The withholding tax on, and deductibility of, year-end bonuses to employees are issues that are frequently raised during tax examinations of a company’s books of accounts. Usually, these bonuses are accrued at yearend and deducted for income tax purposes in the year accrued, although the bonus is paid to the individual employee, and the withholding tax deducted and remitted to the Bureau of Internal Revenue (BIR), in the succeeding year. In these situations, the BIR usually questions and disallows the tax deduction claimed by the employer on the ground of non-withholding.
In a decision promulgated recently by the Supreme Court, the Court confirmed that the obligation of the payor/employer to deduct and withhold the related withholding tax arises at the time the income was paid or accrued or recorded as an expense in the payor’s/employer’s books, whichever comes first. The Court said that since the employer accrued or recorded the bonuses as deductible expense in its books, therefore, its obligation to withhold the related withholding tax due from the deductions for accrued bonuses arose at the time of accrual and not at the time of actual payment.
At issue in this case was the withholding tax on bonuses accrued and recorded by the employer as a deductible expense in its books in 1996 and 1997, but which the employer paid to the employees in the succeeding year. The employer argued that the liability of the employer to withhold the tax does not arise until such bonus is actually distributed, citing Section 72 [now 79 (A)] of the Tax Code, which states that “[e]very employer making payment of wages shall deduct and withhold upon such wages a tax.”
However, the Court applied Section 34 (K) of the Tax Code which provides that any amount paid or payable -- which is otherwise deductible from or taken into account in computing gross income -- may be deducted only if it is shown that the appropriate tax has been paid to the BIR.
Section 2.57.4 of Revenue Regulations (RR) No. 2-98, as amended by RR No. 12-01, also provides that the obligation of the payor to deduct and withhold the tax arises at the time income is paid or payable, or accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books, whichever comes first. The term “payable” refers to the date the obligation becomes due, demandable, or legally enforceable. However, where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor’s books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes.
The Court said that the provision of Section 72 [now 79 (A)] of the Tax Code regarding withholding on wages must be read and construed in harmony with Section 29 (j) [now 34 (K)] of the Tax Code on deductions from gross income. “This is in accordance with the rule on statutory construction that an interpretation is to be sought which gives effect to the whole of the statute such that every part is made effective, harmonious, and sensible, if possible, and not defeated nor rendered insignificant, meaningless, and nugatory. If the theory of the employer is adopted, then the condition imposed by Section 29 (j) [now 34 (K)] would have been rendered nugatory, or we would in effect have created an exception to this mandatory requirement when there was none in the law.”
The Court also reiterated the doctrine that “The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy.” If the taxpayer is on the accrual method, he can deduct the expense upon accrual thereof. An item that is reasonably ascertained as to amount and acknowledged to be due has “accrued;” actual payment is not essential to constitute “expense.”
More interestingly in this case, the Court said that employer already recognized a definite liability on its part considering that it had deducted as business expense from its gross income the accrued bonuses due to its employees. Underlying its accrual of the bonus expense was a reasonable expectation or probability that the bonus would be achieved. Applying the then prevailing Revenue Regulations No. 6-82, as amended, the Court said that, in this sense, there was already a constructive payment for income tax purposes as these accrued bonuses were already allotted or made available to its officers and employees.
Joanne Marie D. Macainag-Cobacha is a Tax Senior Director of SGV & Co.
source: Businessworld
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