7 Features of Withholding Tax System in the Philippines

7  Features  of  Withholding  Tax  System  in  the  Philippines     Withholding  tax  is  the  most  basic  tax  type  that  each  and  every  taxpayer   engaged  in  trade  or  business  or  in  the  practice  of  profession  must  learn.   Upon  registration  of  their  respective  business  entities,  withholding  tax  type   is  a  must  and  it  may  come  in  three  (3)  tax  types  as  sub  classifications  as   follows:     1. Expanded  withholding  tax  (EWT)  or  Creditable  withholding  tax  (CWT)   under  monthly  BIR  Form  No.  1601E  and  annual  BIR  Form  No.  1604E   with  Alphalist  of  Payees;     2. Withholding  tax  on  compensation  (WC)  under  monthly  BIR  Form  No.   1601C  and  part  of  annual  BIR  Form  No.  1604CF  with  Alphalist  of   Employees;     3. Final  withholding  tax  (FWT)  under  monthly  BIR  Form  No.  1601F  and   part  of  annual  BIR  No.  1604CF  with  Alphalist  of  Employees/Payees;     To  develop  a  deeper  understanding  of  the  withholding  tax  system  in  the   Philippines,  let  us  discuss  some  of  its  basic  features.     1.  Automatic  constitution  of  resident  payor  of  income  as  withholding   agents.     By  force  of  the  law,  a  Philippine  resident  payor  of  specific  income  payments   are  mandated  by  law  to  withhold,  whether  he  likes  it  or  not.  Non-­‐resident   foreign  corporations  and  non-­‐resident  alien  payors  are  not  included   because  of  obvious  logical  reasons  –  Philippine  government  does  not  have   jurisdiction  over  them,  and  could  not  run  after  in  case  of  non-­‐compliance.   Specific  items  of  income  payments  are  enumerated  in  the  regulations  and   once  the  payment  is  made  upon  such  items,  withholding  taxes  applies.   Example,  if  a  taxpayer  pays  a  rental  for  its  office  space,  it  is  mandated  to   withhold  5%  of  the  gross  rental  payment.     2.  A  system  of  advance  collection  of  payee’s  income  tax  liability     What  is  withheld  is  the  income  tax  liability  of  the  payee  upon  actual   payment  or  upon  accrual.  Income  tax  returns  are  filed  quarterly  and  annual   and  under  pay-­‐as-­‐you-­‐file  system,  income  taxes  are  paid  upon  filing.   However,  with  the  withholding  tax,  the  government  gets  the  income  tax  on   the  10th  day  of  the  month  following  the  month  of  payment  or  accrual,   ahead  of  the  quarterly  payment  of  payees’  income.  Example,  Company  A   pays  Atty.  A  professional  fees  amounting  to  ₱100,000  on  January  2012  and   the  applicable  withholding  tax  of  15%  or  ₱15,000  was  withheld.  Atty.  A  is   required  to  file  and  pay  quarterly  income  tax  (BIR  Form  No.  1701Q)  on  April   15,  2012,  but,  before  he  could  file  and  pay,  the  government  already   collected  in  advance  the  ₱15,000  that  was  remitted  by  A  Company  not  later   than  February  10,  2012  (BIR  Form  1601E).    

