We are about to enter the fourth month of implementation of the TRAIN law and, to this day, taxpayers still have questions about withholding taxes. The Bureau of Internal Revenue (BIR) finally issued Revenue Regulations (RR) No. 11-2018, discussing some amendments to withholding tax regulations (i.e., RR No. 2-98, as amended) effective Jan. 1, 2018.
Among the main objectives of the TRAIN law are to lower taxes and to simplify tax compliance. Certain provisions of the new regulations, however, would make tax compliance burdensome to taxpayers. Some of the changes involve withholding tax on self-employed individuals/corporations and Sworn Declaration of Gross Receipts/Sales
In January, the BIR issued Revenue Memorandum Circular (RMC) No. 1-2018, where the expanded withholding tax (EWT) rate for individual professionals was reduced to 8% regardless of the total gross income earned within the taxable year. This issuance made the work of both withholding agents and individual professionals easier since the monitoring of gross income is no longer needed to determine the applicable withholding tax rate.
Upon the issuance of RR No. 11-2018, however, the withholding tax rate was revised to 5% (if the gross income of individual professional for the current year does not exceed P3 million) or 10% EWT (if the gross income of the individual professional exceeds P3 million). Income payments to partners of General Professional Partnerships (GPPs), on the other hand, are subject to 15% EWT (if the gross income for the current year exceeds P720,000) and 10% EWT (if otherwise). These new rates took effect on Jan. 1, although RR No. 11-2018 was issued very recently.
For corporations, there is no revision. The EWT rate remains at 10% (if the gross income for the current year did not exceed P720,000) or 15% (if the gross income exceeds P720,000).
If the income withheld by the withholding agent is more than what is prescribed (i.e., the withholding agent withheld 8% instead of 5% EWT), then the excess 3% should be refunded to the payee. The withholding agent shall reflect the refunded amount as an adjustment to the remittable withholding tax due for the 1st quarter withholding tax return. If the withholding tax certificate (BIR Form No. 2307) was already issued to the payee, the payee should return the BIR Form No. 2307 upon receiving the amount refunded by the withholding agent. The withholding agent shall reissue a new BIR Form No. 2307 with the correct amount. The amounts presented in the quarterly expanded withholding tax return and the certificates given to the payees must reflect the corrected amount of taxes withheld. The withholding agents should submit a List of Payees who are subject to refund either because of change of withholding tax rate or availing an exemption from withholding tax as an attachment to the 1st quarter withholding tax return to the RDO where it is registered on or before April 30.
But what if Company A withheld 8% in January or February for a one-time individual professional supplier, which should have been withheld at 10% (i.e., because of failure to a provide sworn declaration that gross receipts/sales or income exceeded the P3-million threshold)? How can Company A recover the overpayment to them, because of the underwithheld tax? It would have been a better option for the BIR to withhold 5% or 10% tax on income payments to individual professionals for easier compliance.
Considering that EWT rates depend on the gross income of suppliers, the Sworn Declaration of Gross Receipts/Sales (Annexes B-1 to B-3 of RR No. 11-2018) are again required to be submitted to the withholding agents not later than Jan. 15 of each year or at least prior to the initial payments of the professional fees/commissions/talent fees/etc. in order for the professionals to be subject to a lower rate of either 5% (individuals) or 10% (corporations), or to be exempt from withholding. The Certificate of Registration (CoR) of the suppliers are also required to be submitted with the sworn declarations.
In case of failure to submit the sworn declaration of gross receipts/sales, the withholding agent should withhold at a higher rate of 10% (individuals) or 15% (corporations). If the income payments to the individuals and corporations exceeded the threshold amount, the withholding agent should subject the income payment at the higher rates.
Additional administrative work in relation to the sworn declaration of gross receipts/sales is that the withholding agents are now required to submit “Income Payor/Withholding Agent’s Sworn Declaration” (Annex C of RR No. 11-2018) stating the number of payees who submitted the income payees’ sworn declarations and CoR to the BIR office where the withholding agent is registered on or before Jan. 31 of each year or 15 days following the month when a new income recipient has submitted the payee’s sworn declaration.
For 2018, payees who are subject to withholding tax, but are availing of exemption from withholding tax or being subjected to a lower EWT rate shall submit on or before April 6 a duly accomplished Income Payee’s Sworn Declaration of Gross Receipts/Sales, together with the CoR to his/her withholding agent.
The withholding agent who received the payees’ sworn declarations of gross receipts/sales and CoR shall submit the Annex C together with the List of Payees who have submitted the sworn declarations of gross receipts/sales and CoRs to the BIR having jurisdiction over the office on or before April 20.
For individuals not subject to withholding: Section 3 of RR No. 11-2018 also provides that individuals whose (a) income did not exceed P250,000; and (b) the source of income only comes from one supplier, may not be subject to withholding tax, provided that the individual submits a sworn declaration of gross sales/receipts (Annex B-2 of RR No. 11-2018) to the withholding agent.
Both requirements must be complied with to be exempt from withholding. If the individual taxpayer has two or more customers, the individual taxpayer is still subject to withholding, even though their income did not exceed P250,000.
This provision is contrary to the TRAIN law’s objective of exempting from income tax those individuals who are earning P250,000 or less. Overwithheld taxes for individuals who have two or more customers will accumulate and form part of the excess credit unless the individual applied for a refund.
It would be more beneficial if individuals engaged in business with gross income not exceeding P250,000 will not be subject to withholding tax, regardless if they only have one or more customers. Aside from simpler compliance, this is also a relief on the part of small taxpayers/entrepreneurs who could have used the withheld taxes for daily necessities.
For entities required to withhold on the purchase of goods and services, the BIR also updated the list of entities required to do so.
Previously, only the Top 20,000 corporations, Top 5,000 individuals, and large taxpaying corporations notified by the BIR Commissioner in writing are required to withhold 1% and 2% respectively on the purchase of goods and services from regular suppliers.
Under the new regulations, however, the following taxpayers — collectively known as top withholding agents — are also required to withhold on their purchase of goods and services:
1. Medium taxpayers (Top 500 non-individual taxpayers of the revenue regions that satisfy the criteria for large taxpayers, but were not notified by the BIR Commissioner); and
2. Those under the Taxpayer Account Management Program (TAMP).
The list of those considered top withholding agents by the concerned Large Taxpayer Services, Revenue Regions, and Revenue District Offices shall either be published in a newspaper or posted to the BIR website. The posting is considered a notice to the top withholding agents. They are now required to withhold on the purchase of goods and services on the 1st day of the month following the month of publication. Corporations and individuals must be mindful of checking the newspapers in circulation or the BIR website to determine if they are now required to withhold on the purchase of goods and services.
In reality, we cannot expect all taxpayers to read the newspapers and BIR website to check if they are already included as top withholding agents. The best option is still to notify taxpayers through a formal letter, stating that they are now required to withhold tax on their purchase of goods and services.
There are also other changes and clarifications mentioned in the regulation, such as clarifications on final taxes and withholding tax on compensation, increases in the amount of certain de minimis benefits, and computations of fringe benefit taxes. We encourage taxpayers to read RR No. 11-2018, because failure to comply may lead to a possible deficiency on tax remittance.
The BIR is doing its best to address the issues concerning the implementation of TRAIN. We hope that it will reconsider some of the provisions, like the ones mentioned above, to achieve one of the objectives of the TRAIN law — to simplify compliance.
Kristine Mae P. Villegas is a senior of the Tax Advisory and Compliance of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.