August 1, 1986 January 1, 1986

REVENUE REGULATIONS NO. 12-86

SUBJECT : Amending pertinent provisions of the Revenue Regulations 6-82,

as amended, otherwise known as the Withholding Tax Regulations on Compensation.
TO : All Internal Revenue Officers, Withholding Agents and Others Concerned

SECTION 1. Scope. — Pursuant to Section 277 and 82 of the National Internal

Revenue Code in relation to Executive Order No. 37 series of 1986, these regulations are
hereby promulgated prescribing the collection at source of income tax on compensation
income paid on or after January 1, 1986 under the Withholding Tax tables (ANNEX "A") which
take into account the increase of personal exemption and the option of married individuals to
compute separately their individual income tax based on their respective taxable income.

SECTION 2. Section 2 of the Revenue Regulations No. 6-82, as amended, is hereby

further amended to read as follows:

"Sec. 2. Definition of terms. — As used herein, the following terms and phrases shall
have the meaning hereunder indicated:
1. Taxable income on compensation. — means gross compensation income as
defined herein less the authorized deduction under Section 30(1) of the NIRC.
2. Gross compensation income. — (a) In general. — For purposes of withholding
tax, the term "compensation" means all remuneration for services performed by an
employee for his employer unless specifically excepted under Sections 29 and 90 of the
National Internal Revenue Code.

The name by which the remuneration for services is designated is immaterial. Thus
salaries, wages, emoluments and honoraria, bonuses, allowances (such as transportation,
representation, entertainment and the like), fringe benefits (monetary and non-monetary),
fees, including directors fees, taxable pensions and retirement pay, and other income of a
similar nature constitute compensation income.

The basis upon which the remuneration is paid is immaterial in determining whether the
remuneration constitutes a compensation. Thus it may be paid on the basis of piecework, or a
percentage of profits; and may be paid hourly, daily, weekly, monthly, or annually.

Compensation may be paid in money or in some medium other than money, as, for
example, stocks, bonds, or other forms of property. If services are paid for in a medium other
than money, the fair market value of the thing taken in payment is the amount to be included
as compensation subject to withholding. If the services are rendered at a stipulated price, in the
absence of evidence to the contrary such price will be presumed to be the fair market value of
the remuneration received. If a corporation transfers to its employees its own stock as
remuneration for services rendered by the employee, the amount of such remuneration is the
fair market value of the stock at the time of the transfer. If a person receives as remuneration
for services rendered a salary and in addition thereto living quarters or meals, the value to such
person of the quarters and meals so furnished shall be added to the remuneration otherwise
paid for the purpose of determining the amount of compensation subject to withholding. If,
however, living quarters or meals are furnished to an employee to the convenience of the
employer, the value thereof need not be included as compensation subject to withholding.

Ordinarily, facilities or privileges (such as entertainment, medical services, or so-called

"courtesy" discounts on purchases), furnished or offered by an employer to his employees
generally, are not considered as compensation subject to withholding if such facilities or
privileges are of relatively small value and are offered or furnished by the employer merely as a
means of promoting health, goodwill, contentment, or efficiency of his employees.

Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld is
available for payment to the Commissioner of Internal Revenue.

Tips or gratuities paid directly to an employee by a customer of an employer, and not

accounted for by the employee to the employer, are not subject to withholding.

Remuneration for services, unless such remuneration is specifically excepted by the

statute, constitutes compensation even though at the time paid the relationship of employer
and employee no longer exists between the person in whose employ the services are
performed and the individual who performed them.

(b) Pensions, retirement and separation pay. — Pensions, retirement and separation
pay constitutes a compensation subject to withholding, except the following:

(1) Retirement benefits received by officials and employees of private firms

under a reasonable private benefit plan maintained by the employer, if the following
requirements are met:

(i) The benefit plan must be approved by the Bureau of Internal

Revenue;

(ii) The retiring official or employee must have been in the service of
the same employer for at least ten (10) years and is not less than fifty (50)
years of age at the time of the retirement; and

(iii) The retiring official or employee shall not have previously availed
of the privilege under the retirement benefit plan of the same or another
employer.
 (2) Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee from the service
of the employer due to death, sickness, or other physical disability or for any other
cause beyond the control of the said official or employee, such as retrenchment,
redundancy and cessation of business.

The phrase "for any cause beyond the control of the said official or employee"
connotes involuntariness on the part of the official or employee. The separation from
the service of the official or employee must not be asked for or initiated by him. aisa dc

Whether or not the separation is beyond the control of the said official or
employee shall be determined on the basis of prevailing facts and circumstances. This
shall be duly established through competent evidence to be submitted by the employer
which should be attached in his monthly return for the period in which the amount was
paid due to involuntary separation.

Any payment made by an employer to an employee on account of dismissal, that

is, for causes other than those mentioned in paragraph b(2) hereof, constitutes
compensation regardless of whether the employer is legally bound by contract, statute,
or otherwise to make such payment.

