[Music] hello everyone welcome to income taxation this is our fifth lesson in this course all about withholding taxes so in this video you will learn how to compute and how to prepare a withholding tax returns also you will understand what is a withholding tax system in the philippines so our lesson objectives is that at the end of this lesson you will be able to understand the overview of the holding tax system in the philippines identify the different withholding taxes on different income payments and apply withholding tax rates on certain cases and of course prepare and file a withholding tax return so this lesson is actually quite exciting because this will be the first time that you will prepare a withholding tax return using abr form and of course emmanuel return okay so if you're ready let's start before we start discussing on how to compute it holding tax and how to fill up a withholding tax return let us first understand why there is withholding tax in the philippines and how this holding tax system operates in the philippines okay so if you recall we have a tax law and then this tax law is being implemented and affected by the executive branch of the philippines and that is under the president so the executive branch will collect taxes from the people and then these people who are now the taxpayers will be burdened to pay their taxes so there are a lot of taxes we have income taxes value-added tax and property tax and so on so these taxpayers will now go to the bureau of internal revenue as the collecting agent of the government these people these taxpayers will file and pay their taxes to the a bureau of internal revenue however uh in the case of income taxes the filing and deadline for income tax is usually annual meaning to say the payer has to wait for one year before it can collect taxes from the people for the taxpayers and then as we know the government would need funds to support its expenditures its activities to protect the people right so waiting for one year would be a long period and then burden some of the part of the government so the br under the administrative visibility of taxation would tap these people the withholding agents so this withholding agent will be directed to withhold taxes from their payments so how would this withholding agents withhold taxes from their payments okay so remember that uh these withholding agents are considered as the buyer taxpayers and then they buy their products from the supplier taxpayers okay so these supplier taxpayers would provide services and goods to these buyer taxpayers okay so it's always like that so this buyer taxpayers would purchase service or goods from the suppliers and then when these withholding agents or buyer taxpayers pay their suppliers they will withhold a certain amount from their gross payments so say for example if the supplier billed their customers let's say a hundred thousand pesos and then instead of paying the whole amount the entire 100 000 pesos the withholding agents the buyer taxpayers would deduct and withhold certain amount from that 100 000 okay so this amount being withheld and deducted from the gross payments would be limited to the vr as an advanced payment so the people or the taxpayer being taxed here is not the withholding agents but the supplier taxpayers okay so they are actually the people being burdened to pay their taxes and this withholding agents only act as withholding agents they just deduct to certain that certain rate or amount from their payments to their suppliers so when the deadline would come these withholding agents would remit to the pay or for taxes withheld so how about these supplier taxpayers what would happen to them are they still required to pay taxes the answer is yes of course they're still going to file and pay their taxes however those taxes deducted in advanced withholding agents are considered as advanced payments made by the supplier taxpayers so when this supplier taxpayer would go to the br they would now file and pay their taxes and claim tax credit for advanced payment so let's have an example if the supplier taxpayers would provide or sell goods to these withholding agents let's say an amount of 100 000 okay so when these withholding agents would pay their suppliers they would only pay let's say 98 000 because the 2000 there is being deducted and withheld okay so these withholding agents will be the one to emit the 2000 pesos to the bay or now who is entitled to that taxes who is being taxed here again the supplier taxpayers are being taxed here okay so when these taxpayers supplier taxpayers would file and pay their annual return and let's say for example they have a total income tax due of five thousand okay for example just for example if they would if their tax do is now 5 000 they will deduct the 2 000 advancely withhold and paid or reducted by the withholding agents okay so it is for the benefit of the supplier taxpayers that the withholding agents withhold their taxes because it is considered as an advance payment of the tax on the other on the other hand the vr would be glad because there is now a harmonious or smooth cash inflow to the government okay because the bearer would not wait for one year it would just wait for one month because the filing and deadline for withholding tax is uh usually 10 days after the end of the month so it will be more easier it will be easier and convenient both for the government and then the taxpayers okay so that's how withholding tax system works in the philippines in the philippines there are three types of withholding taxes the first type is the final withholding tax or the fwt so under this withholding tax the receiver taxpayer is no longer required to file a return because the tax withheld is a final tax so let us assume that a depositor has received interest from the bank for his bank savings account so before the bank would give interest to the repository the bank would first deduct and withhold 20 final tax on the interest so the depositor would now receive an amount net of 20 percent final tax okay so in the part of the repository he is no longer required by the law to file an income tax return and declare such interest income as subject to income tax why because such interest income such passive income is already subjected to a final tax okay so that is a final tax on the other side we have credit avoid holding tax which is often called the expanded