Tax Reminder: Requirements for Deductibility of Certain Income Payments under RR 12-13
Requirements for Deductibility of Certain Income Payments under RR 12-13
Revenue Regulations No.(RR) 12-13 amended RR 2-98,, as follows;
"Sec. 2.58.5. Requirements for Deductibility. — Any income payment which is otherwise deductible under the Code shall be allowed as a deduction from the payor's gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau in accordance with Secs. 57 and 58 of the Code.
No deduction will also be allowed notwithstanding payments of withholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in accordance with Secs. 57 and 58 of the Code."
WHAT DOES THIS MEANS?
If you claimed an expense, let’s say, a rental expense of P 100,000.00 and you failed to pay the expanded withholding tax (EWT) of P 5,000.00 (rental expense is subject to 5% EWT), the BIR will disallow the P 100,000.00 rental expense in your net income and will assess you for a deficiency income tax even if you will pay the unpaid EWT of P5,000.00 at the time of the audit investigation or reinvestigation or reconsideration by the BIR.
This is a new rule. Previously under RR 2-98, once you have paid the deficiency EWT, the expenses will be allowed as a deduction from the gross income.
Under Revenue Memorandum Circular 63-13, RR 12-13 is applicable for the year 2013 onwards.
To know more about the rules on Expanded Withholding Tax, you can join our seminar "ABC's of Expanded Withholding Tax and Final Withholding Tax".
When to apply 10% or 15% EWT for Professional fees
Tax Reminder: When to apply 10% or 15% EWT for Professional fees
Under RR 2-98, as amended, in order to determine the applicable tax rate (10% or 15%) to be applied/withheld by the withholding agent, every individual professional/talent/corporate directors herein enumerated, shall periodically disclose his gross income for the current year to the Bureau of Internal Revenue (BIR) by submitting a notarized sworn declaration in three (3) copies (two (2) copies for the BIR and one (1) copy for the taxpayer), copy furnished all the current payors of the declaration duly stamped received by the BIR (Collection Division of the Regional Office having jurisdiction over the place where the income earner is registered/Large Taxpayers Collection Division for large taxpayers in Metro Manila/LTDO for large taxpayers outside Metro-Manila). Sworn declaration may likewise be filed by the income payor on behalf of the professionals/talents/directors whose services were being rendered exclusively to the aforesaid payor.
The disclosure should be filed on June 30 of each year or within fifteen (15) days after the end of the month the professional/talent/director's income reaches P720,000, whichever comes earlier. In case his total gross income is less than P720,000 as of June 30, he/she shall submit a second disclosure within fifteen (15) days after the end of the month that his/her gross income for the current year to date reaches P720,000. The payee — professional/talent/director shall furnish each payor a copy of the BIR duly stamped received sworn declaration not later than five (5) days from the date of receipt by the BIR. In case of failure to submit the June 30 annual declaration/disclosure to the BIR, and to furnish the payor/s a copy thereof, the payor shall withhold the tax at the rate of 15%.
The Collection Division/Large Taxpayers Collection Division/LTDO shall transmit one (1) copy of the duly submitted notarized sworn declaration, to the Withholding Tax Division within five (5) days from receipt thereof. The remaining copy shall be the file copy of the concerned Regional Office/Large Taxpayer Service/LTDO for monitoring purposes.
These requirements shall likewise apply to taxable juridical persons (sworn declaration shall be executed by the president/managing partner of the corporation/company), partners of general professional partnerships and medical practitioners stated under sub-sections (B), (H) and (I) hereof.
Notwithstanding the foregoing, if an individual recipient receives professional fees/talent fees/directors fees in addition to salaries from the same payor, the said fees shall be considered as supplemental compensation and, thus be subject to the withholding tax on compensation.
Under RMC 72-04, it is clarified that for the period January 1 to June 30, unless the payee has informed the payor/withholding agent through the sworn declaration that his gross income has exceeded P720,000, the applicable withholding tax rate is 10%. Starting July 1, if the payee fails to execute a sworn declaration or furnish a copy to the payor if one has been executed, the withholding tax shall be 15%. In case the withholding agent has made accumulated payments within the year exceeding P720,000 to a particular payee, then subsequent payments by the payee shall be subjected to 15% even without the sworn declaration.
EWT for Professional fees, Talent fees, etc.
Under RR 2-98, as amended, professional fee is subject to EWT of fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise paid to the following;
(1) Those individually engaged in the practice of professions or callings; lawyers; certified public accountants; doctors of medicine; architects; civil, electrical, chemical, mechanical, structural, industrial, mining, sanitary, metallurgical and geodetic engineers; marine surveyors; doctors of veterinary science; dentists; professional appraisers; connoisseurs of tobacco; actuaries; interior decorators, designers, real estate service practitioners (RESPs), (i.e., real estate consultants, real estate appraisers and real estate brokers) requiring government licensure examination given by the Real Estate Service pursuant to Republic Act No. 9646 and all other professions requiring government licensure examination regulated by the Professional Regulations Commission, Supreme Court, etc.
(2) Professional entertainers, such as, but not limited to, actors and actresses, singers, lyricist, composers and emcees;
(3) Professional athletes, including basketball players, pelotaris and jockeys;
(4) All directors and producers involved in movies, stage, radio, television and musical productions;
(5) Insurance agents and insurance adjusters;
(6) Management and technical consultants;
(7) Bookkeeping agents and agencies;
(8) Other recipients of talent fees;
(9) Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in the meetings of the board of directors.
The amounts subject to withholding tax under this paragraph shall include not only fees, but also per diems, allowances and any other form of income payments not subject to withholding tax on compensation.
In the case of professional entertainers, professional athletes, directors involved in movies, stage, radio, television and musical productions and other recipients of talent fees, the amounts subject to withholding tax shall also include amounts paid to them in consideration for the use of their names or pictures in print, broadcast, or other media or for public appearances, for purposes of advertisements or sales proportion.
To know the applicable tax rate (10% or 15%) to be applied/withheld by the company you can attend our seminar “The ABC’s of Expanded Withholding Tax and Final Withholding Tax” on September 14, 2015.
Tax Reminder: Rules if Employee fails to file BIR Form 1902 and BIR Form 2305
Where an employee, 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. Any refund or under withholding that shall arise due to the violations shall be covered by the penalties prescribed in Section 80 of the NIRC, as amended. (SECTION 2.79.2 of RR 2-98, as amended)
Tax Reminder: Rule on Fixed or variable transportation, representation and other allowances
Fixed or variable transportation, representation and other allowances which are received by a public officer or employee or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding.
Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bonafide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied:
(i) It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and
(ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code (must be substantiated by official receipts). The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirement of substantiation and to withholding.