(3) Social security benefits, retirement gratuities, pensions and other similar
benefits received by resident or non-resident citizen of the Philippines or aliens who
come to reside permanently in the Philippines from foreign government agencies and
other institutions, private or public.

(4) Payment of benefits due to any person residing in the Philippines under
the law of the United States administered by the United States Veterans Administration.

(5) Payments of benefits made under the Social Security System Act of 1954,
as amended.

(6) Benefits received from the GSIS and the retirement gratuity received by
government officials and employees.

(c) In general. — Fixed or variable transportation, representation and other

allowances which are received by any officer or employee, in addition to the regular
compensation fixed for his position or office is compensation subject to withholding.

Amounts received by an employee, either as advance or reimbursement for

transportation, representation and other bona-fide ordinary and necessary expenses incurred
or reasonably expected to be incurred by the employee in the performance of his duties are not
compensation subject to withholding. However, if the reimbursement exceeds the actual
expenses, the excess if not returned to the employer, constitutes taxable income.
Transportation and other reimbursed expenses must be identified either by making a separate
payment or by specifically indicating the separate amounts where both compensation and
expense allowances are combined in a single payment.

(d) Vacation and sick leave allowances. — Amounts received by an employee as

"vacation allowances" or "sick leave credits" constitute compensation income. Thus, the salary
of an employee on vacation, or on sick leave, paid notwithstanding his absence from work,
constitutes taxable compensation income.

(e) Deductions by employer from compensation of employee. — Any amount which

is required by law to be deducted by the employer from the compensation of an employee
including tax is considered to be part of the employee's compensation and is deemed to have
been constructively paid to the employee as compensation at the time the deduction is made.
cda

(f) Remuneration for services as employee of non-resident alien individual or

foreign entity. — The term "compensation" includes remuneration for services performed by a
citizen or resident of the Philippines, as an employee of a non-resident alien individual, foreign
partnership or foreign corporation, whether or not such employer is engaged in trade or
business within the Philippines. Any person paying compensation on behalf of such an
employer which is not engaged in trade or business within the Philippines is subject to all
provisions of law and regulations applicable to an employer.

(g) Compensation for services performed outside the Philippines. — Remuneration

received by a citizen for services performed outside the Philippines for a domestic foreign
corporation or partnership, or for a non-resident foreign corporation or partnership, or for a
non-resident individual not engaged in trade or business in the Philippines, the payment of
which is made in the Philippines, is subject to withholding under Section 7(II) of Revenue
Regulations 6-82, as amended.

3. Head of family. — Means an unmarried or legally separated man or woman with

one or both parents, or with one or more brothers or sisters, or with one or more legitimate,
recognized natural, or legally adopted children living and dependent upon him for their chief
support, where such brothers or sisters or children are not more than twenty-one (21) years of
age, unmarried and not gainfully employed or where such children, brothers, or sisters,
regardless of age are incapable of self-support because of mental or physical defect.

4. 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.

SECTION 3. Section 3 of Revenue Regulations 6-82, as amended, is hereby further

amended to read as follows:
 "Sec. 3. Exemptions from withholding. — The following income payments are
excepted from the requirement of withholding:

(a) Fees paid to a public official. — Authorized fees paid to public officials
such as notaries public, clerks of court, sheriffs, etc., for services rendered in the
performance of their official duties are excepted from the definition of the term
"compensation" and hence are not subject to withholding. However, salaries paid such
officials by the government, or government agency or instrumentality, are subject to
withholding.

(b) Remuneration paid for agricultural labor. — (1) In general. —

Remuneration for services which constitute agricultural labor and paid entirely in
products of the farm where the labor is performed is not subject to withholding.
In general, however, the term "agricultural labor" does not include services performed
in connection with forestry, lumbering or landscaping.

(2) Services constituting agricultural labor. — Remuneration paid entirely in

products of the farm where the labor is performed for services performed on a farm by
an employee of any person in connection with any of the following activities is excepted
as remuneration for agricultural labor:

(i) The cultivation of soil;

(ii) The raising, shearing, feeding, caring for, training, or management of

livestock, bees, poultry, or wildlife; or acd

(iii) The raising or harvesting of any other agricultural or horticultural

commodity. The term "farm" as used in this subsection includes, but is not limited to
stock, dairy, poultry, fruit, and truck farms, plantations, ranches, nurseries, ranges,
orchards, and such greenhouses and such similar structures as are used primarily for the
raising of agricultural or horticultural commodities.

(3) The remuneration paid entirely in products of the farm where labor is
performed for the following services in the employ of the owner or tenet or other
operator of one or more farms is excepted as remuneration for agricultural labor,
provided the major part of such services is performed on a farm:

(i) Services performed in connection with the operation, management,

conservation, improvement, or maintenance of any such farms or its tools or
equipment; or

(ii) Services performed in salvaging timber, or clearing land of brush and

other debris, left by a hurricane or typhoon.

