Withholding Tax On Wages: Ruther N. Martinez Tax Reporting and Operations Group (TROG)

Withholding Tax on Wages
Ruther N. Martinez
Tax Reporting and Operations Group (TROG)
Withholding Tax on Wages
(WTW)
07 June 2008 Page 2

I. Underlying Laws and Regulations
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Underlying Laws & Regulations – Withholding Tax on Wages
• National Internal Revenue Code [NIRC] (Title II, Chapter XIII, Sections
78-83 in relation to Sections 23, 24 and 25 of the Code on taxation of
individuals)
• Revenue Regulations (RR) No. 2-98 and amendments (RR Nos. 8-2000,
10-2000, 6-2001, 12-2001, 3-2002, and 19-2002)
• Section 33 of the National Internal Revenue Code [NIRC]
• Revenue Regulations (RR) No. 3-98 and amendments (RR Nos. 8-2000
and 10-2000)
• Republic Act 9504 dated June 17, 2008 (An Act Amending Sections 22,
24, 34, 35, 51, and 79 of RA NO. 8424, as amended, otherwise known as
NIRC of 1997)
• Revenue Regulations (RR) No. 10-2008 (Implementing Pertinent

Provisions of RA 9504) effective July 6, 2008.
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II. General Principles
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Taxation of Individuals – General Rules
Classification Taxable Income Basic Personal Additional Tax
of Alien Exemption (PE) Personal Rates
Individual Exemption
Resident Income from Allowed Allowed 5%-
Citizen sources within and 32%
outside the
Philippines
Non-resident Income from Allowed Allowed 5%-
Citizen sources within the 32%
Philippines
Resident Alien Income from Allowed Allowed 5%-
sources within the 32%
Philippines
07 June 2008 Page 6

Taxation of Individuals – General Rules
Classification Taxable Income Basic Personal Additional Tax
of Alien Exemption (PE) Personal Rates
Individual Exemption
Non-resident Income from Lower amount No specific 5%-
Alien sources within the between PE provision but 32%
ENGAGED in Philippines allowed to may be
trade or Filipinos in the argued to be
business foreign country applicable.
where he resides Requires BIR
vs. PE in the ruling if will
Philippines. claim for
protection.
Non-resident Income from Not allowed Not allowed 25%
Alien NOT sources within the
ENGAGED in Philippines
trade or
business
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Classification of Individuals
 A Filipino resident citizen is taxable on all income
derived from ALL sources (within and without the Phils.).
 A nonresident citizen is taxable only on income
derived from sources WITHIN the Phils.
 A Filipino citizen working and deriving income from
abroad as an Overseas Contract Worker is taxable
only on income from sources WITHIN the Phils.
 A resident alien or non-resident alien is taxable only
on income from sources WITHIN the Phils.
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Definition of a Nonresident Citizen
A nonresident citizen is a Filipino citizen –
• who establishes to the satisfaction of the BIR Commissioner the fact of
his physical presence abroad with a definite intention to reside therein
• who leaves the Phils. during the taxable year to reside abroad (as
immigrant or for employment on a permanent basis)
• who works and derives income from abroad and whose employment
requires him to be present abroad most of the time during the taxable
year
• who has been previously considered as a nonresident and arrives in
the Phils. at any time during the taxable year to reside here
permanently (only with respect to his income from sources abroad
until the date of his arrival in the country)
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Definition of a Resident & Nonresident Alien
 A resident alien is an individual whose residence is in

the Philippines and who is not a Filipino citizen.
 A nonresident alien means an individual whose

residence and citizenship is not in the Philippines.
07 June 2008 Page 10

Definition of a Resident & Nonresident Alien
2 types of nonresident aliens

• Engaged in Trade or Business in the Philippines
• Not engaged in Trade or Business in the Philippines

Resident vs. Nonresident Alien
• Nonresident alien individual – an individual (a) whose residence is not
within the Philippines; and (b) who is not a citizen of the Philippines.
• An alien actually present in the Philippines who is not a mere transient
or sojourner is a resident of the Philippines for purposes of the income
tax.
• Whether he is a transient or not is determined by his intentions with
regard to the length and nature of his stay. A mere floating intention
indefinite as to time, to return to another country is not sufficient to
constitute him a transient.
• If he lives in the Philippines and has no definite intention as to his stay,
he is a resident.

• One who comes to the Philippines for a definite purpose which, in its
nature, may be promptly accomplished is a transient.
• But if his purpose is of such a nature that an extended stay may be
necessary for its accomplishment, and to that end the alien makes his
home temporarily in the Philippines, he becomes a resident, though it
may be his intention at all times to return to his domicile abroad when
the purpose of which he came has been consummated or abandoned.
(Section 5 of RR No. 2)

BIR Ruling No. 052-81 dated March 11, 1981
Held:
► A Norwegian assigned in the Philippines for approximately two (2)
years as resident project manager and consultant on projects of
Norconsult A.S. with the National Electrification Administration is
considered a non-resident alien engaged in trade or business in this
country.
► Same ruling in BIR Ruling Nos. 50-81 and 51-81.

CTA Case No. 2952 dated August 30, 1982 (William Seminoff vs. CIR)
Facts:
► A Canadian arrived in the Philippines on February 5, 1974 as a
Procurement Consultant in the Marcopper Mining Corporation on a
pre-arranged employment basis for a minimum period of three (3)
years stay but extendible every year upon applicant's request which
of late was extended to March 14, 1982.
► For the year 1974, petitioner was already treated by the BIR as a
resident for income tax purposes.
Issue:
► Whether the Canadian is a resident or a nonresident alien in 1975.

Held:
► Petitioner had a firm and continuing purpose to reside in the
Philippines for such time required by the exigency of the service as
an expatriate of the Marcopper Mining Corporation. In point of fact,
petitioner's tenure for an initial minimum period of three (3) years
which commenced in 1974 had been rolled over many a time up to
March 14, 1982.

Held:
► His stay could but connote something different from and more than a
mere transient or sojourner in the Philippines. And we do not regard it
necessary that petitioner should have intended to reside
permanently. It is enough that he made his temporary home in the
Philippines though it may be his intention at all times to return to his
domicile abroad when the purpose for which he came has been
consummated.
► Hence, petitioner was considered a resident alien in 1975.

Engaged vs. Not Engaged in Trade or Business
► In general, a non-resident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than 180
days during any calendar year shall be deemed a non-resident alien
doing business in the Philippines pursuant to Section 25 (A)(1) of the
Tax Code.
► An alien whose aggregate stay in the Philippines does not exceed 180
days shall be deemed as not doing business therein.

Intended Stay in the Philippines Classification for Tax Purposes
Up to 180 days Non-resident alien not engaged in

trade or business (NRA-NETB)
More than 180 days up to 2 Non-resident alien engaged in trade

years or business (NRA-ETB)
Greater than 2 years Resident alien

BIR Ruling No. DA-056-05 dated February 16, 2005
Issue:
► Whether the aggregate period of more than 180 days provided under
Section 25(A)(1) of the Tax Code of 1997 is required in order that an
alien individual may be considered as engaged in trade or business
in the Philippines, should be applied on a yearly basis.

Held:
► A nonresident alien individual who shall come to the Philippines and
stay therein for an aggregate period of more than 180 days during
ANY calendar year shall be deemed a NRA doing business in the
Philippines.


Held:
► This Office holds that the phrase "any calendar year" in the aforesaid
Section of the Tax Code should be interpreted to mean that when an
expatriate stays in the Philippines for more than 180 days in any
calendar year, he would already be taxed at the graduated rates of
5% to 32% not only during the year that he exceeds the 180-day
period, but also during the other years of assignment, even if such
stay did not exceed 180 days.

Sources Within vs. Sources Without (Services)
► Section 42 of the Tax Code also provides that with respect to services,
compensation for services performed in the Philippines will be
considered as income from sources within the Philippines.
► Section 155 of the Income Tax Regulations also states that if a
specific amount is paid for labor or personal services performed in the
Philippines, such amount shall be included in the gross income.

Sources Within vs. Sources Without (Services)
► If no accurate allocation or segregation of compensation for personal

labor or personal services performed within the Philippines can be
made, or when such labor or service is performed partly within and
without the Philippines, the amount to be included in gross income
shall be determined by an apportionment of the time basis, i.e., there
shall be included in the gross income an amount which bears the
same relation to the total compensation as the number of days
performance of the services in the Philippines bears to the total
number of days of performance of labor or services for which the
payment is made.

Illustration
Case 1
Facts:
BMI sent a Bermudan survey team to render consultancy services in
the Philippines. The duration of their stay in the Philippines are as
follows:
Consultant Y1 Y2 Total Number of Days

C1 173 days 207 days 380 days
C3 162 days - 162 days

Illustration
Issue:
How will the consultants be classified for income tax purposes in Y2?
Answer:
Consultant Y2 Classification
C1 207 days NRA - Engaged in Trade or Business
C3 - NRA - Not Engaged in Trade or Business
C6 176 days NRA - Not Engaged in Trade or Business

Illustration
Legal Basis:
► BIR Ruling DA-056-05 states that if the expatriate stays in the
Philippines for more than 180 days in any calendar year, he would
already be taxed at the graduated rate of 5% - 32%.

Who is an Employee?
► an individual performing services under an employer-employee

relationship.

Who is an Employee? – (Labor Code)
► Rank & File Employees

All employees who are holding neither managerial nor supervisory
positions.
► Managerial Employees
Those who are vested with powers or prerogatives to lay down and
execute management policies and/or to hire, transfer, suspend, lay-
off, recall, discharge, assign or discipline employees.
► Supervisory Employees
Those who, in the interest of the employer, effectively recommend
such managerial actions if the exercise of such authority is not merely
routinary or clerical in nature but require the use of independent
judgment.

Who is an Employer?
► Any person for whom an individual performs or performed any

service, of whatever nature, under an employer-employee
relationship.
► Any person paying compensation on behalf of a non-resident alien
individual, foreign partnership, or foreign corporation, who is not
engaged in trade or business within the Philippines.

Who is an Employer?
BIR Ruling No. 128-99 dated August 18, 1999
Facts:
• Faculty members of De La Salle University (DLSU) submit research
proposals and bid for funding from international external agencies.
• The funding agency will award the money to the faculty members
through DLSU for expediency of payments, as embodied in a
Memorandum of Agreement (MOA).
• The grant is kept and maintained in a research fund held in trust for the
funding agency. A Research Director has authority over the
disbursements of the fund.
• Personnel working for the project are not employees of DLSU. Their
tenure is co-terminus with the project.

Who is an Employer?
BIR Ruling No. 128-99 dated August 18, 1999 – cont’d
Issue:
Is the University required to withhold tax on the payments of
honorarium to the project staff considering that the University does
not own the money (funds held only in trust for the funding agency)
and is not the employer of the these personnel?

Who is an Employer?
BIR Ruling No. 128-99 dated August 18, 1999 – cont’d
Held:
► The income earned by the project staff are compensation income
wherein the University has the responsibility of withholding the tax as
an employer.
► Pursuant to Section 2.78.4(B) of RR 2-98, the term “employer” is also
defined as any person paying compensation on behalf of a non-
resident alien individual, foreign partnership, or foreign corporation,
who is not engaged in trade or business within the Philippines.

Employer-Employee Relationship
BIR Ruling No. 128-99 dated August 18, 1999
Issue:
Are payments received by coaches and ROTC Commandant, who do not
report every day, and who do not enjoy the full benefits of a bona fide
employee of DLSU subject to tax?
Held:
• Payments to the Coaches and ROTC Commandant shall form part of
their gross income and shall be subject to WTW.
• The fact that the Coaches and ROTC Commandant do not enjoy the
benefits of a bona-fide employee does not at all affect DLSU being
the withholding agent of the BIR because it is in fact the income
payor and is fully responsible for the services performed by the
coaches and ROTC commandant on its behalf.

BIR Ruling No. 208-99 dated December 28, 1999

► Expatriates who are directors and who at the same time receive
fixed salaries as officers of the company are considered employees
holding managerial / supervisory positions.
► Expatriates who are directors and receive remuneration determined
by BOD based on the retained earnings of the Company are
considered employees.
► Where the Director - Expatriate is being paid on a retainer basis,
NO employer-employee relationship exists.

BIR Ruling DA-382-00 dated November 7, 2000
Facts:
• As part of a car sales plan designed to enhance visibility of Ford
products and develop customer headset, Ford Motor Company
Philippines (FMCP) and its authorized dealers, agree to grant
discounts, to FMCP employees and their relatives.
• Authorized dealers, who are separate entities and unrelated to
FMCP, shall have discretion to provide a discount of 10% - 15% on
the suggested retail price.
Issue:
Whether the discount on Ford vehicles to be sold to FMCP employees
and their relatives by an authorized Ford dealer shall constitute taxable
compensation.

BIR Ruling DA-382-00 dated November 7, 2000 – cont’d
Held:
► Since there is no employer-employee relationship between the Ford
Dealers and FMCP employees and their relatives, the discount
granted by authorized Ford dealers to them relative to their
purchase of Ford vehicles shall NOT form part of their
compensation income nor be subject to the fringe benefit tax.
► The existence of an employer-employee relationship is a condition
sine qua non before the benefits received by a person from another
be considered as part of the former’s compensation income.

Illustration
Case 1
Facts:
Mr. Smith, a US citizen, was assigned by his employer Company U
to its subsidiary Company P.
 Company U – US Corporation based in the US
 Company P – Domestic Corporation
The term of Mr. Smith’s assignment in the Philippines is 3 years. Mr.

Smith did not execute any employment agreement with Company P.
His employment contract is only with Company U. Company U
remits money to Company P for the salary of Mr. Smith. Company P
in turn pays Mr. Smith his salary. Company P also pays for the
housing of Mr. Smith in the Philippines.

Illustration
Question:
Who is the employer for Philippine tax purposes?
Suggested Answer:
• Company P will be considered the employer for WTW and
FBT purposes.
Legal Basis:
Definition of employer includes any person paying
compensation on behalf of a foreign corporation, who is not
engaged in trade or business within the Philippines.

Illustration
Case 2
Facts:
Same facts as Case 1 except that:
 Company U remits the salary of Mr. Smith to his US bank
account directly
 Company U charges Company P for the salary of Mr.
Smith
Question:
Who is the employer of Mr. Smith for Philippine Tax
purposes?

Illustration
Suggested Answer:
• Arguably, Company P will still have to withhold WTW

because Company P will claim the salary expense.
Legal Basis:
Section 5 of RR No. 30-03 provides that all income payments
which are required to be subjected to withholding tax shall be
subject to the corresponding withholding tax rate to be
withheld by the person having control over the payment and
who, at the same time, claims the expenses.

Illustration
Case 3
Facts:
Same facts as Case 1 except that:
 Company U remits the salary of Mr. Smith to his US bank
account directly
 Company U shoulders the salary of Mr. Smith and does not
charge Company P
Question:
Will Company P be required to withhold WTW?

Illustration
Suggested Answer:
• Arguably, NO.
Legal Basis:
Section 5 of RR No. 30-03 provides that all income payments
which are required to be subjected to withholding tax shall be
subject to the corresponding withholding tax rate to be
withheld by the person having control over the payment and
who, at the same time, claims the expenses.

Nature of WTW
• It is a method of collecting the income tax on wages/compensation at
source upon receipt of the income.
• If the taxpayer is an individual, the net income shall be computed on
the basis of the calendar year. Thus, all forms of taxable
compensation are income in the year received, and not in the year
earned (BIR Ruling No. 346-88).
• It applies to all employed individuals whether citizens or aliens,
deriving income from compensation for services rendered in the
Philippines.
• The employer is constituted as the withholding agent of the tax due on
the taxable compensation of the employee.

Requirements for Withholding

• Every employer must withhold from compensation paid, an
amount computed in accordance with existing regulations.
• Compensation income of the following shall not be subject to
withholding tax:
• individuals that do not exceed the statutory minimum wage or
5,000.00 per month (60,000.00 a year), whichever is higher,
and
• employees of the government of the Philippines, or any of its
political subdivisions, agencies or instrumentalities, with salary
grades 1 to 3.
[Section 2.79(A) of RR No. 2-98, as amended by Sec. 2 of RR 1-06

dated December 29, 2005]

• The foregoing individuals whose compensation income is not
subject to withholding tax shall remain liable for income taxes and
shall continue to file their annual income tax returns and pay the
income taxes due thereon, if any, not later than April 15 of the year
immediately following the taxable year.
[Section 2.79(A) of RR No. 2-98, as amended by Sec. 2 of RR 1-06

dated December 29, 2005]

RR No. 10-2008 effective July 6, 2008
Section 3
(A) Requirement of Withholding
 Every employer must withhold from compensation paid an amount
computed in accordance with these Regulations.
 Provided, that no withholding of tax shall be required on the SMW,
including holiday pay, overtime pay, night shift differential and hazard pay
of MWEs in the private/public sectors as defined in these Regulations.
 Provided, further, that an employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits
in excess of the allowable statutory amount of P30,000, taxable
allowances and other taxable income other than the SMW, holiday pay,
overtime pay, hazard pay and night shift differential pay shall not enjoy
the privilege of being a MWE and, therefore, his/her entire earnings are
not exempt from income tax and, consequently, shall be subject to
withholding tax.

RR No. 10-2008 effective July 6, 2008
Section 2.83.5. Registration as withholding agent. –

 Any person who makes payment or expects to make
payment of compensation in the amount exceeding the
statutory minimum wage, to any single employee shall
register by filing in duplicate, with the Revenue District Office
(RDO) of the city or municipality where his legal residence or
place of business is located, an Application for Registration
as a withholding agent using the form prescribed by the
Bureau not later than ten (10) days after becoming an
employer.

Time of Withholding

Time of Withholding
► Generally, the withholding of WTW shall be made every payroll
period.
► Payroll Period means the period of services for which a payment of
compensation is ordinarily made to an employee by his employer. It
is immaterial that the compensation is not always paid at regular
intervals.

Time of Withholding
• Under Section 2.78 of RR No. 2-98, the withholding of tax on
compensation income is a method of collecting the income tax at
source upon receipt of the income.
• This finds support in BIR Ruling No. 555-88 dated November 23,
1988, where the BIR held that the obligation to withhold the tax
arises only at the time of actual payment of bonus.

Time of Withholding
• However, upon effectivity of RR No. 12-2001 further amending RR
No. 6-2001, the obligation of the payor to deduct and withhold the
tax arises at the time the income payment is paid or payable, or the
income payment is accrued or recorded as an expense or asset
whichever is applicable in the payor’s books, whichever comes
first. The term “payable” refers to the date the obligation becomes
due, demandable or legally enforceable.
• Provided, however, where income is not yet paid or payable but
the same has been recorded as an expense or asset whichever is
applicable in the payor’s books, the obligation to withhold shall
arise in the last month of the return period in which the same is
claimed as an expense or amortized for tax purposes.

Time of Withholding
• In this regard, there is still a risk that Section 2.78 may be deemed
modified (as to proper time of withholding) and that the BIR may
require withholding of tax on compensation expense accrued and
claimed as deduction for tax purposes, even if the same is not yet
paid or payable.

Time of Withholding
ING Bank N.V. Manila Branch vs. CIR
(CTA Case No. 6187 dated August 9, 2004)
Facts:
For the year 1996, ING accrued their employees’ bonuses but these
were distributed in 1997. The same happened for the 1997 bonuses.
The bonuses were claimed as an expense, however, in the years they
were accrued (i.e., 1996 and 1997).
Issue:
When ING should have expensed the bonuses and withheld the tax

Time of Withholding
(CTA Case No. 6187 dated August 9, 2004) – cont’d
Held:
In petitioner’s case, bonuses were determined during the year but

were distributed in the succeeding year. No withholding of income tax
was effected but the bonuses were claimed as an expense for the
year.
Under Section 29(j) of the National Internal Revenue Code of 1993,
an expense cannot be claimed as a deduction from gross income
unless the tax due to be withheld therefrom has been remitted to the
Bureau of Internal Revenue. This is an explicit provision of Section
29(j) of the National Internal Revenue Code of 1993, to quote:

Time of Withholding

(CTA Case No. 6187 dated August 9, 2004) – cont’d
Held:
Additional requirement for deductibility of certain payments. — Any
amount paid or payable which is otherwise deductible from, or
taken into account in computing gross income or for which
depreciation or amortization may be allowed under this section,
shall be allowed as a deduction only if it is shown that the tax
required to be deducted and withheld therefrom has been paid to
the Bureau of Internal Revenue in accordance with this section,
Sections 51 and 74 of this Code. (Emphasis supplied).
Since the bonuses were not subjected to withholding tax during the
year they were claimed as an expense, the same should be disallowed
pursuant to the above-quoted law.”

