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STRATEGIC TAX MANAGEMENT

MODULE 2: Strategic Tax Planning

Lesson 5: Train Law vs Create Law

TRAIN Law

The Tax Reform for Acceleration and Inclusion Law (TRAIN Law),[1] officially
designated as Republic Act No. 10963, is the initial package of the Comprehensive Tax
Reform Program (CTRP) signed into law by President Rodrigo Duterte on December 19,
2017.[2]

The TRAIN Act is the first of four packages of tax reforms to the National Internal
Revenue Code of 1997, or the Tax Code, as amended.[3] This package introduced changes in
personal income tax (PIT),[4] estate tax, donor's tax, value added tax (VAT), documentary
stamp tax (DST) and the excise tax of tobacco products, petroleum products, mineral
products, automobiles, sweetened beverages, and cosmetic procedures.[5]

The prominent features of the tax reform are lower personal income tax and higher
consumption tax. Individual taxpayers with taxable income not exceeding ₱250,000 annually
are exempted from income tax. The exemption for minimum wage earners is retained in the
revised tax system.

The TRAIN will provide hefty income tax cuts for majority of Filipino taxpayers while
raising additional funds to help support the government’s accelerated spending on its “Build,
Build, Build” and social services programs.

This tax reform package corrects a longstanding inequity of the tax system by
reducing personal income taxes for 99 percent of taxpayers, thereby giving them the much
needed relief after 20 years of non-adjustment of the tax rates and brackets. This is the
biggest Christmas and New Year gift the government is giving to the people.

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CREATE Law
Republic Act (RA) No. 11534, otherwise known as the Corporate Recovery and Tax
Incentives for Enterprises (CREATE) Act was created by the Philippine Congress in response
to the COVID-19 pandemic as a fiscal relief to domestic and foreign corporations doing
business in the Philippines. It seeks to amend several provisions in the old Tax Code, with a
central focus on lowering corporate income tax rates and rationalizing fiscal incentives to
better attract local and foreign investments in the Philippines.
President Rodrigo Duterte signed CREATE into law on March 26, 2021, with a number
of vetoed provisions. It was published in the Business Mirror on March 27 and took effect on
April 11, 2021.
Before the COVID-19 pandemic, CREATE Act was initially known as TRABAHO bill (or
Tax Reform for Attracting Better and Higher-quality Opportunities). When the bill failed to
pass Congress, it was renamed to CITIRA (or Corporate Income Tax and Incentives Reform
Act), which also failed to pass Congress because it was deemed as a non-priority and non-
urgent bill during the outbreak of COVID-19. The addition of COVID-19 related provisions
propelled the passage of the bill into law.

Salient Features
• Corporate income tax is reduced from 30% to 25% for domestic and resident foreign
corporations. Domestic corporations with net taxable income not exceeding
P5million and with total assets not exceeding P100million is taxed at 20% effective
July 1, 2020. MCIT rate reduced from 2% to 1% effective July 1, 2020 to June 30, 2023
• Income tax rate for nonresident foreign corporation is reduced from 30% to 25%
effective January 1, 2021.
• Percentage tax reduced from 3% to 1 % effective July 1, 2020 to June 30, 2023.
• Rate of tax for proprietary educational institutions and hospital reduced from 10% to
1% effective July 1, 2020 to June 30, 2023.
• Improper Accumulation of Earnings Tax is repealed.
• Definition of reorganization for purposes of applying the tax free exchange provision
under Section 40(C)(2) is expanded. Prior BIR ruling or confirmation shall not be
required for purposes of availing the tax exemption of the exchange.
• Qualified export enterprises shall be entitled to 4 to 7 years ITH to be followed by 10
years 5% Special Corporate Income Tax (SCIT) OR Enhanced Deductions (ED).
• Domestic market enterprises shall be entitled to 4 to 7 years ITH (Income Tax
Holiday) to be followed by 5 years ED.
• Registered enterprises are exempt from customs duty on importation of capital
equipment, raw materials, spare parts, or accessories directly and exclusively used in
the registered project or activity.