The services described in (i) above may include, for example, services performed
by carpenters, painters, mechanics, farm supervisors, irrigation engineers, bookkeepers,
and other skilled or semi-skilled workers, which contribute in any way to the conduct of
the farm or farms, as such, operated by the person employing them, distinguished from
any other enterprise in which such person may be engaged. Since the services described
in this paragraph must be performed in the employ of the owner or tenant or other
operator of the farm, the exception does not extend to remuneration paid for services
performed by employees of a commercial painting concern, for example. which
contracts with a farmer to renovate his farm properties.

(4) Remuneration paid entirely in products of the farm where labor is

performed for services performed by the employee in the employ of any person in
connection with any of the following operations is excepted as remuneration for
agricultural labor without regard to the place where services are performed:
(i) The making of copra, stripping of abaca, etc.;

(ii) The hatching of poultry;

(iii) The raising of fish;

(iv) The operation or maintenance of ditches, canals, reservoirs, or

waterways used exclusively for supplying or storing water for farming purposes;

(v) The production or harvesting of crude gum from a living tree or the
processing of such crude gum into spirits of turpentine and gum resin , provided such
processing is carried on by the original producer of such crude gum.

(5) Remuneration paid entirely in products of the farm where labor is

performed for services performed by an employee in the employ of a farmer or farmer's
cooperative organization or group in the handling, planting, drying, packing, packaging,
processing, grading, storing or delivering to storage or to market or for a carrier for
transportation to market, of any agricultural or horticultural commodity, produced by
such farmer or farmer-members of such organization or group, is excepted as
remuneration for agricultural labor. Services performed by employees of such farmer or
farmers' organization or group in the handling, planting, drying, or packing, packaging,
processing, freezing, grading, storing, or delivering to storage or to market or to carrier
for transportation to market of commodities produced by persons other than such
farmer or members of such farmers' organization or group are not performed "as an
incident to ordinary farming operations." aisa dc

All payments made in cash or other forms other than products of the farm
where labor is performed, for services constituting agricultural labor as explained above,
are not within the exception.
(c) Remuneration for domestic services. — Remuneration paid for services
of a household nature performed by an employee in or about the private home of his
employer is not subject to withholding.

A private home is the fixed place of abode of an individual or family.

 If the home is utilized primarily for the purpose of supplying board or lodging to
the public as a business enterprise, it ceases to be a private home and the remuneration
paid to the employee for services performed therein is not excepted.

In general, services of a household nature in or about a private home include

services rendered by cooks, maid, butlers, valets, laundresses, gardeners and
chauffeurs.
The remuneration paid for the services above enumerated is not within the exception if
performed in or about rooming or lodging houses, boarding houses, clubs, hotels,
hospitals, or commercial offices or establishments.

Remuneration paid for services performed as a private secretary, even though

performed in the employer's home, is not within the exception.

(d) Remuneration for casual labor not in the course of employer's trade or
business. — The term "casual labor" includes labor which is occasional, incidental or
regular.

The expression "not in the course of employers trade or business" includes labor
that does not promote or does not advance the trade or business of the employer.

Thus, remuneration paid for labor which is occasional, incidental or irregular,

and does not promote or advance the employer's trade or business is excepted.

Example: A's business is that of operating a sawmill. He employs B, a

carpenter, at an hourly wage to repair his home. B works irregularly and spends the
greater part of two days in completing the work. Since B's work is casual and is not in
the course of A's trade or business, the remuneration paid for such services is excepted.
cdt

The remuneration paid for casual labor, that is, labor which is occasional,
incidental or irregular, but which is in the course of the employer's trade or business,
does not come within the above exception.

Example (1) — C's business is that of operating a sawmill. He employs D for two
hours, at an hourly compensation, to remove sawdust from his mill. D's labor is casual
since it is occasional, incidental or irregular, but it is in the course of C's trade or
business and the remuneration, paid for such labor is not excepted.

Example (2) — E is engaged in the business of operating a department store. He

employs additional clerks for short periods. While the services of the clerks may be
casual, they are in the course of the employer's trade or business and, therefore, the
remuneration paid for such services is not excepted.

Remuneration paid for casual labor performed for a corporation does not come
within this exception.
 (e) Compensation for services by a citizen or resident of the Philippines for
a foreign government or an international organization. — Remuneration paid for
services performed as an employee of a foreign government or an international
organization is excepted. The exception includes not only remuneration paid for services
performed by ambassadors, ministers and other diplomatic officers and employees but
also remuneration paid for services performed as a consular or other officer or
employee of a foreign government or as a non-diplomatic representative of such
government. However, compensation paid to Filipino civilian employees for services
performed in military and naval bases and facilities of the United States within the
Philippines which is subject to income tax is also subject to withholding tax.

All such employees who are citizens or residents are required to file their
income tax returns in compliance with Section 45 of the Tax Code.

(f) Life insurance. — The proceeds of life insurance policies paid to the
heirs or beneficiaries upon the death of the insured whether in a single sum or
otherwise, but if such amounts are held by the insurer under an agreement to pay an
interest thereon, the interest payments shall be included in gross income. cd

(g) Amount received by insured as return of premium. — The amount

received by the insured as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, either during the term or at the maturity of the term
mentioned in the contract or upon surrender of the contract.

