Linggo, Hunyo 14, 2015

Land I can call my own: Tax procedures for real property acquisition

One of the ultimate goals of Filipinos is to acquire real property. Whether it’s residential property, agricultural land, or commercial space, such acquisitions are treated as part of one’s legacy, which can be passed on to descendants.

One of the advantages of real property is that it generally appreciates over time. Accordingly, land has been the source of many of the country’s biggest fortunes. The first acquisition of real property is a momentous event for almost everyone, a marker of having attained a comfortable station in life.

There are various ways that will ripen to transferring real properties which include but not limted to sale, donation, inheritance, property swap or payment of debt. Whatever the mode it is, ownership is only secure when the transferee’s name is annotated in the Transfer Certificate of Title (TCT), Condominium Certificate of Title (CCT) or Original Certificate of Title (OCT).

With the real estate boom of recent years, many have jumped on the bandwagon and purchasing property of their own. It therefore comes as no surprise that many have fallen into the trap of purchasing real properties which they cannot register in their names, either because they have not secured a Certificate Authorizing Registration (CAR) or the title to the property is bogus.

In other words many still fail to observe the processes prescribed by law. Others exercise due diligence too late, when penalties have already piled up.

On April 17, 2015, the Bureau of Internal Revenue (BIR) circularized the Memorandum of Agreement (MoA) between the Department of Finance, the Department of Justice, the BIR and the Land Registration Authority (LRA) dated Sept. 25, 2013. The MoA aims to plug all loopholes to prevent tax leakage and to properly ensure that all taxes due to the government are collected before registration or transfer of real property is effected by the Register of Deeds (RD). With the MoA, the concerned agencies undertake to expedite the delivery of services to the public and simultaneously, promptly collect the tax due.

The MoA focuses on inter-agency linkages to achieve better monitoring and control over real property transactions. The BIR’s role in achieving the MoA’s goal is to issue CAR, furnish reports on CAR issued and generated online to the RDs for online automated verification as to authenticity by LRA, and receiving and matching electronic reports from LRA on the New Number generated for the newly issued TCT/CCT/OCT.

On the other hand LRA and the RDs are to provide linkage, comparing information relating to all Real Property Transfers against the CARs issued by the BIR. The LRA shall also ensure the development, implementation, and operation of the online automated verification of the CARs presented to the RD through its Land Titling Computerization Project (LTCP). LRA shall also ensure, through the LTCP, the development, implementation, and operation of an automated system that shall provide BIR with monthly electronic reports on new TCT/CCT/OCT, immediately upon their issuance and inclusion.

It is fairly well known that the transfer of a real property requires the issuance of a CAR to the transferor. However, with enhanced communications among agencies, a finding of tax deficiency remains possible even after the real property is registered with the RD under the name of the transferee. To avoid this problem, the transferor must comply with the CAR requirement of the BIR. The parties must know what taxes they will have to pay for.

For instance, in a sale transaction, the owner will be required to pay capital gains tax (CGT) pursuant to Section 24 (D) in the case of an individual seller or Section 27 (D)(5) in the case of a corporate seller. It must be noted that the BIR shall compute the CGT liability of the seller based on the selling price, the fair market value based on the BIR’s zonal valuation, or the assessed value based on the tax declaration of the Local Government Unit which has jurisdiction of the real property, whichever is highest. Moreover, the documentary stamp tax (DST) pursuant to Section 196 of the Tax Code must be paid by any of the parties that have agreed to bear the tax liability.

It is also important to note the deadline within which the CGT returns or DST returns should be filed to avoid the running of the interest of the tax due. The DST should be paid on or before the 5th day of the next succeeding month when the deed of sale is executed. On the other hand, the CGT on sale, exchange or disposition of real properties treated as capital assets (those that are not actually used in the business) shall be filed within 30 days following each sale, exchange or disposition. It shall be filed and the taxes due thereon be made to an authorized agent bank in the appropriate revenue district.

In addition, sellers who convey their real properties which are considered ordinary assets shall report the sale as part of their income and subject the same to value-added tax. The buyer on the other hand, is required to subject the payment to expanded withholding tax which shall be filed on or before the 10th day of the next succeeding month when the deed is executed, subject, however, to the specific rules prescribed by Revenue Regulations No. 2-98, as amended, and the rules prescribed in the eFPS regulations, in case the taxpayer is duly registered with the same. The returns shall also be filed in the appropriate revenue district.

