Taxwise Or Otherwise

Every tax filing season, corporate taxpayers grapple to complete and collect all the certificates of Creditable Tax Withheld (BIR Form 2307) from their local customers up to the eleventh hour. Issues on the validity of the creditable withholding tax (CWT) certificates, and the propriety or timing of recognizing the income tax credits come to the fore. It makes me wonder how hard-earned money contributed to government coffers could still be subject to dispute.

The rules on claims for tax credit or refund of CWT are set forth in Section 2.58.3 of Revenue Regulations (RR) 2-98, as amended. It provides that the amount of CWT shall be allowed as a tax credit against the income tax liability of the payee in the quarter in which income was earned or received. It also provides that claims for tax credit or refund of any CWT shall be given due course only when (1) it is shown that the income payment has been declared as part of the gross income, and (2) the fact of withholding is established by a copy of the withholding tax statement or certificate duly issued by the payer to the payee showing the amount paid and the amount of tax withheld.

The obligation to issue duly accomplished CWT certificates or BIR Form 2307, as proof of withholding, rests with the payer, also known as the withholding tax agent. The certificates must be furnished to the payee within 20 days following the close of the taxable quarter in which the income was earned or received, or simultaneously with the income payment upon request of the payee.

Although the rules appear to be straightforward, disallowance of CWT remains one of the top findings in Bureau of Internal Revenue (BIR) tax assessments. In some court cases, CWTs were disallowed for failure to establish that the related income had been declared in the taxpayer’s income tax return (ITR). In other cases, CWTs not supported by certificates, and those supported by certificates which are not original copies, were also disapproved. Lack of signature of the payer or its authorized representative, incorrect or missing entries such as tax identification number (TIN), name, and address in the CWT certificates are also among the causes of the disallowance.

However, in a decision dated Jan. 21, docketed as Court of Tax Appeals (CTA) Case No. 9298, the CTA invalidated a deficiency tax assessment and allowed the utilization of CWTs pertaining to income declared in the prior year. In that case, it was established that the income payments from which the CWTs arose were already declared by the taxpayer in its ITR for the year 2008. But, since the CWT certificates were only issued in 2009, the tax credits could only be claimed the following year. The CTA held that since the corresponding income had been previously declared and the CWT was duly supported by BIR Form 2307, the taxpayer may validly claim the tax credits in the year 2009.

In the same breath, the Supreme Court (SC), in GR No. 206019 promulgated on March 18, 2015, granted a claim for refund of an erroneously paid CWT. Apart from proving the non-utilization of the tax withheld, documents other than BIR Form No. 2307 were presented and relied upon by the SC to prove the fact of withholding. In this case, a copy of BIR Form No. 1606 or the withholding tax return on the sale of a real property other than capital asset was presented as evidence of withholding, among others. On scrutiny, the evidence showed the amount of tax withheld and paid by the withholding agent, date of remittance, name of payer and payee, description of the property subject of the transaction, the determination of the taxable base, and the tax rate applied. The SC held that these are the very same key information that could be gathered from BIR Form 2307; thus, the presentation of BIR Form 2307 in the final analysis is a superfluity of little or no value.

Notwithstanding these court rulings, the BIR’s stance could remain the same (i.e., income must be declared in the same quarter and related BIR Form 2307 must be presented). Nonetheless, the above court decisions may provide some bases for taxpayers to advance tax credit or refund claims on their CWTs, if necessary.

Of course, the best course of action would still be to preclude such issues from arising. During tax audits, the BIR looks at the books of accounts, audited financial statements (AFS), tax returns, and tax credit certificates, among others, to reconcile accounts and verify discrepancies noted. If the income declaration and the related CWT claim fall into different periods, an issue may therefore arise where the total revenues declared in the CWT certificates exceed the revenues declared in the ITR or AFS. This may be construed as undeclared income that leads to a deficiency income tax and VAT assessment. When this happens, taxpayers instinctively exert herculean efforts, exhausting all available remedies to counter the assessment. But even if they strive to defend their positions, the undue cost that could have been avoided and the tedious attempts invested in legal action cannot be discounted.

In this respect, it would be more prudent to ensure proper matching of the CWT applied vis-a-vis the income earned or received. After all, taxes withheld form part of the hard-earned assets of the taxpayer. Thus, ensuring compliance with governing rules (and to the extent feasible, with the reasonable practices of the BIR), chiefly formulated to attain order and legality, could be the only sensible way to safeguard such assets.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Nelson V. Soriano is a Director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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