Constructive Receipt
 The withholding tax on compensation shall apply to
compensation actually or constructively paid.
 Compensation is constructively paid within the meaning of
these Regulations when it is credited to the account of or set
apart for an employee so that it may be drawn upon by him
at any time although not then actually reduced to
possession.
 To constitute payment in such a case, the compensation
must be credited or set apart for the employee without any
substantial limitation or restriction as to time or manner of
payment or condition upon which payment is to be made,
and must be made available to him so that it may be drawn
upon at any time, and its payment brought with his control
and disposition.

 A book entry, if made, should indicate an absolute transfer
from one account to another.
 If the income is not credited, but it is set apart, such income
must be unqualifiedly subject to the demand of the taxpayer.
 Where a corporation contingently credits its employees with
a bonus stock, which is not available to such employees until
some future date, the mere crediting on the books of the
corporation does not constitute payment.
 (Section 2.83.6 of RR 2-98)

BIR Ruling No. 009-04 dated September 13, 2004
Facts:
► ANZ Bank was organized under the laws of Australia and its
shares are listed and traded in the Australian Stock exchange
► In order to increase employee motivation and to create a stronger
link between increasing shareholder value and its employee
reward system ANZ Bank has established the ANZ Employee
Share Acquisition Plan (ESAP) to provide employees with the
opportunity to participate in the growth of the Bank.
► Under the ESAP, all employees, including executive officers, with
at least one year of service with the Bank will be offered Australian
registered shares in ANZ Bank free of charge. There are two
schemes under the plan: (1) the general scheme and (2) the
incentive scheme

Facts:
Common features of the general and incentive schemes
► There is a trading lock preventing employees from disposing the shares;
until the earlier of (a) a period of three years from the date the shares are
awarded, or (b) termination of employment with ANZ in the case of the
general scheme and a period of three years from the date the shares are
awarded in the case of the incentive scheme.
► During the trading lock, a Trustee will hold the shares on behalf of the
employees.
► Dividends accruing to the employees during the trading lock are required to
be reinvested in ANZ shares under the compulsory participation
requirement of the Dividend Reinvestment Plan (DRP). As such,
employees cannot receive cash dividends; the cash dividends will be
received in the form of additional ANZ shares. The additional shares will be
released from restriction at the same time the participant's plan shares are
released.


Issues:
► Whether the shares granted under the ANZ ESAP Plan which are
subject to disposal restriction and forfeiture clause (the latter
applies to ESAP shares under incentive scheme) at the time of
grant shall not be taxed until the disposal restriction is lifted.
► Whether dividends from ANZ ESAP shares which are mandatorily
reinvested through the ANZ Dividend Reinvestment Plan (DRP),
with the same disposal restrictions and/or forfeiture clauses as the
original shares, shall not also be taxed until the disposal restriction
is lifted.


Held:
► Shares granted pursuant to an employer-employee relationship under
the ANZ ESAP Plan which are subject to disposal restriction and
forfeiture clause at the time of grant shall not be taxed until the
disposal restriction is lifted, that is, for a period of three years from the
date the shares are awarded or the termination of employment with
ANZ in case of the general scheme and a period of three years from
the date the shares are awarded in the case of the incentive scheme
whichever is earlier, as the same will only be taxable when actually or
constructively received.


Held:
► Dividends from ANZ ESAP shares which are mandatorily reinvested
through the ANZ Dividend Reinvestment Plan, with the same disposal
restrictions and/or forfeiture clauses as the original shares, shall not
also be taxed until the disposal restriction is lifted.

Basic Computation of Taxable Income
Compensation Income XXX

Tax-exempt Income:
Non-taxable benefits
(XXX)
P30,000 tax-exempt threshold
(XXX)
GSIS/SSS/Pag-Ibig/Philhealth Contributions (XXX)
Insurance Premiums
(XXX)
Taxable Income before Personal/Additional Exemptions XXX
Personal/Additional Exemptions
(XXX)
Taxable Income XXX

Compensation Income

What is Compensation Income?
► All remuneration for services, regardless of how these are called,
performed by an employee for his employer under an employer-
employee relationship, unless specifically excluded by the Tax
Code.

Examples of Compensation Income
• Salaries and wages
• Honoraria, emoluments
• Allowances (e.g. transportation, representation, entertainment)
• Commissions
• Fees (include Director’s Fees, if the director is, at the same time, an
employee of the payor-corporation)
• Taxable bonuses
• Fringe benefits except those subject to Fringe Benefits Tax (FBT)
under Section 33 of the Tax Code
• Taxable pensions and retirement pay (e.g., retirement benefits earned
without meeting the conditions for exemption thereof – eg. retirement
at less than 50 years of age)

Compensation Income
BIR Ruling DA-123-03 dated April 21, 2003

► Both the basic salary and overload of a faculty member shall be
subject to withholding tax on compensation
► Pursuant to Section 2.79(B) of RR No. 2-98, taxable compensation
income is categorized as follows, (1) regular taxable compensation
income and, (2) supplementary compensation income
► Regular taxable compensation income – salary, fixed allowances for
representation, transportation and allowances paid per payroll period
► Supplementary compensation income – payments in addition to
regular compensation such as commission, overtime pay, taxable
retirement pay, taxable bonus and other taxable benefits, with or
without regard to a payroll period.

Compensation Income
► ECOLA mandated under Wage Order No. NCR-09 to be received by
employees form part of their compensation income subject to the
withholding tax.

Compensation Income
BIR Ruling DA-088-04 dated March 1, 2004

► Technical Incentive Allowance (TIA) of P1,000 a month given by the
Air Transportation Office (ATO) of Davao International Airport, which
is granted solely to ATO Air Traffic Controllers, Airways
Communicators, Air Navigation Specialists and Antenna Rigger
whose functions are highly technical in nature, is embraced within
the term compensation and therefore subject to withholding tax.

Compensation Income
1. Compensation paid in kind
• Compensation may be paid in some medium other than
money – (e.g., shares of stock, bonds, and other forms of
property)
• The FAIR MARKET VALUE (FMV) of the thing taken in
payment is the amount to be included as compensation
subject to withholding.
• If the services are rendered at a stipulated price, in the
absence of evidence to the contrary, such price will be
presumed to be the fair market value of the remuneration
received.

Compensation Income
1. Compensation paid in kind

• If the corporation transfers to its employees its own stock as
remuneration, the amount of such remuneration is the FMV
of the stock at the time the services were rendered.
• Where compensation is paid in property other than money,
the employer shall make necessary arrangements to ensure
that the amount of the tax required to be withheld is available
for payment to the Commissioner.

Compensation Income
BIR Ruling No. 074-00 dated December 22, 2000
Facts:
• Intel Phils. Mfg. Inc. (IPMI) and Intel Technology Phils. Inc. (ITMI)
provided home Personal Computers (PCs) to employees in order to
develop, improve internet, e-business and PC skills and likewise to
advance Intel products to the said employees and their families.
• The grant of said benefits is necessary to the trade or business of
IPMI and ITMI.

Compensation Income
BIR Ruling No. 074-00 dated December 22, 2000 – cont’d

Tax implications:
• If ownership and possession of the PC is transferred to employees -
100% of the acquisition cost of the computer is considered as
compensation subject to WTW for rank & file employees or fringe
benefits for managerial and supervisory employees subject to FBT
• If only the right of usufruct is transferred to the employees – 50% of
the value of the computer (depreciation) shall be subject to WTW for
rank & file employees or FBT for managerial and supervisory
employees

Compensation Income
BIR Ruling No. 03-2007 dated January 29, 2007
Facts:
• San Miguel Corporation (SMC), a corporation duly organized in the
Philippines, established an Employees Stock Purchase Plan
(ESPP) for the employees of the San Miguel Group of Companies
(SMG). SMG consists of SMC and its domestic subsidiaries.
• Under the ESPP, an employee of SMG may subscribe quarterly to a
maximum of 1,900 shares of the capital stock of SMC, payable in
five (5) years through salary deductions. The subscribed shares will
be issued from the unissued shares of SMC. Participation in the
ESPP is neither automatic nor compulsory.
• The ESPP was conceptualized to generate additional capital and to
increase profitability through motivation of the employees toward
greater productivity, loyalty, and concern for the company.

Compensation Income
Facts:
• The subscription price that will be paid by the employees is 15%
less than the quoted price in the stock exchange on the exercise
date.
• The difference between the exercise price and the quoted price is
not treated as an expense by the company as the same is just a
mere reduction of premium on subscription or paid-in-surplus.
• Even before their subscriptions are fully paid, ESPP participants
shall be paid cash/stock dividends declared by SMC on their
subscribed shares. But, in case of cancellation of subscriptions, the
cash/stock dividend shall be returned to SMC.

Compensation Income
Issue:
Whether the subscription of the employees to the SMC shares at 15%
less than the quoted price gives rise to a taxable event at the time of
exercise.
Held:
• The 15% reduction in premium on the subscribed shares under the
ESPP is not considered as compensation income in accordance with
Section 32(A) of the Tax Code.
• It is noted that SMC’s main objectives in conceptualizing the ESPP were
to generate additional capital and to motivate the employees toward
greater productivity, loyalty, and concern for the company. Moreover,
the participation in the ESPP is neither automatic nor compulsory. Thus,
the same may be characterized as an investment portfolio created for
the benefit of SMC and the participating SMG employees only.

