December is just around the corner, the month of giving and
spending extravagantly. Employees like me are very much eager to get hold of
their 13th month pay, Christmas bonuses and final pay checks for the year. By
this time, employers should already be preparing for the annualization of their
employees’ compensation, which will determine the adjusted withholding tax due
on compensation, and the employees’ net final pay for the year.
On the annualization
of compensation, it is important to take note of the several tax regulations
issued this year which affect the taxability of employees’ compensation income.
The most significant among these is the passage of Republic Act (RA) 10653 on Feb. 12, 2015, increasing the tax exemption threshold from P30,000 to P82,000 for 13th month pay and other benefits. This will be enjoyed by compensation income earners starting this year.
Employers should be wary, however, about which benefits the increased threshold is applied to. Among the other benefits covered by the new tax exemption threshold include productivity incentives, Christmas bonus, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private entities. This also covers the excess amount of the de minimis benefits. Revenue Regulation (RR) No. 3-2015, which implements RA 10653, also clarified that the P82,000 exemption shall neither apply to other compensation received by an employee under an employer-employee relationship, such as basic salary and other allowances, nor to self-employed individuals and income generated from business.
Also at the beginning of this year, the Bureau of Internal Revenue (BIR) issued RR No. 1-2015, which added to the list of non-taxable de minimis benefits those benefits provided under a collective bargaining agreement (CBA) and productivity incentive schemes amounting to P10,000 per employee per annum. This issuance has raised some concerns of the taxpayer-employers on how certain benefits or incentives shall be classified. One of the concerns is the award given to a sales employee who was able to meet or exceed his sales quota. Will such sales award be classified under the other benefits subject to the P82,000 exemption threshold; the employee achievement awards subject to P10,000 de minimis threshold; or the productivity incentive scheme amounting to P10,000 provided under RR 1-2015? Considering that the three classifications vary in the ceilings involved as well as the required form of the benefit to be provided (whether in cash or in kind, or strictly in the form of a tangible property only), it is important that the BIR issue a clarification to avoid any dispute on interpretation and implementation.
Other than the increases in tax-exempt thresholds for certain employee benefits, the BIR also released several issuances during the year which provide for certain changes in the submission of documents in relation to employees’ compensation and registration information.
On March 2015, the BIR issued RR No. 2-2015 which sets forth the mandatory submission of employee’s certificate of compensation payment/taxes withheld or BIR Form 2316 in soft copies or “PDF” file format to be stored in a Digital Versatile Disk-Recordable (DVD-R). The duly accomplished DVD-R shall be submitted to the BIR Office where the taxpayer-employer is registered not later than Feb. 28 following the close of the calendar year, together with a notarized certification stating that the DVD-R is submitted in compliance with RR No. 2-2015; that the contents of the DVD-R being submitted conforms to the conditions/specifications requirements set by the BIR; and, that the soft copies contained therein are complete and exact copies of the original document. The mandatory submission of BIR Form 2316 in soft copy is required for all taxpayers registered with the large taxpayers service (LTS). However, should any non-LTS taxpayer opt to adopt the requirements prescribed by this regulation, he may freely do so but such option may no longer be revoked.
Another recent change initiated by the BIR is the electronic updating of employee’s exemption registration. Under Revenue Memorandum Circular (RMC) No. 59-2015, employees shall no longer file their certificate of update of exemption. Instead, the filing of BIR Form 2305 shall now be coursed through the employer. Using the Update of Exemption of Employees Data Entry Module, which can be downloaded from the BIR Web site, or the Microsoft Excel program, the employer inputs all registration updates of its employees one by one.
Updates in the employees registration covered by this electronic submission are limited only to additional exemption for qualified dependents, change of marital status, and execution of the “waiver to claim the additional exemption” by the husband or revocation of the previously executed “waiver to claim the additional exemption by the husband”.
After validating the CSV file using the 2305 Batch File Validation Module, the CSV file shall then be transmitted to the BIR via e-mail to BIRFORM_2305@bir.gov.ph. In addition to the electronic submission of updates in employees’ registration, employers are required to submit with the RDO/LTD having jurisdiction over the place of its office the following documents on or before the 10th day of the following month:
(i) accomplished BIR Form 2305 signed by both the employee and employer together with the required documentary requirements (e.g. NSO certified birth certificate/marriage contract);
(ii) systems-generated e-mail notification of electronically filed BIR Form No. 2305; and
(iii) printed alphalist of employees and information update report listing the names of those with changes for the month only which can be generated from the data entry module or printed excel file following the lay-out prescribed under Annex F of the circular.
