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To 10,000 taxpayers to be expanded to 20,000

To 10,000 taxpayers to be expanded to 20,000

By Atty. Dick Du-Baladad

The Bureau of Internal Revenue (BIR) will soon expand the list of Top 10,000 Corporations (TTC) to Top 20,000.

I’ve heard that the BIR is now in the process of identifying those companies that would be included in the additional 10,000, and that letters will soon be sent to notify them of their new obligations as a TTC.

Under the current rules, TTCs are required to file and pay their taxes through the eFiling and Payment System (eFPS). All information to be furnished to the BIR as attachments to the income, VAT and withholding tax returns are to be submitted in electronic format, in contrast to the traditional norm of manual filing and payment.

For taxpayers, this would be more convenient, expedient and less costly. For the BIR, this would make it easier and faster to monitor payments, detect non-compliance and capture third party information that can be used to validate the income of other taxpayers transacting with TTCs (e.g., suppliers and customers).

The most significant implication of being a TTC, however, concerns a taxpayer’s obligation as a withholding agent: the BIR imposes a heavy requirement on a TTC as a withholding agent. A TTC, in addition to his normal obligations as a withholding agent, is required under RR 02-98, as amended, to withhold a tax of 1% or 2% on all its purchases of goods and services that are not covered by specific rates of withholding. Therefore, practically all payments of TTC — regardless of amount — is subject to withholding tax, except casual purchases, i.e., purchases made from non-regular suppliers and oftentimes involving single purchases.

In the past, business sectors objected to this regulation for being impractical, difficult to implement, and risky, especially as applied to petty purchases and reimbursable expenses of officers and employees. In effect, it required officers and employees — including, for example, company drivers — to carry with them withholding tax certificates whenever they incur reimbursable business expenses such as meals, representation and entertainment, gasoline, out-of-town or fieldwork expenses and supplies.
The difficulty was partly addressed when the BIR issued a circular to the effect that payments made through credit cards are not subject to withholding.

Nonetheless, objections continued to be raised and, at that time, Commissioner Guillermo Parayno, Jr. promised to revoke the regulation. To this day, however, there has been no official issuance revoking the regulation.

The withholding tax system is one of the best innovations ever thought of in the field of tax collection in decades. Under this system, the government is assured that tax is collected in advance even before it reaches the hands of the income recipient. Likewise, the government is able to save on cost as it is able to shift the cost of collection to taxpayers who will perform the function of a tax collector on behalf of the BIR, free of charge, and under pain of penalty if not done properly.

The continued success of the withholding tax system as applied to compensation, nonresidents and passive income earners has encouraged the BIR to widen its coverage. It then created what it called "expanded withholding tax," now more widely known as "creditable withholding tax" (CWT) because the amount withheld is creditable against the income tax liability of the income recipient at year end. The CWT covered income payments that are not fixed or passive in character.

Over the years, the BIR continued to expand the coverage of CWT. Whenever the BIR is short of collection, the CWT is always a first refuge — either by increasing the rates or expanding the coverage. The reasons are clear: first, the effect is immediate and second, there is no cost to government.

What BIR failed to consider is that, for every increase in rate or expansion of the coverage, there is additional burden put on withholding agents. It requires withholding agents to hire additional people to do the work or spend for supplies and other facilities needed to comply with reportorial requirements. Since BIR also falls short in providing the necessary training, public awareness and assistance, withholding agents also incur training costs and consultancy fees to be able to comply with the rules.

Now that the BIR plans to increase the list of top 10,000 corporations to 20,000, it may be timely for the BIR to revisit the withholding tax rules in its totality to determine whether the rates and coverage can still be considered ideal.

Ideally, the tax to be withheld should approximate the tax to be paid at yearend. A withholding tax rate higher than that which would be payable at yearend will create inefficiencies, as taxpayers’ capital would then be tied up in excess taxes with the government rather than being plowed back to generate more business income. BIR, on the other hand, will lose the additional taxes on the foregone business income and in addition, will need more resources to process claims for refund.

More importantly, the BIR should revoke the special rule imposed on TTCs to withhold the 1% and 2% withholding tax on all its purchases of goods and services. This requirement may not be reasonable and feasible if applied to medium-sized businesses, which may be the bulk of the additional taxpayers to be included in the expanded list of top 20,000 corporations.

(The author is a partner and division head for Tax Advisory & Compliance at Punongbayan & Araullo, a member firm within Grant Thornton International Ltd.  For comments and inquiries, please e-mail Benedicta.Du-Baladad@pna.ph or call 886-5511.)