(h) Compensation for injuries or sickness. — Amounts received, through

Accidents or Health Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the amounts of any damages
received whether by suit or agreement on account of such injuries or sickness.

(i) Income except under treaty. — Income of any kind, to the extent
required by any treaty obligation binding upon the government of the Philippines.

(j) Retirement benefits, pensions, gratuities, etc. — Retirement benefits

received by officials and employees of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan maintained by the employer:
Provided, That the retiring official or employee has been in the service of the same
employer for at least ten (10) years and is not less than 50 years of age at the time of his
retirement: Provided, further, That the benefits granted under this paragraph shall be
availed of by an official or employee only once. For purposes of this subsection, the term
"reasonable private benefit plan" means a pension, gratuity, stock, bonus or profit-
sharing plan maintained by an employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer or officials and
employees, or both, for the purpose of distributing to such officials or employees the
earnings and principal of the fund thus accumulated, and wherein it is provided in said
plan that at no time shall any part of the corpus or income of the fund to be used for, or
be diverted to, any purpose other than for the exclusive benefit of the said official or
employees.
 (k) Payments made by a general professional partnership to a partner for
services rendered."

SECTION 4. Section 7 of Revenue Regulations 6-82, as amended, is hereby further

amended to read as follows:

"Sec. 7. Requirement of withholding.

xxx xxx xxx

1. Withholding of tax compensation paid to resident employees. — (a) In general,

an employer making payment of compensation shall deduct and withhold from such
compensation a tax determined in accordance with the prescribed new Withholding Tax Tables,
Effective January 1, 1986 (ANNEX "A").

A. Legend of symbols used and the amount of exemptions:

(1) The symbols used in the Withholding Tax Tables represent the following:

(a) Z — Zero exemption for employee

with multiple employers with
respect to second, third, etc.,
employer and for the employee
who fails to file an exemption
certificate. cd i
(b) S — Single or married but legally
separated individual.
(c) EW(HE) — Employed wife whose husband is
also employed.
(d) HF — Single with qualified dependent
parent, sister or brother,
legitimate, recognized natural or
legally adopted child; married but
legally separated individual with
a qualified dependent child.
(e) EH(WE) — Employed husband whose wife is
also employed.
(f) M(OSE) — Married where only husband or
wife is employed.
(2) The numerals affixed to the status symbols represent the number of qualified
legitimate, recognized natural or legally adopted children.

(3) The asterisks (**) under column SAPE represent special additional personal
exemption of Four Thousand Pesos (P4,000.00) to be allowed if the gross compensation income
of a single, married or legally separated individual, or head of family, does not exceed the
aggregate amount of Twenty Thousand Pesos (P20,000.00) during the calendar year (monthly,
P1,667.00; Semi-monthly, P833.00; Weekly, P385.00; and Daily, P66.00).
 (4) Exemption — The amount of exemption in Thousand of Pesos an employee is
entitled to claim as a deduction from gross compensation income in accordance with his status,
number of qualified dependents and applicable special additional personal exemption.

B. Computation of withholding tax

1. "In general. — The employer shall determine the tax to be deducted and
withheld in accordance with the following:

(a) Use the appropriate table for the payroll period: monthly, semi-monthly,
weekly, daily, as the case may be.

(b) Determine the total monetary and non-monetary (cash value)

compensation paid to an employee.

(c) Segregate the regular compensation from the supplementary

compensation. Regular compensation includes basic salary, fixed allowances for
representation, transportation, housing, cost of living and other allowances or benefits
(monetary and non-monetary) paid to an employee per payroll period. Supplementary
compensation includes payments to an employee in addition to the regular
compensation, such as commission, overtime pay, taxable retirement pay, vacation and
sick leave pay, profit sharing, bonus, 13th month pay, etc., with or without regard to a
payroll period. aisa dc

(d) Determine the line (horizontal) to be used corresponding to the status

and number of qualified dependents. Except in the case of the employed wife whose
husband is also employed, use the appropriate status symbol with the corresponding
asterisks (**) indicated under the SAPE column if the gross compensation income does
not exceed: Monthly, One Thousand Six Hundred Sixty Seven Pesos (P1,667.00); Semi-
monthly, Eight Hundred Thirty Three Pesos (P833.00); Weekly, Three Hundred Eighty
Five Pesos (P385.00); Daily, Sixty-Six Pesos (P66.00). If the gross compensation income
exceeds the respective foregoing amounts us the status symbol without any asterisks.

(e) Determine the column to be used by fixing the compensation level taking
into account only the total amount of regular compensation income. The compensation
level is the amount indicated in the line (as predetermined in paragraph B.1 (d)) to
which the regular compensation is equal or in excess, but not to exceed the amount in
the next column of the same line: Provided, However, That with respect to an employee
entitled to a special additional personal exemption, the compensation level is the
amount indicated in the line to which the gross compensation is equal or in excess, but
not to exceed the amount in the next column of the same line.