Although no specific penalties in case of failure to comply with the electronic submission of the BIR Form 2305 was mentioned in the RMC, taxpayer-employers shall take into consideration the consequence of failure to update the employee’s registration, more particularly with regard to claiming of additional exemption. Section 2.79.2 of RR No. 2-1998, as amended, provides that in case of failure to file BIR Form No. 2305, the employer shall withhold the taxes based on the reported personal exemptions existing prior to the change of status and without reflecting any change. Any refund or under withholding that shall arise due to the violations shall be covered by the appropriate penalties under the pertinent provisions of the Tax Code, as amended, and the applicable regulations issued by the BIR.
The above-mentioned are only updates on employee taxes which took effect this year. Considering the many tax rules on compensation income, a taxpayer-employer must ensure, among others, that it observes the proper tax treatment on various benefits provided to employees to avoid possible assessment for deficiency withholding tax and disallowance of expense in case of failure to subject any taxable compensation income to withholding tax.
One way to avoid reporting the incorrect amount of taxable compensation, non-taxable compensation or withholding tax due, is to prepare the annualization of employees’ compensation on or before the end of the calendar year to avoid cramming, especially in the case of taxpayers with a significant number of employees. In any case, the employer shall ensure that the payment of compensation for the last payroll period is considered in the annualization. Ideally, the correct amount of compensation and withholding tax due, as adjusted for the year, shall be reflected in the December BIR Form 1601C, as it is the last tax remittance return for withholding tax on compensation that will be filed for the year.
Lastly, the employer shall also see to it that all administrative requirements in relation to employees’ compensation and registration information are strictly complied with to avoid any penalties.
Keeping abreast of all the latest tax issuances should always be a top priority for all taxpayers.
With all these new developments concerning employee taxes, employers shall take full responsibility for determining the correct amount of taxes to be withheld from their employees’ compensation income. Not only are we, the employees, concerned with simply receiving our net pay checks, but also with that significant portion of our hard-earned income that is remitted to the government.
Arianne Cyril L. Mandac is a senior with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
The most significant among these is the passage of Republic Act (RA) 10653 on Feb. 12, 2015, increasing the tax exemption threshold from P30,000 to P82,000 for 13th month pay and other benefits. This will be enjoyed by compensation income earners starting this year.
Employers should be wary, however, about which benefits the increased threshold is applied to. Among the other benefits covered by the new tax exemption threshold include productivity incentives, Christmas bonus, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private entities. This also covers the excess amount of the de minimis benefits. Revenue Regulation (RR) No. 3-2015, which implements RA 10653, also clarified that the P82,000 exemption shall neither apply to other compensation received by an employee under an employer-employee relationship, such as basic salary and other allowances, nor to self-employed individuals and income generated from business.
Also at the beginning of this year, the Bureau of Internal Revenue (BIR) issued RR No. 1-2015, which added to the list of non-taxable de minimis benefits those benefits provided under a collective bargaining agreement (CBA) and productivity incentive schemes amounting to P10,000 per employee per annum. This issuance has raised some concerns of the taxpayer-employers on how certain benefits or incentives shall be classified. One of the concerns is the award given to a sales employee who was able to meet or exceed his sales quota. Will such sales award be classified under the other benefits subject to the P82,000 exemption threshold; the employee achievement awards subject to P10,000 de minimis threshold; or the productivity incentive scheme amounting to P10,000 provided under RR 1-2015? Considering that the three classifications vary in the ceilings involved as well as the required form of the benefit to be provided (whether in cash or in kind, or strictly in the form of a tangible property only), it is important that the BIR issue a clarification to avoid any dispute on interpretation and implementation.
Other than the increases in tax-exempt thresholds for certain employee benefits, the BIR also released several issuances during the year which provide for certain changes in the submission of documents in relation to employees’ compensation and registration information.
