From Philippines Taxation Blog…
Sunday, June 7, 2009
Withholding tax requirements for Top Twenty Thousand Corporations (TTC)
The BIR, seeing the potential collections from withholding taxes, has now expanded the coverage of the mandatory withholding under the previously selected Top Ten Thousand Corporations to the now Top Twenty Thousand Corporations (TTC). Under the regulations, the following corporate taxpayers who shall be determined and notified by the BIR shall be classified as belonging to top twenty thousand corp:
a. Large taxpayers under RR 1-98, unless de-classified or ceased operations;
b. Those with VAT paid or payable during the preceding year of at least P100,000;
c. Those with income tax paid or payable during the preceding year of at least P200,000;
d. Those with percentage taxes during the preceding year of over P100,000;
e. Those with gross sales of over P10,000,000.00; or
f. Those with gross purchase of over P5,000,000.
The above covers CORPORATE taxpayers only. This includes partnerships, associations, organizations, and the likes. To be a TTC, the BIR must have a FORMAL LETTER informing the corporate taxpayer that it had satisfied the criteria and will now be cover. Effectivity of application is also stated in the formal letter.
As a TTC, the corporation is mandated as follows:
a. Withhold 1% for payments to regular suppliers of goods;
b. Withhold 2% for payments to regular suppliers of services;
c. For non-regular suppliers, withhold 1% for good, or 2% for services if the amount involved is more than P10,000 in a year;
d.Do not withhold on casual purchases if the amount involved do not exceed P10,000;
f. Do not withhold on income payments to exempt entities like general professional entities;
Submit the required reportorial requirement, summary list specified in the formal letter in the date prescribed therein.
To be a regular supplier, there should be at least six (6) transactions with the supplier, irregardless of the amount, either in the current or the previous year.
By the expansion of the above coverage, most corporate taxpayers are now being classified as a TTC with the above obligations. It seems so simple but would cost too much time administratively in making the creditable withholding tax certificates, and in the preparation of the reports. Another headache in the application is in terms of small purchases (like purchase of supplies of P5.00 from a regular supplier because it occurred six (6) times) where withholding might be impractical. Nevertheless, corporate taxpayers are being left with no choice BUT to ADHERE to the above rules to AVOID submitting itself to more headaches during assessment period.
As an implication, the author suggest that purchases of goods and services must be strictly monitored. If centralization is possible, it maybe better as each one of the purchasing team can easily be oriented. If the company is on a reimbursement scheme for certain officers and employees, it shall see to it that the above rules are being observed. As the saying goes “prevention is better than cure”. Why impose curative measures when preventive measures at the earliest opportunity are available.
The latest update now is that the BIR is looking at the potential of applying almost similar rules to individual taxpayers. A draft is now being presented in its website for public comments. Thus, the author humbly suggest that the individual taxpayers stay abreast with the development of said regulation and familiarize themselves with he corporate set-up to anticipate potential problem areas on its suppliers as their are those very reluctant from being withheld.
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Saturday, June 6, 2009
How does withholding tax system works in the Philippines?
Withholding tax system in the Philippines is not a new topic to talk about. As a matter of fact, it is mostly a taxpayer’s headache during assessments of the BIR. As a rule, your expenses subject to withholding tax shall be subjected to withholding tax in order to be allowed as a deduction from gross income for income tax purposes. If you failed to withhold, then said expense shall be disallowed from your deducted expenses in your income tax return (ITR), and you will be assessed as follows:
a. Income tax at 30% based on the gross amount of disallowed expense; and
b. Withholding tax at the applicable rate to such item based also on the gross amount.
In this post, let us discuss what are these withholding taxes and how does it work. Under the Tax Code, the BIR is allowed to implement a withholding tax system and thus, it issued Revenue Regulations No. 2-98. At present said regulation has undergone various amendments. It imposes three types of withholding taxes:
a. Creditable withholding tax;
b. Final withholding tax; and
c. Withholding tax on compensation
This withholding tax system is a system of advance collection scheme where the approximate income tax of a specific income payment is being deducted and remitted to the BIR using the appropriate return (1601E or 1601F). The payor claiming the item as an expense is thereby constituted as a withholding tax agent that is made accountable thereto by mandate of the Tax Code. Failure of such mandate is sanctioned by the assessment above, and it proved to be costly because assessment includes 25% surcharge, 20% interest and compromise penalties.
On the part of the payee, he shall be furnished a creditable withholding tax (CWT) certificate or certificate of withholding taxes on compensation (WC) which shall be used as a deduction form his income tax liability at the end of the quarter or of the taxable year. By this, the BIR is more assured that the income will be declared and reported by the recipient of income, thus, this is in the form of a check and balance. The BIR is now on computerized matching so it could trace discrepancies of payor declared and payee undeclared or vice versa. If found to have under declared, then the BIR will assess the corresponding tax by referring to the payor declared amount in BIR Form 1601E.
The other type of withholding is the final withholding tax (FWT) for income payments that are subject to final taxes like interest income from bank deposits, dividends, and the likes. In FWT, the payee is no longer required to file a return because the FWT return made by the payor constitutes final payment of the tax. In other words, the amount received by you as a payee is net of final withholding tax so it could no longer be assessed.
Please note however that this system is applicable only with respect to resident payees in the Philippines. If the payor is a non-resident and the payee is resident, this will not apply. Likewise, this system is only applicable to those items of expenses and income payments enumerated under RR No. 2-98. If not listed in there, then it is not subject to withholding tax. Furthermore, the tax base of the withholding should be the gross payment, exclusive of VAT. If services and goods are bought from the same supplier, the applicable rate shall be separate for good and separate for service, except if the other is incurred in furtherance of the other and the amount is immaterial, in which case, it maybe aggregated.