Compensation Income
Held:
• By this characterization, said reduction in premium could not be treated as
additional compensation and is not given as a remuneration for services
under the employer-employee relationship.
• The reduction in premium is not given as remuneration for services
performed by the SMG employees under the employer-employee
relationship. Rather it is given based on a mutual contractual relationship
arising from the subscriptions by the SMG employees to the authorized
capital stock of SMC.
• In the event that the participating SMG employees sell the SMC shares, the
gain, if any, derived from the exercise of stock options granted under the
ESPP is subject to capital gains tax. The gain that they will realize is the
excess of the selling price over the subscription costs, which is less by 15%
than the price at which the SMC shares were quoted at the time of
subscription.

Compensation Income
Facts:
• Nestle Philippines’ Executives can receive shares of stocks of Nestle
SA or their cash equivalent at a future date.
• The benefit is the market price of the shares at the end of the vesting
period of 3 years.
Held:
• The applicable tax is the FBT which is payable upon the delivery of
the shares of stock or its cash equivalent.

Compensation Income
BIR Ruling DA-402-07 dated July 20, 2007
Facts:
• Senior employees of L Corp. (a domestic corporation) are entitled to a
Restricted Stock Award (RSA) under a Stock Incentive Plan (SIP).
• The RSA is to be issued by S Corp., a publicly listed US Company.
Held:
• The fair market value (FMV) of the stocks under the SIP upon
completion of the vesting period is the realized benefit actually
received by the senior employees upon delivery to them at the end of
the vesting period.
• The value of the shares of stock after the vesting period is
compensation subject to WTW.

Compensation Income
2. Living quarters or meals
General Rule: The value to the employee of the quarters &
meals given by the employer shall be added to his compensation
subject to withholding.
Exception: If living quarters/meals are furnished to an employee
for the convenience of the employer the value need NOT be
included as part of compensation income.

Compensation Income
3. Facilities and privileges of a relatively small value
Facilities and privileges (such as entertainment, medical
services, or so called “courtesy” discounts on purchases),
otherwise known as “de minimis”* benefits, furnished or
offered by an employer to his employees generally, are NOT
considered as compensation subject to withholding if such
are:
a. Of relatively small value, and
b. Offered or furnished by the employer merely as a
means of promoting the health, goodwill, contentment,
or efficiency of his employees.

Compensation Income
4. Tips and gratuities
Those paid directly to an employee by a customer of the employer
which are not accounted for by the employee to the employer are
considered as taxable income but NOT subject to withholding.
5. Pensions, retirement and separation pay
These constitute compensation subject to withholding.

Compensation Income
6. Fixed or variable transportation, representation and other
allowances
General Rule: Considered as taxable compensation subject to
WTW
Exception: NOT taxable if incurred or reasonably expected to be
incurred by employee in performance of his duties, subject to the
following conditions –
a. These are ordinary and necessary traveling and
representation or entertainment expenses, paid or incurred
by the employee in the pursuit of the employer’s trade,
business or profession; and
b. These expenses are liquidated/substantiated by receipts or
other adequate documentation.

Compensation Income
BIR Ruling No. 13-02

1 dated April 5, 2002
Facts:
• PGMC, a domestic corporation sends its employees to regularly
visit lottery franchise holders in different parts of the Philippines to
check whether the equipment they are leasing from PCSO are in
top condition.
• As a company policy, PGMC pays for the actual hotel/lodging
accommodations and transportation expenses of the employees
assigned to inspect the equipment.

Compensation Income
Facts:
• It gives a fixed amount of Outstation Allowance as support to its
employees who are sent to locations beyond Metro Manila, with the
rates differentiated as follows:
i) Full allowance — given when the employee assigned is away
from the head office for at least 16 to 24 hours.
• Vice President P770/day
• Supervisors/Managers P700/day
ii) Day allowance — given when the employee is away from the
office for more than 8 hours but less than 16 hours:
• Vice President P400/day
• Supervisors/Managers P330/day

Compensation Income
Issue:
Whether the Outstation Allowance given by PGMC to its
managerial/supervisory employees shall be considered as non-
taxable fringe benefits and therefore, not subject to the fringe
benefit tax or withholding tax on compensation.

Compensation Income
Held:
• The Outstation Allowance given by PGMC to its managerial and
supervisory employees is intended to cover meals and trip-related
expenses in connection with their off-site visit to franchise holders
including, but not limited to baggage services, laundry expenses,
parking fees, toll fees, telephone fees and other incidental
expenses.
• The Outstation Allowance, therefore, is clearly required by the
nature of or necessary to the trade or business of PGMC.

Compensation Income
Held:
• By the same token, the Outstation Allowance which may be incurred or
expected to be incurred by the aforesaid employee in the performance
of his duties cannot be considered as part of compensation subject to
withholding tax even if the employee fails to account/liquidate the same
considering that said expense is pre-computed on a daily basis and is
paid to an employee while he is on an assignment or duty.
• Accordingly, this Office opines and so holds that the grant of the
Outstation Allowance by PGMC to its managerial and supervisory
employees are not subject to the fringe benefits tax prescribed in
Section 33(A) of the said Code.
• Consequently, the Outstation Allowance, not being part of the
compensation income of the employee, is not subject to income tax and
consequently to withholding tax.

Compensation Income
Facts:
► eTelecare Global Solutions, Inc.(EGSI), domestic company, operates a call
center business, providing customer relationship management services
(CRM) through various media. The business is conducted on a 24-hour, 7-
days-a-week basis with peak hours from 9pm to 9am which coincide with the
day hours across the time zones in the United States where all of EGSI’s
clients are located.
► To enable it to efficiently run its operations and consequently meet and
exceed clients’ expectations, EGSI requires its employees to strictly adhere to
their work schedules. Specifically, the employees are made to work at
designated hours which are considered night shift (i.e., between 10pm to
6am) and are also required to work overtime. The above work schedule is not
only observed by operations personnel but even most personnel support
functions. Even those who are primarily assigned day schedules
intermittently report for night shift to meet the requirements of their positions.

Compensation Income
BIR Ruling DA-233-07 dated April 17, 2007 – cont’d
Issues:
► Whether the transportation, meal and mobile allowances being given
across all staff/officer levels are not subject to income tax either as
compensation or fringe benefits; and
► Whether there is no substantiation requirement for the said
transportation and meal allowances.

Compensation Income
Held:
Transportation allowance - Maximum transportation allowance of P3,000
per month to rank and file and supervisory personnel in operations
positions/P1,500 per month to rank and file and supervisory
personnel in support positions
► Since the transportation allowance being given to EGSI’s employees

is an ordinary and necessary expense paid or incurred by the
employees in the pursuit of the business of the Company, the said
allowance is not considered compensation, hence, not subject to
withholding tax. (BIR Ruling DA-350-04 dated June 25, 2004)

Compensation Income
Held:
► The said allowance is not subject to the requirements of

substantiation and to withholding since it is pre-computed on a daily
basis and is paid to the employees while on an assignment or duty
pursuant to Revenue Regulations No. 2-98, as amended.
► Moreover, transportation allowance is not subject to the fringe
benefits tax since it is required by the nature of the business of EGSI
and under the convenience of employer rule pursuant to Section 33
(C) of the Tax Code of 1997 as implemented by RR No. 3-98.

Compensation Income
Held:
Meal allowance - P100 per day to supervisory personnel in both
operations and support positions
► Meal allowance being given across all EGSI staff/officer levels not
exceeding 25% of their respective daily minimum wage may be
considered de minimis meal benefit pursuant to RR No. 8-2000 and
10-2000 and therefore, tax exempt.
► The excess of the meal allowance given over the de minimis ceiling
shall still be exempt provided that it, together with the total amount of
other benefits, shall not exceed P30,000 when added to the 13th
month pay.

Compensation Income
Held:
► The said allowance is not subject to fringe benefits tax since it is

specifically exempted from the application thereof pursuant to Section
33(C)(4), (5) and (6) of RR 3-98 implementing Section 33 (C) of the
Tax Code. (BIR Ruling No. 61-99 dated May 5, 1999).
► Neither is it subject to substantiation requirement.

Compensation Income
Held:
Mobile allowance - P1,200 per month to managers and directors in both
operations and support positions
► Since the mobile phone allowance is being granted to directors,

managers and supervisors because the nature of their jobs requires
them to be on call 24 hours a day which is necessary to the business
of EGSI and redounds to the convenience and benefit of the
Company, said fringe benefit shall not be included as part of
compensation income of the concerned employees subject to
withholding tax prescribed under Section 79 of the Tax Code of 1997
neither will it be subject to the fringe benefits tax under Section 33 of
the Tax Code of 1997, as implemented by RR No. 3-98, as amended.
► Further, the mobile allowance is not subject to the requirement of
substantiation.

Compensation Income
7. Vacation and sick leave allowances
General Rule: Paid Vacation Leaves (VL) and Sick Leaves (SL)
of employees constitute compensation subject to WTW.
Exception:
• Monetized value of unutilized VL credits of ten (10) days or
less are NOT subject to income tax and to the withholding tax
requirement.
• However, monetization of SL credits even if not exceeding 10
days is NOT exempt from income tax and from WTW.

Compensation Income
8. Deductions made by employer from compensation of employee

Any amount which is required by law to be deducted by the
employer from the compensation of an employee including the
withheld tax is considered as part of the employee’s
compensation and is deemed to be paid to the employee as
compensation at the time the deduction is made.
Note: Also applies to deductions not required by law.

