Should the withholding agent be held liable to pay deficiency creditable withholding taxes, even if the income recipient had already included the income payment in its taxable income subjected to the income tax?
Withholding taxes (WHTs) on income are classified as WHT on compensation, creditable WHT and final WHT. Under the final withholding tax system, the amount of income tax withheld by the withholding agent is considered a full and final payment of the income tax due from the recipient of the income subjected to WHT. Creditable withholding tax (CWT), on the other hand, is deductible from the income tax due of the income recipient at the end of a taxable period.
In the regular tax audits conducted by the Bureau of Internal Revenue (BIR), compliance by the taxpayer with its withholding tax obligations is one of the major issues looked into by revenue examiners.
Failure on the part of the withholding agent to deduct and remit the tax due on an income payment subject to withholding tax would give rise to an assessment for deficiency withholding tax, including interest and penalties for non-withholding.
In addition, such non-withholding would also result in the issuance of a deficiency income tax assessment due to the disallowance of the expense as deduction from the payor’s gross income. In other words, the potential tax exposure for noncompliance with the withholding tax requirements is quite substantial and thus, cannot simply be ignored.
The recent tax amnesty program that ended last May resulted in a substantial amount of forgone revenue collection to the BIR as said program covered all internal revenue taxes except withholding taxes.
Thus, to temper the revenue loss, the BIR has zeroed in on withholding taxes in their assessments for 2005 and prior years.
Assessment for withholding tax, final or creditable, may be contested by simply establishing the fact of withholding and remittance of the correct amount of tax to the BIR. The relevant supporting documents, among others, would be the withholding tax returns with the attached alphalists of suppliers, official receipts/invoices, and reconciliation schedules.
However, if no withholding was made, what are the available defenses to the taxpayers?
There are several lines of arguments or defenses that could be raised, depending on the nature of the income payment being assessed for deficiency withholding tax.
One defense would be that the income payment is not among those enumerated under the law and rules and regulations as subject to withholding tax. Examples would include payments made to service contractors or establishments which are not all subject to the 2% CWT unless the payor of the income belongs to the top ten thousand (10,000) private corporations; advertising and promotional costs and expenses which do not form part of the advertising fee paid to the advertising agency and, therefore, not subject to the 2% CWT and fees for services rendered outside the Philippines by nonresident persons which are exempt from Philippine income/withholding tax.
Another possible defense would be to invoke the application of the statute of limitations if the three-year prescriptive period to assess prescribed by law has lapsed and no final assessment for deficiency WHT has been issued.
Prescription, though, would hold water only if a withholding tax return was properly filed by the taxpayer. Otherwise, the withholding tax liability of the taxpayer would effectively be considered imprescriptible.
Moreover, in respect to creditable withholding taxes such as the expanded withholding tax and withholding tax on compensation, the BIR, in several cases, agreed to cancel the withholding tax assessment after presentation of sufficient proof that the subject income payment was properly reported in the payee’s income tax return and subjected to income tax.
In line with the purpose of the withholding tax system which is basically to facilitate the collection of taxes and not to generate taxes or revenue in excess of what is due to the government, the BIR, in these cases, has considered the proper reporting of the income by the payee as substantial compliance with the withholding tax requirement.
In fact, in the case of the withholding tax on compensation, Section 2.58.6 of the Revenue Regulations No. 2-98 explicitly provides that "the employer will not be relieved of his liability for payment of the tax required to be withheld unless he can show that the tax has been paid by the employee."
It should be noted, though, that substantial compliance with the withholding tax requirement under the foregoing instances relieves the withholding agent from the liability to pay the withholding tax due, but not to the penalties and/or additions to the tax for failure to deduct and withhold within the time prescribed by law or regulations.
While substantial compliance appears to be a good defense, this might be difficult to establish since it would require the cooperation of the payee who must be willing to provide the withholding agent copies of his/her income tax return.
Thus, if — for whatever reason — the payee is unable to cooperate, the withholding agent has no other recourse but to pay the deficiency withholding tax, including the interest and penalties.
This is the most practical approach, rather than run the risk of paying deficiency income tax on the disallowed expense, plus interest and penalties, which is more substantial in amount.
Withholding tax is a major concern that should be taken seriously since the potential tax risk is quite significant. Taxpayers as withholding agents, therefore, should exercise diligence in complying with the withholding tax regulations and in applying the correct withholding tax rates. Adopting the conservative position of "when in doubt, withhold," would be a prudent rule to follow.
