Tax Articles

What About Withholding of Local Taxes?

By Atty. Rodel C. Unciano

One of our readers has requested us to tackle on this space the possibility of implementing the withholding tax system in local taxation.

Under the government’s withholding tax system, payors of business transactions are constituted the withholding agents of the government, in which case, a portion of the income payments made is required to be withheld and remitted by the payor to the government.  As it stands now, for internal revenue tax purposes, almost all income payments are subject to withholding taxes, pursuant to existing revenue regulations.

Under the final withholding tax system, the amount of tax withheld by the withholding agent is constituted as full and final payment of the income tax due from the payee on said income. Being already full and final payment of the income tax due, the income recipient is no longer required to file an income tax return for that income.  On the other hand, under the creditable withholding tax system, taxes required to be withheld are intended to equal or approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return and apply as tax credit the taxes previously withheld by the income payors.

The withholding tax system is actually an effective tool in collecting taxes from the taxpayers, and as regards the creditable withholding tax system in particular, it actually helps the government in collecting taxes in advance from the taxpayers through the cooperation of the payors who are constituted as withholding agents.  The income payors, of course, will have to faithfully comply with their obligations as withholding agents for failure to do so would mean nondeductibility of their income payments as deduction against their income.

If the withholding tax system helps tax authorities in tax collection, can we therefore adopt the system in local taxation?

The answer seems to be in the negative.

For one, the withholding of local taxes is not authorized under the Local Government Code of 1991, which is the enabling law governing local taxation in the Philippines. There is, likewise, no provision of the LGC authorizing local government units (LGUs) to enact an ordinance authorizing the imposition of withholding tax on income payments. On the contrary, for national internal revenue tax, the withholding of tax on certain income payments is clearly authorized under the law, specifically under Section 57 of the Tax Code, as amended. For lack of statutory mandate, withholding of local taxes would not therefore be legally feasible.

Also, to my mind, withholding of local taxes seems to be very difficult to implement.  It would be difficult for LGUs to constitute income payors as their withholding agents, especially those income payors not within their respective territorial jurisdictions. It must be noted that for local tax purposes, each LGU is considered a taxing jurisdiction separate and distinct from other LGUs.   And income payors may come from other LGUs.  So, on the part of the LGUs, it would be very difficult to enforce withholding of tax to the income payors, especially in cases where the payors are not within their territorial jurisdictions.

On the part of the income payors, it would be very inconvenient for them to be remitting taxes withheld to different LGUs.  For internal revenue taxes, remittance of taxes withheld will only be made to one entity, which is the Bureau of Internal Revenue, specifically, to the Revenue District Office having jurisdiction over the income payor. For local taxes, it would not be proper to remit taxes withheld only to the LGU having jurisdiction over the income payor, as the income recipient could be under the jurisdiction of another LGU. At the very least, the tax withheld should accrue and should be remitted to the LGU having jurisdiction over the income recipient.

The withholding of local tax therefore is not likewise administratively feasible, a must requirement for a sound tax system.