Illustration
Case 1
Issue:
Employee had employer deduct and directly remit his contribution to
World Wildlife Fund. Will this be considered taxable compensation?
Answer:
Yes. It would be as if the Company paid the employee from his after
tax income.
07 June 2008 Page 100

Illustration
Case 2
Issue:
Employee contributes to SSS. The share of employee is deducted
from his compensation. Will this be considered taxable compensation?
Answer:
No. Sec.2.78.1(A)(12) of RR 2-98 provides that GSIS, SSS, Medicare
and Pag-Ibig contributions, and union dues of individual employees
are exempt from withholding tax on compensation.
07 June 2008 Page 101

Exemptions from Withholding Tax on
Compensation Income
07 June 2008 Page 102

WTW-Exempt Compensation
The following income payments are EXEMPTED from the requirement of
withholding tax on compensation:
1. Remunerations received as an incident of employment
a. Retirement benefits received under R.A. 7641* (The Retirement Pay

Law) & those received by officials & employees of private firms, under a
reasonable private benefit plan
* RA 7641 – “Act Amending Article 287 of Presidential Decree No. 442, as

amended, otherwise known as the Labor Code of the Philippines, by Providing
for Retirement Pay to Qualified Private Sector Employees in the Absence of
any Retirement Plan in the Establishment”
RA 4917 – “Act Providing that Retirement Benefits of Employees of Private
Firms Shall Not be Subject to Attachment, Levy, Execution, or Any Tax
Whatsoever” (now Section 32(B)(6)(a) of the Tax Code of 1997).
07 June 2008 Page 103

1. Remunerations received as an incident of employment
A reasonable private benefit plan should meet all of the following
requirements:
• The plan must be reasonable;
• The plan must be approved by the BIR;
• The retiring official or employee must have been in the service
of the same employer for at least ten (10) years & is not less
than fifty (50) years of age at the time of retirement; and
• The retiring official or employee should not have previously
availed of the privilege under the retirement benefit plan of the
same or another employer.
07 June 2008 Page 104

Facts:
Mr. Y has been employed by Stanplas for 21 years. He was retired
by Stanplas on February 28, 2001. He received gratuity pay in 3
installments and despite his protest, the amount of P24,700 was
withheld from his retirement pay.
Issue:
Whether Mr. Y’s retirement benefits are exempt from withholding
tax.
07 June 2008 Page 105

1. The retirement benefits to be received by private sector employees
under Section 32(B)(6)(a) of the Tax Code of 1997 are exempt from
income tax provided that their employers maintain a qualified
retirement benefit plan duly approved by the BIR.
2. Section 32(B)(6)(a) of the Tax Code of 1997 provides, viz:

"(a) Retirement benefits received under R.A. 7641 and those
received by officials and employees of private firms, whether
individual or corporate, in accordance with a reasonable private
benefit plan maintained by the employer: Provided, that the retiring
official or employee has been in the service of the same employer
for at least ten (10) years and is not less than fifty (50) years of age
at the time of his retirement: . . ., shall not be included in gross
income and shall be exempt from taxation.“
07 June 2008 Page 106

3. Retirement benefits received under Republic Act (R.A.) No. 7641
shall not be included in gross income and shall be exempt from
income tax effective January 1, 1998.
4. Section 1 of R.A. No. 7641, provides that in the absence of a

retirement plan or agreement providing for retirement benefits of
employees in the establishment, an employee upon reaching the
age of 60years or more, but not beyond 65 which is declared the
compulsory retirement age, who has served at least 5 years in the
service of the employer, may retire and shall be entitled to
retirement pay equivalent to at least 1/2 month salary for every year
of service, a fraction of at least 6 months being considered as 1
whole year.
07 June 2008 Page 107

• R.A. No. 7641 will apply only in the absence of any retirement plan,
collective bargaining agreement or other applicable employment
contract in the establishment.
07 June 2008 Page 108

• In this case, employer maintains a collective bargaining agreement
providing for retirement benefits of its employees. Section 1 of
Article XIX of said agreement specifically provides:
"SECTION 1. An employee may be retired at the option of the
Company upon reaching the age of SIXTY (60) years or upon
having completed more than TWENTY (20) years of service.
However, the employee may apply for retirement upon reaching
FIFTEEN (15) years of service subject to the availability of company
funds."
• Accordingly, since Mr. Y has rendered twenty-one (21) years of
service, the retirement benefits he received pursuant to the
aforestated collective bargaining agreement are exempt from
income tax and consequently, to the withholding tax prescribed by
Section 79, Chapter XIII, Title II of the Tax Code of 1997.
07 June 2008 Page 109

• If the retirement benefit to be received by a member of a private
benefit plan established by the employer under R.A. No. 4917 and
duly approved by the BIR is equal to or less than the minimum
retirement benefit provided by R.A. No. 7641, said benefits shall be
exempt from income tax to prevent an absurd situation where the
retirement benefits will be exempt if an employer does not have
such a retirement plan or if the retirement plan is not approved by
the BIR.
07 June 2008 Page 110

• However, if the employee receives from the BIR approved plan a
retirement benefit in excess of the minimum retirement benefit
provided by R.A. No. 7641, he must satisfy the requirements or
conditions of R.A. No. 4917, which means that he must be at least
fifty (50) years old and must have served the company for at least
ten (10) years in order that his retirement benefits may be tax
exempt. This is but fair since it is clear that the retirement benefit
comes from the BIR approved voluntary plan and not from the
requirement of R.A. No. 7641.
• Finally, retirement benefits received by employees not from a BIR
approved retirement plan shall be governed by R.A. No. 7641.
07 June 2008 Page 111

b. Any amount received by an official or employee or by his heirs from

the employer due to death, sickness or other physical disability or
for any cause beyond the control of the said official or employee,
such as retrenchment, redundancy, or cessation of business
07 June 2008 Page 112

“For any cause beyond the control”
• Connotes involuntariness on the part of the official or employee.
• The separation from the service of the official or employee must
not be asked for or initiated by him.
• The separation was not of his own making.
• Such fact shall be duly established by the employer by competent
evidence which should be attached to the monthly return for the
period in which the amount paid due to the involuntary separation
was made.
07 June 2008 Page 113

• Amounts received by reason of involuntary separation remain
EXEMPT from income tax even if the official or the employee, at
the time of separation, had rendered less than ten (10) years of
service and/or is below fifty (50) years of age.
• Any payment made by an employer to an employee on account of
dismissal, constitutes compensation regardless of whether the
employer is legally bound by contract, statute, or otherwise, to
make such payment.
07 June 2008 Page 114

Issue:
Whether the amount received by the employees from Super Car Clinic
Services, Inc. due to business closure or for any cause beyond the
control of said employee is subject to withholding tax
Held:
• Separation of the employees due to the cessation of operations
connotes involuntariness, hence, any and all amounts received by
the employees as separation benefits are exempt from income tax
and consequently from the withholding tax.
• Payment of backwages, 13th month pay and other benefits, in
excess of P30,000 threshold, is subject to income tax and
consequently to withholding tax
07 June 2008 Page 115

BIR Ruling DA-328-04 dated June 17, 2004
Issue:
Whether the separation benefits to be paid to officers and employees who
will be separated from service on account of cessation or termination of its
business operations are exempt from income tax and consequently from
withholding tax
Held:
• Since the separation of the officers and employees is due to cessation
of business operations, and, therefore, beyond the control of the
affected officers and employees, any and all amounts received by
them as a result thereof, are exempt from all taxes and consequently
from the withholding tax.
07 June 2008 Page 116

BIR Ruling DA-328-04 dated June 17, 2004
Held:
• The tax exemption will include the company's payment for cash
equivalent of accumulated vacation and sick leave credits of the said
employees. (BIR Ruling No. 098-91 dated June 4, 1991, based on BIR
vs. Castañeda and CTA, G.R. 96016, October 17, 1991)
• The payment of salaries, however, is subject to income tax and
consequently to withholding tax.
07 June 2008 Page 117

BIR Ruling DA-372-04 dated July 5, 2004
Issue:
Whether separation benefits of an employee as a consequence of his
resignation due to health reasons (to take a rest) is tax exempt.
Held:
• The employee’s separation from the service of the company is of his
own making. Such being the case, the separation benefits he will
receive is subject to income tax and consequently to the withholding
tax considering that his separation is voluntary or initiated by him.
Only separation benefits paid to employees by their employer due to
their involuntary separation therefrom as contemplated under Section
32(B)(6)(b) of the Tax Code of 1997 may be exempt from income tax.
07 June 2008 Page 118

c. Social security benefits, retirement gratuities, pensions & other
similar benefits received from foreign government agencies and
other institutions private or public
d. Payments of benefits under the law of the United States
administered by the U.S. Veterans Administration
e. Payments of benefits made under the Social Security System Act
of 1954, as amended
f. Benefits received from the GSIS Act of 1937, as amended, & the
retirement gratuity received by government officials and
employees.
07 June 2008 Page 119

2. Remuneration for Casual Labor not in the course of an employer’s
trade or business
• “Casual labor” includes labor which is occasional, incidental
or regular.
• “Not in the course of the employer’s trade or business”
includes labor that does not promote or advance the trade or
business of the employer.
07 June 2008 Page 120

Regular vs. Casual Labor
► A’s business is that of operating a sawmill. He employs B, a
carpenter, at an hourly wage to repair his home. B’s work is
irregular and he spends, the greater part of two days in completing
the work. Since B’s labor is casual and is not in the course of A’s
business, the remuneration paid for such services is exempted.
► E is engaged in the business of operating a department store. He
employs additional clerks for a short period. While the services of
the clerks may be casual, they are rendered in the course of the
employer’s trade or business & therefore the remuneration paid for
such services is considered as compensation.
07 June 2008 Page 121

3. Compensation for services by a citizen or resident of
Philippines for a foreign government or an international
organization
• Remuneration paid for services performed as an employee
of a foreign government or an international organization
• Exemption includes not only remuneration paid for services
performed by ambassadors, ministers and other diplomatic
officers and employees but also remuneration paid for
services performed as consular or other officer or
employee of a foreign government or as a non-diplomatic
representative of such government.
07 June 2008 Page 122

BIR Ruling DA-050-06 dated February 15, 2006
Facts:
• GTZ (German Agency for Technical Cooperation) is an agency of
the Government of the Federal Republic of Germany.
• GTZ maintains an office in the Philippines and employs Filipino staff.
Held:
• Because GTZ is an international organization and agency of the
Government of the Federal Republic of Germany, its employees are
not subject to the withholding tax on compensation.
• However, in the interest of good governance, it is earnestly
requested from GTZ to remind its Filipino employees to declare their
income and pay the corresponding tax due thereon.
07 June 2008 Page 123

