The creditable withholding tax (CWT) system has proven to be an effective tool in tax collections through the cooperation of the payors, who are constituted by law as withholding agents. The income payors act as agent of both the taxpayer and the government. The income payors have no choice but to faithfully comply with their obligations as withholding agents, because failure to do so would mean nondeductibility of their income payments.
The imposition of CWTs on income payments is by virtue of the mandate of Section 57 of the Tax Code, which authorizes the secretary of finance, upon the recommendation of the Commissioner of Internal Revenue, to require the withholding of a tax on certain income payments, pursuant to the criteria laid down in the Tax Code, which shall be at a rate of not less than 1 percent to a maximum of not more than 32 percent under the old law, but the Tax Reform for Acceleration and Inclusion (TRAIN) Act reduced the maximum rate from 32 percent to 15 percent beginning January 1, 2019.
In implementing the mandate of the Tax Code, the secretary of finance has since issued several issuances requiring the withholding of tax on certain income payments. And under the regulations issued by the secretary of finance, specific rates of withholding taxes are being imposed on certain income payments, depending upon the nature of the income payments. For income payments not specifically enumerated under the regulations as subject to specific withholding tax rates, taxpayers constituted as top withholding agents (TWAs) are being obliged to remit 1-percent and 2-percent CWTs on their purchase of goods and services, respectively.
In Revenue Regulations 12-94, taxpayers belonging to the top 5,000 corporations, as determined by the Commissioner of Internal Revenue, were constituted as withholding agents and, thus, made to impose withholding of 1-percent CWT on their purchase of goods. In RR 17-2003, the top 5,000 corporations were increased to 10,000 corporations, where 2-percent CWT on purchase of services were, likewise, imposed, in addition to the 1-percent CWT imposed on purchase of goods. In RR 14-2008, the number of top private corporations was increased to 20,000. Subsequently, in RR 6-2009, top 5,000 individual taxpayers were, likewise, included as withholding, agents and, thus, were required to withhold the 2-percent CWT on purchase of services and 1-percent CWT on purchase of goods.
In RR 11-2018, as amended by RR 7-2019, the TWAs were required to be published in a newspaper of general circulation, which shall serve as a notice to the TWAs that they are being constituted as such. Subsequently, RR 7-2019 was issued clarifying that TWAs shall refer to those taxpayers whose gross sales/receipts, or gross purchases or claimed deductible itemized expenses, as the case may be, amounted to P12 million during the preceding taxable year.
The issuance of RR 11-2018 led to the publication of a list of taxpayers notifying them as TWAs. Some taxpayers were included in the list even in the absence of the requirements laid down in RR 7-2019, that is, sales or receipts or itemized deductions of P12 million has not been met. Hence, the confusion.
With the recent issuance of Revenue Memorandum Circular 143-2019, taxpayers are guided that in cases of publication of TWAs in the newspaper of general circulation, wherein they are included or not deleted in the existing list of TWAs but do not satisfy the criteria of RR 7-2019, they cannot be compelled to withhold the 1-percent and 2-percent CWTs.
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The author is a partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual, or particular, tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at rodel.unciano@bdblaw.com.ph or call 8403-2001 local 140.