BIR Ruling [DA-254-04]

May 12, 2004 BIR RULING [DA-254-04] 24; 123-97 Protectors of Assets and Personnel Services, Inc. Cadena de Amor Corner Everlasting Sts. UPS IV, Paraaque City Attention: Mirasol C. Jalbuena Finance Manager Gentlemen : This refers to your letter dated February 18, 2002 relative to the Preliminary Assessment Notice dated January 23, 2002 imposing penalties for underwithholding and underremittance of final withholding tax on dividends for taxable year 1999 in the amount of P60,883.56. It is represented that the usual practice of the corporation to declare dividends based on prior year earning is during its Annual Stockholder's Meeting which is on the 2nd Thursday of May of each year (or thereabouts) as provided for by its By-laws; that your records show that during the 1999 Annual Board Meeting held last May 11, 1999, cash dividends in the amount of P2,000,000.00 was declared which was taken from 1998 Retained Earnings hence subjected to the 6% final withholding tax and remitted on June 24, 1999 as evidenced by official receipt #5420714 dated June 24, 1999 in the amount of P178,057.94 representing tax remittances/due for the month of May 1999 as follows: Withholding tax on Compensation (Staff) P47,640.00 Expanded Withholding Tax 9,691.02 Final Tax 120,000.00 Fringe Benefits Tax 726.92 TOTAL P178,057.94 ========== and that the tax rate used in the PAN by the Withholding Tax Division of the Bureau of Internal Revenue was 8% and not 6%. In reply, please be informed that Section 24 (B) of the Tax Code of 1997 imposes a final tax on cash or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund company, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer, viz. : caSEAH Six percent (6%) - beginning January 1, 1998; Eight percent (8%) - beginning January 1, 1999; Ten percent (10%) - beginning January 1, 2000. The issue now before us is what tax rate shall be used in the computation of the tax due. Section 38 of Revenue Regulations No. 2, as amended, provides: "Section 38. Bases of computation. Approved standard methods of accounting will be ordinarily regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. . . . A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. . . ." In income taxation, income is supposed to be calculated on the basis of the taxable year. The correct basis in imposing the tax is the taxable income actually received at the end of the taxable year. Accordingly, the imposable tax rate in computing the withholding tax is 8% since the P2,000,000.00 dividend is the income that was actually paid by the company during the taxable year 1999. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group