In 2003, the BIR issued Revenue Memorandum Order No. 15-2003 (RMC 15-2003) prescribing policies, guidelines and procedures in the processing of One-Time Transactions and the issuance of CAR on various transactions which include transfer of real properties. Taxpayers must be aware of the checklist of documentary requirements on sale of real property subject to CGT, foreclosure sale of real property, sale of real property classified as real assets, sale of real property under the Community Mortgage Program, tax-exempt sale of principal residence, transfer subject to donor’s tax, transfer subject to estate tax, and sale of real property under Socialized Housing Program as Certified by the HLURB. The BIR is strictly implementing RMC 15-2003 and non-compliance entails non-issuance of the CAR.

After the issuance of the CAR, the buyer must use it within one (1) year, otherwise it is considered revoked and the buyer must apply for CAR again.

The MoA opens a lot of doors towards responsible transfer of properties. The rules and regulations have been there for a long time, but many choose to ignore it. By ignoring these requirements, transferees cannot be wholly secure in their ownership and penalties keep piling up over time. Transferees of real property must be vigilant that the transferor has done everything to comply with his tax and other obligations with the BIR.

While investing in real property promises a brighter future for the investor, doing it the right way should be a primordial consideration to avoid future complications, the resolution of which consume a lot of time, money and peace of mind. After all, buying a little piece of that earth requires that we expend some of the fruits of our labor earned over many years.

Eliezer P. Ambatali
Let’s Talk Tax
Punongbayan and Araullo

Huwebes, Abril 30, 2015


"Sienna, slow down!" people would urge her. "You can't save the world!”
What a terrible thing to say.
Through her acts of public service, Sienna came in contact with several members of a local humanitarian group.  When they invited her to join them on a monthlong trip to the Philippines, she jumped at the chance.
Sienna imagined they were going to feed poor fishermen or farmers in the countryside, which she had read was a wonderland of geological beauty, with vibrant seabeds and dazzling plains. And so when the group settled in among the throngs in the city of Manila -- the most densely populated city on earth -- Sienna could only gape in horror. She had never seen poverty on this scale.
How can one person possibly make a difference?
For every one person Sienna fed, there were hundreds more who gazed at her with desolate eyes. Manila had six-hour traffic jams, suffocating pollution, and a horrifying sex trade, whose workers consisted primarily of young children, many of whom had been sold to pimps by parents who took solace in knowing that at least their children would be fed.
Amid this chaos of child prostitution, panhandlers, pickpockets, and worse, Sienna found herself suddenly paralyzed.  All around her, she could see humanity overrun by its primal instinct for survival.  When they face desperation . . . human beings become animals.
For Sienna, all the dark depression came flooding back.  She had suddenly understood mankind for what it was -- a species on the brink.
I was wrong, she thought. I can't save the world.
Overwhelmed by a rush of frantic mania, Sienna broke into a sprint through the city streets, thrusting her way through the masses of people, knocking them over, pressing on, searching for open space.
I'm being suffocated by human flesh!
As she ran, she could feel the eyes upon her again.  She no longer blended in.  She was tall and fair-skinned with a blond ponytail waving behind her. Men stared at her as if she were naked.
When her legs finally gave out, she had no idea how far she had run or where she had gone.  She cleared the tears and grime from her eyes and saw that she was standing in a kind of shantytown -- a city made of pieces of corrugated metal and cardboard propped up and held together.  All around her the wails of crying babies and the stench of human excrement hung in the air.
I've run through the gates of hell?
"Turista," a deep voice sneered behind her. "Magkano?" How much?
Sienna spun to see three young men approaching, salivating like wolves.  She instantly know shw was in danger and she tried to back away, but they corraled her, like predators hunting in a pack.
Sienna shouted for help, but nobody paid attention to her cries.  Only fifteen feet away, she saw an old woman sitting on a tire, carving the rot off an old onion with a rusty knife.  The woman did not even glance up when Sienna shouted.
When the men seized her and dragged her inside a little shack, Sienna had no illusions about what was going to happen, and the terror was all-consuming.  She fought with everything she had, but they were strong, quickly pinning her down on an old, soiled mattress.
They tore open her shirt, clawing at her soft skin.  When she screamed, they stuffed her torn shirt to deep into her mouth that she thought she would choke.  Then they flipped her onto her stomach, forcing her face into the putrid bed.
Sienna Brooks had always felt pity for the ignorant sould who could believe in God amid a world of such suffering, and yet now she herself was praying . .  . praying with all her heart.
Please, God, deliver me from evil.
Even as she prayed, she could hear the men laughing, taunting her as their filty hands hauled her jeans down over her flailing legs.  One of them climbed onto her back, sweaty and heavy, his perspiration dripping onto her skin.
I'm a virgin, Sienna thought.  This is how it is going to happen to me.
Suddenly the man on her back leaped off her, and the taunting jeers turned into shouts of anger and fear.
The warm sweat rolling unto Sienna's back form above suddenly began gushing . . . spilling onto the mattress in splatters of red.
When Sienna rolled over to see what was happening, she saw the old woman with the half-peeled onion and the rusty now standing over her attacker, who was now bleeding profusely from his back.
The old woman glared threateningly at the others, whipping her bloody knife through the air until the three men scampered off.
Without a word, the old woman helped Sienna gather her clothes and get dressed.
"Salamat," Sienna whispered tearfully. "Thank you."
The old woman tapped her ear, indicating she was deaf.
Sienna placed her palms together, closed her eyes and bowed her head in a gesture of respect. Whe she opened her eyes, the woman was gone.
Sienna left the Philippines at once, without even saying good-bye to the other members of the group.