3.  Amount  withheld  is  a  trust  fund  for  the  government     At  provided  in  Section  57(A)  of  the  Tax  Code,  the  taxes  deducted  and   withheld  by  the  withholding  agent  shall  be  held  as  a  special  fund  in  trust  for   the  government  until  paid  to  the  collecting  officers.  The  withholding  agent,   as  trustee  of  the  funds  withheld  cannot  use  the  funds  in  any  other  purpose,   but  should  remit  the  same  to  the  Bureau  of  Internal  Revenue  (BIR)  through   the  authorized  agent  banks  (AABs)  or  other  payment  facilities.     4.  Amount  withheld  ibis  creditable  or  final  income  tax  due  of  the  payees.     Expanded  withholding  tax  rates  are  carefully  studied  and  crafted  to   reasonably  estimate  payee’s  income  tax  liability  depending  on  the  industry   type  and  nature  of  payment.  This  is  the  reason  why  withholding  tax  rates   are  varying  and  is  challenging  to  memorize  for  proper  application.  Upon   filing  of  quarterly  and/or  annual  income  tax  of  the  payee,  the  amount   withheld  will  be  deducted  from  its  income  tax  liabilities  and  there  would  be   fewer  amounts  due  because  of  the  withholding  tax  duly  supported  by   creditable  withholding  tax  certificates  –  BIR  Form  No.  2307/2316.  On  the   other  hand,  final  withholding  taxes  are  the  same  rates  imposed  in  the  Tax   Code  for  specific  payments.  As  such,  they  constitute  full  payment  of   payee’s  income  tax  and  no  additional  tax  liabilities  would  arise  under  final   withholding  tax  on  top  of  the  amount  withheld.     5.  Check  and  balance  mechanism.     Monthly  withholding  tax  returns  of  the  payor  attaches  a  monthly  alphalist   of  payees  (MAP)  with  the  details  of  the  payee  and  the  income  payments  –   the  name  address  of  payee,  and  the  amounts  of  income  payment  and   corresponding  tax  withheld.  When  the  payee  files  a  quarterly  and  annual   income  tax  returns,  it  attaches  the  summary  alphalist  of  withholding  taxes   (SAWT)  with  the  details  of  the  payor  and  the  income  payment.  With  these   reports,  the  BIR  could  easily  determine  whether  or  not  the  payee  declared   the  income  payment,  or  whether  or  not  the  payor  correctly  declared  the   expense.  As  such,  this  becomes  an  easy  tool  in  the  third  party  information   procedures  of  the  BIR  to  catch  up  tax  evaders.     6.  A  mandatory  requirement  for  deductibility  of  an  expense.     In  effect,  Section  34(K)  of  the  tax  Code,  as  amended,  provides  that  if  an   expense  is  subject  to  withholding  tax,  it  will  not  be  allowed  as  a  deduction   for  income  tax  unless  it  could  be  shown  that  withholding  taxes  has  been   paid  to  the  BIR.  This  explains  why  assessment  of  withholding  tax  has  a  dual   effect  –  disallowance  of  expense  deduction  in  income  tax  computation  for   failure  to  withhold,  and  assessment  for  withholding  tax  liabilities.  Upon  

payment  of  withholding  taxes,  the  income  tax  assessment  based  on  failure   to  withhold  is  automatically  dropped.     7.  Exclusive  enumeration  of  items  subject  to  withholding  taxes.     Revenue  Regulations  2-­‐98,  as  amended,  is  the  main  regulation  enumerating   the  income  payments  subject  to  creditable  withholding  tax.  Enumeration  of   expanded  withholding  tax  therein  is  exclusive  and  whatever  is  not  included   is  deemed  not  subject  to  creditable  withholding  tax.  This  means  to  say  that   as  a  rule,  not  all  expenses  are  subject  to  withholding.  Exception  to  this  rule   is  the  rule  on  Top  Twenty  Thousand  Corporation  (TTC)  or  Top  Five   Thousand  Individuals  duly  selected  and  notified  as  such  by  the  BIR.  On  top   of  those  enumerated  in  Revenue  Regulations  2-­‐98,  as  amended,  they  are   mandated  to  withhold  on  income  payments  to  regular  supplies  of  goods  –   1%  or  of  services  –  2%,  and  from  casual  purchases  amounting  to  ₱10,000  in   a  single  transaction.     Failure  of  the  taxpayer  to  comply  the  obligation  to  withhold  would  expose  a   taxpayer-­‐agent  with  the  following  consequences:   Non-­‐deductibility  of  a  business  expense  for  income  tax  computation  for   failure  to  withhold  until  after  payment  of  the  withholding  tax  and  related   penalties;   Payment  of  the  basic  withholding  tax  that  should  have  been  withheld;   One-­‐time  surcharge  of  25%,  or  50%  for  wilful  neglect  or  fraudulent  filing;   Interest  on  20%  on  annual  basis  based  on  the  basic  withholding  tax  that   should  have  been  withheld;   Compromise  penalties  ranging  from  ₱200  to  ₱50,000  based  on  the  amount   of  basic  withholding  tax  that  should  have  been  withheld;   Or  worst,  criminal  prosecution  and  imprisonment  for  wilful  neglect  or   fraudulent  filing  of  withholding  tax  returns   You  would  not  enjoy  paying  the  above  penalties,  and  wasting  your  hard   earned  money  from  your  business  undertakings  and  simple  ignorance  of   the  above  obligation.  It’s  the  proper  time  now  to  educate  and  you  have  all   the  time  and  opportunity  to  do  it  before  it  is  too  late.