As far as the Bureau of Internal Revenue (BIR) is concerned, business income commensurate income taxes. As much as possible, taxpayers would always want most, if not all, of their expenses to be allowed as a deduction from its gross income. This is to fully maximize the Company’s funds without compromising the obligation to pay correct taxes.
The National Internal Revenue Code (NIRC) enumerates and briefly discusses a number of allowable deductions for the computation of taxable income subject to income tax, including expenses that are subject to withholding taxes. As discussed in Section 34 of the NIRC, “any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR”.
Most of the expenses of the business provide income, which may or may not be subject to withholding taxes, to the other contracting party. Usual expenses subject to expanded withholding taxes are rent, sub-contracted services, professional fees, etc. These expenses are being termed as ‘income payments’ of the Company who serves as withholding tax agent for withholding tax purposes. The Bureau of Internal Revenue (BIR) requires every withholding agent or payor, whether individual or non-individual, to deduct and to withhold taxes on the income payments made. It is important to remember that the withholding agent must issue Form 2307, Certificate of Creditable Tax Withheld at Source, to the seller-payee upon a) request of the seller-payee; b) on the 20th of the month following the end of a taxable quarter; or c) upon payment.
The deducted and withheld taxes shall be reported to the BIR through the filing and payment of Form 0619E/1601EQ. Form 0619E is being used for the first two (2) months of the quarter which falls due on the 10th of the month for manual filers and per taxpayer group for eFPS filers. On the other hand, Form 1601EQ is being used for transactions for each quarter which falls due on the last day of the month following the close of the taxable quarter regardless if the Company files manually or through eFPS.
In relation to the provision quoted above, it is then established as a general rule where no withholding of taxes from income payments were made will make the related expense disallowed for income tax computation. This is a common finding during BIR audits. However, in cases where the related withholding taxes, including the interest incident to the failure to withhold the tax, and surcharges, if applicable, were paid at the time of audit/investigation or reinvestigation/reconsideration, the same shall be allowed as a deduction (Section 2.58.5 of Revenue Regulation (RR) No. 14-2002, as amended by RR No. 17-2003).
Payment of additional taxes, penalties or surcharges due to negligence or simple oversight may greatly impact the Company’s operations especially during difficult times. It is therefore essential for withholding agents to be reminded to withhold and remit the correct taxes from the Company’s suppliers for the expenses to qualify as valid deductions for income tax computation.