 Dan Brown
pages 465 to 468.

Sabado, Marso 21, 2015

Imposition of penalties for failure to file returns under electronic systems of the BIR by taxpayers covered by eFPS and eBIRForms

The BIR clarified the coverage of non-eFPS filers who shall mandatorily use the or Electronic Bureau of Internal Revenue Forms (eBIRForms) facility by electronically submitting and filing all tax returns for certain taxpayers. 

According to the RR No. 5-2015, filing electronically shall be mandatory only for accredited tax agents (ATAs), practitioners and all its client-taxpayers, accredited printers of principal and supplementary receipts and invoices, one-time transaction (ONETT) taxpayers, those filing no-payment returns, government corporations, local government units and cooperatives.

Covered taxpayers are also required to print the system-generated Filing Reference (FRN) page, upon successful validation of the tax returns, and submit to the Authorized Agent Banks for the payment of the taxes due thereon.

It may be recalled that the detailed procedures of the online account enrolment for the use of the online eBIRForms system was provided in Revenue Memorandum Order No. (RMO) 24-2013.

The BIR, on a separate announcement, also reminded the following taxpayers mandated to enrol, file, and pay tax returns EARLY using the Electronic Filing and Payment System (eFPS):

·  Taxpayer Account Management Program (TAMP) Taxpayers;

·   Accredited Importer and Prospective Importer required to secure the BIR-ICC and BIR-BCC;

·   National Government Agencies (NGAs);

·   All Licensed Local Contractors;

·   Enterprise Enjoying Fiscal Incentives (PEZA,BOI, Various Zone Authorities);

·   Top 5,000 Individual Taxpayers;

·   Corporations with Paid-up Capital Stock of P10 Million and above;

·   Corporations with complete computerized system;

·   Procuring Government Agencies with respect to Withholding of VAT and Percentage Taxes;

·   Government Bidders;

·   Large Taxpayers; and

·   Top 20,000 private corporations

It should be noted that the failure to file tax returns using eFPS or eBIRForms shall be subject to the imposition of a penalty of One Thousand Pesos (P1,000) per return. Additionally, for failure to file a tax return in a manner not in compliance with existing regulations tantamount to wrong venue filing pursuant to Section 248 (A)(2) of the NIRC shall incur civil penalty of 25% of the tax due to be paid.

