Compliance as noxious as administration

THE RAISON d’être for substituted filing is clear: hassle-free collection method for the BIR and vigilant compliance for the employers. Following the benefits-protection theory, the state naturally demands and receives taxes from its subjects to be able to carry out its mandate and perform the functions of the government. The citizen, in turn, pays from his property the portion demanded in order that he may, by means thereof, be secure in the enjoyment of the benefits of organized society.

Just recently, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 11-2013, which take effect beginning with the calendar year 2013. The new regulations mandate the submission of a hard copy of the Certificate of Compensation Payment / Tax Withheld (BIR Form 2316) covering employees who are qualified for substituted filing to the BIR. The employer shall furnish each employee with the original copy of BIR Form 2316 not later than Jan. 31 and submit to the BIR the duplicate copy not later than Feb. 28 following the close of the calendar year.

The new regulations also reinforce the applicable penalty in case an employer or withholding agent, including the government or any of its political subdivisions and GOCCs, fails to submit the certificate to the BIR on time. For failure to file an information return, statement or list, or keep any record, or supply any information as may be required by the Tax Code or the Commissioner, and unless it is shown that failure is due to reasonable and not to willful neglect, there shall be imposed, upon notice and demand by the Commissioner, the penalty of a fine ranging from P1,000 to P25,000.

Furthermore, in case the employer or withholding agent is remiss on his duty, for two consecutive years, to make any return, to supply correct and accurate information, and wilfully fails to pay such taxes and file and submit the duplicate copy of BIR Form 2316 at the time required under the new regulations, the said employer or withholding agent may, in addition to other penalties provided by law, upon conviction, be punished with a fine that is not less than P10,000 and suffer imprisonment of not less than one year but not more than ten years. To settle any violation, the regulations provide for a compromise fee of P1,000 for each BIR Form 2316 not filed without any maximum threshold. Note that failure to furnish BIR Form 2316 shall be a ground for the mandatory audit of the employer’s income tax liabilities upon verified complaint of the BIR. Under the pain of perjury, BIR Form 2316 shall be signed by both the employee and employer, attesting to the fact that the information stated therein has been verified and is true and correct to the best of their knowledge.

Based on the framework of the regulation, it would seem that such issuance was meant to ensure that the employer is compliant with his duty of withholding, filing and paying the correct amount of tax. Taking into consideration the ultimate goal of the BIR to provide an efficient and convenient service to its taxpayers through the implementation of a "hassle-free" method of filing Individual Income Tax Returns (BIR Form 1700), this system recognizes that BIR form 2316 serves the same purpose as if BIR Form 1700 has been filed.

Recall that under the tax regulations, substituted filing system of income tax return is the method allowed by law for the declaration of income of a person receiving purely compensation income. Under this system, the requirement to file an annual income tax return has been waived for individuals deriving purely compensation income if they only have one employer for the year and provided that all their income was fully and correctly subjected to withholding tax by their employer.

This begs the question, to whom does substituted filing apply? RMC 1-03 provides that substituted filing applies only to individuals who meet certain conditions: (a) the employee receives purely compensation income regardless of amount, during the taxable year; (b) the employee receives the income from one employer in the Philippines during the taxable year; (c) the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; (d) the employer files the annual information return or BIR Form No. 1604-CF; and (d) that the employer issues BIR Form 2316 to each employee. In case an individual satisfies all of the said conditions, then substituted filing applies to him or her.

Unfortunately, individuals deriving compensation income from two or more employers, concurrently or successively at any time during the taxable year, are not qualified for substituted filing. Substituted filing of income tax do not also apply to (a) employees deriving compensation income, regardless of amount, the income tax of which has not been withheld resulting to a collectible or refundable return; (b) employees whose monthly gross compensation income does not exceed P5,000 or the statutory minimum wage, whichever is higher, and who have opted for non-withholding of tax on said income; (c) individuals deriving other non-business, non-profession-related income in addition to compensation not otherwise subject to final tax; (d) individuals deriving purely compensation income from a single employer, although the income of which has been correctly subjected to withholding tax, but whose spouse is not entitled to substituted filing; and (e) non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income and other business or profession related income.

One must wonder why the BIR keeps on introducing regulations requiring additional submission of returns or information. Evidently, efforts in collection have been improved and strengthened as the BIR projects higher collection target each year. In fact, it has been an issue in our jurisdiction that once the taxpayer is registered, the next challenge to tax administration is the strict enforcement of taxpayer compliance. Thus, the question remains whether, with these new regulations, BIR can track all the employees subject to substituted filing and draw out those who are mixed-income earners.

While the wisdom behind the new regulation is unclear and seems to serve no other purpose but additional means of information-gathering and data collection for the respective revenue district offices, one cannot deny the fact that tax administration for BIR will be even more tedious and tax compliance insofar as employers are concerned will definitely be as noxious.


The author is a tax associate with Punongbayan & Araullo’s (P&A) tax advisory and compliance division. P&A is the Philippine member firm of Grant Thornton International Ltd. For comments and inquiries, please e-mail Robert.DeGuzman@ph.gt.com or call 886-5511.