President Rodrigo Duterte signed into law Republic Act (RA) Number 11213 or the Tax Amnesty Act of 2019, which provides amnesty for those with undeclared estate taxes and tax delinquencies, last February 14.
Under the law, the government will now collect only six percent of the net undeclared estate tax for properties owned by those who died before January 1, 2018.
President Duterte Veto
Duterte vetoed provisions allowing a one-time settlement of estates for those properties under multiple unsettled estates and presuming the truthfulness of self-declared property values. It would thus seem that the six percent rate will apply at every transfer of property based on fair market values, and that the government will have to verify all estate tax amnesty returns.
The President rejected more items in the original bill which would have granted a general tax amnesty for those who failed to pay correct taxes in 2017 and previous years. Citing potential abuse by tax evaders, Duterte called on Congress to pass another bill that would lift bank secrecy in cases of fraud, include mechanisms for the automatic exchange of information, and ensure truthful declaration of assets and liabilities.
In conjunction with the Tax Reform for Acceleration and Inclusion (TRAIN) law, R.A. 11213 was envisioned by the Duterte administration to help raise revenues and expand the tax base in support of its priority development programs.
The law also grants amnesty on tax delinquencies, covering all national internal revenue taxes such as income tax, withholding tax, capital gains tax, donor’s tax, value-added tax, excise tax, and documentary stamp tax. The amnesty tax rate is 40 percent of the delinquent tax. Those whose cases have been subject to final judgment by the courts will have to pay 50 percent. Pending criminal and tax evasion cases merit 60 percent of the tax assessed, while those who did not remit withheld taxes have to pay 100 percent.
Finance Secretary Carlos Dominguez III noted that the amnesty on estate taxes would help those who avail to “free up property that long been estate-locked and allow heirs to make good economic use of the properties they have inherited.”
“We hope that in availing [themselves] of this amnesty—a very, very generous reprieve from the state, taxpayers would feel more encouraged to pay the right taxes, and be more empowered to be good taxpayers in the future,” Dominguez said.
A stock option is a contract which gives the holder the right but not the obligation to buy shares in a corporation at a predetermined price on or before a specified date. Stock options may be purchased or granted “Equity-settlement Option” (usually to employees).
Another kind of stock option is a contract which gives the holder the right to obtain the difference between the actual fair market value of shares and the fixed nominal value of the shares set in the grant option on a specific date, although no shares of stock are transferred “Cash-settlement Option”.
Stock Option Grants
Stock options granted to employees (grantee) of Philippines corporations by their employers (grantor) without any payment are not subject to compensation taxes or Capital Gains Tax (CGT). “However, if the option was granted for a price, the full price of the option shall be considered capital gains, and taxed as such.” The grantor has the obligation to pay the CGT.
Upon the issuance of the Option, the same is subject to a documentary stamp tax amounting to Seventy-five centavos (P0.75) on each Two Hundred pesos (P200), or fractional part thereof, of the par value of the stock subject of the option, or in the case of stock without par value the amount equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of the stock subject of the option, as provided for in Section 175 of the National Internal Revenue Code of 1997, as amended.
Sale or Transfer of Option
The sale, barter, or exchange of stock options is treated as a sale, barter, or exchange of shares of stock not listed on the stock exchange. Thus, any grant of an option for consideration, or transfer of the option is subject to capital gains tax imposed under Section 24 (C) of the NIRC. If the option was granted without any consideration, the cost base of the option for the purposes of computing capital gains shall be zero.
If the option is transferred by the grantee/subsequent owner without any consideration, the same shall be treated as a donation of shares of stock subject to donor’s tax. The basis shall be the fair market value of the option at the time of the donation.
Taxes on Exercise of Option
(a) Equity – Settlement Option – An option is exercised when the grantee pays the exercise price to the grantor, the grantor is then under the obligation to deliver the stocks to the owner of the option.