Revenue Regulations No. 5-2015
Tax Alerts
Punongbayan and Araullo

Biyernes, Marso 6, 2015

The need to adjust taxation on individuals

THERE IS no question that everyone welcomes payday, which is when all of us are sure to have at least some resources to pay for our needs and desires. What isn’t often realized is that the government has paydays of its own, in the form of tax collections. It is these funds that pay for public goods and services which, in theory, help improve the people’s quality of life.
Pursuing this line of thinking brings us to conclude that higher taxes ought to mean a better standard of living. A government that asks for more taxes must deliver on an implied promise of more infrastructure, better health care services, increased education and R&D funding, among other things. Otherwise, there would be little or no return for the public. The other side of this argument is that a government collecting fewer taxes would leave the public free to spend for its needs and desires as it sees fit.

For some of us, the key to progress and economic growth lies in enhancing the government’s ability to raise revenue. But lowering income taxes on individuals does not necessary mean a country cannot grow. The counter-argument has always been that when individuals are taxed less and left with more resources to spend, a large share of these additional resources will find their way to corporations, which will pay more taxes to the government -- a win-win scenario for everyone involved.

Against this backdrop, let us examine the recent expansion of the tax exemption for bonuses and other benefits.

On Jan. 5, the Bureau of Internal Revenue released Revenue Regulation No. 1-2015, expanding the list of tax-exempt benefits to include those received via collective bargaining agreements, as well as productivity incentive schemes to the extent of P10,000 per employee per taxable year.

On Feb. 12, President Benigno S. C Aquino III signed into law Republic Act No. 10653, which increased the ceiling on tax-exempt 13th month pay and other benefits to P82,000 from P30,000. The new law also mandates that the President adjust this threshold every three years to its present value using the consumer price index as published by the National Statistics Office.

The expanded exemptions may only be felt by those receiving 13th month pay and other bonuses of more than P30,000 a year. How about low- and middle-income earners? Does the government intend to take away a bit of the tax burden from them as well?

Our tax system should be progressive. The poor and the middle class should never be taxed at the same level as the upper class. Unfortunately, our tax rates have remained stagnant for decades, distorting the lines between the poor, the middle class and the wealthy. The result is that an ordinary worker, who earns more than P500,000 annually, pays the same 32% personal rate as that paid by a company president.

The good news is that our lawmakers are now addressing these distortions. Bills pending in both houses of Congress would reduce the income tax burdens on individuals. Some bills aim to increase personal and other exemptions, while others aim to adjust income tax brackets and reduce the rates for individual taxpayers.

My hope that enough time remains to pass these into law, considering that the 2016 elections are fast approaching.

Meanwhile, Republic Act 9504, which took effect in 2008, increased the personal exemption to P50,000 and the additional exemptions to P25,000 for each qualified dependent up to a maximum of four. For almost seven years, however, the exemption amounts have not been adjusted. Since personal exemptions are meant to aid individuals in meeting their living expenses, I believe that personal exemptions and additional exemptions should also be adjusted -- to take into account inflation.

Another bill pending with th e legislature seeks to amend the tax brackets and reducing the rates on individuals. This bill was drafted as a measure to discourage migration of our own workforce and to attract human capital by the time of implementation of the Association of South East Asian Nations (ASEAN) Economic Community (AEC). The AEC has the goal of regional economic integration starting Dec. 31, 2015. One of the objectives of the integration is to create a single market and production base through the free movement of goods, services, investment and skilled labor in the region.

Next to Thailand and Vietnam, the Philippines has the highest top tax rate at 32%. When the AEC Declaration was signed in 2007, some member-states started to gradually lower their corporate and individual income tax rates.

If ASEAN Integration goes through this year, the Philippines must brace for competition from other ASEAN nations. One of the implications is that the workforce may move elsewhere to seek a better quality of life, making it critical for the government to address the problem of improving local conditions. Currently, the government is still working on improving services, but my hope is that it gives its citizens the freedom to help themselves -- by enacting fair and equitable tax laws.