4. Damages
Actual, moral, exemplary & nominal damages received by an
employee or his heirs pursuant to a final judgment or compromise
agreement arising out of or related to an employer-employee
relationship.
5. Life Insurance
The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single
sum or otherwise; provided however, that interest payments
agreed under the policy for the amounts which are held by the
insured under such an agreement shall be INCLUDED in the
gross income.
07 June 2008 Page 124

6. Amount received by the insured as a return of premium
The amount received by the insured, as a return of premium or
premiums paid by him under life insurance, endowment, or
annuity contracts either during the term or at the maturity of the
term mentioned in the contract or upon surrender of the
contract.
7. Compensation for injuries or sickness
Amounts received through Accident or Health Insurance or
under Workmen’s Compensation Acts, as compensation for
personal injuries or sickness, plus the amount of any damages
received whether by suit or agreement on account of such
injuries or sickness.
07 June 2008 Page 125

8. Income exempt under treaty
Income of any kind to the extent required by any treaty obligation
binding upon the Government of the Philippines
9. Thirteenth (13) month pay & other benefits not exceeding
P30,000.00
Consists of:
• Mandatory one (1) month basic salary received after the
twelfth (12th)month pay; and
• Other benefits such as Christmas bonus, productivity incentive
bonus, loyalty award, gifts in cash or in kind and other benefits
of similar nature
• “De minimis” type of benefits, given in excess of the ceilings
prescribed in regulations, shall be taxable to the recipient-
employee only if such excess is beyond the P30,000.00
threshold
07 June 2008 Page 126

10. GSIS, SSS, Medicare and other contributions

GSIS, SSS, Medicare and Pag-Ibig contributions, and union
dues of individual employees
[11. Facilities and Privileges of Relatively Small Value or de

minimis benefits]*
* Deleted by RR 10-08
07 June 2008 Page 127

Deduction for Premium Payments on Health Insurance
The amount of premiums NOT to exceed P2,400 per family or

P200/mo. paid during the taxable year for health and/or hospitalization
insurance taken by the taxpayer for himself, including his family shall
be allowed as a deduction from his gross income, provided:
• That said family has a gross income of not more than P250,000
for the taxable year, and
• That in the case of married taxpayers, only the spouse claiming
the additional exemption for dependents shall be entitled to this
deduction
(Sec 34(M) of the Tax Code)
07 June 2008 Page 128

Personal and Additional Exemptions
07 June 2008 Page 129

Basic personal exemptions –

• Single individual or married individual judicially decreed as
legally separated with no qualified dependents – P20,000;
• Each legally married employee – P32,000;
• Head of a family – P25,000
07 June 2008 Page 130

Head of the family –
► an unmarried or legally separated man or woman with:
► one or both parents, or
► with one or more brothers or sisters, or
► with one or more legitimate, recognized natural or legally
adopted children
► living with and dependent upon him for their chief support,
► where such brothers or sisters or children are
► not more than twenty-one (21) years of age,
► unmarried and
► not gainfully employed, or
► where such children, brothers or sisters, regardless of age are
incapable of self-support because of mental or physical defect.
(Sec. 35 of the Tax Code)
07 June 2008 Page 131

► A married individual deriving income within the Philippines,

whose spouse is unemployed or is a non-resident citizen
deriving income from foreign sources, shall be entitled to a
personal exemption of P32,000 only.
07 June 2008 Page 132

Additional exemptions for taxpayer with qualified dependent
CHILDREN
A married individual or a head of family shall be allowed an
additional exemption of eight thousand pesos (P8,000) for each
qualified dependent child, provided that the total number of such
dependents for which additional exemptions may be claimed shall
not exceed four (4).
07 June 2008 Page 133

Dependent –
► a legitimate, illegitimate or legally adopted child
► chiefly dependent upon and living with the taxpayer
► if such dependent is not more than twenty-one (21) years of
age, unmarried and not gainfully employed or
► if such dependent, regardless of age, is incapable of self-
support because of mental or physical defect.
(Sec. 35 of the Tax Code)
07 June 2008 Page 134

Example
Mr. A, a citizen of the Philippines, married, had living with and dependent
upon him for support the following:
(a) his mother;
(b) a brother, 21 years old, single, unemployed;
(c) a legitimate son, 25 years old, single, unemployed;
(d) another legitimate son, 21 years old, married, unemployed; and
(e) an illegitimate daughter, 18 years old, single, unemployed.
How much would be his total personal and additional exemptions?
07 June 2008 Page 135

Example
Solution:
With the underlined word or words indicating why additional exemptions
cannot be claimed, the basic personal and additional exemptions of the
taxpayer follow:
Basic personal exemption (Married) P32,000
(a) Mother; P 0
(b) Brother, 21 years old, single,
unemployed; 0
(c) Legitimate son, 25 years old,
single, unemployed; 0
(d) Legitimate son, 21 years old,
married, unemployed; and 0
• Illegitimate daughter, 18 years old,
single, unemployed 8,000 8,000
Total basic and additional personal exemptions P40,000
07 June 2008 Page 136

• The additional exemptions for qualified dependent children shall

be claimed by only one of the spouses in the case of married
individuals, generally, by the husband, unless he explicitly
waives his right in favor of his wife in the application for
registration (BIR Form 1902) or in the withholding exemption
certificate (BIR Form 2305).
• Where the spouse of the employee is unemployed or is a non-
resident citizen deriving income from foreign sources, the
employed spouse within the Philippines shall be automatically
entitled to claim the additional exemptions for children.
07 June 2008 Page 137

Change of Status
Section 35(C) of the Tax Code
• If the taxpayer should marry or should have additional
dependents during the taxable year, he may claim the
corresponding exemptions in full for the year.
• If the taxpayer should die during the taxable year, his estate
may claim the personal exemptions as if he died at the close of
such year.
• If the spouse or any dependent should die or any dependent
should marry or become twenty-one (21) years old during the
year, or become gainfully employed, the taxpayer may claim
the personal exemptions as if the spouse or the dependent
died or as if such dependent married, became 21 years old or
became gainfully employed at the close of such year.
07 June 2008 Page 138

Illustration
Change of Status Exemptions Reason
A taxpayer, married, had P40,000 If a taxpayer died during
living with and dependent the year, his estate may
upon him for support at the claim the personal
beginning of the year his exemptions as if he died
spouse, a legitimate child, at the close of the year.
minor, single, unemployed, Thus:
and a brother, single, 24 Basic P 32,000
years old but crippled. The For child 8,000
taxpayer died on March 23 of Total P 40,000
the year.
07 June 2008 Page 139

Illustration
A taxpayer was married, with P40,000 A taxpayer whose
a child, 5 years old at the spouse and/or dependent
beginning of the year. The died during the year may
wife and the child died in an claim personal
accident on October 30 of exemptions as if the
the year. death took place at the
close of the year. Thus:
Basic P 32,000
For child 8,000
Total P 40,000
07 June 2008 Page 140

Illustration
A taxpayer was married and had a P48,000 A taxpayer whose spouse
child, 3 years old at the beginning of died during the year may
the year. On April 7 of the year, claim personal exemptions
another child was born. His wife as if the death occurred at
died giving birth to the second child. the close of the year. A
The second child lives. taxpayer who should have
an additional dependent
during the year may claim
the additional exemption
in full for such year. Thus:
Basic P 32,000
For children 16,000
Total P 48,000
07 June 2008 Page 141

Illustration
A taxpayer was married, with a P40,000 If a dependent became
qualified dependent child at the gainfully employed during
beginning of the year. In August of the year, the taxpayer may
the year, the child became gainfully claim the personal
employed. exemptions as if such
dependent became
gainfully employed at the
end of the year. Thus:
Basic P 32,000
For child 8,000
Total P 40,000
07 June 2008 Page 142

Example
Case 1:
Mr. F, married, without any dependent, became legally separated during
the year. His status at the end of the year will allow him a personal
exemption of P20,000. (Change from married to legally separated)
Case 2:
Mr. A, single, had a legitimate child, 25 years old, at the beginning of the
year, who was insane. Within the year, the child recovered his sanity. His
status at the end of the year would allow him a personal exemption of
P20,000. (Change from head of family to single)
Case 3:
Mr. P, single, had a parent living with and dependent upon him for support
at the beginning of the year. Within the year, the parent died. His status
at the end of the year would allow him a personal exemption of P20,000.
(Change from head of the family to single individual)
07 June 2008 Page 143

Excess / Deficiency Tax
07 June 2008 Page 144

Excess Tax - Illustration
Annual income tax due on compensation: P20,000
WTW withheld from January to December: P35,000
Balance (Excess Tax): P15,000
07 June 2008 Page 145

Excess Tax
► The excess tax (i.e., excess of the amount of cumulative tax
already deducted and withheld over the tax computed) shall be
credited or refunded to the employee not later than January 25 of
the following year.
► In case of termination of employment before December, the refund
shall be given to the employee at the payment of the last
compensation during the year.
► The employer can deduct the amount refunded from the taxes to
be remitted in the current month in which the refund was made
and in the next months thereafter until the amount refunded has
been fully repaid.
07 June 2008 Page 146

Deficiency Tax - Illustration
Annual income tax due on compensation: P35,000

WTW withheld from January to December: P20,000
Balance (Deficiency Tax): P15,000
07 June 2008 Page 147

Deficiency Tax
► Any deficiency tax (i.e., excess of the amount of tax computed over
the amount of cumulative tax already deducted and withheld or
when no tax has been withheld from the beginning of the calendar
year) shall be deducted from the last payment of compensation for
the calendar year.
► If the deficiency tax is more than the amount of last compensation to
be paid to an employee
• The employer shall be liable to pay the amount of tax which
cannot be collected from the employee.
• The obligation of the employee to the employer arising from the
payment by the latter of the amount of tax which cannot be
collected from the compensation of the employee is a matter of
settlement between the employee and employer.
07 June 2008 Page 148

Deficiency Tax – Illustration
Scenario 1
Employee’s deficiency tax: P15,000
Last payment of compensation: P20,000
Difference: P 5,000
In this case, the employee will be given a net pay of P5,000, net of the
deficiency tax.
07 June 2008 Page 149