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• VAT exemption on importation and VAT zero-rating on local purchases shall only
apply to goods and services directly and exclusively used in the registered project or
activity by a Registered Business Enterprise (RBE).
• For investments prior to effectivity of CREATE: RBEs granted only an ITH - continue
with the availment of the ITH for the remaining period of the ITH. RBEs granted an
ITH + 5% GIT or currently enjoying 5% GIT - allowed to avail of the 5% GIT for 10
years.

Corporate Income Tax (CIT) Reforms under CREATE Act

The corporate income tax (CIT) rates for domestic corporations and resident foreign
corporations (RFCs) under the CREATE Act will be reduced from the current 30% to
25%, retroactive to July 1, 2020. The CIT will be reduced further by 1% annually in the
next six years. And shall eventually reach 20% by 2027 onwards.
Summary of CIT rates and their effectivity under CREATE Act

Taxpayer Old Rate New Rate Effectivity

Domestic Corporations 30% 25% July 1, 2020

Minimum Corporate Income Tax July 1, 2020 -

2% 1%
(MCIT) for Domestic Corporations June 30, 2023

Domestic Corporations with Net

Taxable Income not exceeding ₱5M and 30% 20% July 1, 2020
total assets not exceeding ₱100M

Non-Profit Proprietary Educational July 1, 2020 -

10% 1%
Institutions and Hospitals June 30, 2023

Resident Foreign Corporations (RFCs) 30% 25% July 1, 2020

July 1, 2020 -
MCIT Resident Foreign Corporations 2% 1%
June 30, 2023

Non-Resident Foreign Corporations

30% 25% January 1, 2021
(NRFCs)

Regional Operating Headquarters

10% 25% July 1, 2020
(ROHQs)

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Changes on rates of certain passive income

Type of Tax Old Rate New Rate

Capital Gains Tax on capital gains derived by RFCs on sale of

5% / 10% 15%
shares of stocks not traded in the stock exchange

Regional Operating Headquarters (ROHQs) 7.5% 15%

Minimum Corporate Income Tax

MCIT, as defined in the National Internal Revenue Code (NIRC) of the Philippines, is
a system that requires corporations to pay a minimum income tax, regardless of their
actual net income. The MCIT is in place to prevent tax evasion or avoidance strategies that
some companies may employ to reduce their tax liabilities.

To what corporations is MCIT applicable?

It is applicable to domestic and resident foreign corporations which are subject to

normal corporate income tax.

What are the instances when the MCIT is imposed?

The MCIT shall be imposed whenever a domestic corporation has:

1. Zero or negative taxable income; or

2. Whenever the amount of MCIT is greater than the NCIT tax rate of 25% on taxable
income from the corporation.

How is MCIT computed?

MCIT is computed at 2% of the gross income of the corporation as of the end of the
taxable year, beginning on the fourth taxable year immediately following the year in which
such corporation commenced its business operations.

Note: MCIT shall likewise apply to the quarterly corporate income tax but the final
comparison between the NCIT due and the MCIT shall be made at the end of the taxable
year taking into consideration quarterly tax payment made.[2] The year in which a
corporation commenced its business operations is the year when the corporation registers
with the BIR and not when the corporation started commercial operations. [3]

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What is gross income for MCIT purposes?

Gross income shall mean gross sales less sales returns, discounts and allowances
and cost of goods sold. In case the taxpayer is engaged in the sale of service, gross income
means gross receipts less gross returns, allowances, discounts and cost of services.

Note: If apart from deriving income from these core business activities, there are
other which are subject to the MCIT. This means that gross income will also include all
items of gross income enumerated under Section 32, par. (A) of the NIRC, except income
exempt from income tax and income subject to final withholding tax.

What is the concept of carry-forward of excess MCIT?

Any excess of MCIT over NCIT may be carried forward on an annual basis and be
credited against the NCIT for the three immediately succeeding years.

What are the rules on the carry forward of excess MCIT?

