Withholding Tax: Interpretations

UNDER the recently issued Revenue Regulations (RR) No. 12-2013, an income payment is allowed as a deduction from the taxpayer’s gross income only if it is shown that the income tax required to be withheld has been remitted and paid to the Bureau of Internal Revenue (BIR) in accordance with the withholding tax regulations. While previously, deductions were allowed even when tax was not withheld on time but rather paid (together with penalties) during a tax audit or investigation, the new RR obliterates such exception.

In the aftermath of this recent BIR directive, withholding agents are now expected to be more mindful and hyper-vigilant of their obligation to withhold tax on income payments; otherwise, they face the dire consequence of an expense disallowance. Time and again, the BIR has consistently emphasized that the duty to pay taxes is different and separate from the duty to withhold. Consequently, non-compliance with the directive to withhold taxes gives rise to the imposition of penalties, regardless of the income recipient’s eventual settlement of the correct taxes.

However, how should the regulation be interpreted in light of the specific requirements for deductibility for wages under Section 2.79 (F) of RR 2-98?

Take, for instance, the case of employers with seconded or assigned expatriates, a once minority sector of the labor market that has continued to increase due to international mobility. As with most cross-border transactions, employers have to deal with territorial policies, including all their nuances in a multidimensional context. Confronted by economic and/or legal restrictions, most global conglomerates are often times compelled to keep their expatriates on the foreign head office payroll, as opposed to including them on the local payroll where they have been physically and functionally assigned. Generally, under this arrangement, salaries of expatriates are paid by the foreign entity and credited directly to their individual foreign bank accounts, subject to recharging to or reimbursement by the domestic payroll of assignment costs incurred by the foreign head office.

In the absence of information and control over the compensation paid to expatriates, it would be difficult for the Philippine employer to carry out its withholding tax obligation. Having no reference for calculating the tax due for remittance, the domestic employer needs to wait for the recharge advice from the foreign head office before it can withhold the appropriate taxes.

Strictly speaking, the Philippine employer’s obligation to withhold shall be deemed to arise on the date that it receives the recharge advice from the foreign head office. However, if at year-end, the foreign head office has not recharged the cost to the Philippine employer, the expatriates themselves are expected to report their income and pay the taxes due directly to the BIR by filing their annual income tax return (BIR Form 1700) by April 15 of the following year.

Matters, though, can get complicated if the recharge advice is received only after the taxes have already been settled by the expatriates. In this case, the timing of the cost charging by the foreign head office to the Philippine employer may impact the withholding tax obligation of the employer and its expense deduction for corporate tax purposes.

Thus, oftentimes, the BIR would assess Philippine employers for non-withholding if salary expenses in its books were not subjected to withholding tax. In a worst-case scenario, the employer would face (1) penalties for non-withholding and (2) disallowance of the corporate expense.

These sanctions seem too onerous. The employer is penalized for its inability to comply with the withholding tax requirement resulting from limitations/complications brought about by international mobility, such as the scenario described above. Personally, the BIR should allow for exceptional cases such as this.

Perhaps the expense disallowance and the penalties for non-withholding should not be imposed provided that the employer is able to establish that (a) prior to the recharge, it did not have information or control over the compensation paid to the expatriates, and that (b) the required taxes on compensation have been properly paid by the expatriates.

However, until the BIR categorically excludes compensation income from the coverage of RR 12-2013, it would be most prudent for affected employers to review their current recharging policies against the operational dictates of the law.

With the Philippines geared towards attracting more foreign investments to boost its domestic economy, the bid to formulate sound tax regulations is imperative. Fiscal policies must strategically align with cross-border transactions of multinational companies and the presence of their growing human capital in the Philippines. These policy transformations may not necessarily be in the form of tax incentives or exemptions. Providing clear guidelines may be enough. Perhaps, advocating flexibility and recognizing exceptions to the rules on withholding tax on wages can serve as a good starting point.

The author is an assistant manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call (02) 845-2728 or e-mail the author at kent.lileo.c.tong@ph.pwc.com for questions or feedback.

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article.

source:  Businessworld