Simplified tax rules: What’s not to like?

Three quarters have passed since the Ease of Paying Taxes (EoPT) law took effect. What convenience in the tax processes did it bring to taxpayers? Has there been any improvement in the number of registered businesses? Any increase in tax collections? We know that the aim of EoPT is to simplify tax rules to encourage taxpayers to properly pay their taxes. The hope is to minimize the tax leakage from the informal sector and improve tax collection to adequately fund government services.

For this article, I would like to focus on three items in the EoPT law.

• Timing of withholding tax remains the same, except for prepayment.

Prior to EoPT, the triggers for withholding tax were provided under Revenue Regulations (RR) No. 2-98, or the Withholding Tax Regulations, pursuant to Section 244 of the Tax Code. Now, it is codified in the EoPT that the obligation to withhold tax arises at the time the income becomes payable. The term “payable” was previously defined as the date when the obligation becomes due, demandable or legally enforceable. This definition was retained in the amended withholding tax regulations but that’s not all that was retained. The new version of Section 2.57.4 of RR No. 2-98 also retained “when the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books.”

Practically speaking, the amount of accruals at the end of the year could be mere estimates, e.g., based on historical payments, because in most cases, the invoices containing the actual expense amount are yet to be received. Forcing companies to comply with this requirement may result in over- or under-withholding of taxes. The consequence is not without additional cost. In case of under-withholding, taxpayers are assessed an interest penalty in case of a tax audit. Meanwhile, in case of over-withholding, there is an additional cost (e.g., professional fees, time value of money) when trying to cover through a refund. And of course, there’s also some uncertainty if the refund will even be granted.

This does not appear to be an easy way of complying with the tax rules. It would have been better if the withholding tax was pegged on the invoice date. It is fixed, simple and ties both buyer and seller to the same time period. Invoicing signifies the reporting of revenue by the seller and, ideally, of an expense claim by the buyer.

Hopefully, this matter will be taken into consideration when implementing Section 57(C) of the Tax Code which provides for a three-year review by the Department of Finance (DoF) of the processes and rules of withholding. The DoF may direct the Bureau of Internal Revenue (BIR) to amend the existing regulations if they are found to adversely and materially impact the taxpayer.

• Time of claiming creditable withholding tax (CWT) credits was not clarified in the regulations.

Similar to withholding tax, the EoPT codified the timing of CWT claims, whereas previously, it was just covered in the Withholding Tax Regulations. Based on how the provision was crafted in the EoPT law, a few points of jurisprudence were taken into consideration, such that CWTs deducted and withheld in the previous period are still creditable in the subsequent year. However, the last statement in the EoPT confuses taxpayers because it seems to qualify the reporting of CWT claims to the period when the corresponding income is reported. This qualifier is contrary to the statement that it is creditable in the succeeding period. Unfortunately, no other guidance has yet been issued to cover how this should be implemented.

Nonetheless, in at least one decision (G.R. No. 231581 dated 10 April 2019), the Supreme Court (SC) made it clear that prior year CWTs can be claimed as tax credits in the year of actual withholding by the withholding agent even if the actual reporting of income by the seller was done in prior years. According to the SC, what is important is that the income was reported in the proper period by the seller and the prior year CWTs have not been claimed as income tax credits in prior years.

In the absence of detailed guidance from the BIR, I hope that the tax authorities are guided by the above SC case considering that it appears to align with the intention of the legislature and satisfies the goal of the EoPT to simplify our tax rules.

• Refund of excess CWTs in case of closure cannot be elevated to the Court of Tax Appeals (CTA) without a decision from the BIR.

Filing a claim for a refund of excess CWTs by a corporation permanently ceasing operations was not provided for in the Tax Code prior to the EoPT nor in the regulations. Previously, guidance for such situations could only be found in court decisions.

With the EoPT, the Tax Code now clearly states that when the taxpayer can no longer carry over excess CWTs due to dissolution, the taxpayer can file an application for refund of any unutilized CWT with the BIR given two years to decide. RR No. 5-2024 covers refunds and one section is devoted to refunds as a consequence of the dissolution of the business.

As provided for under the RR, the two-year processing period for such refunds is an exception to the 180-day rule for other types of income tax refunds (i.e., due to erroneous payment). However, unlike other types of refund where it is clear that the taxpayer may seek judicial remedies in case of inaction by the BIR within the 180-day processing period, in refund cases for closure, there is no clear remedy under the regulations in case of inaction within the two-year processing period.

Personally, I believe that the taxpayer should be able to elevate the refund cases for closure to the CTA in cases of inaction of the BIR as provided for under the Revised Rules of the CTA.

The EoPT features several amendments which I believe have had an impact insofar as convenience in registering and paying taxes is concerned — as in the case of the file-and-pay-anywhere mechanism, and in the process of transferring the place of business. Though the EoPT amendments and intention are commendable, some of the implementation guidelines may need to be revisited. Enactment of a tax rule is one thing, but enforcement of such rule is another thing. I hope that enactment and enforcement can be better harmonized, and as is the intention, the guiding principle under the EoPT should always prevail, that is, to simplify tax compliance.

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.

Samantha Joy H. Oreta is a director with the Tax Services group of Isla Lipana & Co., the Philippine member firm of the PwC global network.