Two trillion pesos. This is the revenue collection target of the Bureau of Internal Revenue (BIR) for 2016 and much of this represents income tax collected via withholding tax. In 2014 alone, withholding taxes accounted for more or less 40% of total income tax collected by the government.
Considering the significance of withholding tax to the government, each and every taxpayer engaged in trade or business in the Philippines is required to withhold on their income payments, unless specifically exempted.
Failure to withhold or under-withholding of the required taxes gives rise to various penalties. This includes not only payment of the amount that the taxpayer failed to withhold and corresponding penalties. More significantly, this includes disallowance of corresponding expense as deduction, despite payment of the deficiency withholding at the time of tax audit. Thus, for failure to withhold, a taxpayer shall be required to pay not only the deficiency withholding tax and corresponding penalties, but shall also be required to pay deficiency income tax of 30%, together with the corresponding penalties.
Considering these penalties, every taxpayer must learn the basic rules and comply with the withholding tax requirements. Every income payment must be assessed if such must be subject to withholding tax and what rate must be applied. For income payments of professional/talent/consultancy fees, this could be 10% or 15% withholding tax rate.
So when must the lower rate of 10% or higher rate of 15% be applied?
This knowledge is important because during a tax audit, the BIR will normally immediately apply the 15% rate on professional fees, management/consultancy fees, and talent fees. It is now up to the taxpayer to prove that the applicable rate is 10% only or that the tax has been correctly withheld.
Basically, the applicable withholding tax rates depends on the amount of the gross income of the payee, and the timing of payment of the fees. A professional whose gross income during the year exceeds P720,000 should be subject to 15% withholding tax. Otherwise, if he did not meet the threshold, the lower rate of 10% must be applied.
So how would the withholding tax agent know if the payee’s gross income exceeds or shall exceed the P720,000 threshold?
Note that this threshold takes into consideration the total gross income of the professional not only from the withholding agent but also from his other clients.
To determine the applicable withholding tax rate, the professional must periodically submit an Affidavit Declaration of Current Year’s Gross Income to the BIR (“sworn declaration”). The sworn declaration must be filed by the professional on or before June 30 of each year or 15 days after the end of the month the income reaches P720,000, whichever comes earlier, during the year. A copy of the BIR duly received sworn declaration shall then be furnished to all the payors 5 days from date of receipt by the BIR.
Based on the foregoing, five days after June 30 of each year, every withholding agent must require its professionals/talents/consultants to submit a copy of their BIR-stamped received sworn declaration. Should such sworn declaration indicate that the professional’s gross income does not exceed P720,000 during the year, then 10% withholding tax rate must be applied by the withholding agent. Otherwise, if the same indicates that the professional’s gross income exceeds P720,000 during the year or the professional failed to submit the sworn declaration, the higher rate of 15% withholding tax must be applied effective July income payment.
The higher rate of 15% also applies in case the income payment of the withholding agent alone to the professional based on the contract is expected to exceed P720,000. Thus, regardless of the submission of the sworn declaration, the withholding agent must already subject to 15% withholding tax rate its income payment to the professional even prior to June 30.
To summarize, the 10% withholding tax rate applies only to income payments for the months of January to June, unless the withholding agent’s total income payment to the professional based on actual payments or the contract already exceeds or is expected to exceed the P720,000 threshold.
On the other hand, the 15% withholding tax rate must be applied effective July income payment, unless the professional submits a sworn declaration stating that his income shall not exceed P720,000 during the year.
Given that the requirement to withhold not only requires withholding but withholding using the correct tax rate, every withholding agent must apply the above rules on professional fees.
With the complicated and constantly changing rules on withholding taxes not only on professional fees but also on other types of income payments, all taxpayers agree that withholding tax requirements pose a significant burden to the taxpayers. Aside from the requirement to withhold and remit the same to the BIR, there are also various administrative reportorial requirements for withholding taxes.
Thus, the current practice by the BIR during tax audits and corresponding penalties imposed for failure to withhold must be re-assessed by the BIR.
On the part of the BIR during tax audits, deficiency withholding tax on professional fees must also be computed in accordance with the regulations. Instead of computing the same using the higher rate of 15% only, the BIR must also comply with the regulations that it expects the taxpayers to comply with.
On penalties imposed for failure to withhold or erroneous withholding, taxpayers must not be burdened if they failed to withhold. Note that under the withholding tax system, taxpayers are merely helping the government in collecting taxes.
Thus, any income payment which the withholding agent fails to withhold will be declared taxable income by the payee and corresponding full income tax due thereon will also be paid by the income payee. Thus, assessing deficiency withholding tax and income tax on the withholding agent will only unjustly enrich the government. In fact, it must be the BIR who should run after the payee to ensure that income is reported and corresponding income taxes due thereon is paid based on the information from the taxpayer/withholding tax agent.
With the incoming new administration’s pronouncements that change is coming, we hope that the new BIR administration will look at these issues. Otherwise, in case of taxpayer’s failure to withhold, taxpayers will continue to be burdened while unjustly enriching the government.
Ma. Lourdes Politado-Aclan is a senior manager of the Tax Advisory and Compliance Division of Punongbayan & Araullo.
As published in Business World dated 7 June 2016