(f) Compute the withholding tax due by adding the tax predetermined in the
compensation level indicated at the top of the column to the product, which is
 computed by multiplying the excess of the total regular and supplementary
compensation over the compensation level by the rate also indicated at the top of the
same column."

EXAMPLE 1

Mr. A, single, with no qualified dependent, receives P1,200.00 as regular monthly

compensation.

COMPUTATION:

Using the monthly Withholding Tax Tables, the monthly withholding tax is computed by
referring to line A.4 S with double asterisks (gross compensation income does not exceed:
Monthly, P1,667.00) of column 2, which shows a tax of P0.00 on P1,042.00 +1% of the excess
(P1,200.00 - P1,042.00 = P158.00)

Total Compensation P1,200.00

Less: Compensation level(line A.4
col. 2) 1,042.00
_______
Excess 158.00
Tax on (P1,042.00) 0.00
Tax on excess (P158.00 x 1%) 1.58
Monthly Withholding tax 1.58
======

EXAMPLE 2

Mr. B, head of the family with no qualified dependent, receives P2,200.00 as regular
monthly compensation and P300.00 as supplementary compensation for January or a total of
P2,500.00.

COMPUTATION:
Using the monthly withholding Tax Tables, the withholding tax for January is computed
by referring to line A.5 HF of column 4 (fixed compensation level taking into account only the
regular compensation income of P2,200.00) which shows a tax of P14.58 on P1,458.00 plus 7%
of the excess (P2,500.00 - P1,458.00 = P1,042.00).

Total Compensation P2,500.00

Less: Compensation level (line A.5
col. 4) 1.458.00
_______
Excess P1,042.00
========
 Tax on P1,458.00 P14.58
Tax on excess (P1,042 x 7%) 72.94
_______
Withholding tax for January P87.52
=======

EXAMPLE 3

Mrs. C married with two (2) qualified dependents receives P1,500.00 as regular monthly
compensation. Mr. C, her husband is also employed.

COMPUTATION:

Using the monthly Withholding Tax Tables, the withholding tax due is computed by referring to
line A.2 EW(HE) of column 4 which shows a tax of P14.58 on P1,333.00 plus 7% of the excess (P1,500.00
- P1,333.00 = P167.00)

Total Compensation P1,500.00

Less: Compensation level (line A.2
col. 4) 1,333.00
________
Excess P167.00
=======
Tax on P1,333.00 P14.58
Tax on excess (P167.00 x 7%) 11.69
_________
Monthly withholding tax P26.67
=======

EXAMPLE 4

Mr. D, married with two (2) qualified dependents receives P900.00 as regular semi-monthly
compensation. Mrs. D, his wife, is also employed.

COMPUTATION:

Using the semi-monthly Withholding Tax Tables, the withholding tax is computed by referring to
line D.3 EH(WE) of col. 3, which shows a tax of P1.04 on P708.00 plus 3% of the excess (P900.00 -
P708.00 = P192.00).

Total Compensation P900.00

Less: Compensation level (line D.3
col. 3) 708.00
_______
Excess P192.00
======
Tax on P708.00 P1.04
Tax on excess (P192.00 x 3%) 5.76
 _______
Semi-monthly withholding tax P6.80
======

EXAMPLE 5

Mr. E, married with two (2) qualified dependents receives P1,200.00 as regular semi-monthly
regular compensation. Mrs. E, his wife, is not employed. cd

COMPUTATION:

Using the semi-monthly Withholding Tax Tables, the withholding tax due is computed by
referring to line C.2 M2(OSE) of column 4 which shows a tax of P7.29 on P1,167.00 plus 7% of the excess
(P1,200.00 - P1,167.00 = P33.00)

Total Compensation P1,200.00

Less: Compensation level (line C.2
col. 4) P1,167.00
__________
Excess P33.00
========
Tax on P1,167.00 P7.29
Tax on excess (P33.00 x 7%) 2.31
_________
Semi-monthly withholding tax P9.60
=======

2. Exceptions —

"(a) Cumulative average method. — If in respect of a particular employee, the regular

compensation is exempt from withholding, but supplementary compensation is paid during the calendar
year/or the supplementary compensation is equal to or more than the regular compensation to be paid,
the employer shall determine the tax to be deducted and withheld in accordance to the cumulative
average method provided hereunder.

(1) Add the amount of regular and supplementary compensation to be paid to an employee
for the payroll period to the sum of regular and supplementary compensation paid since the beginning
of the current calendar year.

(2) Divide the aggregate amount of compensation computed in No. (1) by the number of
payroll periods to which the amount relates.

(3) Compute the tax to be deducted and withheld on the cumulative average compensation
determined in No. (2) in accordance with the appropriate table.