The following are the rules on the carry-forward of excess MCIT:

1. The excess of MCIT over the NCIT can be carried forward on an annual and
quarterly basis;
2. it can be credited against the NCIT due in the next three (3) immediately succeeding
taxable years;
3. Any excess no credited in the next three (3) years shall be forfeited;
4. Carry forward (annually or quarterly) is possible only if NCIT is greater than MCIT;
5. The maximum amount that can be credited is up to the amount of the NCIT; and
6. The excess MCIT cannot be claimed as a credit against the MCIT itself or against any
other losses.

What are the entities exempt from the imposition of the MCIT?

The MCIT shall not be imposed upon and of the following:

1. Domestic proprietary educational institutions;

2. Domestic non-profit hospital;

Note: This is subject to the Predominance Theory. Proprietary education institutions and
non-profit hospitals enjoy the privilege of being taxed at the rate of 10% on net income,
provided if the gross income from unrelated trade, business, or activity exceeds fifty (50%)
of gross income from all sources, the domestic proprietary educational institution or
hospitals shall be subject to 25% NCIT, and thus also to MCIT.

1. Domestic depository banks under the expanded foreign currency deposit system-
subject to final income tax of ten percent (10%) of their taxable income;

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2. Resident foreign international carrier-subject to two and one-half percent of the

Gross Philippine Billings;
3. Resident foreign regional operating headquarters-subject to final income tax at ten
percent (10%) of such income;
4. Resident offshore banking units-subject to final income tax at ten percent (10%) of
their taxable income;
5. Firms enjoying special income tax rate under the PEZA law, Bases Conversion and
Development Act and those enjoying income tax holiday incentives;
6. Nonresident foreign corporations; and
7. Real Estate Investment Trust.

Note: The entities enumerated above are exempt from MCIT because they are not
subject to NCIT.

Clarification on the Manner of Computing the Minimum Corporate Income Tax

(“MCIT”) for Taxable Year 2023

Please be informed that RMC No. 36-2024 has been issued on 11 March 2024 to
clarify the manner of computing the MCIT for taxable year 2023.

The Corporate Recovery and Tax Incentives for Enterprises (“CREATE”) Act
prescribed the one percent (1%) MCIT from 1 July 2020 to 30 June 2023. Effectively
starting 1 July 2023, the MCIT rate shall return to its old rate of two percent (2%) based on
gross income of corporate taxpayers.

In computing the MCIT, the gross income shall be divided by 12 months to get the
average monthly gross income then subsequently apply the rate of 1% for the period from
1 January 2023 to 30 June 2023 and 2% for the period from 1 July 2023 to 31 December
2023.

Below are the following rates corresponding to the taxable period for ease of computation:

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Annual Accounting Period MCIT Rate Annual Accounting Period MCIT Rate

FY 7-31-23 1.08% FY 1-31-24 1.58%

FY 8-31-23 1.17% FY 2-28-24 1.67%

FY 9-30-23 1.25% FY 3-31-24 1.75%

FY 10-31-23 1.33% FY 4-30-24 1.83%

FY 11-30-23 1.42% FY 5-31-24 1.92%

CY 12-31-23 1.50% FY 6-30-24 2.00%

Domestic corporations
The following corporate income tax (CIT) rates apply to domestic corporations:

• In general, on net income from all sources. CIT rate is 25%

• On net income from all sources of domestic corporations with total assets not
exceeding 100 million Philippine pesos (PHP) and total net taxable income not
exceeding PHP 5 million. CIT rate is 20%

• Minimum corporate income tax (MCIT) on gross income, beginning in the fourth
taxable year following the year of commencement of business operations. MCIT is
imposed where the CIT at 25% is less than 2% MCIT on gross income. CIT rate is 2%

• Proprietary educational institutions and non-profit hospitals, on net income if gross

income from unrelated trade, business, and other activities does not exceed 50% of
the total gross income from all sources. CIT rate is 10%

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• Non-stock, non-profit educational institutions (all assets and revenues used actually,
directly, and exclusively for educational purposes) and other non-profit
organisations. CIT rate is NONE. It is Exempt.

