Payment of Fringe Benefit Tax through Tax Credit Certificate Not Valid

October 9, 2002 BIR RULING NO. 036-02 Sec. 33, NIRC Rev. Regs. 3-98 000-00 Tax Counseling Integrated Unit 2204-C, PSE Centre Tower I, Exchange Road, Ortigas Center Pasig City Attention: Atty. Reynoso B. Floreza Gentlemen : This refers to your letter dated May 18, 2000 requesting that your client, BECHTEL OVERSEAS CORPORATION (Bechtel), be allowed to pay their fringe benefit tax (FBT) through the use of its Tax Credit Certificate (TCC). As borne out of the docket of the case, the following facts have been established. On November 18, 1999, Bechtel, through counsel, filed a claim for tax credit of excess value-added tax (VAT) in the amount of P52,508,690.20 (excess input of P54,489,808.05 plus overpaid VAT of P1,018,882.15). It was alleged that the said claim was being applied as tax credit because the construction project in Mauban, Quezon would be 100% completed by December 1999, and Bechtel does not have any other project where said excess input could be tax-credited against the company's VAT liabilities. On January 5, 2000, TCC No. SN 000971 was issued in the amount of P52,508,690.20 in favor of Bechtel for excess input and overpayment of VAT covering the period from April 1997 to September 1999. On April 14, 2000, Bechtel applied for a Tax Debit Memo amounting to P541,389.50 in payment of their FBT for the 1st quarter of 2000 utilizing the said TCC, which, however, was denied by the Collection Service on the ground that " FBT is a final withholding tax which is an exception to the usage of TCCs under Section 204 (c) of the NIRC ". In your supplemental letter dated April 9, 2002, you reiterated your position that FBT is the direct liability of employers and further stated that there could be no valid imposition of the civil penalties because Bechtel voluntarily filed the return and tendered payment of the tax within the statutory period. This ruling is based solely on the facts represented and covers only the legal issue of whether an employer's TCC however issued, may be used to pay the FBT on fringe benefits granted to the employer's managerial and supervisory employees. In reply, please be informed of the following: The second paragraph of Section 204(C) specifically prohibits the application of a Tax Credit Certificate (TCC for brevity ) against withholding tax liabilities of a taxpayer. Thus, "SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes . The Commissioner may xxx xxx xxx A Tax Credit Certificate validly issued under the provisions of thus Code may be applied against any internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable . Any request for conversion into refund of unutilized tax credits may be allowed, subject to the provisions of Section 230 of this Code: Provided, That the original copy of the Tax Credit Certificate showing a creditable balance is surrendered to the appropriate revenue officer for verification and cancellation: Provided, further, That in no case shall a tax refund be given resulting from availment of incentives granted pursuant to special laws for which no actual payment was made. xxx xxx xxx" (Emphasis supplied.) The rationale for the above-stated prohibition is that the withholding tax is not considered a direct liability of the taxpayer. The tax withheld is actually payment made by the taxpayer other than the withholding agent who merely holds the tax withheld in trust for the government. The issue is whether the FBT is a direct liability of the employer or whether the employer merely acts as a withholding agent in paying the FBT. Section 33 of the 1997 Tax Code specifically states that: "SEC. 33. Special Treatment of Fringe Benefit . (A) Imposition of Tax. A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57(A) of this Code . . . ." (Emphasis supplied.) The clear intention of Congress can be gathered from the minutes of the proceedings before the Committee On Ways And Means that deliberated on the said Section. Thus, "Mr. Medalla (continuing). . . " Now, another feature of the reform is fringe benefits taxation which is a feature of the tax system of Australia and many other countries. Since under the present system fringe benefits are already taxable but of course, many of them are not declared for tax purposes, this is really not new tax. This is an example of how the tax reform raises revenue, not by raising new taxes but by making the administration of existing taxes easier . . . The loophole that the FBT seeks to plug is the fact that many executives are able to avoid taxation by being paid fringe benefits rather than straight salaries" (See pages 000026 and 20007, Minutes, Committee on Ways and Means, February 20, 1996/ELP/V-1) Quite evidently, the purpose of the afore-quoted provision is to hold the employer directly liable for the FBT so as "to plug" the so-called loophole and to ensure that the same is paid. This, to this Office's mind, is the reason for the special treatment of the FBT. The second paragraph of Section 2.33(A) of Revenue Regulations No. 3-98 is instructive in stating that: "SEC. 2.33. Special Treatment of Fringe Benefits. xxx xxx xxx The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the employee which shall be withheld and paid by the employer on a calendar quarterly basis as provided under Sec. 57(A) (Withholding of Final Tax on certain Incomes) and Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the Code." (Emphasis supplied.) Furthermore, Revenue Regulations No. 5-2000 defines a direct internal revenue tax liability as ". . . taxes for which the taxpayer is made statutorily liable. In essence, 'direct internal revenue tax liability' pertains to the liability of a person mandated by law to file the tax return and pay the tax due thereon." From the foregoing discussion, it is quite clear that FBT is a withholding tax on the employee although payment thereof is made directly by the employer. It is a direct internal revenue tax liability of the employee, and not the employee. Such being the case, Bechtel cannot use its TCC to pay the FBT because of the prohibition under Section 204(C) of the 1997 Tax Code. As to your request for non-imposition of civil penalties on the ground that a voluntary tender of payment of the tax through the use of the TCC has been made, this Office finds no basis for the abatement of the civil penalties. Sec. 204 of the 1997 Tax Code clearly provides that the TCC cannot be applied against withholding tax payment. Furthermore, Section 2.33 of RR 3-98 provides that FBT is a final withholding tax. Hence, whatever interpretation the taxpayer has is of no moment considering that the provision of law, rules and regulations provide for its proper classification, i.e., final withholding tax. Applying the aforementioned provisions, payment in the form of TCC is not valid and to be considered as no payment at all. Bechtel, having failed to pay the tax on time, the penalties thereon should attach. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue