BIR Regulations on Creditable Withholding Tax on Talent Fees Clarified

February 18, 2002 BIR RULING NO. 009-02 000-00 ABS-CBN Broadcasting Corporation ABS-CBN Broadcast Center, Sgt. E. A. Esguerra Avenue Cor. Mother Ignacia St., Quezon City Attention: Kai V. Rodriguez Assistant Vice-President Gentlemen : This refers to your letter dated December 19, 2001 requesting for clarification on the proper implementation of the BIR regulations on Creditable Withholding Tax on Talent Fees beginning January 1, 2002, and a confirmation of the following assumptions: 1. On Default Withholding Tax Rate The default rate to apply on January 1, 2002 is 10%.This default rate assumes that the 20% withholding tax on talent fees will only be applied when the talent's gross income has reached the threshold of P720,000 anytime during the year. 2. On the filing of the Affidavit-Declaration of current year's gross income It is clear in Revenue Regulations No. 12-2001 (RR 12-2001 for brevity) that the mid-year deadline for filing of the affidavit-declaration is June 30. However, if the talent reaches the P720,000 talent fee threshold anytime before June 30, the rate of 20% is automatically applicable, with or without the filing of an affidavit-declaration. 3. On Talents under Contract with Talent Fees beyond P720,000 per year For talents who are under contract with our Company and are expected to earn at least P720,000 per year, should ABS-CBN Broadcasting Corporation (ABS-CBN for brevity) automatically apply the 20% tax rate? In the case of contract cancellation and the total talent fee of an individual for the year does not reach P720,000, can ABS-CBN recompute talent fees and refund its overpaid withholding taxes and adjust the last talent fee pay-out? 4. Retroactive Adjustments of Taxes When the individual's talent fee reaches P720,000, we understand that there will be no retroactive adjustments to correct the total tax withheld. This means that the application of 20% will be prospective, applicable only to succeeding talent fees to be paid. In reply, please be informed of the following opinions: 1 . On Default Withholding Tax Rate Section 2.57.2(A) of Revenue Regulations No. 2-98, as amended by RR 12-2001, is quite clear in providing that: "Section 2.57.2. xxx xxx xxx (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 xxx xxx xxx (2) Professional entertainers, such as, but not limited to, actors and actresses, singers and emcees Twenty percent (20%),if professional entertainer's gross income for the current year exceeds P720,000; and Ten percent (10%),if otherwise. xxx xxx xxx (4) All directors involved in movies, stage, radio, television and musical productions Twenty percent (20%),if the director's gross income for the current year exceeds P720,000; and Ten percent (10%),if otherwise. xxx xxx xxx (8) Other recipients of talent fees Twenty percent (20%),if the recipient's gross income for the current year exceeds P720,000; and Ten percent (10%),if otherwise. Thus, this Office hereby confirms your assumption that the default rate to apply on January 1, 2002 is 10%.This default rate assumes that the 20% withholding tax on talent fees will only be applied when the talent's gross income has reached the threshold of P720,000 anytime during the year. However, the said taxpayer should file the required annual Affidavit-Declaration within the period discussed in no. 2, below. Failure to do so within the required period discussed in no. 2, below would automatically subject him to the twenty percent (20%) creditable withholding tax. 2 . On the filing of the Affidavit-Declaration of current year's gross income The penultimate paragraph of Section 2.57.2 (A) of RR 2-98, as amended by RR 12-2001, specifically states that: "Furthermore, in order to determine the applicable tax rate (10% and 20%) to be applied/withheld by the withholding agent, every professional entertainer, professional athlete, director involved in movies, stage, radio, television and musical productions and other recipients of talent fees shall annually disclose his gross income for the current year to the Bureau of Internal Revenue (BIR),by submitting a notarized sworn declaration duly stamped received by the BIR (Withholding Tax Division of the National Office).The disclosure should be filed on June 30 of each year or within fifteen (15) days after the end of the month the talent'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 initial disclosure after the effectivity of these Regulations shall be filed on or before September 30, 2001 or within fifteen (15) days after the effectivity of these Regulations, whichever comes later. In case of failure to submit the annual declaration/disclosure to the BIR, the payor shall withhold the tax at the rate of 20%. xxx xxx xxx" Thus, should the talent fees for the current year reach P720,000 before the June 30 deadline, the taxpayer should file within fifteen (15) days after the end of the month his/her income reaches P720,000 or June 30, whichever comes earlier, the affidavit-declaration. In other cases, the taxpayer is required to file the annual affidavit-declaration on June 30. Should the talent fees or gross income for the current year reach P720,000 only after June 30, thus after the taxpayer has filed his/her June 30 affidavit-declaration, the taxpayer should file another (second) affidavit-declaration within fifteen (15) days after the end of the month that his/her gross income for the current year reaches P720,000. To illustrate: a. If taxpayer A earns P720,000 by March 5, he/she should file the affidavit-declaration on or before the 15th of April. b. If taxpayer B earns P720,000 by June 14, he/she should file the affidavit-declaration on June 30. c. If taxpayer C earns less than P720,000 by June 30, he/she should file the affidavit-declaration on June 30. d. If taxpayer D earns less than P720,000 as of June 30 as reflected in his/her June 30 affidavit-declaration, but thereafter and within the current year, reaches the threshold of P720,000 on September 5, he/she should file a second affidavit-declaration on or before the 15th of October. It should be emphasized, further, that should the taxpayer fail to file the required affidavit-declaration within the prescribed deadlines, and the payor knows as a fact that the taxpayer has already received P720,000 or more as of that date ( e.g .,the payor has itself paid said amount to the taxpayer),the taxpayer would automatically be subjected to the twenty percent (20%) creditable withholding tax. 3 . On Talents under Contract with Talent Fees beyond P720,000 per year For talents who are under contract with you and who are expected to earn at least P720,000, the 20% creditable withholding tax rate should not be automatically applied. It is only when the talents actually earned/reached the P720,000 threshold that you should apply the 20% creditable withholding` tax rate. Thus, the situation you presented regarding contract cancellation and refund of overpaid withholding tax is not relevant since it is only when the talent's income has reached P720,000 that you should apply the 20% creditable withholding tax rate. 4. On the Retroactive Adjustments of Taxes The application of the 20% creditable withholding tax rate on the individual's talent fee is prospective. Under Section 2.57.4 of RR 2-98, as amended by RR 12-2001, the time of withholding arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books, whichever comes first. Thus, since the liability of the individual for payment of the 20% creditable withholding tax rate arises only when his income reaches P720,000, it is only on the succeeding talent fees that the withholding agent should withhold the 20% tax. There is, thus, no retroactive adjustment of the application of the 20% creditable withholding tax rate. Please note that creditable withholding taxes are taxes withheld on certain income payment intended to approximate the actual amount of tax to be paid on the income of the payee. The payee is still required to file an income tax return, as prescribed in Sections 51 and 52 of the Tax Code of 1997, in order to report the income and make the necessary adjustments. (Section 2.57 (B), RR 2-98). We hope that the foregoing has been helpful. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue