Atty. Richard V. Funk

September 10, 2008 BIR RULING [DA-(I-020) 202-08] RR 13-78; RR 2-98 & 30-03 Atty. Richard V. Funk Suite 25-B Kingswood Tower A Vito Cruz Ext. cor. Metropolitan Avenue La Paz, Makati City S i r : This refers to your letter dated June 27, 2008 requesting an opinion whether or not the attorney's fees awarded by the Supreme Court in your favor is subject to withholding tax. HICSaD It is represented that in 1983 you were already entitled to attorney's fees. However, the defendant refused to pay so you went to court to enforce your right to collect the same. The case eventually reached the Supreme Court wherein it finally affirmed the decisions of the lower court and the appellate court awarding you the attorney's fees. The decision became final and executory, so you filed a motion for its execution at the court a quo which granted your motion for the issuance of the writ of execution. The defendant, however, refused to pay pursuant to the order of the court and insisted to withhold certain amount for the payment to the BIR of the withholding tax. It is your position, however, that the attorney's fees awarded to you which was due in 1983 is not covered by the withholding tax law or regulations as at the time it was earned the said law is yet to be enforced or implemented. Moreover, it is your opinion that the said attorney's fees shall constitute as part of your earnings for the taxable year 2008, and thus, it shall be collated with your other income for the particular taxable year and shall be subject to the corresponding allowable deductions. In reply thereto, please be informed as follows: Pursuant to the provisions of Presidential Decree No. 1051 and in accordance with Section 4 in relation to Section 326 of the National Internal Revenue Code of 1977, as amended, Revenue Regulations (RR) No. 13-78, dated September 7, 1978, was promulgated to implement the withholding of creditable income taxes from certain income payments and the additional requirement for deductibility of such income payments, which are otherwise deductible from the gross income of the payor. Section 1 (a) of said regulations provides, viz. : "Section 1. Income payments subject to withholding tax and rates prescribed therein. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: HDATSI (a) Professional fees, talent fees, etc. paid to individuals. On the gross professional, promotional and talent fees paid to the following individuals: Those individually engaged in the practice of professions: lawyers; certified public accountants; medical practitioners; architects; civil, electrical, chemical, mechanical, structural, industrial, mining, and sanitary engineers; veterinarians; dentists; professional appraisers of connoisseurs of tobacco and other domestic or foreign products; actuaries; interior decorators; marine surveyors; land surveyors; customs and real estate brokers; registered electricians; registered master plumbers; and other professionals ten per centum (10%)." As early as 1978, income payments to individuals engaged in the practice of professions, including the practice of law, were already subject to the withholding tax at the rate of ten percent (10%) based on the gross professional fees received. The rate of 10% fixed by then RR 13-78 has not been changed despite the several revisions that have taken placed. In RR 30-2003, 1 however, a significant addition was made thereto whereby a threshold was set in order for a professional fee to be subject only to the 10% withholding tax rate. Pertinent portion of RR 2-98, as amended by RR 30-2003 provides: "Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon. . . . (A) Professional fees, talent fees, etc., for services rendered by individuals. On the gross professional, promotional and talent fees or any other form of remuneration for the services of the following individuals Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise; (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; dentist; professional appraisers; connoisseurs of tobacco; actuaries; interior decorators, designers and all other profession requiring government licensure examinations and/or regulated by the Professional Regulations Commission, Supreme Court, etc. ADETca (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 recipient 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. xxx xxx xxx Furthermore, 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 attached as Annex "A" hereof 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%." (Emphasis supplied) HcaDTE From the foregoing, the attorney's fees awarded to you shall either be subject to the 10% or 15% withholding tax as above imposed depending on whether your gross income for the current taxable year exceeds the threshold of P720,000.00, or otherwise. The payor required to deduct and withhold the tax under the regulations shall furnish you a withholding tax statement, using the prescribed form (BIR Form No. 2307) showing the income payment made and the amount of tax withheld therefrom. The payor must furnish such statement to the payee simultaneously with the income payment. SECTION 2.58.1. Income of Recipient. Income upon which any creditable tax is required to be withheld at source shall be included in the return of its recipient. On the other hand, the attorney's fees you received shall be included in the computation of your gross income earned for the taxable year 2008 subject to the corresponding deductions allowed under Section 34 of the Tax Code of 1997, as amended (Sec. 2.58.1, RR 2-98, as amended). The tax withheld from your attorney's fees shall be deducted from your taxable income for the current taxable year. Thus, if the income tax withheld or collected at source is less than the tax due on your adjusted return, the difference shall be paid in accordance with the provisions of Sec. 56 of the Tax Code of 1997, as amended. The excess of the withheld tax over the tax due on your return, if any, shall be refunded to you subject to the authority of the Commissioner to refund taxes under Sec. 204 of the same Tax Code. AECacS This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. The last revision of RR 2-98, following RR 8-98, 06-01, 12-01 & 17-03, implementing the provisions of the 1997 Tax Code, as amended, relative to the withholding of tax on specific income.