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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 payees 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 payees 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
payees 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. Its the proper time now to educate and you have all
the time and opportunity to do it before it is too late.