(4) Multiply the tax computed in No. (3) by the number of payroll periods to which it
relates.
 (5) Determine the excess, if any, of the amount of tax computed in No. 4 over the total
amount of tax already deducted and withheld from the beginning payroll period to the last payroll
period. The excess, as computed, shall be deducted and withheld from the compensation to be paid for
the last payroll period of the current calendar year. cdt

The cumulative average method, once applicable to a particular employee at anytime during the
calendar year, shall be the same method to be consistently used for the remaining payroll period/s of
the same calendar year."

EXAMPLE 6:

Mr. F, married with four (4) qualified dependents and whose spouse is not employed received
the following compensation.

NOTE: Regular monthly compensation is exempt from withholding but supplementary

compensation is paid during the calendar year.

Month Regular Supplementary Total

Compensation Compensation Compensation

Jan. P2,000.00 P1,500.00 P3,500.00

Feb. 2,000.00 1,500.00 3,500.00
Mar. 2,000.00 - 2,000.00

COMPUTATION:

1. For Jan. — P3,500 + 0 = P3,500.00

For Feb. — P3,500 + 0 = P7,000.00
For Mar. — P2,000 + P3,500 + P3,500 = P9,000.00

2. For Jan. — P3,500/1 = P3,500.00

For Feb. — P7,000/2 = P3,500.00
For Mar. — P9,000/3 = P3,000.00

3. For Jan.
Tax on P2,833.00 (line C.4, col. 4) P14.58
Tax on excess (P667.00 x 7%) 46.69
________
Tax on P3,500.00 P61.27
======

For Feb.
Tax on P2,833.00 (line C.4, col. 4.) P14.58
Tax on excess (P667.00 x 7%) 46.69
________
Tax on P3,500.00 P61.27
======
 For Mar.
Tax on P2,833.00 (line C.4, col. 4) P14.58
Tax on excess (P167.00 x 7%) P11.69
_______
Tax on P3,000.00 P26.27
======

4. For Jan. — P61.27 x 1 = P61.27

For Feb. — P61.27 x 2 = P122.54
_______
For Mar. — P26.27 x 3 = P78.81
=======

5. For Jan. — P61.27 - 0 = P61.27

For Feb. — P122.54 - P61.27 = P61.27
For Mar. — P78.81 - P122.54 = NO W/HOLDING
TAX

EXAMPLE 7:

Mr. G, married with one (1) qualified dependent and whose spouse is also employed received
the following compensation.

Month Regular Supplementary Total

Compensation Compensation Compensation

Jan. P3,000.00 P2,000.00 P5,000.00

Feb. 3,000.00 5,000.00 8,000.00
Mar. 3,000.00 2,000.00 5,000.00

COMPUTATION:

For Jan.
Total Compensation P5,000.00
Less: Compensation level (line D.1
col. 5) 2,417.00
_________
Excess P2,583.00
=======
Tax on P2,417.00 P72.92
Tax on excess (P2,583.00 x 11%) 284.13
_______
Withholding Tax for January P357.05
=======

For Feb. and Mar.

1. Feb. — P8,000.00 + P5,000.00 = P13,000.00

 Mar. — P5,000.00 + P13,000.00 = P18,000.00

2. Feb. — P13,000/2 = P6,500.00

Mar. — P18,000/3 = P6,000.00

3. Feb.
Tax on P5,750.00 P506.25
Tax on excess (P750.00 x 19%) 142.50
________
Tax on P6,500.00 P648.75
=======

4. Feb. — P648.75 x 2 = P1,297.50

Mar. — P533.75 x 3 = P1,661.25

5. Feb. — P1,297.50 - P357.05 = P940.45

_______
Mar. — P1,661.25 - P1,297.50 = P363.75
======

NOTE: The supplemental compensation of P2,000.00 is less than the regular compensation of
P3,000.00 for March. The rule to be followed will still be the cumulative average method.

(b) Annualized Withholding tax method. — (1) When the employer-employee relationship is
terminated before the end of the calendar year, and (2) when computing for the year-end adjustment to
determine the amount to be either withheld in December of the current calendar year or refunded as
excess withheld taxes, the employer shall determine the tax on the sum of the regular and
supplementary compensation for the entire calendar year before the payment of the last compensation
in accordance with the following procedures:

(1) Employer-employee relationship terminated:

1. Add the amount of regular and supplementary compensation to be paid to an employee

for the payroll period to the sum of regular and supplementary compensation paid since the beginning
of the current year.

2. Deduct from the aggregate amount of compensation computed in No. 1 the amount of
total exemptions of the employee.

3. Compute the amount of tax on the difference arrived at in No. 2. in accordance with the
following schedule:
OVER BUT NOT AMOUNT RATE OF EXCESS
OVER OVER

0 P 2,500 0%
P 2,500 P 5,000 P 0 + 1% P 2,500
P 5,000 P 10,000 P 25 + 3% P 5,000
P 10,000 P 20,000 P 175 + 7% P 10,000
P 20,000 P 40,000 P 875 + 11% P 20,000
P 40,000 P 60,000 P 3,075 + 15% P 40,000
P 60,000 P 100,000 P 6,075 + 19% P 60,000
P 100,000 P 250,000 P 13,675 + 24% P 100,000
P 250,000 P 500,000 P 49,675 + 29% P 250,000
P 500,000 P 122,175 + 35% P 500,000

4. Determine the deficiency or excess, if any, of the tax computed in No. 3 over the
cumulative tax already deducted and withheld since the beginning of the current calendar year.

