhold tax unless BIR regulations specify otherwise for specific platforms or transactions.
Question 2: Withholding Tax and Mixed Income
A freelance writer uses an online platform to find clients. Sometimes, the writer receives a fixed fee per project, while other clients pay an hourly rate. Do the withholding tax rules differ depending on the payment method (fixed fee vs. hourly)?
A. Yes, withholding tax applies only to fixed fees, not hourly payments.
B. No, the withholding tax rules remain the same regardless of the payment method.
C. The platform needs to consult a tax professional for each type of payment.
D. The writer needs to declare all income and determine the appropriate tax treatment.
Answer: B. No, the withholding tax rules remain the same regardless of the payment method.
Legal Reasoning:
The nature of the income (compensation for services rendered) determines withholding tax obligations, not the specific payment method (fixed fee vs. hourly). Both types of payments can be considered compensation income subject to withholding tax if the writer is not registered as a business.
Question 3: Withholding Tax and Foreign Platforms
Many online platforms connecting freelancers and clients operate internationally. If a Filipino freelance graphic designer works for a client through a US-based platform, is the US platform required to withhold Philippine income tax on the designer’s payment?
A. Yes, the US platform needs to withhold Philippine income tax regardless of its location.
B. No, the US platform is not obligated to withhold Philippine income tax.
C. Withholding tax depends on whether the platform has a Philippine branch.
D. The designer needs to be aware of potential tax implications in both countries.
Answer: B. No, the US platform is not obligated to withhold Philippine income tax.
Legal Reasoning:
Withholding tax obligations typically apply to the payor’s location. In this scenario, the US platform is likely not considered a resident payor in the Philippines. However, the designer is still responsible for declaring the income in the Philippines and paying the corresponding tax.
Option D highlights the designer’s tax responsibility, but the withholding obligation doesn’t necessarily fall on the foreign platform.
