A call to simplify the reckoning of withholding
By Euney Marie Mata-Perez on February 9,2023
REPRESENTING the Management Association of the Philippines as the incoming chairman of its tax committee, I attended a meeting of the Senate Committee on Ways and Means technical working group on the proposed “Ease of Paying Taxes Act” last Feb. 2, 2023. One of the welcome discussions was a proposal to change the reckoning time to withhold creditable or expanded withholding taxes by amending Section 57 of the National Internal Revenue Code and require that the obligation to deduct and withhold tax arises at the time payment is made.
Revising and clarifying that the withholding tax applies when an obligation is paid simplifies many issues that have affected taxpayers because current reckoning rules have given rise to numerous problems and burdens for taxpayers.
The timing when to withhold tax is currently prescribed under Section 2.57.4 of Bureau of Internal Revenue (BIR) Revenue Regulation (RR) 2-98, as amended. This section provides that the obligation of the payor to deduct and withhold tax arises “at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books, whichever comes first.”
The current language was introduced by RR 12-2001 in 2001. It was further clarified in BIR Revenue Memorandum Circular 10-18 (Jan. 31, 2018), which stated that the obligation to withhold taxes already arises when an expense or asset is already recorded, whether or not the same has been paid.
Prior to RR 12-2001, the obligation was prescribed to arise only “at the time an income is paid or payable, whichever comes first.” The term “payable” refers to the date the obligation becomes due, demandable or legally enforceable. The current language went beyond this because expenses can be accrued or recorded in a taxpayer’s books even before these become due, demandable or legally enforceable.
In Commissioner of Internal Revenue v. Isabela Cultural Corp. (GR 172231, Feb. 12, 2007), the Supreme Court expounded on the accrual method of accounting as opposed to the cash method. The court held that the accrual method relies upon the taxpayer’s right to receive amounts or the obligation to pay them as opposed to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. The Supreme Court recognized that accrual of income and expense is permitted when the “all-events” test has been met. The test requires the fixing of a right to income or liability to pay and the availability of the reasonable accurate determination of such income or liability.
Based on the foregoing decision, when accruing expenses and liabilities, there should already be a legal right (which should be legally demandable and enforceable) for the taxpayer to pay (and for the income recipient to receive) the payment amounts. However, the word “accrual,” in the accounting sense, extends beyond the legality of the obligation to pay.
Estimated liabilities are also accrued for accounting purposes. In other words, there are instances when liabilities (and the corresponding expenses) are accrued or recorded when they become determinable in amount. In such an event, the recording in the taxpayer’s books are made even before such amounts become due, demandable or legally enforceable. This is a common exercise or requirement at year-end and this is where the problem arises.
Because of the current requirements, the BIR has issued numerous assessments and is expected to continue issuing assessments based on the failure of taxpayers to withhold at the mandated time. Many of the assessments have been upheld by the courts. One landmark decision is the case of ING Bank N.V. v Commissioner of Internal Revenue, GR 167679, July 22, 2015, where ING was assessed for deficiency taxes, which included, among others, a deficiency withholding tax on compensation for bonuses accrued at year-end.
It should be noted that bonuses are accrued at year-end generally at a lump sum, without specifics as to who the recipients are or will be, because the final distribution of the bonuses are made after the year ends and after individual performance evaluations. Thus, the bonuses accrued at year-end are not yet “legally payable” to any employee.
The withholding tax system is a way for the government to collect in advance the income taxes due. Instead of waiting for the recipient income taxpayers to pay their taxes, the government mandates payors or withholding agents to withhold a certain percentage of the income payments and remit the amounts withheld to the government immediately on the month succeeding the payment.
However, the withholding tax system should not be so burdensome as to require withholding agents to withhold even before the payment is made, and much more, even before the income payment is due, demandable and/or legally enforceable. Not all expenses that are accrued or recorded in the books are due, demandable and legally enforceable. Many times, estimated expenses are accrued, following accounting standards and rules, for financial reporting purposes. In these instances, the obligation to withhold should not yet arise.
Thus, requiring the withholding only at the time of payment greatly simplifies the withholding tax system and relieves taxpayers of the burden of remitting withholding taxes even before the obligation becomes legally demandable and enforceable.
Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel).