Publishing the Full Text of Republic Act No. 7497, Otherwise Known as the "Finality of the Withholding Tax on Purely Compensation Income"

June 2, 1992 REVENUE MEMORANDUM CIRCULAR NO. 28-92 SUBJECT : Publishing the Full Text of Republic ActNo.7497, Otherwise Known as the "Finality of the Withholding Taxvon PurelyCompensation Income" TO : All Internal Revenue Officers and Others Concerned For the information and guidance of all concerned, quoted hereunder is the full text of Republic Act No. 7497: "REPUBLIC ACTNO.7497 "AN ACT AMENDING PERTINENT PROVISIONS OF THE NATIONAL INTERNALREVENUECODE, AS AMENDED, RELATIVE TO THE FINAL WITHHOLDING TAX ON PURELYCOMPENSATION INCOME "Sec. 1. Title . This Act shall be known as the "Finality of the Withholding Taxon Purely Compensation Income." "Sec. 2. Declaration of Policy . It is the policy of the State to further enhance the development of the tax system in our country thus simplifying compliance and administration of the withholding tax system on purely compensation income. "Sec. 3. Coverage . Every employer making payment of compensation income shall deduct and withhold a tax in an amount equal to the tax due on the employee's compensation income for the entire year, in accordance with Section 21(a) of the National InternalRevenueCode, as amended. "Sec. 4. The last paragraph of paragraph (a) of Section 21 of the National InternalRevenueCode, as amended, is hereby further amended to read as follows: "In the case of married individuals, the husband and wife, subject to the provision of Section 44(d) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided , That if any income cannot be definitely attributable to or identifiable as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of computing their respective taxable income. "Sec. 5. The first paragraph of item (1), paragraph (1) of Section 29 of the sameCode, as amended, is hereby further amended to read as follows: "(1) Personal exemptions allowable to individuals. "(1) Basic personal exemption . For the purpose of determining the tax provided in Section 21(a) of this Title, there shall be allowed a basic personal exemption as follows: "For single individual or married individual judicially decreed as legally separated with no qualified dependents P 9,000 "For head of a family P 12,000 "For each married individual P18,000 " Provided , That, in case one of the spouses is deriving taxable income, only said spouse shall be allowed to avail of the aforesaid basic personal exemption for married individual. "Sec. 6. The first paragraph of item (2) (A), paragraph (1) of Section 29 of the sameCode, as amended, is hereby further amended to read as follows: "(2) Additional exemptions "(A) Taxpayers with dependents . A married individual or a head of a family shall be allowed an additional exemption of Five thousand pesos (P5,000) for such dependent: Provided , That the total number of dependents for which additional exemptions may be claimed shall not exceed four dependents: Provided, further , That the additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. "Sec. 7. A new subparagraph (C) is hereby added to Section 44(a)(2) of the National InternalRevenueCode, as amended, to read as follows: "(C) Individuals with respect to pure compensation income, as defined in Section 28(a)(1), derived from sources within the Philippines, the income tax on which has been withheld under the provisions of Section 72 of this Code: Provided , That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return; Provided, further , That an individual whose pure compensation income exceeds Sixty thousand pesos (P60,000) shall also file an income tax return. "Sec. 8. Paragraph (d) of Section 44 of the sameCode, as amended, is hereby further amended to read as follows: "(d) Husband and wife . Married individuals, whether citizens, resident or non-resident aliens who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. "Sec. 9. Section 72(d)(2)(B) of the sameCode, as amended, is hereby further amended to read as follows: "(B) Change of status . In case of change of status of an employee as a result of which he would be entitled to a lesser or greater amount of exemption, the employee shall, within ten days from such change, file with the employer a new withholding exemption certificate reflecting the change. "Sec. 10. Item (1), paragraph (f) of Section 72 of the sameCode, as amended, is hereby further amended to read as follows: "(1) The husband shall be deemed the head of the family and proper claimant of the additional exemption in respect to any dependent children, unless he explicitly waives his right in favor of his wife in the withholding exemption certificate; "Sec. 11. A new paragraph (h) is hereby added to Section 72 of the National InternalRevenueCode, as amended, to read as follows: "(h) Year-end adjustment . On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 21(a). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee, not later than January 25 of the succeeding year. "Sec. 12. Section 73 of the same Code, as amended, is hereby further amended to read as follows: "Sec. 73. Liability for tax . (a) Employer . The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld under this Chapter. If the employer fails to withhold and remit the correct amount of tax as required to be withheld under the provision of this Chapter, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable in respect of such failure to withhold and remit. "(b) Employee . Where an employee fails or refuses to file the withholding exemption certificate or willfully supplies false or inaccurate information thereunder, the tax otherwise to be withheld by the employer shall be collected from him including penalties or additions to the tax from the due date of remittance until the date of payment. On the other hand, excess taxes withheld made by the employer due to: (a) failure or refusal to file the withholding exemption certificate; or (b) false and inaccurate information shall not be refunded to the employee but shall be forfeited in favor of the Government. "Sec. 13. A new section, Section 251-A, is hereby added in the National InternalRevenueCode, as amended, which shall read as follows: "Sec. 251-A. Failure of a withholding agent to refund excess withholding tax . Any employer/ withholding agent who fails, or refuses to refund excess withholding tax shall, in addition to the penalties provided in this Title, be liable to a penalty equal to the total amount of refunds which