Compliance with Requirements on Payroll Tax Computation Method

July 31, 2000 BIR RULING NO. 029-00 57 (B) 2.57 (B) RR2-98 000-00 Chato Eleazar Liboro & Santos Law Office 8/F Strata 2000, Emerald Avenue Ortigas Center, 1605 Pasig City Attention: Attys . Wilfredo M . Chato and Gerardo J. de Leon Gentlemen : This refers to your letter dated June 14, 2000 requesting on behalf of your client, SAP Philippines, Inc. (SAP), for a confirmation that SAP's payroll tax computation method complies with the requirements of R.A. 8424, particularly Section 57 (B) thereof, in relation to Section 2.79 of Revenue Regulations No. 2-98. DHcESI It is represented that SAP is a leading provider of Enterprise Resource Planning Software; that one of the modules SAP delivers as part of its Human Resources solution is Philippines payroll; that the SAP's payroll tax computation method uses Tax Averaging; that under the Tax Averaging method of payroll tax computation, the Tax Due is arrived at by dividing the Total Taxable Income (Actual year-to-date Taxable Income) by the number of payroll periods; that thereafter, the Average Tax Due is multiplied by the current number of payroll periods and then, the taxes withheld from the previous payroll periods and from the previous employer/s are deducted therefrom to arrive at the Payroll Period's Tax due (Withholding Tax Amount); that the Tax Averaging method will exceed the minimum legal requirements under R.A. 8424 since the tax remittances to the Bureau of Internal Revenue (BIR) on a periodic (i.e., monthly, semi-monthly, weekly, daily, etc.) basis will be greater than the minimum required by law; that the discrepancy in withholding taxes in terms of year-end adjustment accomplished by annualizing the gross compensation income and computing the corresponding tax thereon vis-a-vis the total amount of taxes withheld for a particular employee shall be reduced to its minimum. In reply, please be informed that under Section 57(B) of the Tax Code of 1997, the items of income payable to natural or juridical persons residing in the Philippines are subject to withholding tax at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. Moreover, Section 2.57(B) of Revenue Regulations No. 2-98 provides that under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. Accordingly, the SAP Philippines payroll tax computation method may be adopted to arrive at the payroll period's tax due provided that the amount to be remitted to the BIR is equal to or higher than the tax due of the payee on his compensation income. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue