Under Revenue Regulations No. (RR) 02-98, as amended, the payor/buyer is constituted as the government’s withholding agent who is mandated to deduct and withhold from the gross income to be received by the payee at the time of payment or accrual of income, whichever comes first.
Along with the obligation to withhold and remit the amount of tax withheld due to the Bureau of Internal Revenue (BIR), the withholding agent also has the responsibility to furnish the payee a copy of a duly issued Certificate of Creditable Tax Withheld at Source (BIR Form 2307) showing the amount paid and the amount of tax withheld therefrom.
The issuance of the BIR Form 2307 is crucial to the payee, since it has a direct impact on its income tax due to the BIR. The BIR Form 2307 is a valuable document entitling the payee to a tax credit or refund or issuance of tax credit certificate (TCC) on any tax withheld and remitted to the BIR. However, if the BIR Form 2307 was not issued by the withholding agent, or if such document got lost, are there other documents that can be used as evidence to support the claim for tax credit or refund or issuance of TCC?
It is a well-settled principle that refunds and tax credits are in the nature of tax exemptions, hence, strictly construed against the taxpayer. The taxpayer claiming for tax refund or credit has the burden of proving that he is entitled for such refund or credit by providing evidence of compliance of certain conditions of the law under which the privilege of exemption is granted.
In a recent Court of Tax Appeals (CTA) decision (CTA Case No. 7758, June 28, 2010), a taxpayer sought for refund or issuance of TCC of its excess/unapplied creditable withholding taxes (CWT). In order to be entitled to a refund or issuance of TCC, the CTA held that the petitioner must comply with the conditions under Sections 204(C) and 229 of the Tax Code, as amended, and under Section 2.58.3(B) of RR 02-98, as amended, which requires that proof of withholding be established by a copy of a statement duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld therefrom.
Instead of the BIR Form 2307, the taxpayer submitted the BIR Form 1606 (Withholding Tax Remittance Return) which the taxpayer, as payee, used to remit the amount of tax withheld.
The CTA disallowed the taxpayer’s claim for refund or issuance of TCC on the ground that the BIR Form 1606 does not suffice because it was not filed by the withholding agent. Furthermore, the taxpayer failed to explain why the withholding agent never issued the prescribed BIR Form 2307 for their transaction, in violation of its obligation stated under Section 2.58(B) of RR 02-98, as amended.
Citing the Supreme Court (SC) ruling in Banco Filipino Savings and Mortgage Bank vs. Court of Appeals case (G.R. No. 155682, March 27, 2007), the CTA held that the only document which may be accepted as evidence to establish the fact of withholding must emanate from the payor itself, and not merely from the payee, and must indicate the name of the payor, the income payment basis of the tax withheld, the amount of the tax withheld and the nature of the tax paid.
Interestingly, however, except for the fact that the BIR Form 1606 did not emanate from the payor, all information required to be indicated in the BIR Form 2307 under Section 2.58.3(B) of RR 02-98, as amended, such as the name of the payor (i.e., the buyer), the income payment basis of the tax withheld, the amount of the tax withheld and the nature of the tax paid are also contained in the BIR Form 1606. However, it is the view of the CTA that the only acceptable evidence to establish the fact of withholding is the BIR Form 2307.
The practice of self-withholding is prevalent in some industries on their sale of real properties to individuals not engaged in trade or business, whether on installment or on deferred/cash basis. More often than not, these companies have encountered difficulties in collecting the BIR Form 2307 because not all of its individual buyers are acquainted with the proper timing of withholding the tax and issuing of the corresponding BIR Form 2307, thereof.
As a matter of practice, these taxpayers voluntarily remit the supposed tax due to be withheld by the buyer as the constituted withholding agent using BIR Form 1606, disregarding BIR Form 2307.
However, considering that the SC has already ruled that only BIR Form 2307 issued by the payor may be used as support of the creditable withholding tax, taxpayers are but obliged to comply with this requirement without regard to the difficulty in collecting this form from individual buyers not engaged in trade or business. Still, taxpayers may opt to prepare BIR Form 2307 and have it signed by the buyer to ensure its availability in case of request for tax refund or TCC. –Let’s Talk Tax — By Diendo M. Dupal, Businessworld
(The author is a tax manager at Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please e-mail Diendo.Dupal@pna.ph or call 886-5511.)