holding tax or ewt so under this withholding tax the receiver taxpayer is still required to file a return but he may claim tax credit for any taxes paid in advance so let's say for example in the case of a lessor and a lessi so the lessor would of course receive irrent income from the lessee but before the lessee will pay the lessor the lessee will withhold five percent withholding tax such five percent withholding tax is actually creditable which means that the lessor would receive only 95 percent of the rent because the five percent is deducted in advance by the lessee the lassie will remit this five percent to the vr on his annual income tax return the lessor will still have to declare such rent income as an income okay so the lesser would still have to include the rent income on his income tax return however for any tax jew due thereon the lessor can claim tax credit for the taxes paid in advance such as the withholding tax deducted by the lessee okay so the last withholding tax is the withholding tax on compensation so under this withholding tax the employee taxpayer may still be required to file a return but may claim for credit for the taxes paid in advance so for example imagine you are an employee of a company so you have your monthly compensation you have your monthly allowance etc so before you would receive your monthly income your employer is required by the law to withhold certain amount from your compensation income as a withholding tax okay so when you file your annual income tax return later that year you can claim those withholding taxes withhold withheld and deducted by the by your employee employer from your income tax due okay similar to that of the creditable withholding tax okay so let us compare and contrast these three withholding taxes as fast so we have here the final withholding tax we also have the creditor withholding tax or the ewt we also have withholding tax on compensation so as to the applicability the final holding tax is imposed on passive incomes earned within the philippines so always remember that this final withholding tax is usually imposed in passive incomes earned within the philippines because passive incomes earned outside the philippines are no longer subject to final tax so i hope you have watched the other videos on passive income so you would understand how passive income circum how taxes and passive incomes are computing however in the case of cwt or ewt these are imposed on payments made by the buyer to their suppliers so later on we will discuss what these payments are and we have here the withholding tax and compensation these are imposed and salaries paid by employer to their employees as to timing for final ruling tax it is withheld at source meaning before the payment is made the taxes are already deducted the same way the cwt ended holding tax and compensation so they are actually the same now before the taxpayer would receive income payments from the other taxpayer there is already a tax deducted as to the question who withholds the tax for final withholding tax it is the payer of the income so for example in the case of dividends the stockholder is the receiver of the income and the payer of the income is the company or the corporation so before the corporation would pay the stockholder for the dividends the corporation would first deduct and withhold certain amount of tax if you have watched the other videos that is actually 10 and in the case of cwt or ewt it is the buyer or the payer of the income who would withhold the um the tax so for example if you are a top withholding agent so any transactions any purchases you made with your supplier you should withhold um one percent or two percent from your payment okay so later on again we will show you what this is all about and we have the withholding tax and compensation again it is the employer who would withhold the tax okay as to the effect the receiver taxpayer would receive a lesser amount similar to the cwt and of course the withholding tax and compensation as to when these taxes are limited for the final withholding tax these are limited by the uh by the taxpayer on or before the 10th day of the following month in the case of the first two months for every quarter so as you know there are four quarters in a year we have january february and march for the first quarter and so on so for the first two months of every quarter for example for the first quarter we have january and february the deadline for filing such tax is on or before the 10th day of the following month so for the month of january the deadline is on february 10. for the month of february the deadline will be on march 10. but for the quarterly return the deadline would be on the 25th day of the following month so for example in the case of march which is a quarter the last or the third month of the quarter the deadline would be on april 25. so let's have this um drill how about for the second quarter when will be the deadline for april for the month of april okay that would be may 10. how about for the month of may when would be the deadline that would be june 10 yes you're correct and how about for the month of june the third month of the quarter that would be july 25 okay very good so same with the cwt it follows same pattern however for withholding tax and compensation it is always on monthly basis and should be filed and paid on or before the 10th day of the following month okay there is no quarterly return for withholding tax and compensation as to the form used we have the br form 0619f for the monthly return nbr form 1601 fq for the quarterly return so for the month of january and february you will be using 0619f for the month of march you will be using 1601 fq okay for cwt it is player form zero six one and e again it's e for expanded and then that's for monthly for quarterly we have br form 1601 eq okay for the withholding tax and compensation it will always be they are form1601c again this is monthly so there will be another video for this and i will show you how to use and how to fill up this they are forms 0 6 1 and f or e and 1601 f or eq okay so there is another video for that now let's focus on the final withholding taxes so as i have said final holding taxes are imposed in passive incomes derived in the philippines the payer of the income is required to deduct the tax from the income before paying to the earner example of violating taxes we have