AMONG the income payments where the payor is required to withhold the applicable tax in full is on the payment of compensation by an employer to its officers and employees. This obligation is not difficult to comply since the withholding is done for every payroll period and remittance is made on a monthly basis. And an annualization is made at the end of the year, such that any excess withholding tax made for the previous months has to be returned to the employees and any deficiency in the taxes already withheld has to be deducted on the last payment to the employee for the year.
A related issue, however, in relation to the withholding of taxes on wages is the timing. Is the withholding and remittance of the tax required to be made upon the accrual in the books of the employer? Or is the responsibility of the employer as withholding agent timely met when the withholding tax is remitted only upon payment of the compensation to the employee?
This question was somehow settled by the Supreme Court (SC) in G.R. 167679, July 22, 2015. In said case, the taxpayer was assessed by the Bureau of Internal Revenue (BIR) for, among others, withholding tax on bonuses accruing to its officers and employees. The assessment pertains to accrued bonuses for said years where the taxpayer maintained that the liability of the employer to withhold tax does not arise until such bonus is actually distributed. As the bonuses were not paid in the year they were accrued but only in the following year when such amounts were finally determined, the employer asserted that its obligation to withhold did not arise upon accrual. The BIR, on the other hand, contended that the employer’s act of claiming the bonuses as deductible expenses although it has not yet remitted the withholding taxes contravenes Section 29(j) [now Section 349k)] of the Tax Code.
In its decision, the SC cited various provisions of the Tax Code (such as Section 79 of the Tax Code) and the implementing rules and regulation which seem to imply that withholding of tax on compensation shall be made on compensations paid to employees, either actually or constructively. However, the SC made reference also to Section 45 of the Tax Code, which provides that the deductions from gross income are taken for the taxable year in which “paid or accrued” or “paid or incurred,” dependent upon the method of accounting income and expenses adopted by the taxpayer.
Under the said rule, an expense is considered as accrued and can be deducted for tax purposes when (1) the obligation to pay is already fixed; (2) the amount can be determined with reasonable accuracy; and (3) it is already knowable or the taxpayer can reasonably be expected to have known at the closing of its books for the taxable year. Therefore, if the taxpayer is on cash basis, the expense is deductible in the year it was paid, regardless of the year it was incurred. If the employer is on accrual method, he can deduct the expense upon accrual thereof.
In this regard, the SC also made reference to Section 34(k) of the 1997 Tax Code, which expressly requires as a condition for the deductibility of an expense, that the tax required to be withheld on the amount paid or payable is shown to have been made to the BIR by the taxpayer constituted as withholding agent of the government.
According to the Court, both the provisions of Section 79 regarding the withholding on wages must be read and construed in harmony with Section 34(k), or the Tax Code, on deductions from gross income. And reading these provisions together, the Court declared 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 expense in the payor’s/employer’s books, whichever comes first.
In conclusion, the Court held that since the employer applied the accrual method of accounting, by accruing and recording the bonuses in its books and claimed them as a deductible expense in the year of accrual, it should have withheld the compensation tax at the time of accrual and not at the time of actual payment. Further, when the employer had deducted the expense from its gross income, it already recognized the definite liability on its part to withhold since, in effect, there was already a constructive payment for income tax purposes considering that the bonuses were already allotted and made available to the officers and employees.
On final note, in this particular case, the employer was held liable for the withholding of tax on the bonuses at the time of the accrual since the accrued expenses were claimed as deductions when the accrual was made. Is the rule different if the accrued bonus was not claimed as deduction upon accrual but only in the following year when the withholding of tax was actually made. The case did not specially deal on such issue. The opening statement in the decision, however, stated that the duty to withhold tax on compensation arises upon accrual. This seems to emphasize that the withholding of tax on compensation should be made once an accrual of the expense is recorded in the books.
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The author is a junior associate of Du-Baladad and Associates Law Offices, a member-firm of World Tax Services Alliance.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author atroselle.casiguran@bdblaw.com.ph or call 403-2001 local 370.
source: Business Mirror Column of Atty Roselle Casiguran
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