Fiscal Incentive Reforms under CREATE Act

Corporate Income Tax (CIT) Incentives
CIT incentives under CREATE Act shall include:
• Income Tax Holiday (ITH) granted for a period of 4 to 7 years, followed by the
Special Corporate Income Tax Rate of 5% on gross income earned (GIE), in lieu of all
national and local taxes, or enhanced deductions (ED) for 5 or 10 years (the
incentive period varies depending on which area the registered project or activity
will be located)
• Duty exemption on importation of capital equipment, raw materials, spare parts, or
accessories
• VAT exemption on importation and VAT zero-rating on local purchase (partly vetoed
by the President)
• The Strategic Investment Priority Plan (SIPP) shall define the coverage of the tiers
and provide the conditions for qualifying activities:
o For export enterprises:

Value-Added Tax (VAT) Exemptions

Value-Added Tax (VAT) exemptions under CREATE Act shall include:
• Sale or distribution, importation, printing, or publication of any educational material
covered by the UNESCO agreement including digital and electronic format
• All drugs, vaccines, and medical devices prescribed and used for the treatment of
COVID-19
• Capital equipment, its spare parts, and raw materials for the production of personal
protective equipment for COVID-19 prevention
• Drugs for the treatment of COVID-19 approved by the FDA for use in clinical trials,
including raw materials directly necessary for the production of such drugs
• Sale of prescription drugs and medicines for cancer, mental illness, tuberculosis,
diabetes, high cholesterol, hypertension, and kidney disease (beginning January 1,
2021 instead of January 1, 2023)

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Vetoed Provisions in CREATE Act

The President vetoed several provisions in the new tax law, including:
• Increasing the VAT-exempt threshold on sales of real property and the adjustment
in the threshold amount every 3 years
• 90-day period for processing of general tax refunds, requirements in case of denial
by the Commissioner, and remedy of taxpayer in case of denial
• Definition of investment capital
• Domestic market enterprises’ entitlement to special corporate income tax (SCIT)
rate
• Specific share of the national government and local government units in the gross
income earned using the SCIT rate
• Availment of a new set of incentives and its corresponding period of availment for
qualified expansions or entirely new project or activity
• Allowing export enterprises registered prior to CREATE Act to avail of further
extension of new incentives for the same activity
• Exercise of power by the Fiscal Incentives Review Board (FIRB) in granting
incentives to registered projects or activities with a total investment capital of more
than ₱1B
• Specific industries mentioned under activity tiers
• Provision granting the President the power to exempt any investment promotion
agency (IPA) from coverage of Title XIII of CREATE Act
• Automatic approval of applications for incentives in case of inaction

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Lesson 6: Choosing an Entity

Objectives:
1. Know the basic legal structure of business
2. Understand the tax and non-tax consideration of different forms of business
organization
3. Understand the crucial importance in decision making for choosing a legal entity

Forms of Business Organization

Sole Proprietorship
The simplest and least formal type of business structure, where a single
individual has full control and authority over the business. The owner or proprietor
owns all the assets of the company but is also solely responsible for all its liabilities.

Partnership
By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry into a common fund with the intention of
dividing the profits among themselves.

Corporation
An artificial being created by operation of law, having the right of succession
and the powers, attributes, and properties expressly authorized by law or incidental
to its existence.

Non-Tax Considerations

SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION

Simplified Extensive Extensive

There is little Registration with Registration with

paperwork needed. One the Securities and the Securities and
only need to apply for a Exchange Exchange
Registration business name and Commission (SEC) Commission (SEC)
register the business requires more requires more
with the Department of paperwork. paperwork.
Trade and Industry
(DTI)

Cost of Minimal Computed based on Computed based on

Registration capital contribution the amount of
of the partners authorized capital
stock

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Control The sole owner has Unless a managing Except for certain
complete control over partner is appointed acts which require
business decisions in the articles of co- ratification by the
partnership, all shareholders, the
partners act as agent affairs of the
of the partnership corporation is
managed by the
Board of
Directors/Trustees

Profits All profits are to be The profits are to be Shareholders share

enjoyed by the sole distributed among in the profits only
owner the partners when dividends are
declared and
distributed

Losses All losses are to be Except for an Shareholders do not

suffered by the sole industrial partner, suffer (at least not
owner the losses are to be indirectly) when a
distributed among corporation incurs a
the partners loss.

