Concept of Withholding Taxes

Taxes imposed or prescribed by the NIRC are to be deducted and withheld by the payor-corporations
and/or persons for the former to pay the same directly to the BIR. Hence, the taxes are collected
practically at the same time the transaction is made or when the taxable transaction occurs. It is
taxation at source.

Section 57 (B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the
recommendation of the Commissioner, require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent
(32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable
year.

The withholding tax system is embedded in the income tax system in the Philippines to ease the
administration and collection of taxes. It is not a “separate” kind of tax as withholding tax is simply a way
of collecting tax from the source.

In the operation of the withholding tax system, the payee is the taxpayer– the person on whom the tax
is imposed, while the payor, a separate entity, acts no more than an agent of the government for the
collection of the tax in order to ensure its payment.

The duty to withhold is different from the duty to pay income tax. Indeed, the revenue officers generally
disallow the expenses claimed as deductions from gross income, if no withholding tax as required by law
or regulations was withheld and remitted to the BIR within the prescribed dates.

Withholding agent

A withholding agent is a separate entity acting no more than an agent of the government for the
collection of tax in order to ensure its payments. A withholding agent is explicitly made personally liable
under Sec. 251 of the NIRC for the payment of the tax required to be withheld, in order to compel the
withholding agent to withhold the tax under any and all circumstances.

In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated
upon the person over whom the Government has jurisdiction (Filipinas Synthetic Fiber Corporation v.
CA, et al., G.R. Nos. 118498 & 124377, October 12, 1999).

NOTE: In applications for refund, the withholding agent is considered a taxpayer because if he does not
pay, the tax shall be collected from him (CIR v. P&G, G.R. No. L66838, December 2, 1991).

The withholding agent is liable for the correct amount of the tax that should be withheld. The
withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld be finally found to be less than the amount that should
have been withheld under the law. Given this responsibility, a withholding agent can validly claim for tax
refund.
Creditable withholding tax (CWT) –

Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of
the payee on said income;

- Creditable tax must be withheld at source, but should still be included in the tax return of the recipient;
- The liability to withhold arises upon the accrual, not upon the actual remittance. The purpose of the
withholding tax is to compel the agent to withhold under all circumstances
The Withholding of Creditable Tax at Source or simply called Expanded Withholding Tax is a tax imposed and
prescribed on the items of income payable to natural or juridical persons, residing in the Philippines, by a payor-
corporation/person which shall be credited against the income tax liability of the taxpayer for the taxable year.

The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for
the government until paid to the collecting officers

Purpose of the Withholding Tax System

1. Provide the taxpayer a convenient manner to meet his probable income tax liability.

2. Ensure the collection of the income tax which would otherwise be lost or substantially reduced
through the failure to file the corresponding returns.

3. Improve the government’s cash flow.

4. Minimize tax evasion, thus resulting in a more efficient tax collection system.

When to withhold

It arises at the time an income payment is paid or payable or accrued or recorded as an expense or
asset, whichever is applicable in the payor’s books, whichever comes first (R.R. 2-98, Sec. 2.57.4, as
amended by R.R. 12- 2001).

The term “payable” refers to the date the obligation becomes due, demandable or legally enforceable
(R.R. 2- 98, Sec. 2.57.4, as amended by R.R. 12-2001).

Persons required to withhold taxes

The withholding taxes shall be withheld by the person having control over the payment and who at the
same time claims the expenses.

The following persons are constituted as withholding agents:

1. Juridical person, whether or not engaged in trade or business;

2. Individuals, with respect to payments made in connection with his trade or business;

3. Individual buyers, whether or not engaged in trade or business insofar as taxable sale, exchange or
transfer of real property is concerned; and

4. All government offices including GOCCs as well as provincial, city and municipal governments and
barangay (R.R. 2-98, Sec. 2.57.3)
VAT vs Withholding taxes: Understanding its basic principle

Indirect taxes, like VAT and excise tax, are different from withholding taxes (direct taxes).

To distinguish, indirect taxes, the incidence of taxation falls on one person but the burden thereof can
be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching
the consumer who ultimately pays for it.

On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same
entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely
collects, by withholding, the tax due from income payments to entities arising from certain transactions
and remits the same to the government. Due to this difference, the deficiency VAT and excise tax cannot
be “deemed” as withholding taxes merely because they constitute indirect taxes (Asia International
Auctioneers, Inc. v. CIR, G.R. No. 179115, September 26, 2012).

A ship agent is any person or company that carries out the functions of an agent (see the following
slide), irrespective of whether they are in business as a ship agent, or they perform such functions as an
adjunct to, or in conjunction with, other activities such as ship owning or operating, providing cargo
handling or similar.

The ship agent, as enshrined by international maritime convention, is primarily the servant of the master
and owners of the vessel, the “principal”. In practice however, the agent can act for any of the parties
involved in the voyage and in any capacity as agreed between the agent and his principal.

Value-Added Tax (VAT) is a form of sales tax. It is a tax on consumption levied on the sale, barter,
exchange or lease of goods or properties and services in the Philippines and on importation of goods into
the Philippines. It is an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee
of goods, properties or services.

SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporations. -

(A) Payment of Tax. -

(1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto
at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding
agents, and in their absence, the captains thereof are required to file the return herein provided and pay
the tax due thereon before their departure. Upon failure of the said agents or captains to file the return
and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure
until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due.