interest which is 20 15 and 25 percent so i really hope you have already watched the other videos on passive income so you can relate what are these rates are all about for royalties we have 20 and 10 for books prizes and winnings we have 20 dividends also we have 10 percent 15 20 25 and 30 so these passive incomes are already discussed in the other videos so please watch the other video so may's repository at the time at the same time is the holder of abc bank a philippine domestic bank during the year 2020 may receive the following from abc bank so may is a depositor at the same time a stockholder of a bank so may receive interest on short-term savings deposit amounting to 20 000 and also cash dividend amounting to 30 000 so how much is the total final tax to be withheld by the bank so again interest on savings deposit and cash dividends are considered as passive incomes and since these are earned or given by domestic bank therefore these are earned within the philippines so therefore subject to final withholding taxes so our solution would be interest on short-term savings deposit that is 20 000 times 20 percent that is 4 000 and then cash dividend we have thirty thousand times ten percent we have a tax of three thousand a total of seven thousand total final withholding tax deducted by the bank so before may would receive the interest in cash dividend the bank would first deduct this entire amount so hence may would receive the following amount so for the interest may would only receive a net amount of 16 000 and for cash dividend may would receive an amount of 27 000 pesos so a total of 43 000 pesos okay so since this is a final tax this is amazed no longer required to declare this incomes on his income tax return okay so why because the tax is a final tax so may don't should not add these items these two items on her gross income okay again since the incomes are already subjected to final tax may is no longer required to include these items on his on her gross income after you have learned about the final withholding tax now let's proceed to creditable or expanded withholding taxes so these taxes are imposed on income payments made by the buyer to the supplier of goods or service the tax is deducted in advance before the payment the supplier receiving such income net of withholding tax can claim tax credit once it files its annual or quarterly return so examples of these taxes are the five percent of the rental payments if if and only if the rent payment is more than ten thousand in a year okay so if it's not more than ten thousand a year then you don't have to deduct the five percent so this rental payments is made by the lessee to the lessor of the property we also have five percent or ten percent for professional fees rendered by an individual professional so for example you are an accountant or an architect and you have a client okay you rendered professional services so before your client will pay you for the professional fees your client would ask you first how much is your total annual gross income again your annual gross income if you will declare as a professional if you will declare that your annual gross income does not exceed 3 million then your client would deduct 5 however if you would say that your total annual gross income exceeds 3 million then your client will deduct 10 from the professional fees okay so say for example you bill your client for let's say ten thousand one hundred thousand for example okay so your client would first ask you how much is your total annual gross income if you would say i'm earning 4 million in a year so your client would it automatically deduct 10 from the professional fees before it pays you or before he pays you the professional fees we also have 10 percent or 15 percent again this is the same but uh the professional services is rendered by a corporate taxpayer or a partnership for example okay so 10 if the annual gross income does not exceed 720 000 and otherwise it's 15 okay so let's have an illustration john a vat registered taxpayer is an accountant and an owner of an empty warehouse he leased the warehouse to peter who also hired john for the latter's accounting and consultation services during the year 2020 john billed peter the following so we have rental payments this is inclusive of the vat meaning the vat is already added there the vat in the philippines is actually 12 and also professional fees and then again this amount is inclusive of the vat a total build amount of 134 thousand four hundred so john the accountant at the same time an owner of a of an empty warehouse who is now a lessor billed peter peter is actually the lessee and then also a client for accounting and consultation services of john so john expects or billed peter this amount so how much would be john's net receipt okay so john declared that his annual gross income exceeds 3 million pesos so how do we compute the withholding tax here so our solution would include upon payment peter will deduct the creditor withholding tax computed as follows so for rental payments with vat we need to divide the amount by 112 percent to exclude the vat because again always remember when you compute the withholding tax do not include the vat okay so to exclude the vat we need to deduct to divide rather the amount by 112 percent so if we will divide 112 000 by 112 percent it will be one hundred thousand pesos okay times five percent that is five thousand pesos for the professional fees again the same since the amount given is inclusive of the vat we need to exclude the vat first before we can multiply by 10 percent okay so that 22 400 divided by 112 percent that would become 20 000 pesos times 10 so we have 2 000 pesos so why 10 because john declared that his annual gross income exceeds 3 million pesos therefore the 10 percent rate is applicable so peter the payer of the income will now withhold a total of seven thousand pesos hence again always remember before multiplying the amount by the tax rate make sure to exclude the vat of twelve 12 so hence john would receive the following amount from peter so from rental payment john i mean john yes john expects 112 000 but peter would deduct 5 000 pesos okay so that becomes 107 000 pesos and also from professional fees john expects 22 400 but peter would deduct two thousand pesos so that becomes twenty thousand four hundred a total of one hundred twenty seven thousand four hundred pesos you