Separate The sole proprietorship The partnership has The corporation has
juridical does not acquire its own a juridical a juridical
personality juridical personality personality distinct personality distinct
and separate from and separate from
the partners which the individual
composes it shareholders

Assets The assets of the sole The assets of the The assets of the
proprietorship are also partnership are corporation are
the assets of the sole separate and distinct separate and distinct
owner from the personal from the personal
assets of each assets of each
partner stockholder
Liabilities The liabilities of the sole Once the The liability of each
proprietorship are also partnership assets stockholder is
the liabilities of the sole are exhausted, limited only to their
owner personal assets of capital contribution,
the partners may be hence, their
held responsible for personal assets
the settlement of cannot be used to
partnership satisfy corporate
liabilities, except for liabilities

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a limited partner
whose liability is
limited to his capital
contribution

Tax Consideration

SOLE PARTNERSHIP CORPORATION

PROPRIETORSHIP

Income Tax Regular income tax 0 Regular corporate Regular corporate

to 35% of Taxable income tax 20% or income tax 20% or
(projected/actual Net income 25% of Taxable Net 25% of Taxable Net
gross sales or gross Income Income
receipts DO NOT OR OR OR
EXCEED
P3,000,000.00 in Optional tax regime Minimum corporate Minimum corporate
any 12-month 8% of Gross sales or income tax income tax
period and taxpayer Gross receipts 1% of Gross Income 1% of Gross Income
is registered as
NON-VAT taxpayer) Whichever is higher Whichever is higher
Income Tax Regular corporate Regular corporate
income tax 25% or income tax 25% or
(Projected/actual Taxable Net Income Taxable Net Income
gross sales or gross Regular income tax 0
receipts EXCEED to 35% of Taxable OR OR
P3M in any 12- Net Income
month period Minimum corporate Minimum corporate
OR income tax 1% of income tax 1% of
Taxpayer is Gross Income Gross Income
registered as VAT
taxpayer) Whichever is higher Whichever is higher
Business Tax 1% Percentage tax 1% Percentage tax 1% Percentage Tax
under Sec. 116 under Sec. 116 under Sec. 116
(Projected actual
gross sales or gross OR
receipts DO NOT
EXCEED P3M in any Exempt if under the
12-month period 8% optional income
AND tax regime
Taxpayer is
registered as NON-
VAT taxpayer)

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Business tax 12% or 0% Value 12% or 0% Value 12% or 0% Value

Added Tax Added Tax Added Tax
(Projected/actual
gross sales or gross
receipts EXCEED
P3M in any 12-
month period
OR
Taxpayer is
registered as VAT
taxpayer)
Interest on bank 20% Final Income 20% Final Income
deposits, yield on Tax Tax
deposit substitutes,
money market
placements, trust
funds, and other
similar
arrangements,
including
government bonds
Interest on foreign 15% Final Income 15% Final Income
currency deposits Tax exempt NRC, Tax except NRFC
NRAE, NRANE
Interest on long- Exempt Regular income Tax
term deposits with
maturity period of
not less than (5)
years
Interest on pre-
terminated long
term deposits
4 yrs. to less than 5% Final Income Tax 20% FIT
5yrs 12% Final Income 20% FIT
3yrs to less than Tax 20% FIT
4yrs 20% Final Income
Less than 3yrs Tax
Dividends from 10% FIT DC – Exempt
domestic NRAE – 20% FIT RFC – Exempt
corporations NRANE – 25% FIT NRFC – 15% FIT
Dividends from Regular Income Tax Regular Income Tax
foreign corporations
– sources within the
Philippines

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Dividends from RC – Regular Income DC – Regular Income

foreign corporations Tax Tax
– sources without Not RC – Exempt Not DC – Exempt
the Philippines
Stock dividends Exempt Exempt
Royalties 20% FIT 20% FIT
Royalties from 10% FIT 10% FIT
books, literary
works, and musical
compositions
Informer’s reward 10% FIT 10% FIT
Final tax on 6% FIT (or Capital 6% FIT (or Capital
presumed gains on Gains Tax) of the Gains Tax) of the
sale of real selling price or the selling price or the
properties classified fair market value, fair market value,
as capital assets whichever is higher whichever is higher