Donna Flor V. Lipat
Let’s Talk Tax
Punongbayan and Araullo

Linggo, Pebrero 15, 2015

What makes or breaks a tax case

ANYONE who likes mainstream pop music knows that the chorus often makes the song. The chorus is the high point, with the most unforgettable lines and the catchiest beat. A song may or may not have a third or a fourth verse or even a coda. But a chorus is a must.
Having been in the tax practice for several years, I have come to observe that tax cases with the Bureau of Internal Revenue (BIR) often follow the pattern of songs. Like songs with lines and verses, each relating to its message, a tax investigation has several parts, and when taken as a whole, the exercise is aimed at determining whether the taxpayer has unpaid taxes and whether the government has the right to assess and collect the same.
First, an investigation takes place where tax issues are identified and addressed. The taxpayer and the BIR examiners go through the process of discussing the tax treatment of income and expenses, discussing laws and jurisprudence, reconciling tax discrepancies and submitting supporting documents. In every stage of the tax investigation, the substantive and procedural due process rules must come into play: the BIR is required to send a Preliminary Notice Assessment, to which a taxpayer is given 15 days to reply and submit documents; in case of a disagreement as to the taxes assessed, the BIR shall send a Final Letter of Demand (FLD) or a Final Assessment Notice (FAN) within the three (3) -year period prescribed for the assessment of taxes. 
The taxpayer must contest the FLD or FAN in a timely manner by filing a request for reconsideration or a request for reinvestigation; otherwise, tax assessments become final and executory. The BIR may or may not act on the protest by issuing a Final Decision on Disputed Assessment (FDDA), and the taxpayer may or may elevate the case to the Court of Tax Appeals (CTA).
Where it is established that the BIR duly served a FLD or FAN, what makes or breaks the tax case is the filing or non-filing of the protest letter. The filing of the protest to the FLD or FAN is the most crucial remedy in the pursuit of a taxpayer’s defense. In countless cases decided by the courts, the validity of the tax assessments were upheld not because the government had a basis to assess and collect the taxes, but because the taxpayer failed to dispute the assessment and collection of the taxes within the period and by the manner prescribed by law.
Section 228 of the National Internal Revenue Code (NIRC) of 1997 provides that the tax assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment, and within 60 days from the filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. In a recent decision, the CTA held that the tax assessment does not become final and executory although the taxpayer chose to submit the protest without supporting documents, since the lack of documentation will only matter when the BIR evaluates the merits of the said protest (CTA Case No. 8185, Third Division, December 3, 2014).
The filing of the protest letter should not only be made; it must also be clearly established. Last week, the CTA dismissed an appeal filed by a taxpayer on the final decision of the BIR, citing lack of jurisdiction. In this case, the facts show that the BIR issued a FAN against the taxpayer, and later, a FDDA. The petitioner filed an appeal on the FDDA with the Commissioner of Internal Revenue. The CTA held that although the petitioner made allegations that it filed a protest letter, no proof was presented. For having failed to file a protest to the FAN within the given period, the FAN attained finality (CTA Case No. 8891, Third Division, February 2, 2015).
Under Revenue Regulation (RR) No. 18-2013, which implements Section 228 of the NIRC, the protest letter should now indicate the nature of the protest, i.e., request for reconsideration or request for reinvestigation, specifying the newly discovered evidence to be presented in case of reinvestigation, the date of the assessment notice, the applicable laws, rules and regulations, and jurisprudence on which the protest is based; otherwise, the protest shall be considered void and without force and effect. The additional requirements laid down in RR No. 18-2013 only highlight how important the exercise of this remedy is.
The two cases and the new regulation cited above illustrate how the filing (and non-filing) of the protest letter can make or break the tax case.
To relate all of these to our song analogy, I would say the protest letter is definitely the chorus. A bad chorus can still make for an enjoyable song, although its ultimate meaning may be difficult to understand. On the other hand, a song without a chorus may have no point at all.
Jean Ross Abenasa-Miso
Let’s Talk Tax
Punongbayan and Araullo

Lunes, Pebrero 9, 2015

Due process in change of address

TAXES are the “lifeblood” that give real meaning to the existence of the government. Without them, the government would be unable to perform its functions and duties. Taxes are the cost of a functioning government and by extension a civilized society.

Since taxes are critical to its existence, the government is continuously improving its tax collection processes. The Bureau of Internal Revenue (BIR) has been very focused on strengthening its tax collection effort. Under pressure from ambitious revenue targets, the bureau has passed a series of regulations to ensure prompt collection of taxes. The 
motivational  nature of the targets is felt by the public in the form of the BIR’s aggressive approach. It should come as no surprise that the BIR be highly focused on the assessment process. Collections from assessments have traditionally constituted a major share of tax revenue.

