Claiming CWT credits

SUITS THE C-SUITE By Cherry Liez O. Rafal-Roble

Business World (04/25/2016 – p.S1/2)

One of the withholding tax schemes adopted in the Philippines is the creditable withholding tax (CWT) system. Under the CWT, income payments made to Philippine residents enumerated in the CWT regulations should be subjected to the different CWT rates. The income subject to CWT still needs to be reported in the income tax return of the recipient, the income tax calculated thereon, and the CWT claimed against the CWT so withheld. Any excess of the tax income due on the return over the CWT withheld should then be paid by the recipient to the Bureau of Internal Revenue (BIR). On the other hand, if the CWT exceeds the income tax due on the return, then the excess CWT may either be refunded or carried over to the next period by the taxpayer.

While this withholding system might appear straightforward and mechanical, taxpayers whose income was subjected to the creditable withholding tax need to be aware of the requirements needed to prove the entitlement to the CWT credits.

Section 2.58.3 of Revenue Regulations No. 2-98 requires that claims for tax credit or refund of any creditable income tax, which was deducted and withheld on income payments, shall be given due course only when it is shown that (1) the income payment has been declared as part of the gross income, and (2) the fact of withholding is established by a copy of the withholding tax statement duly issued by the payor/withholding agent to the payee/recipient, known as the Certificate of Creditable Tax Withheld at Source or BIR Form No. 2307, showing the amount paid and the amount of tax withheld therefrom.

The regulations also require that the CWT “shall be allowed” as a tax credit against the income tax liability of the payee in the quarter of the taxable year in which income was earned or received. In other words, the CWT credits should be claimed in the same quarter when the related income was earned or received. If, for example, the CWT credit is related to an income earned or received in 2015, and duly reported in 2015, the tax credit is allowed to be deducted from the tax due on such income in 2015.

A question arises if the CWT credits may still be claimed by the payee/recipient in a subsequent period if the CWT credits are not claimed within the same period when the related income was received or earned. For example, if the CWT credit pertains to income earned/received and reported in 2015, but the CWT is not claimed in 2015, can the said CWT be claimed in 2016 when the related certificate or BIR Form No. 2306 is received by the payee/recipient?

In a 2013 decision of the Court of Tax Appeals, CWT credits were disallowed on the grounds that the CWT credits actually pertained to income earned and reported in a prior year.

If the CWT credits are claimed in the same period when the related income is earned/ received and reported by the income payee, the regulations also require that the fact of withholding is established by a copy of BIR Form No. 2307, duly issued by the payor/withholding agent to the payee/recipient showing the amount paid and the amount of tax withheld therefrom. It is thus required that the corresponding BIR Form 2307 be presented to prove the fact of withholding.

There are court decisions that ruled that the Certificate of Creditable Tax Withheld at Source or BIR Form 2307 is the competent proof to establish the fact that taxes were withheld, making it unnecessary for the person who prepared and executed BIR Form 2307 to be presented and to testify personally to prove the authenticity of the CWT certificates.

However, in a recent Supreme Court decision, Philippine National Bank vs Commissioner of Internal Revenue (G.R. No. 206019 promulgated on March 18, 2015), the court held that the fact of withholding may be established by documents other than the certificate or BIR Form No. 2307. In the said case, the fact of withholding was established by a copy of the withholding tax return, BIR Form No. 1606, or the withholding tax return on the sale of a real property other than capital asset. The said form showed the amount of tax withheld and paid by the withholding agent, date of remittance, name of payor and payee, description of the property subject of the transaction, and the determination of the taxable base and tax rate applied. The court said that these are the very same key information that would be gathered from BIR Form No. 2307; thus, the presentation of BIR Form 2307 would be a superfluity, of little or no value.

The question that now arises is this: Is the above decision sufficient reason to disregard or dispense with compliance with BIR Form No. 2307? We think not. We believe it is still more prudent for the income recipient to require its income payors to provide it with BIR Form 2307 in a timely manner, so that its CWT credits are secure. While the above decision offers the income payee with another option to prove its CWT credits in the absence of BIR Form No. 2307, we remind the reader that the above decision arose from a transaction on which the CWT was paid in 2003 and the claim for refund for the CWT was filed in 2005.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Cherry Liez O. Rafal-Roble is a Tax Senior Director of SGV & Co.