CREDITABLE WITHHOLDING TAX ISSUES
By: Euney Marie J. Mata-Perez on December 19,2019
The withholding tax obligations in the Philippines are not simple. Philippine taxpayers are required to withhold creditable withholding taxes (CWT) at varying rates on several income payments, and remit the taxes withheld to the Bureau of Internal Revenue (BIR).
A CWT is an advance collection of tax. The income from which it is withheld is still required to be included in the taxpayer’s gross income for income tax calculation purposes. The CWT withheld is used to offset against the income tax due of the taxpayer. Any excess CWT can be carried forward and used in successive taxable periods or it can be refunded.
We have so many CWT rates, ranging from 1 to 15 percent. These rates depend on the type of income payment, status of payees or payors, and on the amount of income payments. For instance, for payments to professionals, the CWT is 5 percent if the payee’s gross income does not exceed P3 million for a year, or 10 percent in other cases.
A taxpayer may also be required to withhold because of its status. Large taxpayers for instance are required to withhold 1 percent on payments to its supplier of goods and 2 percent to its supplier of services. The same applies to top 20,000 private corporations under Revenue Regulations (RR) 06-2009, top 5,000 individuals under RR 6-2009, and taxpayers identified and included as medium taxpayers and those under the Taxpayer Account Management Program (TAMP).
No doubt, application of the correct withholding tax rate can be dictated by facts that the withholding agent is supposed to know or verify.
It is not surprising that audits conducted by the BIR would usually give rise to deficiency CWT assessments. Aside from a deficiency CWT assessment, a taxpayer would be faced with deficiency income tax assessments arising from the disallowance of the expense supposedly subject of the CWT. This double whammy treatment can give rise to hundreds of millions in tax assessments.
Under the old RR 12-2013, the BIR will maintain the disallowance of the expense if the expanded withholding tax is belatedly paid. Fortunately, this rule was reversed. Under RR 6-2018, an expense shall be allowed as a deduction provided that the required CWT is remitted to the BIR, even if such remittance is done belatedly, during a tax audit and with the concurrent penalties as a result of under-withholding or non-withholding. Despite such reversal, however, some BIR examiners insist in the disallowance for the periods prior to Feb. 7, 2018, the effectivity of RR 6-2018, if the CWT is paid late.
The recipient of income payments subject to CWT also faces certain issues, especially when such recipient has excess CWT and claims for refund therefor. Taxpayers whose income receipts are subject to CWT have the option to claim for refund for unutilized or excess CWT or carry such excess forward to the next taxable periods.
Taxpayers seeking the refund of excess or unutilized CWT must comply with the following: the claim must be filed with the BIR within two years from the date of payment of the tax; the fact of withholding must be established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld; and it must be shown on the return that the income received was declared as part of the taxpayer’s gross income.
In a long line of cases, the Supreme Court has explicitly ruled that proof of actual remittance of the CWT to the BIR is not a requirement for proving entitlement to a claim for refund of excess and unutilized CWTs. In other words, the CWT certificates issued by the withholding agents of the government are prima facie proof of actual remittance to the BIR by the withholding agents.
Also, it is not necessary that the CWT certificate be duly stamped as “received” by the BIR or supported by official receipts issued by the BIR accredited bank. The certificate provides sufficient proof of the creditable income taxes withheld.
It is important to note that rules of evidence must be complied on issues of fact, such as whether or not the income received was indeed declared as part of the taxpayer’s gross income. In case the assessment or claim for refund is appealed the Court of Tax Appeals, comparing the amount of the income subject to CWT as against the income in the taxpayer’s financial statements or income tax returns is not sufficient. Adequate proof, like accounting records and other documentary evidence, must be submitted to the court.
In case of errors in the CWT certificates, source documents of the transactions giving rise to CWTs showing that there were clerical errors in the entries of CWT certificates must also be presented in court.
A taxpayer’s option to carry forward excess CWT or seeking its refund is irrevocable. Once a taxpayer chooses to carry forward, it can no longer seek the refund of excess or unutilized CWT.
All the above shows that the present CWT system is complex. It gives the BIR a rich opportunity to assess taxpayers for deficiency CWT and income taxes, including penalties and interest. There is thus a need to simplify the CWT system, not just to reduce compliance costs, but also to make doing business in the Philippines easier.