To check any tendency towards harsh taxation, the Supreme Court (SC) has been consistent in blocking practices deemed as arbitrary. Justice Isagani Cruz has written: “Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with the law as any arbitrariness will negate the very reason for the government itself.” (CIR v. Algue, Inc.) In other words, taxes should be collected expeditiously, though not to the point where collection methods become preposterous.

In the recent case of Commissioner of Internal Revenue v. BASF Coating + Inks Phils., Inc., G.R. No. 198677, the assessment process once again was the subject of dispute. It involved an invalid assessment preceded by invalid assessment notices, a clear case of denial of due process of law.

Due process is both substantive and procedural in nature. It is substantive in the sense that it acts as a safeguard from arbitrary denial of life, liberty, or property by the government outside the sanction of law. It is also procedural in nature, aiming to protect individuals from the coercive power of government, by ensuring that adjudication processes under valid laws are fair and impartial.

The denial of due process that resulted in the deprivation of property was the core issue underlying the SC decision.

In the BASF case, the BIR was overruled when the SC affirmed a decision by the Court of Tax Appeals, and found no valid assessment due to invalid notices of assessment. Being an invalid assessment, the notice never attained finality and the period for assessment and collection was therefore deemed to have lapsed.

The respondent company, BASF, transferred to a new office without informing the BIR of the move. In 2003, the BIR issued a Final Assessment Notice (FAN) for the taxable year of 1999. However, it was sent to BASF via registered mail to its old address. The company duly protested citing violation of due process and prescription.

Due to inaction on the part of the BIR, the case was elevated to the Court of Tax Appeals (CTA) and then subsequently to the SC. The SC backed the CTA in denying the Petition for Review filed by the BIR, ruling that no valid notices that were sent. Hence, the assessments were also declared void. In effect, the right of the BIR to assess and collect was found to have prescribed.

It is noteworthy that the SC upheld once again the significance of notice as part of due process. What is peculiar about the case is that the BIR was not also properly informed of the change of address of BASF. The BIR cited this circumstance in its Petition before the SC. The BIR also contended that such change of address without prior notice means the prescription clock continues to run, as provided by Sections 203 and 222 of the Tax Code of 1997.

Section 11 of BIR Revenue Regulation No. 12-85 requires the taxpayer to give written notice of any change of address to the Revenue District Officer (RDO) or the district having jurisdiction over his former legal residence and/or place of business. In the event of failure to give notice, any communications sent to the former address are still be considered valid.

The case hinged on the SC’s finding that BIR officers, at various times prior to the issuance of the FAN, had conducted examinations and investigations of BASF’s tax liabilities for 1999 at the latter’s new address. Several communications were also sent to the new address of the respondent prior to the issuance of the FAN including letters and reports of the BIR signed by the revenue officer.

It must not be overlooked that the BIR sent the Preliminary Assessment Notice (PAN) via registered mail to the old address of the respondent but was “returned to sender” as attested by the revenue officer. Despite the return, the BIR still mailed the FAN to the old address. The SC has construed this to mean that the BIR should have been alerted of such change of address. As a result, the Statute of Limitations was not suspended, resulting in the lapsing of the assessment and collection deadline.

A closer look at the decision makes it apparent that both parties failed to give proper notice to each other. The taxpayer was not able to formally notify the BIR of its change of address. On the other hand, the BIR continued to transmit its assessment notices to the “wrong address,” a practice which, combined with the other circumstances, rendered its notices invalid.

This means both parties were “in pari delicto” or “equally at fault,” giving rise to a situation where a court may refuse to intervene. Nevertheless, the weight of justice tilted in favor of the taxpayer.

Let this jurisprudence be our guide in dealing with BIR assessments in the future. It provides an indication that the Supreme Court recognizes the principle laid down in a longstanding ruling from CIR v. Algue, which states: “It is necessary to reconcile the apparent conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.”

Mark Arthur M. Catabona
Let’s Talk Tax
Punongbayan and Araullo

Linggo, Enero 25, 2015

Wrapping it up on employee taxes

AT THE turn of each year, many employees are eager to find out whether they will receive a tax refund, or whether additional taxes will be withheld from their December paychecks. This concern arises from the annualization of compensation that every employer does at year’s end. Thus, it is important that employee taxes are properly computed to ensure that employees pay only what is due from them for the entire year and that no issues emerge during a Bureau if Internal Revenue (BIR) audit of employers.

