Severe consequences of failure to withhold

REVENUE Regulations No. (RR) 12-2013, which were issued more than a month ago, made a drastic impact on some taxpayers. Many got panicked and were upset by the sudden change while others remained skeptical on the seriousness of the intent of the regulation and immediately took precautionary measures to mitigate the impact of the issuance on their businesses.

The regulation was issued to amend the old rule relative to the requirements for deductibility of expenses. Under the old rule, if a deficiency withholding tax is discovered by the Bureau of Internal Revenue (BIR) examiner during an investigation, the expense item to which such deficiency withholding tax relates will still be allowed as deduction against the taxable income in the year incurred, provided that the deficiency withholding tax plus interest or penalties are paid by the taxpayer during the investigation. Under the new rule (RR 12-2013), however, even if the deficiency withholding tax is paid during the investigation, the expense item to which such deficiency withholding tax relates will not be allowed as a deduction against the taxable income in the year incurred.

The taxpayers, as withholding tax agents, will have to face dire consequences -- i.e., assessment on withholding tax and income tax -- once found noncompliant. Among the income payments that will be greatly affected by the regulation are the petty cash expenses and reimbursable business expenses. Note that corporations designated by the BIR as one of the Top 20,000 Corporations (TTC) are required to withhold a tax of 1% or 2% on purchases of goods and services, respectively. Time and again, withholding on reimbursements has been an issue for businesses.

For instance, as for petty cash expenses, withholding on every expense incurred by officers and employees for meals, representation and entertainment, gasoline, administrative expenses, out-of town-expenses and supplies are found by the taxpayers to be impractical to do. It has been a concern that officers and employees (including company drivers and utility men) are not likely to withhold on small expenses. They are not expected to bring with them withholding tax certificates (BIR Form 2307) whenever they incur such expenses.

To address these complexities, what should the taxpayers do?

It is imperative among taxpayers to be more prudent and vigilant of their withholding tax obligations. It is not unusual to find taxpayers facing BIR assessments for violation of withholding rules and regulations. Accordingly, taxpayers must familiarize themselves with the basic principles relative to withholding taxes.

For petty cash expenses, employees in the business sector may consider using company credit cards -- strictly, “cashless spending”. Under this scheme, the burden to withhold is shifted to the credit card companies.

Moreover, there are a lot of precautionary actions that could be specifically implemented to prevent non-withholding of income payments and, subsequently, disallowance of expense. One of these is by regularly attending tax seminars to keep abreast of changes in the tax rules. Taxpayers should also evaluate compliance of their internal tax practices. This may be done through in-house trainings or by engaging a qualified personnel or tax practitioner to conduct tax compliance review. Outsourcing the preparation of the company’s tax returns may also be an option.

Another measure which the taxpayers could adopt is the formation of a method of periodic reconciliation of the accounting records as against the tax returns. With this, in case of discrepancies noted and there are discovered mistakes of under-withholding or non-withholding of expenses, an amendment to the tax returns can immediately be done.

These preventive measures may perhaps incur too much of the taxpayer’s time and resources. Conversely, the burden is nothing compared to the risk of huge amount of possible withholding tax and income tax assessments in the future.

Currently, there are taxpayers who still hope that the BIR will have a change of heart and revoke this regulation. The sentiment of the taxpayers is that they merely partake in the collection effort of the government to ensure that the tax is collected in advance even before it reaches the hands of the income recipients. Unfortunately, while they are just being tasked to perform the duty of a tax collector on behalf of the government, they are the ones exposed to harsh tax penalties. Nevertheless, the best recourse for taxpayers is to be meticulous in fulfilling their withholding tax obligations to avoid the severe consequences.

The author is a senior 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 Jen.Serrano@ph.gt.com or call 886-5511.

source:  Businessworld