How can a credit card protect a

taxpayer from tax assessment?

Posted on March 06, 2012
Let’s
Have you ever received a call from a credit card agent who makes Talk Tax
the application process a breeze by simply asking for your basic Nikkolai F.
information -- full name, birthdate, mother’s maiden name, etc.? Canceran
Or have you seen dressed-up people chasing mall goers, giving out
brochures while speaking vigorously to offer a credit card?
These aggressive marketing drives employed by credit card providers are brought
about by the positive performance of the industry. The credit card industry has
niched itself as a profitable player in the business sector. The industry has been steadily maturing and
is projected to continuously cast significant growth in the coming years. Credit cards are turning into
financial tool for consumers as businesses embrace the era of cashless spending. It is a powerful tool
for financial leveraging. Moreover, credit cards expand the purchasing power of consumers, and
provide temporary liquidity and convenience. Having a credit card at hand means no more running to
the bank for cash, counting out change, or hurriedly writing in a check book when you need to make a
purchase.

Furthermore, credit card providers offer promos, rebates, freebies, rewards and exclusive discounts at
various establishments and other irresistible exciting perks.

Unbeknownst to many, using a credit card to purchase goods and services can also protect a taxpayer
from the possible risk of tax assessment by the Bureau of Internal Revenue (BIR). How? Let’s find
out.

In certain cases, company officers or employees are making business-related purchases for and on
behalf of the company which later on are being reimbursed from the company. Examples of these are
purchase of office supplies, tools, spare parts or equipment from bookstores, hardware store or
supermarkets, purchase of food from restaurants or fastfood chains served during company meetings,
client meetings or in certain occasions, purchase of gasoline, and payment for hotel accommodation
during out of town engagements or official business trips, among others. Many of these purchases are
bought from establishments allowed to accept credit card as means of payment.

We all know that when a taxpayer makes income payment, it is required to withhold creditable
withholding tax (CWT) at various tax rates depending on the type of income payment as enumerated
in Revenue Regulations No. (RR) 02-98. More importantly, if the taxpayer is one of the top 20,000
corporations (TTC) as duly notified by the BIR or a large taxpayer (LT), it is also required to withhold,
in addition to the income payments enumerated in RR 02-98, creditable tax on its purchase of goods
and services at applicable tax rates of 1% and 2%, respectively.

Assuming a TTC or LT company, or through its officers or employees, purchased goods or services
from establishments allowed to accept credit card as payment but actually paid outright in cash
instead, do the company or its officers or employees withhold the applicable withholding tax of 1% or
2%? Usually, they do not. First, it is impractical for the officer or employees to withhold the tax upon
payment to these establishments and issue the CWT certificate (BIR Form No. 2307). Second, they
will be required to bring with them BIR Form No. 2307 every time they make purchases.

This omission of withholding the CWT will place the TTC or LT taxpayers to possible withholding tax
deficiency assessment when the BIR performs its audit. Not only that, the related expenses will be
disallowed as deductions from the gross income for failure to withhold and remit the required taxes as
provided in Section 34(K) of the Tax Code, as amended
How can TTC or LT taxpayer resolve this dilemma? Use company-issued credit cards.

Under Section 2.57.2 (L) of RR 02-98, as amended by RR 06-01, income payments made by credit
card companies in the Philippines to any business entity, whether a natural or juridical person,
representing the sales of goods/services made by the aforesaid business entity to cardholders are
subject to one percent (1%) on the one-half (1/2) of the gross amounts paid. It only means that the
obligation to withhold the tax on TTC or LT taxpayer’s purchase of goods or services is shifted to
credit card companies.

In fact, the BIR has clarified this when it issued Revenue Memorandum Circular No. (RMC) 72-04
(Clarification of Issues on the Additional Transactions Subject to Creditable Withholding Tax), that if
the payment for the purchase of goods or services by the TCC or LT is through credit card or through
company issued credit card to officers or employees for purposes of reimbursements, the TTC or LT is
not required to withhold the tax upon presentation of the credit card to the supplier. The TTC or LT,
however, is required to withhold the 2% CWT corresponding to the interest payment and/or service
fee and other charges imposed by the credit card company. The credit card company, on the other
hand, shall withhold 1% of 50% of the gross amount paid to any business entity pursuant to Section
2.57.2 (L) of RR 02-98, as amended.

Just recently, on Nov. 16, 2011, the BIR re-affirmed when it issued BIR Ruling No. 456-2011 that a
company classified as a TTC is not required to withhold the 1% or 2% CWT on its income payments
for the purchase of goods and services through credit cards. It is only when the TTC is billed for its
purchase on credit that it is then required to withhold 2% CWT but only on the interest and/or service
fee and other charges, if any, charged by the credit card company.

The BIR further explained that in case of purchases using a credit card, the merchant/service
establishment allows the customer (i.e., the cardholder) to make the purchase on credit. The
receivables of the merchant/service from the customer or cardholder are then assigned by the former
to the credit card company at a discount for early payment or settlement of the transaction. What is
being sold to and purchased by the credit card companies are the receivables from purchaser-
cardholder. Hence, the payments made by the credit card companies, which are termed "settlement of
accounts," are those receivables transferred or assigned to them by the merchant.

A credit card company generates revenues principally from the discount granted by the establishment
and from fees paid by the cardholder. The cardholder (i.e., the TTC), is then required to withhold the
2% CWT on the interest payment and/or service fee and other charges imposed by the credit card
company when it subsequently pays the credit card company.

On the part of the credit card company, it is required to withhold 1% on 1/2 of the gross amount the
credit card company pays the business entity, whether a natural or a juridical person, representing the
sales of goods or services made to the company credit card holder.

Notwithstanding the payment through credit card, the taxpayer is still required to obtain sales invoice
or official receipt from the business establishment to validly claim the input tax, provided it complies
with the invoicing requirements set forth under the existing regulations, as well as to validly claim as
deductions from gross income.

In view of the foregoing, the BIR itself offers unsolicited alternative solution to resolve the dilemma of
TTC or LT taxpayers of non-withholding by shifting its obligation to withhold to credit card companies
in so far as their purchases of goods and/or services are concerned.

Innovations have made credit cards an economically valuable tool packed with value-laden features
tailored to fit the needs of its users. As it unfolds numerous economic benefits to consumers, credit
cards can also be a tax assessment protective tool to the taxpayers.

The author is a tax senior with Punongbayan & Araullo, a member firm within Grant Thornton
International Ltd. For comments and inquiries, please email Nikkolai.Canceran@ph.gt.com or call 886-
5511.