Deficiency Tax – Illustration
Scenario 2
Employee’s deficiency tax: P15,000
Last payment of compensation: P10,000
Difference: (P 5,000)
In this case, the employer shall be liable for the deficiency tax which
was not covered by the employee’s last payment of compensation.
07 June 2008 Page 150

Tax Updates
07 June 2008 Page 151

Further Amendments to RR Nos. 2-98 and 3-98, as as Last Amended
by RR No. 10-2000, With Respect to “De Minimis Benefits”.
RR No. 5-2008 dated April 17, 2008
Pursuant to Sections 4 and 244 in relation to Section 33 of the Tax Code of 1997,
these Regulations are hereby promulgated to further amend RR Nos. 2-98 and 3-
98, as last amended by RR No. 10-2000, with respect to “De Minimis “ benefits
which are exempt from income tax on compensation as well as from fringe benefit
tax.
Section 1. Section 2.78.1 (A)(3)(c) and (d) of RR 2-98, as last amended by RR 10-
2000, is hereby further amended to read as follows:
“Sec. 2.78.1 Withholding of Income Tax on Compensation Income.-
xxx xxx xxx

The following shall be considered as “de minimis” benefits not subject to
income tax as well as withholding tax on compensation income of both managerial
and rank and file employees:
07 June 2008 Page 152

by Revenue Regulations No. 10-2000, With Respect to “De Minimis
Benefits”.
xxx xxx xxx
(c) Rice subsidy of P1,500.00 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500.00; *
(d) Uniform and Clothing allowance not exceeding P4,000.00 per annum; **
* Previously P1,000
** Previously P3,000
07 June 2008 Page 153

Benefits”.
Section 2 . Section 2.33(C) of RR 3-98, as last amended by RR 10-2000, is hereby

further amended to read as follows:
“Sec. 2.33. Special Treatment of Fringe Benefits
(C) Fringe Benefits Not Subject to Fringe Benefit Tax – In general, the
fringe benefit tax shall not be imposed on the following fringe benefits:
xxx xxx xxx
(c) Rice subsidy of P1,500.00 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500.00; *
(d) Uniform and Clothing allowance not exceeding P4,000.00 per annum; **
* Previously P1,000
** Previously P3,000
07 June 2008 Page 154

Benefits”.
Section 3. Transitory Provisions. – The benefits herein provided shall apply to

income earned starting the year 2008.
07 June 2008 Page 155

Amendments to Sections 22, 24, 34, 35, 51 and 79 of Republic Act
(RA) No. 9504
Comparison between RA No. 8424 and RA No. 9504

RA No. 8424 RA NO. 9504
Sec. 22. Definitions Sec. 22. Definitions
xxx xxx xxx xxx xxx xxx
(GG) The term statutory minimum wage

shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board, as
defined by the Bureau of Labor and
Employment Statistics (BLES) of the
Department of Labor and Employment
(DOLE).
07 June 2008 Page 156

(RA) No. 9504

RA No. 8424 RA NO. 9504
Sec. 22. Definitions (HH) The term ‘minimum wage earner’ shall
refer to a worker in the private sector paid the
statutory minimum wage, or to an employee in
xxx xxx xxx
the public sector with compensation income of
not more than the statutory minimum wage in
the non-agricultural sector where he/she is
assigned.
07 June 2008 Page 157

(RA) No. 9504

RA No. 8424 RA NO. 9504
Sec. 24. Income Tax Rates same
(A) Rates of Income Tax on Individual

Citizen and Individual Resident Alien of the
Philippines –
xxx xxx xxx
(c) On the taxable income defined in Section

31 of this Code, other than income subject
to tax under Subsections (B), (C) and (D) of
this Section, derived for each taxable year
from all sources within the Philippines by an
individual alien who is a resident of the
Philippines.
07 June 2008 Page 158

(RA) No. 9504

RA No. 8424 RA NO. 9504
2) Rates of Tax on Taxable Income of same
Individuals. -- The tax shall be computed in
accordance with and at the rates
established in the following schedule:
07 June 2008 Page 159

(RA) No. 9504 (Income Tax on Individuals)

RA No. 8424 RA No. 9504
Not over P10,000 5% same
Over P10,000 but not over P500 + 10% of the excess over same
P30,000 P10,000
Over P30,000 but not over P2,500 + 15% of the excess over same
P70,000 P30,000
Over P70,000 but not over P8,500 + 20% of the excess over same
P140,000 P70,000
Over P140,000 but not P22,500 + 25% of the excess same
over P250,000 over P140,000
Over P250,000 but not P50,000 + 30% of the excess same
over P500,000 over P250,000
Over P500,000 P125,000 + 34% of the excess P125,000 + 32% of the excess over
over P500,000 in 1998; 33% in P500,000
1999 and 32% in 2000
07 June 2008 Page 160

(RA) No. 9504

RA No. 8424 RA NO. 9504
For married individuals, the husband and For married individuals, the husband and
wife, subject to the provision of Section 51 wife, subject to the provision of Section 51
(D) hereof, shall compute separately their (D) hereof, shall compute separately their
individual income tax based on their individual income tax based on their
respective total taxable income: Provided, respective total taxable income: Provided,
That if any income cannot be definitely That if any income cannot be definitely
attributed to or identified as income attributed to or identified as income
exclusively earned or realized by either of exclusively earned or realized by either of
the spouses, the same shall be divided the spouses, the same shall be divided
equally between the spouses, the same equally between the spouses, the same
shall be divided equally between the shall be divided equally between the
spouses for the purpose of determining their spouses for the purpose of determining
respective taxable income. their respective taxable income.
07 June 2008 Page 161

(RA) No. 9504

RA No. 8424 RA NO. 9504
Provided, That minimum wage earners as
defined in Section 22 (HH) of this Code
shall be exempt from the payment of
income tax on their taxable income.
Provided, further, That the holiday pay,
overtime pay, night shift differential pay and
hazard pay received by such minimum
wage earners shall likewise be exempt
from tax.
07 June 2008 Page 162

(RA) No. 9504

RA No. 8424 RA NO. 9504
Sec. 34. Deductions from Gross Income Sec. 34. Deductions from Gross Income
(L) Optional Standard Deduction. – In lieu of (L) Optional Standard Deduction. – In lieu
the deductions allowed under the preceding of the deductions allowed under the
Subsections, an individual subject to tax preceding Subsections, an individual
under Section 24, other than a nonresident subject to tax under Section 24, other than
alien, may elect a standard deduction in an a nonresident alien, may elect a standard
amount not exceeding ten percent (10%) of deduction in an amount not exceeding forty
his gross income. Unless the taxpayer percent (40%) of his gross sales or gross
signifies in his return his intention to elect receipts, as the case may be. In the case
the optional standard deduction, he shall be of a corporation subject to tax under
considered as having availed himself of the Sections 27(A) and 28(A)(1), it may elect a
deductions standard deduction in an
07 June 2008 Page 163

(RA) No. 9504

RA No. 8424 RA NO. 9504
allowed in the preceding Subsections. Such amount not exceeding forty percent (40%)
election when made in the return shall be of its gross income as defined in Section 32
irrevocable for the taxable year for which the of this Code. Unless the taxpayer signifies
return is made: Provided, That an individual in his return his intention to elect the
who is entitled to and claimed for the optional standard deduction, he shall be
optional standard deduction shall not be considered as having availed himself of the
required to submit with his tax return such deductions allowed in the preceding
financial statements otherwise required Subsections. Such election when made in
under this Code: Provided, further, That the return shall be irrevocable for the
except when the Commissioner otherwise taxable year for which the return is made:
permits, the said individual shall keep such Provided, That an individual who is entitled
records pertaining to his gross income to and claimed for the optional standard
during the taxable year, as may be required deduction shall not be required to submit
by the rules and regulations promulgated by with his tax return such financial statements
the otherwise
07 June 2008 Page 164

(RA) No. 9504

RA No. 8424 RA NO. 9504
Secretary of Finance, upon recommendation required under this Code: Provided, further,
of the Commissioner. That except when the Commissioner
otherwise permits, the said individual shall
keep such records pertaining to his gross
sales or gross receipts, or the said
corporation shall keep such records
pertaining to his gross income as defined in
Section 32 of this Code during the taxable
year, as may be required by the rules and
regulations promulgated by the Secretary
of Finance, upon recommendation of the
Commissioner.
07 June 2008 Page 165

(RA) No. 9504

RA No. 8424 RA NO. 9504
Sec. 35. Allowance of Personal Sec. 35. Allowance of Personal
Exemption for Individual Taxpayer Exemption for Individual Taxpayer
(A) In General. – For purposes of (A) In General. – For purposes of

determining the tax provided in Section determining the tax provided in Section
24(A) of this Title, there shall be allowed a 24(A) of this Title, there shall be allowed a
basic personal exemption as follows: basic personal exemption amounting to
Fifty thousand pesos (P50,000) for each
individual taxpayer.
For single individual or married individual
judicially decreed as legally separated with
no qualified dependents – P 20,000
For head of family – P 25,000
For each married individual – P 32,000
07 June 2008 Page 166

(RA) No. 9504

RA No. 8424 RA NO. 9504
In the case of married individuals where In the case of married individuals where
only one of the spouses is deriving gross only one of the spouses is deriving gross
income, only such spouse shall be allowed income, only such spouse shall be allowed
the personal exemption. the personal exemption.
(B) Additional Exemption for Dependents. – Additional Exemption for Dependents. –

There shall be allowed an additional There shall be allowed an additional
exemption of eight thousand pesos (P8,000) exemption of twenty-five thousand pesos
for each dependent not exceeding four (4). (P25,000) for each dependent not
exceeding four (4).
The additional exemption for dependents
shall be claimed by only one of the spouses The additional exemption for dependents
in the case of married individuals. shall be claimed by only one of the spouses
in the case of married individuals.
07 June 2008 Page 167

(RA) No. 9504

RA No. 8424 RA NO. 9504
In the case of legally separated spouses, same
additional exemptions may be claimed only
by the spouse who has custody of the child
or children: Provided, That the total amount
of additional exemptions that may be
claimed by both shall not exceed the
maximum additional exemptions herein
allowed.
For purposes of this Subsection, a

