DIGESTS
Withholding Tax
Reasons for the withholding tax system
The withholding tax system was devised for three (3) primary reasons, i.e. — (1) to provide taxpayers a convenient manner to meet their probable income tax liability; (2) to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns; and (3) to improve the government’s cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies. Succinctly put, withholding tax is intended to facilitate the collection of income tax. And if there is no income tax, withholding tax cannot be collected.
Section 57 of RA No. 8424 directs that only income, be it active or passive, earned by a payor-corporation can be subject to withholding tax.
Although Section 57(B) was later amended by the TRAIN Law, it still decrees that the withholding of tax covers only the income payable to natural or juridical persons.
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Three-fold purpose of the withholding tax system; The withholding agent is merely a tax collector and not a taxpayer.
In Chamber of Real Estate and Builders’ Associations, Inc. v. The Executive Secretary, the Court has explained that the purpose of the withholding tax system is three-fold: (1) to provide the taxpayer with a convenient way of paying his tax liability; (2) to ensure the collection of tax, and (3) to improve the government’s cashflow. Under the withholding tax system, the payor is the taxpayer upon whom the tax is imposed, while the withholding agent simply acts as an agent or a collector of the government to ensure the collection of taxes.
It is, therefore, indisputable that the withholding agent is merely a tax collector and not a taxpayer, as elucidated by this Court in the case of Commissioner of Internal Revenue v. Court of Appeals, to wit:
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer – he is the person subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him – he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since:
“the government’s cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer.” (Emphases supplied)
Based on the foregoing, the liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him.
While the payor-borrower can be held accountable for its negligence in performing its duty to withhold the amount of tax due on the transaction, RCBC, as the taxpayer and the one which earned income on the transaction, remains liable for the payment of tax as the taxpayer shares the responsibility of making certain that the tax is properly withheld by the withholding agent, so as to avoid any penalty that may arise from the non-payment of the withholding tax due.
RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the payor-borrower as the withholding agent. As such, it is liable for payment of deficiency onshore tax on interest income derived from foreign currency loans, pursuant to Section 24(e)(3) of the National Internal Revenue Code of 1993.
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RR No. 02-98 provides that the term “payable” refers to the date the obligation becomes due, demandable r legally enforceable.
Section 2.57.4 of RR No. 2-98 provides:
SEC. 2.57.4. Time of Withholding. – The obligation of the payor to deduct and withhold the tax under Section 2.57 of these regulations arises at the time an income is paid or payable, whichever comes first, the term ‘payable’ refers to the date the obligation becomes due, demandable or legally enforceable.
In this case, the CIR insists that EBCC was liable to pay the interest from the date of the execution of the contract on January 5, 2000, not from the date of the first payment on June 1, 2002.
We are not convinced.
EBCC’s loan agreement with Ogden stated that:
3. Repayment and Interest
3.1 The BORROWER shall repay the Loan to the LENDER (or as it may in writing direct) in sixteen (16) consecutive semi-annual [installments] of US DOLLARS EIGHT HUNDRED and EIGHTY ONE THOUSAND and TWO HUNDRED and FIFTY (US$881,250.00) commencing on 1 June 2002 and thereafter on June 1 and December 1 of each year.
3.2 Interest shall accrue on the Loan from the date hereof until the date of repayment at a rate equal to the 90-day LIBOR rate plus 2.5%, subject to review every 90 days.
3.3 Notwithstanding the provisions of Clause 3.2 above, if the BORROWER fails to make payment of an amount due on a payment date, the BORROWER shall pay additional interest on such past due and unpaid amount from the due date until the date of payment at the rate of ½% per month.
3.4 The interest payable to the LENDER shall be exclusive of withholding tax and/or any other similar taxes which shall be to the account of the BORROWER. Every payment to the LENDER hereunder shall be net of any present or future tax assessment or other governmental charge imposed by any taxing authority of any jurisdiction.
Clearly, EBCC’s liability for interest payment became due and demandable starting June 1, 2002. And considering that under RR No. 02-98, the obligation of EBCC to deduct or withhold tax arises at the time an income is paid or payable, whichever comes first, and considering further that under the said RR, the term “payable” refers to the date the obligation becomes due, demandable or legally enforceable, we find no error on the part of the CTA En Banc in ruling that EBCC had no obligation to withhold any taxes on the interest payment for the year 2000 as the obligation to withhold only commenced on June 1, 2002, and thus cancelling the assessment for deficiency FWT on interest payments arising from EBCC’s loan from Ogden.
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Competent proof to establish the fact that creditable taxes are withheld.
The certificate of creditable tax withheld at source is the competent proof to establish the fact that taxes are withheld. It is not necessary for the person who executed and prepared the certificate of creditable tax withheld at source to be presented and to testify personally to prove the authenticity of the certificates.
In Banco Filipino Savings and Mortgage Bank v. Court of Appeals, this court declared that a certificate is complete in the relevant details that would aid the courts in the evaluation of any claim for refund of excess creditable withholding taxes.
