Tax Articles

Update on Creditable Withholding Taxes

By Atty. Rodel C. Unciano

The creditable withholding tax (“CWT”) system has proven to be an effective tool in tax collections through the cooperation of the payors who are constituted by law, as withholding agents. The income payors act as agent of both the taxpayer and the government. The income payors have no choice but to faithfully comply with their obligations as withholding agents as failure to do so would mean non-deductibility of their income payments.

The imposition of CWTs on income payments is by virtue of the mandate of Section 57 of the Tax Code, which authorizes the Secretary of Finance, upon the recommendation of the Commissioner, to require the withholding of a tax on certain income payments, pursuant to the criteria laid down in the Tax Code, which shall be at a rate of not less than one percent (1%) to a maximum of not more than thirty-two percent (32%) under the old law, but the TRAIN Law reduced the maximum rate from thirty-two (32%) to fifteen (15%) beginning January 1, 2019.

In implementing the mandate of the Tax Code, the Secretary of Finance has since issued several issuances requiring the withholding of tax on certain income payments. And under the regulations issued by the Secretary of Finance, specific rates of withholding taxes are being imposed on certain income payments, depending upon the nature of the income payments. For income payments not specifically enumerated under the regulations as subject to specific withholding tax rates, taxpayers constituted as Top Withholding Agents (TWA) are being obliged to remit one percent (1%) and two percent (2%) CWTs on their purchase of goods and services, respectively.

In Revenue Regulations (RR) No. 12-94, taxpayers belonging to the top five thousand (5,000) corporations, as determined by the Commissioner of Internal Revenue, were constituted as withholding agents, and thus, made to impose withholding of 1% CWT on their purchase of goods. In RR 17-2003, the top five thousand corporations (5,000) were increased to ten thousand (10,000) corporations, where 2% CWT on purchase of services were likewise imposed, in addition to the 1% CWT imposed on purchase of goods. In RR 14-2008, the number of top private corporations was increased to twenty thousand (20,000). Subsequently, in RR 6-2009, top five thousand (5,000) individual taxpayers were likewise included as withholding agents, and thus were required to withhold the 2% CWT on purchase of services and 1% CWT on purchase of goods.

In RR 11-2018, as amended by RR 7-2019, the top withholding agents were required to be published in a newspaper of general circulation which shall serve as a notice to the top withholding agents that they are being constituted as such. Subsequently, RR 7-2019 was issued clarifying that top withholding agents shall refer to those taxpayers whose gross sales/receipts or gross purchases or claimed deductible itemized expenses, as the case may be, amounted to twelve million pesos (12,000,000.00) during the preceding taxable year.

The issuance of RR 11-2018 led to the publication of list of taxpayers notifying them as TWAs. Some taxpayers were included in the list even in the absence of the requirements laid down in RR 7-2019, that is, sales or receipts or itemized deductions of twelve million pesos (12,000,000) has not been met. Hence, the confusion.

With the recent issuance of Revenue Memorandum Circular 143-2019, taxpayers are guided that in cases of publication of TWAs in the newspaper of general circulation wherein they are included or not deleted in the existing list of TWAs but do not satisfy the criteria of RR No. 7-2019, they cannot be compelled to withhold the 1% and 2% CWTs.