Withholding Taxes

WITHHOLDING TAXES

Tax credits refers to amounts allowed as deductions from the tax due. Withholding taxes just like foreign income tax paid or accrued are tax credits. Thus, withholding taxes on income are being deducted from the income tax due and not from gross income.

WITHHOLDING OF TAX AT SOURCE

1. Final Withholding Tax- Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rest primarily on the payor as a withholding agent.

The liability for payment of the tax rest primarily on the payor as a withholding agent. Thus in case of his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income.

The finality of the withholding tax is limited only to the payee’s income tax liability on the particular income. It does not extend to the payee’s other tax liability on income, such as when the said income is further subject to a percentage tax. For example, if a bank receives income subject to final withholding tax, the same shall be subject to a percentage tax.

2. Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return to report the income and or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable in nature.

INCOME PAYMENTS SUBJECT TO FINAL WITHHOLDING TAX AND CORRESPONDING RATES.

1. Income Payment to a citizen or resident alien individual.

a. Interest from any peso bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, prizes (except prizes amounting to P10,000.00 or less which shall be subject to the normal income tax for individuals), and other winnings (except PCSO winnings and lotto winnings) derived from sources within the Philippines – 20%

b. Royalties on books, as well as other literary works and musical compositions- 10-%

c. Interest income received by a resident individual taxpayer from a depository bank under the Foreign Currency Deposit System- 7.5%

d. Interest income from long term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments predetermined by the holder before the 5TH year at the following rates
Holding Period                                  Rate
4 years to less than 5 years                5%
3 years to less than 4 years                12%
Less than 3 years                              20%

e. On capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales based on the gross selling price or fair market value, whichever is higher- 6%.

x x x

PERSONS REQUIRED TO DEDUCT AND WITHHOLD CREDITABLE TAX ON INCOME PAYMENTS
a. In general, any juridical person, whether or not engaged in trade or business;
b. An individual, with respect to payments made in connection with his trade or business; however,, insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents;
c. All government offices, including government-owned or controlled corporations, as well as provincial, city and municipal governments.

TIME OF WITHHOLDING

The obligation of the payor to deduct and withhold the tax arises at the time an income is paid or payable, whichever comes first. The term “payable” refers to the date the obligation became due, demandable or legally enforceable.

EXEMPTION FROM WITHHOLDING

The withholding of creditable withholding tax prescribed shall not apply to income payments made to the following:
a. National Government and its instrumentalities, including provincial, city or municipal governments; 
b. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following:
      1. sales of real property by a corporation which is registered with and certified by the Housing and Land Use Regulatory Board (HLURB) or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed P180,000 in Metro Manila or other highly urbanized areas and 150,000 in other areas or such adjusted amount of selling price for socialized housing….x x x.
     

      2. corporations registered with the Board of Investments x x x 

      3. corporations which are exempt from the income tax under the NIRC, such as GSIS, SSS, PCSO, PHIC, PCSO and PAGCOR.