Moreover, as correctly held by the CTA En Banc, the figures appearing in the withholding tax certificates can be taken at face value since these documents were executed under the penalties of perjury, pursuant to Section 267 of the 1997 NIRC, as amended.
Thus, upon presentation of a withholding tax certificate complete in its relevant details and with a written statement that it was made under the penalties of perjury, the burden of evidence then shifts to the CIR to prove that (1) the certificate is not complete; (2) it is false; or (3) it was not issued regularly.
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Proof of actual remittance is not necessary.
Proof of actual remittance is not a condition to claim for a refund of unutilized tax credits. Under Sections 57 and 58 of the 1997 NIRC, as amended, it is the payor-withholding agent, and not the payee-refund claimant such as respondent, who is vested with the responsibility of withholding and remitting income taxes.
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Party liable for remitting withheld taxes; Final withholding tax.
The party liable for remitting the amounts withheld is the withholding agent of the BIR.
When a particular income is subject to a final withholding tax, it means that a withholding agent will withhold the tax due from the income earned to remit it to the BIR. Thus, the liability for remitting the tax is on the withholding agent.
When a particular income is subject to a final withholding tax, it means that a withholding agent will withhold the tax due from the income earned to remit it to the BIR. Thus, the liability for remitting the tax is on the withholding agent.
Clearly, the withholding agent is the payor liable for the tax, and any deficiency in its amount shall be collected from it. Should the BIR find that the taxes were not properly remitted, its action is against the withholding agent, and not against the taxpayer.
Section 58(B) and (C) of the NIRC of 1997, and Sections 2.57.4 and 2.58(B) and (C), state that the withholding agent must file the annual information return and furnish the payee written statements of the payments it made and of the amounts it deducted and withheld. They confirm that the remittance of the tax is not the responsibility of the payee, but that of the payor, the withholding agent.
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Nature of final taxes withheld by the withholding agent; Sufficient evidence to establish final withholding of taxes.
Final withholding taxes withheld by the withholding agent are deemed to be the full and final payment of the income tax due from the income earner or payee.
Certificates of Final Taxes Withheld issued by the Agent Banks are sufficient evidence to establish the withholding of the taxes.
Moreover, these Certificates of Final Tax Withheld, complete in relevant details, were declared under the penalty of perjury. As such, they may be taken at face value.
When these Certificates are presented, the burden of proof shifts to the CIR, who needs to establish that they were incomplete, false, or issued irregularly.
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The ruling that proof of remittance is not necessary applies to final withholding taxes.
The case of Commissioner of Internal Revenue v. Philippine National Bank involves a refund of creditable withholding tax and not of final withholding tax. However, its ruling that proof of remittance is not necessary to claim a tax refund applies to final withholding taxes. The same principles used to rationalize the ruling apply to final withholding taxes: (i) the payor-withholding agent is responsible for the withholding and remitting of the income taxes; (ii) the payee-refund claimant has no control over the remittance of the taxes withheld from its income; (iii) the Certificates of Final Tax Withheld at Source issued by the withholding agents of the government are prima facie proof of actual payment by payee-refund claimant to the government itself and are declared under perjury.
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Additional and more significant reason for not requiring from the payee to prove actual remittance of taxes withheld.
Both the CIR and the CTA should have appreciated the unreasonable difficulty that it would have put the taxpayer—in this case PAL—to claim a statutory exemption granted to it. In requiring that it prove actual remittance, the court a quo and the CIR effectively put the burden on the payee to prove that both government and the banks complied with their legal obligation. It would have been near impossible for the taxpayer to demand to see the records of the payor bank or the ledgers of the government. The legislative policy was to provide incentives to the taxpayer by unburdening it of taxes. By administrative and judicial interpretation, such policy would have been unreasonably reversed. This is not this Court’s view of equity. Clearly, the taxpayer in this case is entitled to relief.
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Nature of interest income from bank deposits
The taxes on interest income from bank deposits are in the nature of a withholding tax.
Interest income from bank deposits is taxed under Section 27(D)(1) of the NIRC. The tax due on this income is a final withholding tax under Section 57(A).
Final withholding taxes imposed on interest income are likewise provided for under Section 2.57.1(G) of RR No. 2-98.
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Withholding taxes are internal revenue taxes covered by Section 203 of the NIRC.
Section 203 of the NIRC provides for the ordinary prescriptive period for the assessment and collection of taxes.
On the other hand, Section 222(a) of the NIRC provides for instances where the ordinary prescriptive period of three years for the assessment and collection of taxes is extended to 10 years, i.e., false return, fraudulent returns, or failure to file a return. In short, the relevant provisions in the NIRC concerning the prescriptive period for the assessment of internal revenue taxes provide for an ordinary and extraordinary period for assessment.
The CIR, however, forwards a novel theory that Section 203 is inapplicable in the present assessment of EWT and WTC deficiency against La Flor. It argues that withholding taxes are not contemplated under the said provision considering that they are not internal revenue taxes but are penalties imposed on the withholding agent should it fail to remit the proper amount of tax withheld.