The deficiency tax (when the amount of tax computed in No. 3 is greater than the amount of
cumulative tax already deducted and withheld) shall be deducted from the last payment of
compensation for the calendar year.

The excess tax (when the amount of cumulative tax already deducted is greater than the tax
computed in No. 3) shall be credited or refunded from the remittable amount of taxes withheld in the
current month in which the refund was made, and in the succeeding months thereafter until the amount
refunded by the employer is fully repaid. aisa dc

(2) Year-end adjustment:

The tax due from each employee for the entire year shall be decreased by the sum of the taxes
withheld from the salary of such employee from January to November. The difference shall be the
amount to be withheld in December of the current calendar year or amount to be refunded if the sum of
the taxes withheld from January to November is greater than the tax due from such employee for the
entire year.

EXAMPLE 8:

Employer-employee relationship terminated:

Mr. X, head of the family with no qualified dependent children receives P4,000.00 as monthly
regular compensation starting January 1, 1986. On June 1, 1986 he filed his resignation effective June 30,
1986.

Tax withheld from January to May 1986 was P1,312.75.

COMPUTATION

1. Total compensation received from

January 1 to May 31, 1986 P20,000.00
Compensation to be received on June 4,000.00
__________
Gross Compensation P24,000.00
========

2. Gross compensation P24,000.00

 Less: Personal exemption 7,500.00
__________
Taxable compensation income P16,500.00
========

3. Tax on P10,000 P175.00

Tax on excess (P6,500 x 7%) 455.00
_________
Tax on P16,500 P630.00
========

4. Tax Due P630.00

Less: Tax withheld from January to May P1,312.75
_________
Tax to be refunded to Employee X (P682.75)
=======

EXAMPLE 9:

Annualized Withholding tax (year-end adjustment)

XYZ Company — employer has the following employees:

1. Mr. A, married with one dependent receives a salary of P3,000.00 a month. Sometime in
October his wife who is also employed, gave birth to a second child thereby increasing their additional
exemption to P6,000.00. However, he was able to file an amended W-4 only in December, hence the
need for adjustment.

2. Mr. B, married and whose wife is not employed, receives a monthly salary of P2,500.00.

3. Mr. C, receives a monthly salary of P1,500.00 and in claiming personal exemption of

P6,000.00 as an employed wife whose husband is also employed.

4. Mr. D, started working only in August 1986 and is claiming personal exemption of
P7,500.00 as head of the family receives a monthly salary of P3,000.00.

5. XYZ Company gave a 50% of their monthly salary as bonus for December to employees
A, B, C and D for the calendar year 1986.

COMPUTATION:

Alphabetical List of Employees from whom taxes were withheld.

NAME OF TAN GROSS COM- AMOUNT OF TAX DUE TAX WITHHELD DECEMBER
EMPLOYEE PENSATION PERSONAL (COMPU- FROM JAN. TO YEAR-END
INCOME EXEMPTION TED UN- NOV. (COMPU- ADJUSTMENT
FROM JAN. DER SEC. TED MONTH-
TO DEC. IN- 21 (a) NIRC LY UNDER
 CLUDING ON NET THE WITH
BONUS TAXABLE HOLDING
COMPEN- TAX TABLE)
SATION
INCOME

MR. A — P37,500 P12,000 P1,480.00 P1,507.55 (P27.55)

*
MR. B — 31,250 12,000 822.50 673.97 148.53 **
MR. C — 18,750 6,000 367.50 288.97 78.53 **
MR. D — 16,500 11,500 25.00 603.20 (578.20) *
---- ---- ----- ----- ----
P104,000 P2,695.00 P3,073.69 P(378.69) ***
----- ----- ----- -----

NOTE. The W-2 to be given to the employees will show gross compensation and tax withheld as
adjusted as follows:

GROSS COMPENSATION TAX WITHHELD

Mr. A. P37,500.00 P1,480.00
Mr. B. 31,250.00 822.50
Mr. C. 18,750.00 367.50
Mr. D. 16,500.00 25.00
___________ ________
P104,000.00 P2,695.00
__________ ________
* Amount to be refunded by XYZ Company to the employee not later than January 31,
1987.
** Amount to be deducted from the December salary of the employee.
*** Creditable against remittances of taxes withheld for the month of January. A Monthly
Return of Income Tax Withheld (BIR Form 1743W) for December is still required to be
filed by XYZ Company whether or not taxes have been withheld.

SECTION 5. Section 8 of Revenue Regulations No. 6-82, as amended, is hereby

further amended to read as follows:

"Sec. 8. Right to claim the following exemption.

xxx xxx xxx

Each employee may claim the following exemptions, with respect to compensation paid on or
after January 1, 1986.

(a) If single — P6,000.00.

