Under Circular Letter 2020-89 (Guidelines in the Treatment of Creditable Withholding Taxes), September 3, 2020, CWT may be considered as admitted assets of insurance companies, subject to conditions and documentation provided therein. Prior to this circular, CWTs were considered as non-admitted assets. It has been observed that several companies have recorded in their books unutilized or excess CWT that have been considered as non-admitted assets. Under Statutory Issue Paper 83 of the US National Association of Insurance Commissioners (NAIC), current income tax recoverables (i.e., CWTs) are considered as admitted assets if they are reasonably expected to be recovered. For insurance companies, this circular finds relevance with collected direct premiums, subject to CWT of 2 percent; collected reinsurance commission income from ceded premiums, subject to CWT of 2 percent; and collected rental income from properties or equipment of insurance companies, subject to CWT of 5 percent.
Nature of CWTs
CWT is not an internal revenue tax but a method of collecting income tax “in advance” (because the tax has already been withheld even before the payee has received his income) from the recipient of income through the payor thereof, which is constituted by law as the withholding agent of government. The income payors, in effect, act as agent of both the taxpayer and the government. The taxes withheld are then to be remitted to the Bureau of Internal Revenue (BIR). Taxes withheld on certain payments are intended to equal or at least approximate the tax due of the payee on said income computed using the graduated tax rate (from 1 percent to 15 percent). Failure to withhold the tax means the non-deductibility of their income payments.
Upon withholding, the withholding agent shall furnish the taxpayer with a BIR Form 2307 (Certificate of Creditable Tax Withheld at Source) or Form 2316 (Certificate of Compensation Payment/ Tax Withheld), to be later attached to the Income Tax Return (ITR), as proof that the taxes have already been withheld. These BIR Forms are prima facie proof of actual remittance to the BIR by the withholding agents. The certificates must be given to the payee within 20 days following the close of the taxable quarter in which the income was earned or received, or simultaneously with the income payment upon request of the payee.
The recipient of income is still required to report the income in his income tax return, and subsequently to pay the difference between the tax withheld and the tax due on the income.
The term “creditable” means the taxes withheld (CWT withheld) are deductible from the income tax due the taxpayer payee (or can be offset against the income tax due of the taxpayer). “Creditable,” in this instance, means deductible from the tax/income tax due. Any further excess CWT can be carried forward or used in the succeeding taxable periods (tax credit) or it can even be refunded, at the option of the taxpayer. The rules thereof are set forth in Section 2.58.3 of RR 2-98, as amended. Under said provision, claims for tax credit or refund of any CWT shall be given due course only when: (a) it is shown that the income payment has been declared as part of the gross income; and (b) the fact of withholding is established by a copy of the withholding tax statement or certificate duly issued by the payer to the payee showing the amount paid and the amount of tax withheld.
Note that the income subject to CWT are ordinary income and returnable income (income to be included in the tax return).
Insurance companies may be required to withhold because of their status as Large Taxpayers. Thus, they are required to withhold 1 percent on payments to suppliers of goods and 2 percent to suppliers of services. Under Revenue Regulations 06-2009, the same rule applies to the top 20,000 private corporations. Under RR 6-2009, the same rule applies to the top 5,000 individuals, as well as to the taxpayers identified and included as medium taxpayers and those under the Taxpayer Account Management Program.