Abstract

Chapter 1: Problem Background of the Problem Statement of the Problem What is the Net Income effect of Rev. Reg. No. 2-98 disallowing the deductibility of business expenses for failure to withhold withholding taxes. Objectives of the Study 1. To determine whether Rev. Reg. No. 2-98 is constitutional with regard to its retroactive effect. 2. To determine the effect of Rev. Reg. No. 2-98 on covered business entities, specifically with regard to Net Income effect and Double (or more) Taxation. Theoretical or Conceptual Framework Research Hypotheses

Significance of the Study Scope and Delimitations Definition of Terms

Chapter 2: Review of Related Literature Overview Present literature on development of interest in the topic Present literature on dependent variable/s Present literature on independent variables Present literature on relationships among variables Provide synthesis of literature leading to need for present study Review of Related Literature In discussing the importance of taxes, legal scholars often quote the 1988 decision of the Supreme Court, which described the same as the lifeblood of the government.1 Hence, the imperative that taxes should be calculated and collected without unnecessary hindrance. In fact, because of its importance in government operations, enforcement and collection of taxes is normally summary in nature. Even the concept of due process of law under the
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Commissioner of Internal Revenue v. Algue, 1988

Constitution admits of a modified interpretation in relation to taxation, where a question of the propriety of a tax assessment or exemption will always be interpreted in favor of the government and against the taxpayer.

Taxation is a necessary attribute of sovereignty and is therefore inherent in the State. The rationale of taxation lies in the symbiotic relationship that exists between the government and taxpayers in a civilized society: taxpayers pay taxes which government then uses to operate and provide citizens with certain benefits, privileges, and protection. As in any symbiotic relationship, fair dealing between the government and the taxpayer is of paramount importance. Thus, while the governments power to tax is limitless, such power should never be exercised so arbitrarily as to result in the destruction of the taxpayer. Taxes have to be enforced but it should not be an obstacle to business growth and economic development.

Under the withholding tax system, payments made for certain goods and services as enumerated in BIRs Revenue Regulation No. 2-98 are subject to withholding taxes. As such, taxpayers purchasing these goods and services are required to deduct an amount corresponding to the applicable withholding tax from final payments to be made for said goods and services. The taxpayer-payor is then required to remit the amount deducted and withheld to the BIR. The payor may then claim a deduction for the goods and services as a proper business expense. The taxpayer-payor is also required to issue to the seller of the goods or services (taxpayer-payee) a Certificate of Income Tax Withheld in order for the taxpayer-payee to be able to claim the proper deduction from its income tax payable. The concept seems simple enough until the taxpayer-payor fails to withhold or fails to remit the tax withheld to the BIR. The nightmare then begins. The expense for which there was failure to withhold or failure to remit becomes non-deductible unless, upon assessment or audit investigation by the BIR, the taxpayer-payor (1) pays the withholding tax with interest at 20% per annum; (2) in certain cases, pay a surcharge of 25% to 50% of the basic tax due; and (3) in case the tax not withheld exceeds P1,000,000, pay a compromise penalty of up to P25,000. Whether failure to withhold was intentional or not, the taxpayer-payor may very well end up paying triple of what was due in the first place. This is regardless of the fact that the taxpayer-payee may have most likely already paid the income tax due on the same transaction because absent the Certificate of Income Tax Withheld, said taxpayer-payee may not claim a deduction therefor from its income tax payable. Therefore, taxes for one and the same transaction are paid twice. This makes the withholding tax system a gold mine for government. Not only are they able to collect

taxes and penalties, they are also able to save on the cost of collecting taxes by designating private sector businesses as tax collection agents.

It is the governments duty to collect taxes. By designating private individuals and businesses as tax collection agents (withholding agents), the government is able to keep tax collection costs to a minimum at the expense of withholding agents. Aside from the burden of incurring additional costs to train its accounting staff, withholding agents get penalized in the event that they fail to fully comply with the withholding obligation imposed upon them. This is true even in cases where the rules are unclear, or withholding is not possible due to causes beyond the withholding agents control.

Apparently not content with the hardship they have foisted upon taxpayers-withholding agents, the BIR recently issued Revenue Regulation No. 12-2013 which disallows deductions for expenses where it is shown that the applicable withholding taxes had not been withheld. Thus, even though the taxpayer-payor or withholding agent pays the withholding tax deficiency upon assessment or audit investigation together with the corresponding interests and charges, the same shall be disallowed for deduction as business expense. The severe consequences of failure to withhold for whatever reason is that (1) deficiency withholding taxes with corresponding interests and charges from the withholding agent; (2) income tax from the taxpayer-payee; (3) and income tax on the disallowed expense deduction from the withholding agent are collected are collected by the BIR. All the foregoing emanate from a single transaction.

The nature of regular business expenditures such as petty cash expenses, representation expenses, gasoline expenses, administrative expenses, and other reimbursable expenses make it impractical and unduly burdensome for withholding agents to withhold taxes on every expense incurred by their officers or employees. Worse, it boarders on the absurd to have each and every officer or employee carry around withholding tax certificates so they may withhold taxes each time they incur expenses. Granted that companies can resort to issuing corporate credit cards in order to shift the burden of withholding to credit card companies, it cannot very well issue corporate cards to every rank and file employee. Also, not all expenses may be payable by credit card.

Under the withholding tax system, private individuals and businesses who are taxpayers and withholding agents at the same time are saddled with having to dedicate resources in order to comply with withholding tax obligations; in the event of failure to comply even

through no fault of their own they are heavily penalized; and the expenses incurred for the burdensome compliance, in case of failure to fully comply, are not deductible.

Based on the foregoing, the further research on the following is recommended: 1. The history of the withholding tax system in the Philippines; specifically on established practice or implementation vis--vis Revenue Regulations and Commissioners Rulings. 2. The net income effect of disallowance: single transaction effectively subject to income tax three times. 3. The withholding tax system of the U.S. Internal Revenue Service and the system for refund of excess taxes paid as a basis for comparison with the Philippine withholding tax system. 4. The existence or lack of a system for refund of excess taxes paid in the Philippines.

Chapter 3: Methodology Research Design Population and Respondents Entities Required to Withhold: 1. Income payments to professionals 15% (10% if annual gross income from all sources does not exceed P720,000 reqd: sworn declaration of gross income stamped recd by BIR). 2. Top 20,000 private corporations required to withhold (as notified by BIR) 1% for goods, 2% for services. 3. Income payments to contractors 2%. (limited to: general engineering contractors, general building contractors, specialty contractors, contractors per BIR enumeration) 4. Sampling Design Measurement and Instrumentation Research Procedures Data Analysis Assumptions of the Study Methodological Limitations

References: Commissioner of Internal Revenue v. Algue L-28896 (1988) Luzon Stevedoring Corp. v. Court of Tax Appeals L-30232 (1988) Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd. G.R. No. 68252 (1995) Devesa, Rolando. Final and Creditable Withholding Taxes. Punongbayan & Araullo (2009). 3 October 2013 http://www.punongbayanaraullo.com/pnawebsite/pnahome.nsf/section_docs/RI015W_4-9-09 Figueroa, Lina. Of Withholding Taxes and Penalties. Punongbayan & Araullo (2011). 3 October 2013 http://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/US626Q_31-5-11 Serrano, Jenny. Severe Consequences of Failure to Withhold. Punongbayan & Araullo (2013). 3 October 2013 http://www.punongbayanaraullo.com/pnawebsite/pnahome.nsf/section_docs/VN754O_27-8-13