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CREATE’s amendatory provision on withholding tax

More than three years after the start of its legislative journey, and having undergone several rebrandings — from TRABAHO to CITIRA and now CREATE — the government’s second tax reform package has finally been ratified by Congress. Now touted as an economic relief measure rather than a fiscal reform, this tax reform package was originally intended to have a revenue-neutral effect. Under the proposed Corporate Recovery and Tax Incentives for Enterprises Act or CREATE, the corporate income tax rate is reduced to 25% (or 20% for small businesses), with tax incentives that are performance-based, time-bound, and transparent offered to targeted enterprises.

CREATE also includes timely measures intended to address the urgent need to combat the ongoing pandemic. Primarily, it provides a value-added tax (VAT) exemption on all drugs, vaccines, and medical devices specifically prescribed and directly used for the treatment of COVID-19, as well as capital equipment, spare parts, and raw materials necessary for the production of personal protective equipment components for COVID-19 protection from 2021 to 2023. Sadly, it appears that the personal protective equipment components themselves — N95 mask, coveralls, gown, gloves, etc. — are not exempt from VAT.

One particular amendment in CREATE that this author believes should warrant more attention is the amendatory provision to Section 57 of the Tax Code, which covers Withholding of Tax at Source. The amendment consists of the following sentence: The Department of Finance [DoF] shall review, at least once every three (3) years, regulations and processes for the withholding of creditable tax under this Code, and direct the Bureau of Internal Revenue [BIR] to amend rules and regulations for the same, should it be found during the review that the existing rules, regulations, and processes for the withholding of creditable tax under this Code adversely and materially impact the taxpayer.

Section 57 of the Tax Code is mainly implemented by Revenue Regulations (RR) No. 2-98 as amended (Consolidated Withholding Tax Regulations). While originally promulgated in 1998, this set of rules and regulations has been undergoing amendments for more than two decades. In more recent times, several RRs were issued after the TRAIN Law came to effect in 2018. The previous rule on the requirement for deductibility (Section 2.58.5 of the RR) was reinstated, also in 2018.

The current creditable withholding tax rules under Section 2.57.2 of the RR has 27 subsections, each imposing a different requirement to withhold creditable tax on certain income payments. The rates range from 1% to 15% (there’s even an effectively 0.5% rate for a transaction taxed at 1% computed on one-half of the income payment amount). Moreover, for the same type of income payment, there may be two tiers of rates that could apply, depending on the income level of the payee, among other conditions. Hence, knowing the correct rate is just as important as determining whether a transaction is subject to tax in the first place.

As to the rule on timing of withholding, Section 2.57.4 of the RR provides for the “paid, payable or accrued, whichever comes first” rule, which has not been updated since 2001. Particularly on the requirement to withhold upon accrual, this sometimes creates a timing mismatch, when a taxpayer withholds on the accrued expense, even though its supplier will only record the income upon billing, which could occur in the period after accrual. In this case, the income-earner may be constrained from claiming the income tax credit for being out-of-period.

On the certificate of taxes withheld (i.e., BIR Form No. 2307) requirement, although not expressly stated in the rules, in practice, taxpayers may strictly require originally issued certificates from their customers, for fear that the return could be disallowed if not supported by originals. This situation poses a compliance challenge, especially in a pandemic when many are still working from home.

With the aforementioned amendatory provision introduced by CREATE in mind, this author would like to offer a few suggestions specifically addressing some of the challenges with the current rules as explained above, with the end-goal of improving taxpayer compliance.

On the high number of prevailing tax rates, the DoF/BIR may consider reducing the number of applicable rates, without necessarily reducing the types of income subject to withholding tax. In principle, the creditable withholding tax system was designed with the intention of equaling or at least approximating the tax due of the payee on the income payment subject to tax. However, some of the rates may no longer be reflective of current economic conditions and profit margins, resulting in some taxpayers carrying significant excess creditable taxes, which are computed at their top line.

As for the rule on when to withhold, the inclusion of accrual in triggering withholding tax may be reconsidered. A simpler “paid or payable” rule would minimize instances when the timing difference between income and expense recognition of the payee and payor, respectively, could come into play. While this would consequently result in a timing difference between claiming the deduction (upon accrual) and withholding the tax (once billed and payable after the year of accrual), this may be less challenging to resolve, especially with the relaxation of rules under the reinstated Section 2.58.5 of RR 2-98.

As for the BIR Form No. 2307 requirement, the DoF/BIR may consider explicitly allowing soft copies of the form to give taxpayers peace of mind, both from a tax and a safety perspective, subject to necessary safeguards.

CREATE is the most integrated tax reform package since the 1997 Tax Code was enacted. It is arguably at its best form since it was originally conceptualized, and marks a great opportunity, for policymakers and taxpayers alike, to give our country a fighting chance in these less than certain times. I hope we all maximize this invaluable opportunity.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Marion D. Castañeda is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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