Clarifies substituted filing for compensation income

Legal framework and purpose

The circular clarifies rules under Revenue Regulations No. 3-2002 as amended by Revenue Regulations No. 19-2002, amending Section 2.83 of Revenue Regulations 2-98.
The circular’s purpose is to answer questions on substituted filing and to clarify the required handling of BIR Form 1700 for qualified pure compensation income earners.
The circular recognizes the employer’s annual return BIR Form No. 1604CF as the “substitute” income tax return of the employee when the required conditions are met.

Core concept: substituted filing

Substituted Filing exists when the employer’s annual return (BIR Form 1604CF) is considered the employee’s “substitute” Income Tax Return (ITR)” because the information in the employee’s BIR Form 1700 would be exactly the same as the information in the employer’s annual return.
Under substituted filing, the employee no longer has to personally file the employee’s own BIR Form 1700 when qualified, because the employer’s return is treated as the substitute ITR.
Non-filing is distinct: it applies to certain individuals not required by law to file an income tax return (example given: an employee whose pure compensation income does not exceed P60,000, who has only one employer for the taxable year, and whose tax withheld equals tax due).

Qualification requirements for substituted filing

Substituted filing applies only to individuals who meet all of the following conditions:
- The employee receives purely compensation income (regardless of amount) during the taxable year.
- The employee receives the income only from one employer in the Philippines during the taxable year.
- The amount of tax due at the end of the year equals the amount of tax withheld by the employer.
- The employee’s spouse also complies with the same three (3) conditions above.
The employer must file the employee-related annual return: BIR Form No. 1604-CF.
The employer must issue the employee: BIR Form 2316 (Oct 2002 ENCS version).

Disqualification: who cannot use substituted filing

The following individuals are not qualified for substituted filing:
- Individuals deriving compensation income from two or more employees, concurrently or successively, at any time during the taxable year.
- Employees deriving compensation income (regardless of amount) from a single or several employers during the calendar year where the income tax has not been withheld correctly (tax due is not equal to tax withheld), resulting in a collectible or refundable return.
- Employees whose monthly gross compensation income does not exceed Five Thousand Pesos (P5,000) or the statutory minimum wage, whichever is higher, and opted for non-withholding of tax on said income.
- Individuals deriving other non-business, non-profession-related income in addition to compensation not subject to final tax.
- Employees deriving purely compensation income from a single employer where withholding tax was correctly subjected to tax, but whose spouse is not entitled to substituted filing.
- Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income, or compensation income and other business or profession-related income.

BIR Form 2316 role, issuance, and contents

BIR Form 2316 (Oct 2002 ENCS version) is a certificate signed by both the employee and the employer and serves the same purpose as if BIR Form No. 1700 had been filed.
When an employee is qualified for substituted filing, the circular requires that BIR Form 2316 is not submitted or filed with the BIR as the replacement mechanism works through the employer’s filing and employee certification process.
Every employer required to withhold tax on compensation, including fringe benefits given to rank-and-file employees, must furnish each affected employee with BIR Form 2316 (Oct 2002 ENCS version).
Employers must issue BIR Form 2316 on or before January 31 of the succeeding calendar year; if employment terminates before year-end, issuance must be on the day on which the last payment of compensation is made.
BIR Form 2316 includes:
- Part I (Employee Information, items 3 to 12): employee personal information consistent with BIR Form 2305 and the annual information return BIR Form 1604CF.
- Part II (Present Employer Information, items 13 to 15A).
- Part III (Previous Employer Information, items 16 to 24A): if there was a previous employer within the same taxable year.
- Part IV (Details of Compensation Income and Tax withheld, items 25 to 50): details and summary of taxable and non-taxable regular and supplementary compensation, including summary of taxes withheld.
- 1st Signature Box (items 51 and 52): employer declaration that information was made in good faith, verified, and is true and correct pursuant to the National Internal Revenue Code.
- 2nd (Substituted Filing) Signature Box (items 53 and 54): completed for substituted filing, with both employer and employee signing under the pain of perjury.

Substituted filing certifications in BIR Form 2316

The lowest portion of BIR Form 2316 (Oct 2002 ENCS version) is the substituted filing signature area, made up of certifications by the employer and certifications by the employee, and must be signed by both under pain of perjury.
For substituted filing, the EMPLOYER must certify that:
- The information in BIR Form 2316 (Oct 2002 ENCS version) matches the information reported in BIR Form 1604CF, including that:
  - The employee’s information matches what the employee declared in BIR Form 2305.
  - If there were previous employer(s), the previous employer’s information matches what the previous employer reported in the employee’s BIR Form 2316 issued by that previous employer.
  - The present employer information is true and correct.
  - The details of compensation and taxes withheld are true and correct.
- The employer filed the annual information return with the BIR: BIR Form 1604CF.
For substituted filing, the EMPLOYEE must certify that:
- The employee is qualified under substituted filing by meeting the conditions that include:
  - Pure compensation income during the taxable year (regardless of amount).
  - Income only from one employer in the Philippines during the taxable year.
  - Tax due equals tax withheld at year-end.
  - If married, the spouse complies with the same three conditions.
- The employee has none of the instances for disqualification for substituted filing (as covered by the disqualification rules).
- The employee’s employer’s filed BIR Form 1604CF constitutes the employee’s income tax return.
- BIR Form 2316 (Oct 2002 ENCS version) will serve the same purpose as if BIR Form 1700 had been filed under Revenue Regulations No. 3-2002 as amended by Revenue Regulations No. 19-2002.

Proof uses and employee handling

For qualified employees, BIR Form 2316 (Oct 2002 ENCS version) serves as a replacement for BIR Form 1700 as proof of income earnings and financial capacity.
Qualified employees may present BIR Form 2316 as proof of:
- Financial capacity for loan, credit card, or other applications.
- Payment of tax or for availing tax credit in the employee’s home country.
- Travel permits and travel tax exemptions when necessary.
- Other requirements of various government/private agencies.
If an employee is issued BIR Form 2316 by a previous employer due to termination and later becomes employed within the same calendar year, the employee must submit a copy of the previous employer’s BIR Form 2316 to the present employer for consolidation with present compensation received.

Mandatory substituted filing; ITR handling; notarization

Substituted filing became mandatory starting taxable year 2002 for qualifying employees.
For taxable year 2002 and beyond, qualified employees must not file BIR Form 1700; substituted filing is mandatory.
Qualified employees must sign the substituted filing signature box of BIR Form 2316, and have the same signed by the employer.
The circular requires both the employer and the employee to retain and keep a copy of BIR Form 2316 signed by both.
Notarization is not required for BIR Form 2316 for qualified employees.
If an employee is not qualified for substituted filing, the employee is required to file an income tax return (BIR Form 1700 or BIR Form 1701), and BIR Form 2316 must be attached as proof of compensation income and withholding taxes, including other necessary attachments such as financial statements and a certificate of creditable withholding taxes.