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General obligations of a withholding agent

By Gladys Jane Dela Cruz on August 19,2022

THE withholding tax system is a mechanism to facilitate the collection of taxes from taxpayers. In the case of Chamber of Real Estate and Builders’ Associations Inc. v. Executive Secretary Alberto Romulo, et al. (GR 60756, March 9, 2010), the Supreme Court stated that the purpose of the system was three-fold: to provide the taxpayer a convenient way of paying a tax liability, to ensure the collection of the tax and to improve the government’s cash flow.

Many taxpayers are withholding agents for the government. The obligation to withhold tax has its legal basis in Section 57 of the National Internal Revenue Code as amended (Tax Code) and is primarily governed and implemented by Revenue Regulations 02-98 as amended.

There are three different types of withholding tax: withholding tax on compensation (WTC), expanded withholding tax (EWT), also known as creditable withholding tax, and final withholding tax (FWT). For WTC, the employer, acting as a withholding agent, is obliged to deduct taxes from its employees’ compensation income. For EWT and FWT, the income payor, acting as withholding agent for the government, is obliged to deduct the appropriate withholding tax from the total amount payable on certain income payments. Thereafter, these deductions are remitted by these withholding agents to the government through the Bureau of Internal Revenue (BIR).

Under the withholding tax system, the taxpayer is the person who earns or receives the income and upon whom the tax is imposed, whereas the withholding agent is the person who pays the income and acts as a collector of the government to ensure the collection of taxes. Hence, a withholding agent is a person or an entity who is responsible for the income payment subject to withholding tax. Consequently, such agent is required to deduct and remit the taxes it withholds from the income of the taxpayer to the government.

It should be emphasized that unlike FWT, the EWT is not a final tax and the taxpayer is still obliged to file an income tax return and pay the tax due. It is, however, entitled to deduct any EWT withheld from the income tax due, if any. If the correct WTC is withheld, the employee may also qualify for substituted return and thus no longer be required to file a separate income tax return.

The obligation of the withholding agent arises upon the occurrence of any of the following, whichever comes first: when an income payment is paid, when the income payment becomes due or payable, or when the income payment is recorded as expense or asset, whichever is applicable, in the books of the taxpayer.

The liabilities of the withholding agent are distinct and separate from that of the income earner or ultimate taxpayer. In the case of Commissioner of Internal Revenue (CIR) v. Court of Appeals (CA), et al. (GR 108576, Jan. 20, 1999), the Supreme Court clarified that under the withholding tax system, the withholding agent’s liability was direct and independent from that of the taxpayer’s. This is because the income tax is in reality imposed on and due from the taxpayer.

In this regard, the Supreme Court held that the withholding agent could not be made liable for any deficiency tax due on the taxpayer because it was the taxpayer who earned the income subject to withholding tax. Thus, the withholding agent was liable only insofar as he failed to perform his duty to withhold the proper tax and remit it to the government. The ultimate liability for the income tax remained with the taxpayer because the gain was realized and received by him (Rizal Commercial Banking Corporation v. CIR, [GR 170257, Sept. 7, 2011]).

In the same vein, the Supreme Court stated in the CIR v. CA case that the ultimate taxpayer or income payee should not answer for the withholding agent’s nonperformance of its legal duty to withhold unless there was collusion or bad faith. The taxpayer could not be deemed to have evaded the tax if the withholding agent failed to perform its withholding tax duty.

As early as 1967, in the en banc case of CIR v. Malayan Insurance Co. (GR No, L-21913, Nov. 18, 1967), the Supreme Court explained that when the government makes a withholding agent liable, the former’s cause of action against the latter is not for the collection of income tax of the income payee but rather the enforcement of the Tax Code’s mandatory withholding provisions. Compliance with such is imposed on the withholding agent and not the taxpayer.

Additionally, it is worth noting that, under Section 34(K) of the Tax Code, if an expense is subject to withholding tax and in order for the same to be validly claimed as a deduction from gross income, it must be shown that the proper withholding of taxes was made.

Ultimately, the obligation of the withholding agent is rooted essentially on the legal duty to withhold taxes under the Tax Code. Failure to comply exposes the withholding agent to potential liability and assessment by the BIR.

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Gladys Jane M. de la Cruz is an associate of Mata-Perez, Tamayo and Francisco.

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