New years are a good time to reflect, which is a useful exercise for evaluating how we responded to past situations, and which experiences will serve us well going forward moving forward. This helps us gain a better understanding of ourselves and draw up more realistic life goals.
Similarly, in tax practice, I believe it is advantageous for taxpayers to revisit their past experiences in responding to the Bureau of Internal Revenue’s (BIR) issuances and court decisions. A taxpayer engaged in such study can evaluate the impact of developments like these on their compliance with the tax rules, particularly measures that helped them avoid undue tax exposure and costs.
Before 2020 ended, the Court of Tax Appeals (CTA) ruled en bank in Case No. 2084 on a tax assessment case involving deficiency withholding taxes. In that case, the BIR issued a Formal Letter of Demand against a taxpayer which included a finding of withholding tax deficiencies and income tax deficiency related to the corresponding non-deductibility of expenses due to the alleged non-withholding of tax. The taxpayer filed a protest letter, and received a Final Decision on Disputed Assessment (FDDA) from the BIR denying the protest. The taxpayer petitioned the CTA to review the BIR’s ruling.
The taxpayer had paid the deficiency withholding taxes after the issuance of the FDDA. On this basis, the taxpayer claimed that since the assessed deficiency withholding taxes were paid, the assessment item of disallowed expenses due to non-withholding should have been deleted. However, the CTA did not agree with this contention, ruling that the taxpayer may not claim the deduction, since it only paid the deficiency withholding taxes after the FDDA, and not at the time of the audit investigation or reinvestigation/reconsideration.
The CTA disagreed with the taxpayer’s position that the phrase “at the time of the audit investigation or reinvestigation/reconsideration” should be interpreted to cover the period given to the taxpayer within which to agree with the assessment and pay the same, prior to the filing of a Petition for Review with the CTA. Thus, the CTA retained the tax assessment on non-deductibility of expenses due to non-withholding against the taxpayer.
In effect, the CTA held that, on the issue of non-withholding of tax, the taxpayer was hit with two types of tax deficiencies — on withholding tax, and at the same time, on income tax.
WHAT ARE THE TAKEAWAYS FROM THIS CASE FOR TAXPAYERS?
A taxpayer undergoing a BIR audit should be conscious of the timing of the payment of deficiency withholding taxes. As discussed by the CTA, the timing should be during the audit investigation or reinvestigation/reconsideration, and not after the FDDA. Otherwise, the taxpayer might be hit with a double whammy, in which both the deficiency on the withholding taxes and the deficiency in income tax due to disallowed expenses could be imposed against the taxpayer. Let’s take as an example an income payment to contractors of P10 million, which was not subjected to 2% expanded withholding tax. This would generate a basic deficiency of P200,000 for expanded withholding tax, and another P3 million for income tax (using a 30% corporate income tax rate), if the payment of deficiency withholding taxes is not properly timed. However, the larger consequence is the disallowance of expenses due to non-withholding, for income tax purposes.
Another takeaway is that a taxpayer should not wait for a BIR audit to discover its withholding tax deficiencies, to avoid altogether the situation described in the CTA case. A taxpayer should take care to ensure that the corresponding withholding taxes are made on day-to-day operations. Remember that the penalties for late withholding of taxes are a 25% surcharge and 12% interest per annum.
In addition, a supplemental subsequent periodic review of transactions can also be helpful to determine whether there were transactions that were not properly subjected to withholding tax, and could require a possible amendment to withholding tax returns. Taking these measures, at least the 12% interest penalty might be avoided.
Having been made aware of the repercussions of non-withholding of tax, the taxpayer must know the transactions covered by the withholding tax rules. It would be prudent to implement effective controls to monitor these transactions and to ensure withholding tax compliance.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Richard R. Ibarra is a senior manager of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.