Reforms in the Withholding Tax System

By: Atty. Mabel L. Buted

"Also, although the withholding tax rates are lower, the rates are high ranging from 1% to 15%. The withholding tax rates remain unchanged. Lowering the withholding tax rates can thus be considered, especially that the corporate income tax rate had been reduced to 25% (previously at 30%) in 2021 when the CREATE Act was passed."

Many taxpayers incur excess tax credits on their income at the end of the taxable year. The rules provide them ways to recover the overpaid taxes, i.e., either to carry over the excess amount or to claim for a refund or tax credit certificate (TCC). Carrying-over the excess amount would be favorable to the taxpayers if they expect to earn significant amount of income in the succeeding periods to enable them to utilize the excess taxes paid against their future income taxes. Otherwise, the taxpayers would just continue accumulating excess taxes, and the claim for a refund or TCC becomes the more viable option, although the process would entail a difficult and tedious procedure.

This is the reason why various groups continuously call to revisit the present withholding tax system of the tax authority. A lot of issues posed by the system were already addressed but these mainly pertain to the procedural process in claiming for a refund.

As it stands now, the taxpayer is granted a period of two years from the date of payment to file a claim for refund with the BIR. The BIR has prescribed a list of mandatory requirements that need to be submitted in the application. After the submission of complete documentary requirements, the BIR has a period of 180 days to process and decide on the administrative claim. It is only in case the BIR renders a decision within the 180-day period or in case the BIR fails to act on the claim within the same period can the taxpayer appeal with the tax court. In such case, the taxpayer can file judicial appeal within 30 days, to be counted from the receipt of the decision or from the lapse of the 180-day period.

While these procedures facilitated the processing of refund claims, there are other possible reforms that are worth pursuing.

Lower withholding tax rates. Excess withholding taxes arise if the taxes collected from the income recipients under the withholding tax system exceed their final income tax due at year-end. The taxes withheld oftentimes exceed the final tax due on the income because the withholding tax is applied on the higher gross amount, while the final tax is based on the net taxable income of the taxpayer, after deducting the allowable deductions. Also, although the withholding tax rates are lower, the rates are high ranging from 1% to 15%. The withholding tax rates remain unchanged. Lowering the withholding tax rates can thus be considered, especially that the corporate income tax rate had been reduced to 25% (previously at 30%) in 2021 when the CREATE Act was passed.

Withholding tax on service fees. Sometimes, in service transactions, the taxpayer charges fee on a cost-plus basis whereby a fixed mark-up or profit is added on top of the costs incurred in rendering the services, like salaries of its employees and other expenses earmarked for payment to third parties. This arrangement is usually common in agency companies and other entities that advance payment to third-party suppliers. In this case, the total service fee comprises both the service income (i.e., agency fee or commission) and the costs.

Following the rule on withholding tax, taxes are withheld based on the total gross amount of service fee. There are few exceptions to the rule. In the case of security agencies and brokers, existing revenue circulars provide that only their service income, excluding the costs charged, is subject to withholding tax. I hope that this rule can likewise be considered and applied to other companies that are similarly situated.

Timing of withholding of tax. The current rule provides that the obligation to deduct and withhold the tax arises at the time the income has become payable, and that is, when the obligation becomes due, demandable or legally enforceable. The rule requires the payor to withhold “at the time an income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books, or upon the issuance by the seller of the sales invoice or other adequate document to support such payable, whichever comes first.”

The present rule suggests that all accrued or recorded expenses or assets are subject to withholding tax.

After year-end, it is common for companies to accrue expenses to meet financial reporting compliance standards. Not all accrued expenses, however, are already due, such that the expenses become payable only after payment is demanded or enforced through the issuance of the supplier’s billing or invoice.

Are these kinds of accruals covered and subject to withholding tax? If so, I hope that our concerned authorities can revisit the rule to facilitate compliance by taxpayers.

The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at This email address is being protected from spambots. You need JavaScript enabled to view it. or call 8403-2001 local 160.