Penalties of Employer’s Failure to Withhold as Agent in Philippines

By: Tax and Accounting Center Philippines

As we are all aware, employees are being subjected to withholding tax on compensation in the Philippines every payday. Withholding of payroll taxes in the Philippines is the liability of the employer (individual engaged in trade or business, of a juridical entity like corporation) because the employer is automatically appointed by tax rules as withholding agent for the withholding tax on compensation in the Philippines. The following are the Tax Code provisions imposing such obligations:

• Section  80(A)  of  the  National  Internal  Revenue  Code  (Tax  Code),  as  amended, provides that the employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld.
• Section 79(H) of the Tax Code, provides that on or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of  the succeeding year.

Under Revenue Memorandum Circular No. 21-2010 (RMC No. 21-2010), the tax authorities reiterate the applicable penalties for employers who fail to do the following:

• withhold income taxes on compensation;
• remit withholding taxes on compensation;
• do the year-end adjustments or annualization; and,
• refund employees the excess withholding taxes on compensation

Failure to comply with the provisions relative to withholding taxes on compensation and its year-end adjustment may result in the following violations of the employer/withholding agent in the Philippines:

1. Non-withholding of tax – when employer fails to withhold the tax on the taxable income of the employee.
2. Underwithholding  –  when  employer  fails  to  correctly  withhold  the  tax  which should be equal to the tax due of the employee for the taxable year.
3. Non remittance – when employer fails to remit total amount withheld.
4. Underremittance – when employer fails to correctly remit total amount withheld or when the total amount of remittance is lesser than the total amount withheld.
5. Late remittance – when employer remits the correct amount withheld beyond the prescribed due date.
6. Failure to refund excess taxes withheld – when employer fails/refuses to refund excess taxes withheld to its employees.

The applicable penalties for non-compliance with the existing tax laws and regulations relative to withholding are as follows:

Additions to the tax (Title X, Chapter I of the Tax Code, as amended)

Surcharge under Sec.  248  –  a  penalty equivalent  to  twenty-five  percent  (25%)  of  the amount due for failure to file any return and pay the tax due thereon as required on the date prescribed; in case of willful neglect to file the return within the period prescribed, or in case a false or fraudulent return is willfully made, the penalty shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any payment has been made on the basis of such return before the discovery of the falsity or fraud.

Interest under Sec. 249 – interest at the rate of twenty percent (20%) per annum on any unpaid amount of tax, from the date prescribed for payment until the amount is fully paid.

Liability equal to amount it should have withheld under Sec. 251 – for failure of any person required to withhold, account for, and remit any tax imposed or who willfully fails to withhold such tax, or account for and remit such tax, or aids or abets in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties, be liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted.

Liability equal to amount refundable under Sec. 252– for failure or refusal of any employer/withholding agent to refund excess withholding tax shall, in addition to the penalties, be liable to a penalty equal to the total amount of refunds which was not refunded to the employee  resulting  from  any  excess  of  the  amount  withheld  over  the  tax actually due on their return.

Criminal Liabilities (Title X, Chapters II, III & IV of the Tax Code, as amended)

a.  Sec. 255 of the Tax Code– for failure of any person required to pay any tax, make a return,  keep  any  record,  or  supply  correct  the  accurate  information,  who willfully fails to pay such tax, make such return, keep such record, or supply correct and accurate information, or withhold or remit taxes withheld, or refund excess taxes withheld on compensation, at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but not more than ten (10) years.

b. Sec. 256 of the Tax Code – in the case of corporations, the penal liabilities of any corporation, association or general co-partnership liable for any of the acts or omissions penalized under the Tax Code, in addition to the penalties imposed upon the responsible corporate officers, partners, or employees shall, upon conviction for each act or omission, be punished by a fine of not less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000).

c.   Sec. 272 of the Tax Code – in case of public officers, the penalties imposed on every officer or employee of the Government of the Republic of the Philippines or any of its agencies and instrumentalities, its political subdivisions, as well as government-owned or controlled corporations, including the Bangko Sentral ng Pilipinas (BSP), who is charged with the duty to deduct and withhold any internal revenue tax and to remit the same is guilty of failing or causing the failure to deduct, withhold, remit, file withholding tax return or statement within the  time  prescribed,  shall,  upon  conviction  for  each  act  or  omission  be punished by a  fine of not less than Five thousand pesos (P5,000) but not more than Fifty thousand pesos (P50,000) or suffer imprisonment of not less than six (6) months and one (1) day but not more than two (2) years, or both.

d.  Sec. 275 of the Tax Code – provides that any person who violates any provision of the Code or any rule or regulation promulgated by the Department of Finance, “for which no specific penalty is provided by law, shall, upon conviction for each act or omission, be punished by a fine of not more than One thousand pesos (P1,000) or suffer imprisonment of not more than six (6) months, or both.”

e. In certain instances as provided under Revenue Memorandum Order No. 19-2007 a compromise penalty in lieu of criminal liability may be imposed and collected.

Non-deductible salaries expense for not withholding

No wonder, compensation to employees in the Philippines is a business expense and deductible from gross income for income tax in the Philippines. However, under Section 34(K) of the Tax Code, if an expense is subject to withholding and for which no withholding tax was made, the same shall not be allowed as a deduction for income tax purposes until the same has been made. As such, another notable penalty for not withholding by employers of withholding tax on compensation in the Philippines is non-deductibility of such salaries expense for income tax purposes.

Summary

In sum, compliance with withholding tax on compensation is a must to avoid the above penalties. A simple failure may waste employer’s money so compliance would be far better that failure to withhold taxes on compensation. Withholding tax on compensation rules may only take a while to learn and properly apply and cost of education is far cheaper than the above penalties.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at in**@ta************.org.