For the past months, the push for tax reform has been increasing, to rationalize our 19-year-old Tax Code in response to our changing economic environment, including the impact of ASEAN integration. Among the issues surfacing in the news are: updating the tax brackets for individual income tax, reducing corporate income tax rates, and simplifying certain tax administration procedures.
Not to be left behind is the possible reform of the withholding tax system, particularly on the expanded withholding tax (EWT). This article focuses on EWT.
Under the EWT system, the person or the entity that pays the income to another is given the responsibility of withholding the tax from income payments and then remitting the same to the government. From the point of view of the government, the system is an effective and convenient method to facilitate the collection and payment of taxes, since there is another person obliged to collect and remit taxes on behalf of and for the government. Simply stated, a person or entity, called the “withholding agent,” is collecting and remitting the “taxes of others,” not its own taxes, to the government.
Moreover, the withholding agent has to be well aware of the different rates, timing, and other guidelines on EWT, which are further defined by subsequent BIR regulations, rulings, and Court jurisprudence.
It will be noted that the withholding agent has to dutifully perform its role, with any failures on its part making it liable to penalties.
Before the issuance of Revenue Regulations (RR) No. 12-2013, the impact of failure to withhold EWT, when discovered during a BIR audit, requires the withholding agents to pay the deficient withholding tax and its penalties. With the issuance of the RR No. 12-2013, the consequences of such failures, when discovered during a BIR audit, also include the non-deductibility of the related expense which was inadvertently not subjected to EWT by the withholding agents.
In other words, under the RR No. 12-2013, if a corporate-withholding agent fails to withhold 5% EWT on an office lease expense of P1 million, and the Bureau of Internal Revenue (BIR) assessed such agent later on, the tax exposures include: (1) P50,000 deficient withholding EWT; (2) interest penalties; and, (3) P300,000 deficient income tax due to non-deductible rental expense (P1 million multiplied by 30% regular corporate income tax).
A triple whammy in itself -- payment of deficient EWT, payment of interest penalties, and non-deductibility of the related expenses. Are these not too much of consequences for one infraction by a (mandated) withholding agent of the government? Is it like penalizing disproportionately the aide who was obligated and who was merely helping the principal do its job?
We would note that the above adverse consequences continue to operate even if the recipient of the income payment (i.e. lessor in the example above) actually pays the corresponding income tax on its part. In this case, the government actually collects the correct income tax from the lessor, and in addition, the government further collects “triple whammy costs” from the withholding agent, as above-described.
The effect of RR 12-2013 is an apparent stringent “penalty” for withholding agents who are supposedly just assisting the government in the early collection of taxes. Should the EWT system be totally abolished? Should the EWT system be simplified? Should RR 12-2013 be invalidated?
Many believe that it is possible that the EWT system be totally abolished, considering that the role of collecting taxes should really be performed by the government itself, and not by the withholding tax agents. Anyway, there is a periodic payment of income taxes on the part of the income earner. Although, expectedly, this idea could be treated negatively by the government, as the timely tax collection of taxes had been such a great challenge to the government that it had to adopt the withholding system in the 1950s starting with compensation payments[VA1].
If the EWT system cannot be abolished, the alternative course is to simplify the rules without the excessive burden and penalties on the part of the withholding agents. It should be remembered that the EWT system should be taken into a perspective that the withholding agents are merely assisting the government in the collection of taxes. Thus, the withholding agents are performing certain functions of the government -- which is to collect taxes.
An example of simplification of the EWT rules would be to design the EWT rates in a manner that is easier to comply with, such as compartmentalizing similar transactions in a few categories, subject to their own applicable EWT rates. Review the covered transactions of the EWT, particularly those covered under the category on purchases of goods and services by top 20,000 corporations, and rationalize the application of EWT considering the practicality of actually withholding on certain petty transactions.
Pending the simplification of the EWT system, it has been an ardent desire of the withholding agents that RR 12-2013 be immediately invalidated and be declared void, given the fact that the taxable years 2013 and 2014 are currently being subjected to BIR audit, and the BIR examiners are using the said regulations against the taxpayers. The triple whammy effect of this regulation as earlier described, or at least the consequence of having a non-deductible expense even though the withholding tax deficiency and interest penalties have been paid during a BIR audit, is held by many as oppressive and unjust. We would expect much litigation from disputes on this matter, if the said regulation continues to be used by the BIR examiners.
In the end, while the EWT system must be used in the furtherance of an effective means of collecting taxes, the government should not heavily depend on the “imposed” role given to the withholding agents to the end that excessive penalties are imposed for failure to withhold. The EWT system, if not abolished, should be reasonably and justly used, and should not be cause to torment the withholding agents who actually help the government in the collection of taxes.
Madel M. Ramos is a senior associate of the Tax Advisory and Compliance Division of Punongbayan & Araullo.
As published in Business World, dated 11 October 2016