BIR Ruling [DA-142-05]

April 11, 2005 BIR RULING [DA-142-05] Atty. Maria Lourdes R. Reyes 131 F. Manalo Street San Juan, Metro Manila M a d a m : This refers to your letter dated March 29, 2004 stating that your client, Heirs of Alex and Engracia Reyes, Sr., Inc. (Company) is duly registered with the Securities and Exchange Commission (SEC); that it has declared cash dividends on income earned in 1998, which it paid out to its stockholders in monthly installments in 1999; that every month from January to June 1999, the company withheld the amount corresponding to six percent (6%) of the dividends it paid out to each of its stockholders, as final tax to be remitted to the Bureau of Internal Revenue (BIR); that the return for the said final withholding tax was filed monthly, (except for the dividends paid out in April 1999) using the form (BIR Form 1601) within ten (10) days from the close of each month; that the .same return was used in the filing of the withholding tax on compensation received by the company's employees; that from February to July 1999, the Company remitted to the BIR a total of P345,060.00 representing the final tax on dividends paid to individual stockholders from January to June 1999 in the total amount of P5,751,000.00; that however, from July to November 1999, the Company withheld the total amount of P614,151.54 as final tax on the dividends in the amount of P7,123,119.54 it distributed to its stockholders within the same period, instead of the amount of P427,387.17 representing 6% of the amount of dividends which it should properly have withheld; that the said amounts withheld as final tax were remitted to the BIR together with the amount of P29,380.43 withheld from compensation income paid to the company's employees; that after realizing that it had over-withheld and in effect pre-paid final taxes due on dividends paid to its stockholders, the Company made internal adjustments in December 1999 and reflected the pre-payment of P181,086.87 in its return for December 1999 which it filed on 25 January 2000; that in January 2000, the Company paid cash dividends in the amount of P1,222,826.63 to its stockholders on income earned in 1999; that the Company filed the monthly remittance return of final income taxes withheld on March 10, 2000 and reflected therein the amount of P97,826.13 representing the 8% final tax as having been previously over-remitted; that again in February 2000, the Company paid cash dividends in the amount of P1,222,826.63 to its stockholders on income earned in 1999 and filed the monthly remittance return of final income taxes withheld on March 10, 2000 and reflected therein the amount of P97,826.13 representing the 8% final tax as having been previously partly over-remitted by P81,850.94, and thus made a payment of P15,975.18; and that the Company has received the Demand No. 33-2000 dated January 19, 2004 together with Final Assessment Notices in the amounts of P286,903.38 representing deficiency on withholding tax on compensation under-remittance pursuant to Sec. 78 of the Tax Code of 1997 and P16,000.00 representing the compromise penalty. In connection therewith, you are now requesting confirmation of your opinion that: "1. Section 78 is not applicable to the instant case considering that the alleged under-remittance is not on withholding tax on compensation income but rather on the final tax withheld on corporate dividends; 2. The right of the BIR to collect from the Company the amount of P286,903.38 has prescribed. This is so considering that given the date of issuance of the Demand Letters and accompanying FAN; i.e.,January 19, 2004, the assessment was issued after three (3) years, eleven (11) months and twenty-five (25) days and three (3) years, eight (8) months and twenty five (25) days respectively from the last days prescribed by law for the filing of the monthly remittance returns of final income taxes withheld; and 3. Considering that the final assessment is being disputed, the imposition of the compromise penalty in the amount of P16,000.00 by the BIR, in lieu of the criminal sanctions under the NIRC, is premature and is therefore devoid of legal and factual basis." In reply thereto, please be informed as follows: (1) Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as withholding agent. On the other hand, under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return as prescribed in Sections 51 and 52 of the Tax Code, as amended, to report the income and/or to pay the difference between the tax withheld and the tax due on the income. In the case of the latter, the taxes withheld on income payments are creditable in nature. But in both cases, failure to withhold the tax or in case of under withholding the deficiency tax shall be collected from the payor/withholding agent. ( Sec. 2.57(A) of Revenue Regulations No. 2-98, as amended ) SIEHcA Corollarily, Section 2.57.1(A)((5), supra provides that the following forms of income shall be subject to final withholding tax at the rates herein specified: "xxx xxx xxx "(5) Cash and/or property dividends actually or constructively received from a domestic corporation, joint stock company, insurance or mutual fund companies or on the share of an individual partner in the distributable net income after tax of a partnership (except general professional partnership) or on the share of an individual in the net income after tax of an association, a joint account or a joint venture or consortium of which he is a member or a co-venturer: "Six percent (6%) beginning January 1,1998; "Eight percent (8%) beginning January 1,1999; "Ten percent (10%) beginning January 1, 2000 and thereafter "The tax on cash and property dividends shall only be imposed on dividends which are declared from profits of corporations made after December 31, 1997." It is clear from the foregoing that the dividends paid by the Company to its stockholders are indeed subject to the final tax rates prescribed above. Thus, the Company, as the payor/withholding agent, is under obligation to withhold the aforesaid taxes due on the dividends prior to its distribution to the recipient stockholders and the latter is no longer obliged to file the corresponding returns for the said income. Accordingly, the assessment made by the Revenue Region No. 6, Manila for under-remittance of withholding tax on compensation in the amount of P286,903.38 under Section 78 of the Tax Code of 1997, is devoid of legal basis. (2) Section 58 of the Tax Code of 1997 provides in part that "The return for final withholding tax shall be filed and the payment made within twenty five (25) days from the close of each calendar quarter. ..." On the other hand, Section 203 of the same Code provides as follows: "Sec. 203. Period of Limitation Upon Assessment and Collection . "Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, that in a case where a return is filed beyond the period prescribed by law, the three (3) year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day." Based on the foregoing facts and the above-quoted provision of the NIRC, the three (3) year period to assess the Monthly Remittance Return of Final Income Taxes Withheld filed by the Company on January 25, 2000 and March 10, 2000 prescribed on January 25, 2003 and April 25, 2003 respectively. The Demand Letters and accompanying Final Assessment Notice (FAN) were sent on January 19, 2004 or after eleven (11) months and twelve (12) days and eight (8) months and twenty-five (25) days respectively from the last days prescribed by law for the filing of the monthly remittance returns of final income taxes withheld. Thus, based on the legal ground for prescription, the FAN is void ab initio and is bereft of any legal basis. HSEIAT (3) Considering the fact that the final assessment is being disputed, the imposition of a compromise penalty in the amount of P16,000.00 in lieu of the criminal sanctions under the Tax Code is premature. It is to be emphasized, however, that the essence of a compromise penalty is mutuality and a unilateral imposition of the compromise penalty is without legal basis. ( Commissioner of Internal Revenue vs. Liangga Bay Logging Co., 193 SCRA 86 quoting Collector vs. UST, 100 Phil 1062, Phil. International Fair vs. Collector, G.R. Nos. L-12928 and L-12932, March 1962 : This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group