Clarification of Certain Withholding Tax Issues

July 31, 2002 BIR RULING NO. 029-02 RR 2-98; 79; RR 3-2002 000-00 Atty. Maria Elena C. Ramiro 2423 Zamora Street Pasay City M a d a m : This refers to your letter dated .November 8, 2001 requesting for a ruling in behalf of your clients, Loida P. Kahulugan, Rhodora M. Medel, Ma. Luisa N. Hibionada, Araceli S. Alegria and Jean D. Pena, on the following withholding tax issues. It is your contention that: 1. The nature of a withholding tax on compensation income of government employees is creditable since it can be allowed as credit against the income tax liability of the taxpayer for the taxable year pursuant to Section 79(C)(2) of the National Internal Revenue Code; and 2. Any deficiency or excess in the Monthly withholding taxes on such compensation income duly remitted to the Bureau of Internal Revenue may be reconciled or adjusted at year-end, particularly during the last payroll period of the employee in accordance with Sec. 22(a) and (b) of Revenue Regulations No. 6-82, as amended by RR 12-86, otherwise known as the "Withholding Tax Regulations on Compensation." In reply, please be informed that Section 2.57 (B) of Revenue Regulations No. 2-98, implementing Republic Act No. 8424, "An Act Amending The National Internal Revenue Code, as amended" relative to the Withholding on Compensation, provides, viz. : "Sec. 2.57. Withholding of Tax at Source. (A) . . . (B) Creditable Withholding. 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 Sec. 51 and Sec. 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in nature." Thus, the withholding tax on compensation income of government employees is creditable in nature. Therefore, pursuant to Section 79 (C) (2) of the Tax Code of 1997, the amount deducted and withheld during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24 (A). As regards any deficiency or excess in the monthly withholding, Step 6 of Section 2.79 (B) (5) (b) of Revenue Regulations No. 2-98 provides that the deficiency tax (when the amount of tax computed in Step 5 is greater than the amount of cumulative tax already deducted and withheld or when no tax has been withheld from the beginning of the calendar year) shall be deducted from the last payment of compensation for the calendar year. If the deficiency tax is more than the amount of last compensation to be paid to an employee, the employer shall be liable to pay the amount of tax which cannot be collected from the employee. The obligation of the employee to the employer arising from the payment by the latter of the amount of tax which cannot be collected from the compensation of the employee must be settled between the employee and employer. The excess tax (when the amount of cumulative tax already deducted and withheld is greater than the tax computed in Step 5), shall be credited or refunded to the employee not later than January 25 of the following year. However, in case of termination of employment before December, the refund shall be given to the employee at the payment of the last compensation during the year. In return, the employer is entitled to deduct the amount refunded from the remittable amount of taxes withheld from compensation income in the current month in which the refund was made, and in the succeeding months thereafter until the amount refunded by the employer is fully repaid. On the basis of the foregoing, the deficiency or excess in the withholding tax on compensation income of government employees, which is creditable in nature, may be reconciled or adjusted at year-end, more particularly during the last payroll period of the employee pursuant to Section 79 (C) (2) of the Tax Code of 1997 as implemented by Revenue Regulations No. 2-98. Moreover, Revenue Regulations No. 3-2002 dated March 22, 2002 provides that employees receiving compensation income from only one employer for one taxable year whose tax due is equal to tax withheld qualify for substituted filing of Income Tax Return (ITR). In substituted filing of ITR, the employer's annual information return (BIR Form No. 1604-CF) may be considered the "substituted ITR of the employee inasmuch as the information he would have provided the BIR in his own ITR (BIR Form No. 1700) would have been exactly the same information contained in the employer's annual information return. This being the case, the taxpayer has the option not to file his ITR for the taxable year involved. In addition, substituted filing applies only if all the following circumstances are present: 1. The employee receives purely compensation income (regardless of amount) during the taxable year; 2. The employee receives the income only from one employer during the taxable year; 3. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; and 4. The employee's spouse also complies with all the three (3) conditions stated above. Furthermore, RR 3-2002 shall cover taxable year 2002 and succeeding years although substituted filing is optional on the part of the employee for income earned for taxable year 2001. 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.) REN G. BAEZ Commissioner of Internal Revenue