Ideally, annualization should be done on or before the end of the calendar year, but prior to the payment of compensation for the last payroll period. Nonetheless, should this not be done yet, the employer still has the time to do the annualization prior to the January 25 deadline of refunding any over-withheld tax from the employee.

Here are some common issues on annualization of withholding taxes of employees and reminders on filing:

Basic personal and additional exemptions -- Every individual, regardless of tax status, is entitled to a P50,000 basic personal exemption. In addition, for every qualified dependent child, an additional exemption of P25,000 shall be available to the husband, unless a waiver in favor of the wife is executed. In case the husband is unemployed or working abroad, the wife automatically claims the additional exemption, provided required documents have been duly submitted.

In case a child was born or adopted within the year, such child can already be claimed as qualified dependent for the year, so long as necessary documents have been updated and properly filed with the BIR. If the employee fails to update his information, the excess tax withheld will not be refunded and will be forfeited in favor of the government. Employees should, therefore, properly submit certificates of update of exemption to be entitled to the additional exemption of P25,000.

On the other hand, in case a qualified dependent changes status during the year, such that his status shall no longer qualify him for exemption, an additional exemption of P25,000 can still be claimed during the year. It is only on the following year when the employee can no longer claim the exemption.

Considering the above rules on additional exemption, employers are then reminded to properly check the tax status of the employee prior to computing the tax due for the year. Any additional exemption not considered will definitely impact the employee’s net take home pay. Of course, employees can opt to file an annual income tax return and apply for refund. However, considering the cost and hassle of doing so, this recourse may no longer be an option for some employees.

Employees with previous employers -- Employers are required to annualize the employee’s compensation including that from previous employer (if employed within the same year). Thus, it is necessary that BIR Form 2316 issued by previous employer be provided by the employees to their current employer. Note that tax due of employees who failed to submit the same shall be computed only based on the compensation paid by the current employer. Hence, failure to provide the same may significantly result to higher tax payable upon filing of their individual annual income tax return. Employees with previous employers cannot qualify for substituted filing and are required to file their annual income tax return on or before April 15.

Taxable vs. non-taxable income -- Under existing revenue regulations, certain types of compensation income can be considered non-taxable and exempt from withholding. However, recent issuances/rulings by the BIR provide that those benefits considered non-taxable should be limited only to those specifically provided in the law as non-taxable (e.g. P30,000 tax exempt bonus, statutory contributions, de minimis benefits). In recent years, the BIR issued clarifications on the taxability of stock option plans, de minimis benefits, among others.

Hence, it is recommended that employers revisit their classification of employee benefits.

Tax returns and certificates -- Currently, employers who are considered withholding agents are required to submit monthly remittance return of income taxes withheld on compensation (BIR Form 1601-C), annual information return of income taxes withheld on compensation (BIR Form 1601-CF), together with the alphabetical lists (alphalists) of employees, and employee’s certificate of compensation payment/taxes withheld (BIR Form 2316). A copy of the latter is also required to be submitted to the BIR RDO where the company is registered on or before Feb. 28.

As of calendar year 2013, alphalists of employees are to be submitted either as attachments to the electronic Filing and Payment System (eFPS) or through e-submission/e-mail. Manual submission of diskettes, CDs or hard copies shall no longer be allowed.

Prior to filing, among other things, it must be ensured that the amount of compensation income and taxes withheld per monthly returns, annual returns, alphalist of employees, and employees’ BIR Form 2316 tie up. Also, such compensation income as reported in the returns must also tie up, or at least be reconcilable with the totals in the company’s books.

The above list includes only some of the reminders on employee withholding taxes. Other issues may arise considering the many rules on employee taxes.

At the end of the day, it is the employers who shall be subjected to audit by the BIR. Any taxable compensation income payment not subjected to withholding tax shall result in deficiency withholding tax and disallowance of expense. Thus, following the old adage “prevention is better than the cure”, a thorough review is highly recommended prior to filing.

Ma. Lourdes A. Politado-Aclan
Let’s Talk Tax
Punongbayan and Araullo