Limited to
land/building
Final tax on net 15% FIT of the net 15% FIT of the net
capital gains on the capital gains capital gains
sale of shares of
stock in domestic
corporations which
are not listed or
traded in the local
stocks exchange
Fringe benefits Regular income tax N/A
received by rank-
and-file employees
Fringe benefits 35% FIT (Fringe N/A
received by benefit tax) of the
managerial or Grossed-Up
supervisory Monetary Value of
employees the Fringe Benefit/s

Preferential Taxation
• Barangay Micro Business Enterprise
• Special Economic Zones
• Omnibus Investments Code
• Non-stock, Non-profit Organization
• Double Taxation Agreements

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Lesson 7: Employee Compensation and Benefits

Objectives:
1. Understand the importance of compensation management
2. Understand the tax implication on employee compensation
3. Able to identify compensation exempt from income taxation
4. Identify steps in compensation management
5. Explain the effect of job contracting

Compensation – is a systematic approach to providing monetary value to employees in

exchange for work performed. Compensation may achieve several purposes assisting in
recruitment, job performance, and job satisfaction.

Compensation may be used to:

1. Recruit and retain qualified employees
2. Increase or maintain morale/satisfaction
3. Reward and encourage peak performance
4. Achieve internal and external equity
5. Reduce turnover and encourage company loyalty
6. Modify (through negotiations) practices of unions

Compensation Management – is a process by which employees are scouted, engaged, and

retained employees through competitive compensation plans that align with the company
budget, corresponding job-market, and government regulations.

Good Compensation Management Should Be:

1. Attract and recruit talent
2. Motivate employee
3. Maintain morale
4. Adhere to government regulations and company compensation philosophy
5. Reflect the current job-market

Salary ranges involve a number factors: regional prevailing salary rates, contractual
stipulations, and negotiating bargaining agreements.

Government-Mandated Contributions (Salary Deductions)

Social Security System (SSS) – the SSS was created to provide private employees and
their families protection against disability, sickness, old age, and death. The
Government Service Insurance System (GSIS) is the equivalent system for Philippine
government employees.

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Philippine Health Insurance Corporation (Philihealth) – Philihealth is administered by

the Philippine Health Insurance Corporation, and provides employees with a practical
means of paying for adequate medical care in the Philippines.

DE MINIMIS BENEFITS

In reference to Section 2.78.1 of RR No. 2-98, as amended, De minimis benefits are

facilities and privileges which are given to employees by their employers that is not subject
to income tax as well as withholding tax on compensation income of both managerial, and
rank and file employees. They are intended to support and promote the health, goodwill, and
to improve the morale and productivity of their employees. The term "de minimis" comes
from the Latin phrase "de minimis non curat lex", which means "the law does not concern
itself with trifles". In other words, de minimis benefits are relatively of small value.

The legal basis for de minimis benefits in the Philippines is found in Section 33(C) of
the National Internal Revenue Code (NIRC), as amended by Republic Act No. 10963 or the
Tax Reform for Acceleration and Inclusion (TRAIN) Law. This section provides a list of de
minimis benefits that are exempt from income tax, withholding tax, and fringe benefit tax,
subject to certain conditions and limitations. To wit:

(1) Fringe benefits which are authorized and exempted from tax under special laws;

(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;

(3) Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and

(4) De minimis benefits as defined in the rules and regulations to be promulgated by

the Secretary of Finance, upon recommendation of the Commissioner.