Shares Not Traded on the Local Stock Exchange
Rank-and-file Employees: any difference between the book value/fair market price (whichever is higher),at the time of the exercise of the stock option and the price fixed on the grant date is considered taxable income and subject to withholding tax on compensation.
Managerial and Supervisory Employees: any difference between the book value/fair market value of the shares (whichever is higher), at the time of the exercise of the stock option and the price fixed on the grant date, shall be treated as fringe benefit subject to fringe benefit tax imposed under Section 33 of the National Internal Revenue Code of 1997, as amended (NIRC).
Shares Traded on the Local Stock Exchange
If the shares involved are shares of stock listed and traded through the Local Stock Exchange, the transaction is subject to stock transaction tax imposed under Section 127(A) of the NIRC, as amended; a tax at the rate of one-half of one percent (1/2 of 1%) of the gross selling which shall be paid by the seller.
(b) Cash Settlement Option – The above rules on Equity-settlement also apply in cases of Cash-settlement Options. Cash-settled Options do not require the actual delivery of shares. Instead, the market value, at the exercise date, of the stock is compared to the exercise price, and the difference (if in a favorable direction) is paid by the grantor to the holder of the option.
The Waiting Game in Employee Stock Option Taxation
When stock options are exercisable over a number of years, its advantageous for employees who are rank and file to not exercise their options until they are promoted to supervisory or managerial positions to avail of a better tax treatment, though more costly to the employer.
Stocks of a Foreign Corporation
If the shares involved are shares of stock in a foreign corporation, the gain, if any, is subject to ordinary income tax.
BIR STOCK OPTION REPORTORIAL REQUIREMENTS
Within 30 days from the grant of the option, the issuing corporation shall submit to the Revenue District Office where it is registered a statement under oath indicating the following:
Terms and Conditions of the stock option ii. Names, TINs, positions of the grantees iii. Book value, fair market value, par value of the shares subject of the option at the grant date iv. Exercise price, exercise date and/or period v. Taxes paid on the grant, if any vi. Amount paid for the grant, if any.
Exercise of Option
During the exercise period, the issuing corporation shall file a report on or before the 10th day of the month following the month of exercise stating therein the following:
Exercise Date ii. Names, TINs, positions of those who exercised the option iii. Book value, fair market value, par value of the shares subject of the option at the exercise date/s iv. Mode of settlement (i. e. cash, equity) v. Taxes withheld in the exercise, if any. vi. Fringe benefits tax paid, if any.
Sources BIR Revenue Memorandum Circulars: 79-2014 & 88-2012
Upon registering your corporation, branch office or business with the Philippine Bureau of Internal Revenue (BIR), you will be required to attend a seminar that will orient you on your company’s basic tax obligations in the Philippines.
While most corporation owners would send their accountants to this seminar rather than attend it themselves, it is wise and prudent for you to be aware of the information given there as well. So here, in a nutshell, are the basic rules of Philippine tax filing that you, as a business owner, should know.
What to pay
1. Sales tax. There are two kinds of businesses in the Philippines: value added tax (VAT) payers and percentage tax payers, or non-VAT.
VAT payers are required to pay monthly and quarterly sales taxes equivalent to 12% of their gross sales, while non-VAT payers pay 3% monthly.
When to pay: on or before the 20th day of the following month (monthly) and the 25th day after the close of the quarter (when applicable)
Forms to use: 2551-M (monthly) for non-VAT; 2550-M (monthly) and 2550-Q (quarterly) for VAT
Who are Required to File VAT Returns
Any person or entity who, in the course of his trade or business, sells, barters, exchanges, leases goods or properties and renders services subject to VAT, if the aggregate amount of actual gross sales or receipts exceed One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00).
A person required to register as VAT taxpayer but failed to register
Any person, whether or not made in the course of his trade or business, who imports goods
2. Income taxes withheld at source. Businesses are required to withhold taxes from their building lessors (5% of total monthly rent), hired freelancers (10–15% for professionals and 2% for subcontractors), and regular employees (rates depend on salary), and remit these taxes to the BIR every month. The BIR Form 2307 should be issued to these withholdees to serve as their proof of creditable income tax withheld at source.
