The paper discusses the historical background of the withholding tax system in the Philippines as well as the trends in withholding tax collection and notes that it improves the revenue intake of the government. It also discusses the present withholding tax system on individual taxpayers and identifies the abuses and leakages that weaken the system and recommends ways to strengthen it.
The withholding tax system or the method of collecting the tax in advance or upon the receipt of income by the tax authority is an important feature of the income tax administration in the Philippines. Among the advantages of this scheme are: 1) it makes tax administration more efficient by improving the collection of tax revenues; 2) it encourages tax compliance and minimizes tax evasion and avoidance practices; 3) it relieves the taxpayer from financial difficulties in raising the entire amount of tax when it falls due; and 4) it provides the government a continuous cash flow to finance its services.
The government has adopted several administrative measures to strengthen the withholding tax system. For one, the BIR has established ties with national government agencies (NGAs) and local government units (LGUs) for the prompt remittance of withholding taxes. In 2000, a Memorandum Agreement (MOA) was signed with NGAs in collaboration with the Department of Finance (DOF), the Department of Budget and Management (DBM) and the Commission on Audit (COA). Consequently, DOF-DBM-COA Joint Circular No. 1-2000 was issued on January 3, 2000 setting the guidelines in the use of the Tax Remittance Advice (TRA) as a new mode of payment for taxes withheld by NGAs. Revenue Memorandum Order (RMO) No. 16-2000, on the other hand, implemented the said Joint Circular providing for the policies and procedures for the processing and monitoring of withholding tax payments from NGAs. This was later amended by RMOs 27-2001 and 02-2007. Also, Revenue Memorandum Circular (RMC) No. 21-2001 was issued with the following objectives: 1) increase tax collections by increasing the taxpayer base and collecting internal revenue taxes from concerned taxpayers; 2) implement continuing tax campaign programs in order to increase the level of tax compliance as well as for the fast, efficient and courteous delivery of service to the taxpaying public; 3) recognize the importance of a collaboration effort among the concerned groups in meeting the national and local tax collection targets; and 4) to ensure compliance by all LGUs with the pertinent provisions of internal revenue tax laws, rules and regulations. Finally, RMO 13-2006 was issued to ensure the efficient compliance by designated withholding agents in the LGUs with existing withholding tax laws, rules and regulations and other related issuances and to ensure the efficient implementation and monitoring of monthly withholding tax collections from LGUs.
The paper notes, however, that despite the withholding tax system’s substantial contribution in facilitating tax compliance, it still suffers from weaknesses that diminish its role as an effective tax collection mechanism. There is still a significant amount of potential income taxes from individual taxpayers. This may be attributed to the following weaknesses in the present withholding tax system: 1) non-collection or non- remittance of withholding tax by employers/withholding agents; 2) non-reporting of multiple employment income of certain individuals; 3) fictitious claims of personal and additional exemption allowances and premium payments on health and/or hospitalization expenses; 4) non-filing of returns among self-employed individuals; and 5) irregularities in the claims for tax credits.
The withholding tax system upon receipt of income as institutionalized is an effective and convenient means to facilitate the collection and payment of taxes. With the withholding tax system, the tax evasion and avoidance practices particularly of compensation income earners have been kept minimal.