In Chamber of Real Estate and Builders’ Associations, Inc. v. Hon. Executive Secretary Romulo, the Court had succinctly explained the withholding tax system observed in our jurisdiction, to wit:
We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is sanctioned by our tax laws. The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the government’s cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.
Under the existing withholding tax system, the withholding agent retains a portion of the amount received by the income earner. In turn, the said amount is credited to the total income tax payable in transactions covered by the EWT. On the other hand, in cases of income payments subject to WTC and Final Withholding Tax, the amount withheld is already the entire tax to be paid for the particular source of income. Thus, it can readily be seen that the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts as the government’s agent for the collection of the tax in order to ensure its payment.
As a consequence of the withholding tax system, two distinct liabilities arise — one for the income earner/payee and another for the withholding agent. In Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue, the Court elaborated:
It is, therefore, indisputable that the withholding agent is merely a tax collector and not a taxpayer, as elucidated by this Court in the case of Commissioner of Internal Revenue v. Court of Appeals, to wit:
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer — he is the person subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him — he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since:
“the government’s cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer.”
Based on the foregoing, the liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him. (Citations omitted)
It is true that withholding tax is a method of collecting tax in advance and that a withholding tax on income necessarily implies that the amount of tax withheld comes from the income earned by the taxpayer/payee. Nonetheless, the Court does not agree with the CIR that withholding tax assessments are merely an imposition of a penalty on the withholding agent, and thus, outside the coverage of Section 203 of the NIRC.
The CIR cites National Development Company v. CIR [235 Phil. 477 (1987)] as basis that withholding taxes are only penalties imposed on the withholding agent, to wit:
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals, the Court quoted with approval the following regulation of the BIR on the responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a query to be addressed to the Commissioner of Internal Revenue for the determination whether or not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding, the withholding agent may thereupon remit the amount of tax withheld. (2nd par., Sec. 200, Income Tax Regulations).
“Strict observance of said steps is required of a withholding agent before he could be released from liability,” so said Justice Jose P. Bengson, who wrote the decision. “Generally, the law frowns upon exemption from taxation; hence, an exempting provision should be construed strictissimi juris.”
The petitioner was remiss in the discharge of its obligation as the withholding agent of the government and so should be held liable for its omission.
A careful analysis of the above-quoted decision, however, reveals that the Court did not equate withholding tax assessments to the imposition of civil penalties imposed on tax deficiencies. The word “penalty” was used to underscore the dynamics in the withholding tax system that it is the income of the payee being subjected to tax and not of the withholding agent. It was never meant to mean that withholding taxes do not fall within the definition of internal revenue taxes, especially considering that income taxes are the ones withheld by the withholding agent. Withholding taxes do not cease to become income taxes just because it is collected and paid by the withholding agent.
The liability of the withholding agent is distinct and separate from the tax liability of the income earner. It is premised on its duty to withhold the taxes paid to the payee. Should the withholding agent fail to deduct the required amount from its payment to the payee, it is liable for deficiency taxes and applicable penalties. In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation [281 Phil. 425 (1991)] the Court explained:
It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is “required to deduct and withhold any tax” is made “personally liable for such tax” and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.
A “person liable for tax” has been held to be a “person subject to tax” and properly considered a “taxpayer.” The terms “liable for tax” and “subject to tax” both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made “liable for tax” as not “subject to tax.” By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him. (Emphasis supplied)
Thus, withholding tax assessments such as EWT and WTC clearly contemplate deficiency internal revenue taxes. Their aim is to collect unpaid income taxes and not merely to impose a penalty on the withholding agent for its failure to comply with its statutory duty. Further, a holistic reading of the Tax Code reveals that the CIR’s interpretation of Section 203 is erroneous. Provisions of the NIRC itself recognize that the tax assessment for withholding tax deficiency is different and independent from possible penalties that may be imposed for the failure of withholding agents to withhold and remit taxes. For one, Title X, Chapter I of the NIRC provides for additions to the tax or deficiency tax and is applicable to all taxes, fees and charges under the Tax Code.
In addition, Section 247(b) of the NIRC provides:
SEC. 247. General Provisions. —
x x x x
(b) If the withholding agent is the Government or any of its agencies, political subdivisions or instrumentalities, or a government-owned or controlled corporation the employee thereof responsible for the withholding and remittance of the tax shall be personally liable for the additions to the tax prescribed herein.
On the other hand, Section 251 of the Tax Code reads:
SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. — Any person required to withhold, account for and remit any tax imposed by this Code or who willfully fails to withhold such tax, or account for and remit such tax, or aids or abets in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted.
Based on the above-cited provisions, it is clear to see that the “penalties” are amounts collected on top of the deficiency tax assessments including deficiency withholding tax assessments. Thus, it was wrong for the CIR to restrict the EWT and WTC assessments against La Flor as only for the purpose of imposing penalties and not for the collection of internal revenue taxes.
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