Tax Articles

Top withholding agents redefined

By: Atty. Rodel C. Unciano

Currently, almost all income payments are subject to withholding taxes where income payors are constituted by law or by regulations as withholding agents of the government. As constituted withholding agents, the income payors will have no choice but to comply with their obligations to withhold a portion of the income payments and remit the same to the government. Failure to do so would result in the non-deductibility of the related expenses.

Under the final withholding tax system, the amount of tax withheld by the withholding agent is constituted as full and final payment of the income tax due from the payee on said income. Being already full and final payment of the income tax due, the income recipient is no longer required to pay income tax for that income. On the other hand, under the creditable withholding tax system, taxes required to be withheld are intended to equal or approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return and apply as tax credit the taxes previously withheld by the income payors.

The imposition of creditable withholding tax 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 Tax Code, but the TRAIN Law reduced the maximum rate from thirty-two percent (32%) to fifteen percent (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 obliged to remit one percent (1%) and two percent (2%) withholding tax 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% 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% creditable withholding tax on purchase of services were likewise imposed, in addition to the 1% withholding tax imposed on purchase of goods. In RR 14-2008, the number of top private corporations was increased to twenty thousand (20,000). 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% withholding tax on purchase of services and 1% withholding tax on purchase of goods.

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 (P12,000,000) during the preceding taxable year.

Only recently, RR 31-2020 was issued redefining taxpayers who are constituted as TWAs. As now defined, TWAs shall refer to those taxpayers whose gross sales/receipts or gross purchases during the preceding taxable year shall fall under the minimum thresholds determined according to the existing group classifications of the Revenue District Offices (RDOs) where they are duly registered, in reference to the group classifications under Revenue Memorandum Order (RMO) 13-2018. In accordance with RR 31-2020 in relation to RMO 13-2018, the minimum threshold for taxpayers belonging to Groups A and B classification is twelve million pesos (P12,000,000) while only five million pesos (P5,000,000) for taxpayers belonging to Groups C, D, and E classification.

Thus, taxpayers are advised to check RMO 13-2018 for the group classification of the RDO where they are duly registered to determine whether they are now constituted as TWAs.