When to remit: on or before the 10th day of the following month
Forms to use: 1601-C (compensation) for employees; 1601-E (expanded) for lessors and freelancers
3. Income tax. As a general rule, income tax rates for corporations in the Philippines are at 30% of net taxable income, while the optional standard deduction rate, which can be used in lieu of itemized deductions, is 40% of the company’s gross income.
However, several conditions, such as BOI or PEZA registrations, special tax treatises, etc., may significantly lower the amount of taxes due from a corporation. Our company can guide you on what steps to take to legally minimize your company’s tax duties in the Philippines.
When to pay: on or before May 30 (q1), August 29 (q2), November 29 (q3), and April 15 (annual)
Forms to use: 1702-Q (quarterly) and 1702-RT (annual)
4. Registration fee. This is a ₱500 fee that needs to be paid every year as a renewal of one’s BIR registration.
When to pay: on or before January 31
Form to use: 0605 (payment form)
If the deadlines for filing fall on a holiday or weekend, then your company may still file and pay without incurring penalties on the next working day.
The deadlines listed above are for manual payers only. Users of the eFiling and Payment System (eFPS) usually have their due dates set one to five days after the manual payers, depending on the industry that their business is engaged in. The companies that are required to use the eFPS include corporations with paid-up capital stocks of at least ₱10 million pesos, taxpayers with computerized accounting systems, PEZA members, and BOI-certified companies.
Payments should be made at authorized agent banks within the revenue district under which your business is registered. Payments made in banks outside your own revenue district will be subject to 25% penalty.
If you would like to learn more about the tax environment and exemptions for local- or foreign-owned corporations in the Philippines, we at Dayanan Consulting can help you. Call us today and let’s talk. We’d be happy to be of service.
Doing business in the Philippines and hiring Filipino talent requires compliance with the revenue regulations of the Bureau of Internal Revenue (BIR). This applies to all companies, whether local or foreign owned BPOs, or engaged in any other kind of business and have already registered with the BIR.
Revenue Regulations No. 11-2013
Other than submitting documents to the government, companies in the Philippines are required to provide its employees a hard copy of BIR Form 2316 or the Certificate of Compensation Payment/Tax Withheld. Employers should:
1) Provide its employees with BIR Form 2316 on or before January 31 and 2) Provide the terminated employee with the form on the day of giving the last payment of compensation.
Minimum wage earners (MWEs) are not exempted from this rule. Employers of MWEs should issue BIR Form 2316 (June 2008 Encs version) to their employees on or before January 31 as well.
Several rules should be followed when employers issue the Certificate of Compensation Payment or Tax Withheld form to its employees. Employers should provide the original and duplicate copies of BIR Form No. 2316 with the following information:
1) Name and address of the employer; 2) Employee’s Tax Identification Number (TIN); 3) The amount of exemptions claimed, amount of premium payments on health and/or hospitalization insurance not exceeding P2,400; 4) The sum of compensation paid including nontaxable benefits; 5) The amount of statutory minimum wage receieved by MWEs; 6) Overtime, holiday, night shift differential, and hazard pay received by MWEs; 7) The amount of tax due; 8) The amount of tax withheld during the calendar year; and 9) Other information in the form that needs to be filled out.
For cases covered by substituted filing, employers should provide the employees with the original copy of BIR Form No. 2316 and file the duplicate copy with the BIR not later than February 28 following the close of the calendar year.
If an employer or a withholding agent fails to comply with this revenue regulation within the required time, there will be a corresponding fee of P1,000 for each penalty committed. The aggregate amount for all penalties should not exceed P25,000. The fee will be waived unless the failure is due to reasonable cause and not willful neglect.
Furthermore the employer or withholding agent will be punished with a fine of P10,000 and at least one year imprisonment if it fails to pay any tax, make any return, keep any record, or supply correct and accurate information, withhold taxes, or refund excess taxes for two consecutive years.