LIST OF DE MINIMIS BENEFITS:

a. Monetized unused vacation leave credits to employees not exceeding ten (10) days
during the year;
b. Monetized value of vacation and sick leave credits paid to government officials and
employees;
c. Medical cash allowance to dependents of employees, not exceeding ₱ 1,500.00 per
employee per semester of ₱ 250.00 per month;
d. Rice subsidy of ₱ 2,000.00 or one sack of 50kg rice per month amounting to not more
than ₱ 2,000.00;
e. Uniform and clothing allowance not exceeding ₱ 6,000.00 per annum;

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f. Actual medical assistance, e.g. medical allowance to cover medical and healthcare
needs, annual medical/executive check-up, maternity assistance, and routine
consultations, not exceeding ₱ 10,000.00 per annum;
g. Laundry allowance not exceeding ₱ 300.00 per month;
h. Employees achievement awards, e.g. for length of service or safety achievement,
which in the form of a tangible personal property other than cash or gift certificate,
with an annual monetary value not exceeding ₱10,000.00 received by the employee
under an established written plan which does not discriminate in favor of highly paid
employees;
i. Gifts given during Christmas and major anniversary celebrations not exceeding
₱5,000.00 per employee per annum;
j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of
the basic minimum wage;
k. Benefits received by an employee by virtue of a collective bargaining agreement
(CBA) and productivity incentive schemes provided that the total annual monetary
value received from both CBA and productivity incentive schemes combined do not
exceed ten thousand pesos (Php 10,000.00)per employee per taxable year;

WITHHOLDING TAX ON COMPENSATION

Compensation or Wages - refers to all remuneration for services performed by an

employee for his employer under an employee-employer relationships unless exempted by
the NIRC and pertinent laws.

Withholding Tax On Compensation - is the tax withheld from income payments to

individuals arising from an employer-employee relationship.

KINDS OF COMPENSATION

• Regular
a. Basic Salary
b. Fixed allowances

• Supplmentary
a. Commission
b. Overtime pay
c. Fees, including directors fees
d. Profit sharing
e. Monetized vacation leave in excess of ten (10) days
f. Sick leave
g. Fringe benefits received by rank and file employees
h. Hazard pay

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i. Taxable 13th month pay and other benefits

j. Other remuneration received from an employee-employer relationships

Taxable Compensation Income:

1. Salaries, wages, compensation, commission, emoluments, and honoraria
2. Bonuses and other benefits exceeding P90,000.00
3. Allowances for transportations, representation, entertainment, and other similar
items
4. Fees (including director’s fees paid to a director who is at the same time an employee
of the payer)
5. Taxable pensions
6. Taxable retirement pay
7. Bonuses and profit-sharing
8. Other income of a similar nature, including compensation paid in-kind

Tax Exempt Compensation Income

1. Statutory minimum wage, including holiday pay, hazard pay, overtime pay, and night
shift differential
2. 13th month pay, Christmas bonus, and productivity incentives not exceeding
P90,000.000
3. Mandatory contributions for SSS, Philihealth, Pag-ibig
4. De minimis benefits
5. If the net compensation income does not exceed P250,000.00
6. Retirement pay, if (a) the retiree is at least 50 years old; (b) if the retiree has rendered
at least 10 years of service; (c) if it is his/her first retirement; and (d) the private
retirement benefit plan is approved by the BIR
7. Separation pay, if the reason for separation is (a) death; (b) disability; (c) sickness; or
(d) for any cause or beyond the control of the employee

RESPONSIBILITIES OF THE EMPLOYER

• Submit the duly accomplished BIR Form Nos. 1902 and/or 1905 to the RDO within
thirty (30) days from receipt;
• Withhold the tax due from the employees following the prescribed manner;
• Remit the amount of tax withheld from the employee within the prescribed due dates;
• Do the year-end adjustment;
• Submit Annual Information return (BIR Form 1604-C, 1604-F and 1604-E), including
the required alphabetical list of employees/payees on or before January 31 following
the close of the calendar year;
• Issue the Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316) to
the employees; and
• Refund excess tax withheld.

Strategic Tax Management 24

 MPre304

Computation for Taxable compensation income:

On Compensation
Total Compensation Income P ___________
Less: Non-taxable Income
Non-Taxable salaries (₱ 250,000.00) 250,000.00
SSS, GSIS, PHIC, HDMF and union dues (employee share)
De Minimis Benefits
13th month pay and other benefits (max) 90,000.00
Taxable Compensation Income P ----------------

Strategic Tax Management 25