As 2015 drew to a close, the concern regarding the withholding of taxes on accrued yearend bonuses payable to employees became more compelling. The deductibility of these accrued expenses and the withholding tax thereon are among the routine issues raised during tax examinations. While bonuses are accrued in the books at yearend and claimed as deductible expense during the year of accrual, the bonuses are usually paid to the employees and the corresponding withholding taxes are remitted the following year. In such cases, the Bureau of Internal Revenue (BIR) frequently questions the tax deduction claimed by the employers on the ground of failure to withhold at the time of accrual.
In the case of ING Bank (Bank) vs. Commissioner of Internal Revenue (CIR) promulgated on 22 July 2015, the Supreme Court (SC) ruled that the obligation of the payor/employer to deduct and withhold the related withholding tax arises at the time the income was paid, accrued, or recorded as an expense in the payor’s/employer’s books, whichever comes first.
In the said case, the Bank was held liable for withholding tax on bonuses it claimed as expenses in the year these were accrued. The Bank insisted that the bonus accruals in the years 1996 and 1997 were not subjected to withholding tax because the bonuses were actually distributed only in the succeeding years when the amounts were finally determined.
The SC struck down the contention of the Bank stating that the absolute accuracy in the determination of the amount of compensation income is not a prerequisite for the employer’s withholding obligation to arise. The rules require that the employer deduct and pay the tax on compensation paid to its employees, either actually or constructively.
Notwithstanding the SC ruling in the ING Bank case, the Court of Tax Appeals also recognized, in the 30 April 2015 case of Ace/Saatchi & Saatchi Advertising vs. CIR, albeit merely in passing, that the tax on compensation should be withheld when the accrued compensation was actually paid and the related withholding tax remitted in the same year of payment.
Section 2.83.6 of Revenue Regulations No. 2-98 provides that in order to be constituted as constructive payment, the compensation must be credited or set apart for the employee without any substantial limitation or restriction as to time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn upon at any time, and its payments brought within his control and disposition. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with a bonus stock, which is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute payment. And in which case, the obligation to withholding tax does not follow.
Although the SC has already settled the question on when taxes should be withheld on accrued bonuses, the actual implementation of this interpretation leaves not only the employers, but also the employees, in more uncertain terms than before. The consequent question of when these payments are recognizable as income on the part of the employee (i.e., year of accrual by the employer, or at the time of actual payout to the employee) surfaces.
In the event that the actual bonus paid is different from the amount previously allocated, the employees’ prior eligibility for substituted filing will be negated depending on whether the actual payout and the tax due thereon is less than or more than the accrued amount. While it is recognized that employees are required to report and pay the difference between the actual tax due and the tax withheld from their income, will the employees be penalized for late filing of their individual income tax returns if the bonus payout occurs after April 15 following the year of accrual?
Similarly, will the employer be penalized for inability to refund any overwithheld tax if the actual bonus payout and amount overwithheld are determined after the deadline to do the refund by January 25 of the following year? When the amount of bonus accrued is not yet apportioned per employee, how will the employer compute and withhold the taxes given that the employees are under different income tax brackets? Supposing that there exists a reasonable allocation of the bonus per employee, will such estimated amounts and the related taxes withheld be required to be reported on the employees’ BIR Form 2316 in the year of accrual? Barring issuance of any letter of authority from the BIR, will the bonus be allowed as a deductible expense in the year of accrual if the employer paid the withholding taxes, with penalties, in the subsequent year?
Lest be subjected to penalties, employers are for sure eager to comply with the intricacies of our withholding tax laws. With the cheeky question of “Where do our taxes go?” set aside, employees are left with the burden of paying their tax liabilities with the inevitable fines. Without the corresponding implementing rules or circulars from the BIR, the SC’s ruling is a bitter pill to swallow as it leaves both the employer and the employees with more questions than ever.
Atty. Maricel Alisuag is a Manager with the Tax & Corporate Services Division of Navarro Amper & Co., the local member practice of Deloitte Touche Tohmatsu Ltd., a UK private company limited by guarantee (DTTL). Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. It has more than 210,000 professionals worldwide, including those in Deloitte Southeast Asia Ltd., which covers Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.