Law Summary
Policy Declaration
- The State is committed to the development of the tax system.
- Emphasis on simplification of withholding tax compliance and administration for purely compensation income.
Coverage of the Act
- Applies to every employer who pays compensation income.
- Employers are mandated to deduct and withhold tax equal to the tax due on the employee's compensation income for the entire year, per Section 21(a) of the National Internal Revenue Code.
Computation of Tax for Married Individuals
- Married individuals compute their income tax separately based on their respective taxable income.
- If income cannot be distinctly attributed to either spouse, it shall be divided equally for tax computation purposes.
Personal Exemptions
- Basic personal exemptions are set at:
- P9,000 for single or legally separated individuals with no dependents.
- P12,000 for the head of a family.
- P18,000 for each married individual.
- If only one spouse has taxable income, only that spouse may claim the married personal exemption.
Additional Exemptions for Dependents
- Married individuals or heads of families may claim an additional exemption of P5,000 per dependent.
- Maximum of four dependents allowed for additional exemptions.
- For married individuals, only one spouse may claim additional exemptions for dependents.
Filing of Income Tax Return
- Individuals with purely compensation income that has been subjected to final withholding under Section 72 need not file an income tax return, except:
- If receiving compensation from multiple employers concurrently.
- If total pure compensation income exceeds P60,000.
Joint and Separate Filing for Married Individuals
- Married individuals who do not derive purely compensation income file one return including both spouses' income.
- If impractical to file jointly, separate returns may be filed but will be consolidated by the Bureau for verification.
Withholding Exemption Certificate
- Employees must file a new withholding exemption certificate within 10 days from any change in status affecting exemptions.
- The husband is deemed the head of the family and claimant of additional exemptions unless he waives rights in favor of his wife.
Year-End Adjustment
- Employers must determine tax due on each employee's compensation income for the year before the last payroll.
- Any difference between tax due and taxes withheld from January to November must be withheld or refunded by January 25 of the following year.
Liabilities
- Employers are liable for correct withholding and remittance of taxes.
- Failure to withhold/remit taxes results in collection with penalties from the employer.
- Employees who fail or refuse to file accurate exemption certificates face tax collection plus penalties.
- Excess taxes withheld due to employee non-filing or false information are forfeited to the government.
Penalty for Failure to Refund Excess Withholding Tax
- Employers/withholding agents who fail or refuse to refund excess withholding tax are subject to penalties equal to the amount not refunded, plus other applicable penalties.
Penalties for Violations
- Willful failure to file returns, supply correct information, pay taxes, withhold/remit taxes, or refund excess taxes on compensation:
- Penalty includes a fine of not less than P10,000.
- Imprisonment from 1 to 10 years.
Implementing Rules and Regulations
- The Bureau of Internal Revenue (BIR) shall issue rules and regulations for the Act's implementation.
Reportorial Requirement
- BIR shall submit an annual report to Congress on the implementation of the Act.
Repealing Clause
- Laws, rules, or parts inconsistent with this Act are repealed or modified accordingly.
Effectivity
- The Act takes effect upon approval.