was not refunded to the employee resulting from any excess of the amount withheld over the tax actually due on their return. "Sec. 14. The first paragraph of Section 254 of the sameCode, as amended, is hereby further amended to read as follows: "Sec. 254. Failure to file return, supply correct and accurate information, pay tax, withhold and remit tax and refund excess taxes withheld on compensation . Any person required under thisCode or by regulations promulgated thereunder to pay any tax, make a return, keep any record, or supply correct and accurate information, who willfully fails to pay such tax, make such return, keep such record, or supply such correct and accurate information, or withhold or remit taxes withheld, or refund excess taxes withheld on compensation, at the time or times required by law or regulations shall, in addition to other penalties provided by law, upon conviction thereof, be fined of not less than Ten thousand pesos (P10,000) and imprisonment of not less than one (1) year but not more than ten (10) years. acd "Sec. 15. Rules and Regulations . The Bureau of Internal Revenue shall issue and publish the implementing rules and regulations to implement the provisions of this Act. "Sec. 16. Reportorial Requirement . The Bureau of Internal Revenue shall provide Congress with an annual report with respect to the implementation of the provisions of this Act. "Sec. 17. Repealing Clause . Any law, decree, order, rule and regulation, or part thereof, which is inconsistent with this Act is hereby repealed or modified accordingly. "Sec. 18. Effectivity Clause . This Act shall take effect upon its approval. "Approved, xxx xxx xxx "Approved: May 15, 1992 (SGD.) CORAZON C. AQUINO President of the Philippines" SALIENT FEATURES 1) Codifying the administrative issuances imposing a final withholding tax on purely compensation income, Republic Act No. 7497 requires every employer making payment of compensation income to deduct and withhold a tax in an amount equal to the tax due on the employee's compensation income for the entire year. cdtai 2) The FWT system shall continue to adopt the year-end adjustment which is accomplished by annualizing the gross compensation income and computing the corresponding tax thereon. Any excess tax withheld shall be refunded to the employee by the employer and any deficiency shall be collected from the compensation in the last payroll period. 3) Husband and wife shall be treated as separate taxable units. Whereas before, they have the option to compute their income tax separately or jointly, under this Law, it is mandatory that they compute separately the tax due on their respective compensation incomes. cdtai 4) Further amending Section 29 of the National Internal Revenue Code, R.A. No. 7497 incorporated in its amendatory provisions the basic personal and additional exemptions allowable to individual taxpayers for income tax purposes, as previously introduced by R.A. No. 7167 with modification/revision. acd a) The basic personal exemptions are as follows: For single individual or married individual judicially decreed as legally separated with no qualified dependents P 9,000 For head of a family P 12,000 For each married individual P 18,000 Provided , That, in case only one of the spouses is deriving taxable income, only said spouse shall be allowed to avail of the aforesaid basic personal exemption of P18,000 for married individual. b) Additional exemptions A married individual or a head of family shall be allowed an additional exemption of Five thousand pesos (P 5,000) for each dependent child. The total number of dependents for which additional exemptions may be claimed shall not exceed four (4) dependents. Said exemption shall be claimed by only one of the spouses in the case of married individuals . For purposes of this exemption, a dependent means a legitimate, recognized natural or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. 5) Individuals earning pure compensation income derived from sources within the Philippines, the income tax on which has already been withheld pursuant to Section 72 of the Tax Code, as implemented by Revenue Regulations No. 6-82, as amended, are no longer required to file the annual income tax return. The following individuals, however, are still required to file an income tax return: a) individuals deriving compensation concurrently from two or more employers at any time during the taxable year (even if pure compensation income for the year does not exceed Sixty thousand pesos (P60,000); casia b) individuals whether citizens, residents or non-resident aliens who do not derive income purely from compensation; and c) individuals whose pure compensation income for the taxable year exceeds Sixty thousand pesos (P60,000). In other words, an individual taxpayer whose compensation income for the taxable year has already been subjected to the withholding tax is still required to file the annual income tax return if his said compensation income exceeds P60,000.00. 6) Where both husband and wife receive compensation income, additional exemption for qualified dependent children shall be claimed by the husband unless he explicitly waives his right in favor of his wife in the withholding exemption certificate. cd 7) Specific penalties have been provided for failure of any person required under the Tax Code to refund excess taxes withheld on compensation. 8) The Law likewise reiterates that the employer shall be responsible for withholding and remitting the correct amount of tax on the compensation income of his employees. Failure of the employer to do so would make him liable to pay such tax together with the corresponding statutory penalties. However, the employee shall be liable to penalties for failure to declare true and accurate information necessary for correct withholding of his final income tax. cdt On the other hand, excess withholding tax made by the employer due to: (a) failure or refusal of the employee to file withholding exemption certificate or (b) false and inaccurate information reported by the employee shall not be refunded to the employee but shall be forfeited in favor of the Government. Failure or refusal of the employer to refund excess withholding tax shall likewise make him liable to a penalty equal to the amount of refund due the employee but which was not refunded to him in addition to other penalties applicable. It is desired that this Circular be given as wide a publicity as possible. JOSE U. ONG Commissioner of Internal Revenue