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Disposition of creditable withholding taxes

ITR preparation reminder: Disposition of creditable withholding taxes

by Fulvio D. Dawilan

For most taxpayers, the month of April is the deadline for the filing of the annual income tax returns and the payment of the annual income taxes due. The law requires the filing of the annual income tax returns on or before the 15th day of the 4th month following the close of the fiscal year. The taxes due are likewise required to be paid at the time the return is filed. Since most taxpayers are using the calendar year, the deadline falls on the 15th day of April.

This cutoff date should not be missed, since doing so may entail an enormous cost on the part of the taxpayer. Failure to file the tax return and pay the tax due on or before the deadline would result in a penalty of 25% of the tax due, regardless of the number of days delayed. In addition, a 20% interest per annum would be imposed on the taxes due.

And yes, the computation of the annual income taxes due requires the preparation of a complicated income tax return.

Nonetheless, any information indicated by the taxpayer in the return is his representation and would be considered final unless subsequently changed through an amendment. Thus, all information required in the return should be correctly indicated.

And speaking of amendment, a taxpayer has every right to modify, change or amend a return that he had already filed. But while a previously filed return can be amended, taxpayers should not take comfort in this remedy. Note that the Bureau of Internal Revenue may already issue a letter of authority for the examination of taxpayers just after the deadline for the filing of the return. This would then bar a taxpayer from amending his income tax return.

Thus, it is still prudent to file the return on or before the prescribed deadline should already contain the correct and final information.

One important thing to consider is the proper disposition of excess creditable withholding tax credits. Because almost all sales transactions are now required to be subjected to withholding taxes by the payors, it is not unusual for taxpayers to accumulate unutilized creditable withholding taxes at the end of the year.

For these excess payments, the taxpayer has the right to choose whether to ask for a refund (either in the form of cash or tax credit certificate) or to carry over the excess to the succeeding taxable years. The option to carry over or claim as refund is an alternative remedy. A taxpayer cannot opt to carry over, and at the same time get a tax refund for the excess income taxes paid.

The authority to identify the option is a matter that lies exclusively within the sound discretion of the taxpayer himself. That option can be indicated by marking the appropriate box in the income tax return. And once the option is exercised, the same shall be considered irrevocable.

It should also follow that the treatment of the prior year’s unutilized excess income tax payments in the current year should be consistent with the choice made in the previous year. Thus, there is a need to refer to the income tax return of the previous year to determine which option was taken.

If the option indicated in the previous year’s return was for a refund (either in the form of cash or tax credit certificate), the excess amount should not be carried forward in the current year. Instead, the taxpayer should appl y for the refund within two years from the date of filing of the annual income tax return from which the excess income tax payment was incurred.

On the other hand, if the option for the prior year’s excess income tax payment was to carry forward in the succeeding years, there should be no other option but to carry it forward in the current year. Any remaining balance shall be added to the current year’s excess and carried forward to the subsequent years until the said amount is fu lly utilized.

However, since the taxpayer is free to make another choice for the excess income tax payments arising from the current year, a situation may arise where the taxpayer may opt for a refund for the current year’s excess while continuing to carry over the prior year’s excess to the subsequent years. There would then be two choices for the accumulated excess as of the end of the current year.

Apparently, this situation is not addressed by the present income tax return form.

Whatever option the taxpayer chooses, to be considered valid, should ensure that the creditable withholding taxes claimed comply with the requirements.

The most important of these requirements — but which is usually taken for granted — is the establishment of the fact that the withholding of taxes had actually been made by the payors. While it should be the responsibility of the withholding agents to issue the required withholding tax certificates, this responsibility is sometimes disregarded. 

Since it’s the recipient of the income who suffers the consequences, it has to ensure that these certificates are made available by the withholding agents


(The author is a tax partner at Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please e-mail the author or call 886-5511.)