(b) If married, and both spouses are employed, the spouses shall each be entitled to a
personal exemption of P6,000.00. cdt
 (c) If married, and only one spouse is employed, the employed spouse is entitled to
P12,000.00.

(d) If head of family — P7,500.00.

(e) Additional exemption for each qualified dependent child but not to exceed four (4)
dependents — P3,000.00; in excess of four (4) dependent children, for each child who otherwise
qualified as a dependent prior to January 1, 1980 under the provision of Presidential Decree,
meaning children who were born prior to 1973 — P1,000.00.

For purposes of compliance with the requirements of withholding tax on compensation

income, the husband shall be deemed the proper claimant of the additional exemption for
dependent children in the case of married individuals. The option of claiming additional
exemption, and the special additional personal exemption by either husband or wife shall be
exercised and reflected in the joint income tax return.

(f) If the gross compensation income of single, married or legally separated

individual, or heads of family does not exceed the aggregate amount of P20,000.00, he is further
entitled to a special additional personal exemption of P4,000.00.

There is no need for an employee to file an amended withholding exemption certificate unless
there is a change in his exemption unit during the year. The employer shall automatically compute the
tax to be withheld based on the increased amount of exemptions in accordance with the Withholding
Tax Tables, effective January 1, 1986.

SECTION 6. Paragraphs (a) and (b) of Section 22 or Revenue Regulations 6-82 as

amended, is hereby further amended to read as follows:

"Sec. 22. Monthly adjustments. — (a) In general. — If for any month of the
calendar year, except the last month, more or less than the correct amount of the tax is
withheld, or more or less than the correct amount of the tax is paid to the
Commissioner of Internal Revenue or to any authorized Revenue Officer, proper
adjustment without interest and surcharge, may be made: Provided, That the deficiency
shall be paid not later than the next remittance date in the following month. No
adjustment shall, however, be made under the provisions of this section in respect of
underpayment for any month after receipt from the Commissioner of Internal Revenue
or any authorized revenue officer of notice and demand for payment thereof based
upon assessment, but the amount shall be paid in accordance with such notice and
demand, nor shall any adjustment under the provisions of this section be made in
respect of overpayment for any month after the filing of a claim for refund thereof.
Every adjustment shall be reported in the "Adjustment for Previous Month" portion of
BIR Form 1743W indicating the month/months when the
underwithholding/overwithholding occurred: correct amount due and the amount
erroneously paid; TCC encashed; and the adjusted amount. cdasia
 (b) Annualized withholding tax (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 sum of the gross compensation paid to each employee for the
entire year, including the last compensation to be paid and compute for the amount of income
tax on the annualized gross compensation income in accordance with Section 21 of the
National Internal Revenue Code.

The tax due from each employee for the entire year shall be decreased by the sum of
the taxes withheld from the salary of such employee from January to November. The difference
shall be the amount to be withheld in December of the current calendar year or amount to be
refunded by the employer to the employee, if the sum of the taxes withheld from January to
November is greater than the tax due from such employee for the entire year.

The total amount actually refunded by the employer to his employees resulting from the
year-end adjustment shall be repaid from the remittable amount of taxes withheld for the
month of December of the current year and succeeding months of the following year until the
total amount actually refunded is fully repaid.

SECTION 7. Repealing Clause. — All existing rules and regulations or parts thereof
which are inconsistent with the provisions of these regulations are hereby revoked.

SECTION 8. Effectivity. — These regulations shall take effect on compensation income

form January 1, 1986.

SECTION 9. Transitory provision. —

1. Refund or credit. —

A. Employee. — (a) Any amount of tax previously withheld from an employee

whose compensation income is no longer subject to withholding under the Withholding Tax
Tables effective January 1, 1986 shall be refunded by the employer to his employee.

(b) Any excess over the amount of tax already withheld from the compensation of
employees from the months of January to July 31, 1986 over the tax required to be withheld for
the same period under the Withholding Tax Tables effective January 1, 1986 shall be credited
against the withholding tax due from such employee from August and the succeeding months
of the current calendar year.

B. Employer. — The total amount actually refunded by the employer to his

employees shall be repaid from the remittable amount of taxes withheld for the current month
in which the refund was made and in succeeding months thereafter until the overwithheld tax
is fully paid. cdtai

(2) Report on refunds and credits. — In addition to the mandatory requirement of

filing the Monthly Remittance Return of Income Tax Withheld (BIR Form 1743W) by withholding
agents on compensation, whether there are taxes to be remitted or no taxes are remittable,
such agents shall also submit for the calendar year 1986 an Interim Report (ANNEX "B")
showing taxes, withheld from January to July 1986 computed under the Withholding Tax Tables
effective January 1, 1986 and the total amount of excess taxes withheld which shall be
refunded and/or credited to the employees beginning August and the succeeding months of
the current year.

(SGD.) JAIME V. ONGPIN

Minister of Finance

Recommending Approval:

(SGD.) BIENVENIDO A. TAN, JR.

Commissioner of Internal Revenue