‘dependent’ means a legitimate, illegitimate
or legally adopted child chiefly dependent
upon a living with the taxpayer if such
dependent is not more than twenty-one (21)
years of age, unmarried and not gainfully
employed or if such dependent, regardless
of age, is incapable of self-support because
of mental or physical defect.
07 June 2008 Page 168

(RA) No. 9504

RA No. 8424 RA NO. 9504
Sec. 51. Individual Return Sec. 51. Individual Return
(A) Requirements (A) Requirements
(1) Except as provided in paragraph (2) of (1) Except as provided in paragraph (2) of
this Subsection, the following this Subsection, the following
individuals are required to file an individuals are required to file an
income tax return: income tax return:
(2) The following individuals shall not be (2) The following individuals shall not be
required to file an income tax return: required to file an income tax return:
(a) xxx xxx xxx (a) xxx xxx xxx
07 June 2008 Page 169

(RA) No. 9504

RA No. 8424 RA NO. 9504
(b) An individual with respect to pure (b) An individual with respect to pure
compensation income, as defined in compensation income, as defined in
Section 32(A)(1), derived from sources Section 32(A)(1), derived from sources
within the Philippines, the income tax on within the Philippines, the income tax
which has been correctly withheld under on which has been correctly withheld
the provisions of Section 79 of this under the provisions of Section 79 of
Code: Provided, That an individual this Code: Provided, That an individual
deriving compensation concurrently deriving compensation concurrently
from two or more employers at any time from two or more employers at any
during the taxable year shall file an time during the taxable year shall file
income tax return; Provided, further, an income tax return;
That an individual whose pure
compensation income derived from
sources within the Philippine exceeds
sixty thousand pesos (P 60,000) shall
also file an income tax return;
07 June 2008 Page 170

(RA) No. 9504

RA No. 8424 RA NO. 9504
(c) x x x; and (c) x x x; and
(d) An individual who is exempt from (d) A minimum wage earner as defined in
income tax pursuant to the provisions Section 22 (HH) of this Code or an
of this Code and other laws, general individual who is exempt from income
or special. tax pursuant to the provisions of this
Code and other laws, general or
special.
07 June 2008 Page 171

(RA) No. 9504

RA No. 8424 RA NO. 9504
Sec. 79. Income Tax Collected at Source Sec. 79. Income Tax Collected at Source
(A) Requirements of Withholding. – (A) Requirements of Withholding. –
Every employer making payment of Except in the case of a minimum
wages shall deduct and withhold upon wage earner as defined in Section 22
such wages a tax determined in (HH) of this Code, every employer
accordance with the rules and making payment shall deduct and
regulations to be prescribed by the withhold upon such wages a tax
Secretary of Finance, upon determined in accordance with the
recommendation of the rules and regulations to be prescribed
Commissioner: Provided, however, by the Secretary of Finance, upon
That no withholding of a tax shall be recommendation of the
required where the total compensation Commissioner.
income of an individual does not
exceed the statutory minimum wage,
or five thousand pesos (P5,000.00)
per month, whichever is higher.
07 June 2008 Page 172

(RA) No. 9504
RA No. 9504 dated June 17, 2008

Effectivity Clause
• This Act shall take effect fifteen (15) days following its publication in the
Official Gazette or in at least two (2) newspapers of general circulation.
• This was published in Manila Bulletin and Malaya on June 21, 2008.
Date of Effectivity: July 6, 2008
07 June 2008 Page 173

RR No. 10-08: Implementing Rules and Regulation of RA No.
9504
Computation of Wages
► The basis of the computation of the minimum wage rates prescribed

by law shall be the normal working time of eight (8) hours a day. The
computation of wages shall be in accordance with the Collective
Bargaining Agreement (CBA), if any, or the provisions of the Labor
Code as implemented.
07 June 2008 Page 174

9504
► Hazard pay shall mean the amount paid by the employer to MWEs who
were actually assigned to danger or strife-torn areas, disease- infested
places, or in distressed or isolated stations and camps, which expose
them to great danger of contagion or peril to life. Any hazard pay paid to
MWEs which does not satisfy the above criteria is deemed subject to
income tax and consequently, to withholding tax.
► In case of hazardous employment, the employer shall attach to the

Monthly Remittance Return of Withholding Tax on Compensation (BIR
Form No. 1601C) for return periods March, June, September and
December a copy of the list submitted to the nearest DOLE
Regional/Provincial Offices – Operations Division/Unit showing the names
of MWEs who received the hazard pay, period of employment, amount of
hazard pay per month; and justification for payment of hazard pay as
certified by said DOLE/allied agency that the hazard pay is justifiable.
07 June 2008 Page 175

9504
Allowance for personal exemption of individual taxpayers
► Basic Personal Exemptions – There shall be allowed a basic

personal exemption amounting to Fifty thousand pesos (P50,000) for
each individual taxpayer.
► Additional Exemption for Dependents – There shall be allowed an

additional exemption of Twenty-five pesos (P25,000) for each
dependent not exceeding four (4).
Note: Under RA 8424, there shall be allowed a basic personal exemption of PhP 20,000 for Single, PhP 25,000 for Head of the Family and
PhP 32,000 for Married and an additional exemption of PhP 8,000 for each dependent not exceeding four (4).
07 June 2008 Page 176

9504
Right to Claim Withholding Exemptions
► An employee receiving compensation shall be entitled to

withholding exemptions as provided in the Code, as amended. In
order to receive the benefit of such exemptions, the employee
must file the Application for Registration (BIR Form No. 1902),
upon employment, or a Certificate of Update of Exemption and of
Employer’s and Employee’s Information (BIR Form No. 2305), in
case of updates on changes in his exemption. The withholding
exemption to which an employee is entitled depends upon his
status and the number of dependents qualified for additional
exemptions. Each employee shall be allowed to claim the following
amount of exemptions, with respect to compensation paid on or
after July 6, 2008.
07 June 2008 Page 177

9504
► In general, every employer making payment of compensation shall

deduct and withhold from such compensation a tax determined in
accordance with the prescribed Revised Withholding Tax Tables
which shall be used starting January 1, 2009.
► For the year 2008, however, being the initial year of implementation of
RA 9504, there shall be a transitory withholding tax table for the period
from July 6 to December 31, 2008 determined by prorating the annual
personal and additional exemptions under RA 9504 over a period of
six months. In order to receive the benefit of such exemptions, the
employee must file the Application for Registration (BIR Form No.
1902), upon employment, or a Certificate of Update of Exemption and
of Employer’s and Employee’s Information (BIR Form No. 2305), in
case of updates on changes in his exemption. The withholding
exemption to which an employee is entitled depends upon his status
and the number of dependents qualified for additional exemptions.
07 June 2008 Page 178

RR No. 10-08: Implementing Rules and Regulation of RA
No. 9504
Failure to file Application for Registration (BIR Form No. 1902) or

Certificate of Update of Exemption and of Employer’s and Employee’s
Information (BIR Form No. 2305)
► Where an employee, in violation of the regulations either fails or

refuses to file an Application for Registration (BIR Form No. 1902)
together with the required attachments, the employer shall
withhold the taxes prescribed under the Schedule for Zero
Exemption of the Revised Withholding Tax Table. In case of
failure to file the Certificate of Update of Exemption and of
Employer’s and Employee’s Information (BIR Form No. 2305)
together with the attachments, the employer shall withhold the
taxes based on the reported personal exemptions existing prior to
the change of status and without reflecting any change.
07 June 2008 Page 179

9504
Transitory Provisions
► For taxable year 2008, all employees with change in status and
number of qualified dependent children shall accomplish and file the
Certificate of Update of Exemption and of Employer’s and Employee’s
Information (BIR Form No. 2305), Application for Registration (BIR
Form No. 1902) for those with no TIN reflecting the claimed
exemption, together with the required documents/evidence of
exemption and must be submitted to their employers not later than
October 31, 2008.
► The employer, after accomplishing the employer’s information shall

transmit both the original and duplicate copies of BIR Form No. 2305
on or before November 28, 2008 to the RDO where the employee is
registered.
07 June 2008 Page 180

9504
Transitory Provisions (continued)
► Towards the end of 2008 and using the annualized withholding tax
method, withholding agents are required to undertake/conduct the final
year-end adjustments consolidating the compensation data for the entire
year of 2008 but taking into consideration the following transitory personal
and additional exemptions, which are rounded off for administrative ease:
► Employers are required to ensure that tax due is equal to the tax withheld
for the year-end adjustment computation.
07 June 2008 Page 181

9504
► The alphabetical list for 2008 shall be analyzed by the concerned

LTAD/LTDO/RDO by comparing the compensation figures reported in
2007 as against 2008 to ensure that there is no diminution in the
compensation structure of employees.
► MWEs whose compensation earned from January 1 to July 5, 2008

were not subjected to withholding tax but are, after considering the
relevant exemptions, still subject to income tax, shall be required to
file an income tax return covering the period from January 1 to July 5,
2008, on or before April 15, 2009.
07 June 2008 Page 182

Questions and Answers
07 June 2008 Page 183

Withholding Tax On Wages: Ruther N. Martinez Tax Reporting and Operations Group (TROG)

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07 June 2008 Page 2

07 June 2008 Page 3

• Section 33 of the National Internal Revenue Code [NIRC]

• Revenue Regulations (RR) No. 10-2008 (Implementing Pertinent

07 June 2008 Page 4

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 A resident alien is an individual whose residence is in

 A nonresident alien means an individual whose

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2 types of nonresident aliens

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Intended Stay in the Philippines Classification for Tax Purposes

Up to 180 days Non-resident alien not engaged in

More than 180 days up to 2 Non-resident alien engaged in trade

Greater than 2 years Resident alien

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BIR Ruling No. DA-056-05 dated February 16, 2005

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► If no accurate allocation or segregation of compensation for personal

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Consultant Y1 Y2 Total Number of Days

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► an individual performing services under an employer-employee

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► Rank & File Employees

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► Any person for whom an individual performs or performed any

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BIR Ruling No. 208-99 dated December 28, 1999

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The term of Mr. Smith’s assignment in the Philippines is 3 years. Mr.

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• Arguably, Company P will still have to withhold WTW

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