Compliance with tax filing and payment obligations in the Philippines is tedious and often stressful for any business. In one taxable year, even a small business owner is required to file around 40 tax returns, composed of: four income tax returns (three quarterly and one annual return) and 36 monthly returns for expanded withholding tax (EWT), withholding tax on compensation (WTC), and percentage tax. This is on the assumption that a “small business” has gross sales or receipts that do not exceed the value-added tax (VAT) threshold of P1,919,500.
It seems even more daunting when we consider that withholding tax returns and percentage tax/VAT returns are considered final upon filing, unless amended. As held in several tax cases, the Court of Tax Appeals (CTA) pointed out that the reckoning of the three-year period within which the Bureau of Internal Revenue (BIR) is allowed to assess deficiency taxes for these tax types shall be counted from the date such monthly/quarterly returns were filed or due to be filed, whichever is later.
Perhaps understandably, taxpayers may at times commit errors in accomplishing the information required in filing these tax returns. In such cases, taxpayers are allowed to amend their tax return, except when it covers a taxable period already under tax audit or examination by the BIR. If the error resulted in underpayment of tax in the original tax return, filing the amended tax return and paying the additional tax due after the mandated filing/payment deadline shall be subject to surcharge and interest penalties.
On the other hand, in case of overpayment of tax, Sections 204(C) and 229 of the Tax Code provide that taxpayers are allowed to file a claim for refund or issuance of a tax credit certificate (TCC) within two years from the date of the erroneous tax payment. While such a remedy is available, taxpayers must be wary of this route since the refund process can be time-consuming and will automatically trigger a tax audit or examination.
With this in mind, it has been the practice of some taxpayers, including those that are duly constituted withholding agents, to carry over the excess tax paid/withheld in one period to the next period. This is exactly the scenario in a recently decided case docketed as CTA Case No. 9146 dated Sept. 19, 2017. In the case, the taxpayer-withholding agent (T-WA) amended its monthly EWT return for July 2012 upon realizing it had overpaid EWT for the said month. In the Amended EWT Return, the T-WA indicated its intention to refund the overpayment by marking the “To be Refunded” box. Subsequently, in its August 2012 monthly EWT return, however, the T-WA used the excess amount of EWT paid in the previous month to offset its EWT payable for the month of August.
The BIR then assessed deficiency EWT plus penalties against the T-WA, arguing that offsetting of EWT is not allowed. While the T-WA paid the deficiency tax and penalties assessed, it had nonetheless pursued its claim for refund/TCC for the allegedly erroneous deficiency EWT payment. Unsurprisingly, the BIR denied the claim for refund/TCC, leading the T-WA to seek judicial recourse.
The CTA denied the T-WA’s appeal. In its decision, the tax court reiterated the long-standing principle that taxes are distinct from debts and therefore cannot be subject to compensation (i.e., offsetting) since, in the case of taxes, the government and the taxpayer are not creditors and debtors of each other. Furthermore, the court held that overpayment of EWT in July cannot be used to offset or be treated as an advance tax payment to the succeeding EWT for which the T-WA may be held liable. Offsetting or crediting against other tax liabilities is not a remedy provided by law in case of overpayment of taxes.
It should be noted that the T-WA pursued a refund of the deficiency EWT assessed and paid pertaining to the August EWT Return, instead of the allegedly overpaid tax based on the Original EWT Return for July. Hence, the CTA simply ruled on the practice of offsetting reflected in the August return, and not on the merits of the EWT supposedly overpaid in the original July return.
Paramount in tax compliance is the concept we know as taxable period. Transactions included and reported in annual tax returns (e.g., income tax returns) must have formed part of or occurred during the taxable period or year covered by such tax return. Likewise, returns filed quarterly (e.g., for VAT and fringe benefits tax) and monthly (e.g., for withholding taxes and percentage taxes) also follow this concept. To recall, for EWT purposes, the obligation to withhold arises at the time an income is paid, becomes payable (i.e., due, demandable or legally enforceable), or is accrued or recorded as an expense or asset in the payor’s books (as applicable), whichever comes first.
In reality, the payor-withholding agent may be faced with circumstances where they are required to adjust and correct the amount of expenses and such adjustments/corrections may not occur within the same month when the expenses were initially recorded (and presumably subjected to withholding tax). Practically speaking, the payor withheld the correct amount of tax until he was made aware of the need to adjust or correct the expense amount and, correspondingly, the amount of tax withheld. Strictly speaking though, the payor must reflect the correction and amend the withholding tax return covering the same period or month when the expense was subjected to withholding tax.
We are already aware of the importance of withholding tax compliance as it is one of the requisites for deductibility of expenses for income tax purposes. The aforementioned CTA case reinforces this importance, albeit in a different light. The payor-withholding agent may find it beneficial to perform an evaluation of its processes for determining whether there is already an obligation to withhold (i.e., when the “paid, payable or accrued/recorded, whichever comes first” event is triggered).
In this author’s mind, perhaps the case is also an opportunity for us to ask if there is a need to revisit the withholding tax regulations. While the monthly remittance of withholding taxes addresses the need of the government to have a steady flow of tax revenue, this need does not have to be at the disadvantage of the taxpayer who may find it unreasonably challenging to comply with existing tax rules.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Marion D. Castañeda is a manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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