On March 2015, the BIR issued RR No. 2-2015 which sets forth the mandatory submission of employee’s certificate of compensation payment/taxes withheld or BIR Form 2316 in soft copies or “PDF” file format to be stored in a Digital Versatile Disk-Recordable (DVD-R). The duly accomplished DVD-R shall be submitted to the BIR Office where the taxpayer-employer is registered not later than Feb. 28 following the close of the calendar year, together with a notarized certification stating that the DVD-R is submitted in compliance with RR No. 2-2015; that the contents of the DVD-R being submitted conforms to the conditions/specifications requirements set by the BIR; and, that the soft copies contained therein are complete and exact copies of the original document. The mandatory submission of BIR Form 2316 in soft copy is required for all taxpayers registered with the large taxpayers service (LTS). However, should any non-LTS taxpayer opt to adopt the requirements prescribed by this regulation, he may freely do so but such option may no longer be revoked.
Another recent change initiated by the BIR is the electronic updating of employee’s exemption registration. Under Revenue Memorandum Circular (RMC) No. 59-2015, employees shall no longer file their certificate of update of exemption. Instead, the filing of BIR Form 2305 shall now be coursed through the employer. Using the Update of Exemption of Employees Data Entry Module, which can be downloaded from the BIR Web site, or the Microsoft Excel program, the employer inputs all registration updates of its employees one by one.
Updates in the employees registration covered by this electronic submission are limited only to additional exemption for qualified dependents, change of marital status, and execution of the “waiver to claim the additional exemption” by the husband or revocation of the previously executed “waiver to claim the additional exemption by the husband”.
After validating the CSV file using the 2305 Batch File Validation Module, the CSV file shall then be transmitted to the BIR via e-mail to BIRFORM_2305@bir.gov.ph. In addition to the electronic submission of updates in employees’ registration, employers are required to submit with the RDO/LTD having jurisdiction over the place of its office the following documents on or before the 10th day of the following month:
(i) accomplished BIR Form 2305 signed by both the employee and employer together with the required documentary requirements (e.g. NSO certified birth certificate/marriage contract);
(ii) systems-generated e-mail notification of electronically filed BIR Form No. 2305; and
(iii) printed alphalist of employees and information update report listing the names of those with changes for the month only which can be generated from the data entry module or printed excel file following the lay-out prescribed under Annex F of the circular.
Although no specific penalties in case of failure to comply with the electronic submission of the BIR Form 2305 was mentioned in the RMC, taxpayer-employers shall take into consideration the consequence of failure to update the employee’s registration, more particularly with regard to claiming of additional exemption. Section 2.79.2 of RR No. 2-1998, as amended, provides that in case of failure to file BIR Form No. 2305, the employer shall withhold the taxes based on the reported personal exemptions existing prior to the change of status and without reflecting any change. Any refund or under withholding that shall arise due to the violations shall be covered by the appropriate penalties under the pertinent provisions of the Tax Code, as amended, and the applicable regulations issued by the BIR.
The above-mentioned are only updates on employee taxes which took effect this year. Considering the many tax rules on compensation income, a taxpayer-employer must ensure, among others, that it observes the proper tax treatment on various benefits provided to employees to avoid possible assessment for deficiency withholding tax and disallowance of expense in case of failure to subject any taxable compensation income to withholding tax.
One way to avoid reporting the incorrect amount of taxable compensation, non-taxable compensation or withholding tax due, is to prepare the annualization of employees’ compensation on or before the end of the calendar year to avoid cramming, especially in the case of taxpayers with a significant number of employees. In any case, the employer shall ensure that the payment of compensation for the last payroll period is considered in the annualization. Ideally, the correct amount of compensation and withholding tax due, as adjusted for the year, shall be reflected in the December BIR Form 1601C, as it is the last tax remittance return for withholding tax on compensation that will be filed for the year.
Lastly, the employer shall also see to it that all administrative requirements in relation to employees’ compensation and registration information are strictly complied with to avoid any penalties.
Keeping abreast of all the latest tax issuances should always be a top priority for all taxpayers.
With all these new developments concerning employee taxes, employers shall take full responsibility for determining the correct amount of taxes to be withheld from their employees’ compensation income. Not only are we, the employees, concerned with simply receiving our net pay checks, but also with that significant portion of our hard-earned income that is remitted to the government.
Arianne Cyril L. Mandac is a senior with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
Let’s Talk Tax : Arianne Cyril L. Mandac
Economy : Business World
November 23, 2015
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