Tax Rules: Penalties and violations to Philippine employers who fail to withhold income tax

Forvis Mazars shares a short guide for Philippine employers who are obligated to handle their employees’ withholding payroll taxes and their incurred penalties if the tax process is not done correctly.

Importance of Withholding tax and reaching out to service providers

In the Philippines, all employees must pay a certain amount of withholding tax on compensation every time their salaries arrive during payday. Meanwhile, employers are responsible for withholding payroll taxes and will be considered liable by the law if the process is not implemented correctly. Furthermore, tax rules mandate them to act as withholding agents for their employees’ withholding tax on compensation.

Employers often outsource to tax management firms like Forvis Mazars to make the process easier. Our tax managers can expertly compute and organise all your yet-to-be-paid tax requirements; we can even guide business owners on their business and advise taking the path that would minimise tax expenses and avoid tax penalties for the foreseeable future.

Withholding tax rules

Withholding rules were implemented in adherence to the Philippines Tax Code. These rules are placed in sections within the tax code and are explained in the information provided below:

• Tax Code Section 79(H) – states that employers must identify the tax due from each employee on taxable compensation income for the entire taxable year following the guidelines present in Section 24(A) of the Tax Code during or before the end of the calendar year, but not before the payment of the last compensation for the previous payroll period.The section then notes that the difference between the tax due to the employee and the accumulated amount of taxes withheld from January to November shall either be retained from their salary in December of the current year or be refunded to the affected employee no day later than January 25 of the following year.
• Tax Code Section 80(A) – explains that employers are liable for the withholding and remittance of the proper amount of tax that must be deducted and withheld.

Employer Duties

Employers are advised to follow the responsibilities given by tax authorities. If unable, they will be subject to penalties under Revenue Circular No.21-2010 if they cannot accomplish the following tasks.

• Withhold income taxes on compensation
• Remit withholding taxes on compensation
• Complete the year-end adjustments or annualisation
• Refund an employee’s excess withholding taxes or compensation

Violations of non-compliant Employers/Withholding Agents

A Philippine employer/withholding agent who in any way fails to meet with the provisions relating to withholding taxes on payment and its year-end adjustment can become subject to any of the following violations:

1. Non-withholding tax is given to an employer who fails to withhold the tax on the employee’s taxable income.
2. Under withholding is incurred when an employer could not correctly withhold the tax, which should be equal to the tax due of the employee for the taxable year.
3. Non-remittance is placed upon employers unable to remit the total amount withheld
4. Under remittance occurs when the employer fails to remit the total amount withheld correctly or when the total amount of remittance is less than the sum withheld.
5. Late remittance happens when an employer can remit the correct amount withheld but does so after the prescribed due date.
6. Failure to refund excess taxes withheld is handed to employers who fail or refuse to refund extra taxes to their employees.

Penalties to non-compliant Employers/Withholding Agents

The following are the applicable penalties given for non-compliance with active tax laws and regulations relative to withholding income tax:

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

• The surcharge under Section (Sec). 248 – Employers will be given a penalty equal to twenty-five percent (25%) of the amount due because of failing to file any return and pay the due tax following as required on the date given.If the employer is proven to have wilfully neglected to file the return within the period given, or if they made an intentionally false or fraudulent return, they will be given a penalty of fifty percent (50%) of the tax or the deficiency tax will be incurred, in case, any payment has been made based on such return before the discovery of the falsehood or fraud.
• Interest under Sec. 249 – An interest rate of twelve percent (12%) per annum on any unpaid amount of tax, from the date prescribed for payment until the amount is fully paid.
• Liability equal to the amount that should have been withheld under Sec. 251 – is implemented if a person required to withhold fails to account for and remit any tax imposed or intentionally fails to withhold the tax, or account for and pay the tax, or assist in any way to avoid any such tax payment will be, in addition to other penalties, be equally liable to a penalty equal to the amount of the tax not withheld, or not accounted for and remitted if proven guilty through a conviction.
• Liability equal to the amount refundable under Sec. 252 – is given to an employer/withholding agent who fails or refuses to refund excess withholding tax; it states that, in addition to other penalties, will become liable to a penalty equal to the total amount of refunds that were not refunded to the employees resulting from any access of the amount withheld over the tax due on their return.

Criminal Liabilities (Title X, Chapter II, III, & IV of the Tax Code)

1. Sec. 255 of the Tax Code – Occurs if an employer fails to pay the required to pay any tax, make a return, keep any record, or give out the correct and accurate information, or withhold, or remit taxes withheld, refund excess taxes withheld on compensation, at the time or times required by laws or rules and regulations shall, in addition to other penalties provided by law, upon conviction, will 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.
2. Sec. 256 of the Tax Code – This applies to corporations; it states that their penal liabilities, association, or general co-partnership liable towards any of the acts or omissions penalised under the Tax Code, in addition to the penalties imposed upon the responsible corporate partners, officers, or employees, will, upon being proved guilty for each act of omission, be punished by a fine of not less than Fifty thousand (P50,000) but not more than One hundred thousand pesos (P100,000).
3. Sec. 272 of the Tax Code – For involved public officers, 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, which includes the Banko Sentral ng Pilipinas (BSP), who is currently 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, will, upon being proven guilty for each 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.
4. Sec. 275 of the Tax Code – clarifies that anyone who violates any provision of the Tax 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 punishable by a fine amounting to no more than one thousand pesos (P1,000) or be imprisoned for no more than six (6) months, or both.”.
5. Revenue Memorandum Order No. 19-2007 – In certain instances following the guidelines of this order, a compromise penalty in place of criminal liability may be imposed and collected.

Non-deductible salaries expense for not withholding

• Section 34(K) of the Tax Code – In the Philippines, employees are commonly given compensation as a business expense and is deductible from gross income for income tax. But following the rules of this section, state that if an expense is subject to withholding and no withholding tax was made, the same is not allowed as a deduction for income tax purposes until the same has been completed.Because of this, another hefty penalty for employers not being able to withhold the withholding tax on compensation in the Philippines is added, which is the non-deductibility of such salaries expense for income tax purposes.

Tax services with Forvis Mazars

Managing every aspect of your company’s tax requirements can become overwhelming and negatively affect your operations if left unattended. Forvis Mazars computes tax rates, tax requirements, income taxes, and withholding taxes. Make tax management much easier by using the services of a trusted tax management firm. Other benefits we provide include dealing with employee payments and mandatory requirements from government institutions.