A retreat to the antiquated ITR filing system?

It has long been practiced and accepted that that the Employer’s Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) substitutes for the Income Tax Return (ITR) of its employees. BIR Form No. 1604-CF, indeed, has all the information required to be reported in the employee’s ITR (BIR Form No. 1700). This system commonly known as “substituted filing” has given millions of qualified employees a welcome reprieve in the filing of ITR with the BIR.

Revenue Memorandum Circular (RMC) No. 01-03 provides the conditions for substituted filing, namely: (a) the employee receives purely compensation income (regardless of amount) during the taxable year; (b) the employee receives the income only from one employer in the Philippines during the taxable year; (c) the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; (d) the employee’s spouse also complies with all three (3) afore-stated conditions; (e) the employer files the annual information return; and (f) the employer issues BIR Form No. 2316 (Certificate of Compensation Payment/Tax Withheld) to each employee.

Individuals not qualified for substituted filing are likewise enumerated in RMC No. 01-03, as follows: (a) individuals deriving compensation income from two or more employees, concurrently or successively at anytime during the taxable year, (b) employees deriving compensation income, regardless of amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to a collectible or refundable return, (c) employees whose monthly gross compensation income does not exceed five thousand pesos (P5,000) or the statutory minimum wage, whichever is higher, and opted for non-withholding of tax on said income, (d) individuals deriving other non-business, non-profession-related income in addition to compensation not otherwise subject to final tax, (e) individuals deriving purely compensation income from a single employer, although the income of which has been correctly subjected to withholding tax, but whose spouse is not entitled to substituted filing and (f) non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income or compensation income and other business or profession related income.

As mentioned earlier, employees qualified for substituted filing, need not accomplish and file an ITR. On the other hand, employees not qualified for substituted filing will have to file their Annual ITR (BIR Form No. 1700).

In lieu of the ITR, qualified employees can present the BIR Form No. 2316 issued to them by their employer should they be required to present an ITR (as proof of financial capacity for purposes of loan, credit card, or other application; as proof of payment of tax or for availing tax credit in the employee’s home country; in securing travel permits and travel tax exemptions when necessary or; for other purposes to meet the requirements of various government/private agencies).

Unfortunately, in a surprising turn of events, the BIR issued Revenue Regulations (RR) No. 11-2013 dated May 20, 2013 requiring employers, starting taxable year 2013, to file with the BIR the BIR Form No. 2316 issued to employees qualified for substituted filing. Under the said regulations, the employer should furnish each employee with the original copy of the BIR Form No. 2316 on or before Jan. 31 of the succeeding calendar year, or if the employment is terminated before the close of the calendar year, on the day on which the last payment of compensation is made. The duplicate copy of the BIR Form No. 2316, on the other hand, should be filed by the employer with the BIR not later than Feb. 28 following the close of the calendar year.

 The rug under the feet of employers is suddenly pulled by this issuance. With the implementation of RR No. 11-2013, even employees qualified for substituted filing are now required to file their ITR (BIR Form No. 2316 is practically the same as BIR Form No. 1700) with the BIR through their employers.  Effectively, the BIR is getting rid of the substituted filing system, and going back to the old days requiring individual taxpayers to file their ITR with the BIR.

Undoubtedly, the issuance of RR No. 11-2013 aggravates the tax compliance burden of employers. Nevertheless, employers must comply with this new issuance of the BIR, otherwise, they will be penalized. RR No. 11-2013 provides that any employer or withholding agent, including the government or any of its political subdivisions and government owned and controlled corporations (GOCC), who/which fail to comply in filing the BIR Form No. 2316 within the time required will be held liable under Section 250 of the Tax Code. Said section states that, “in case of each failure to file an information return, statement or list, or keep any record, or supply any information required by this Code or by the Commissioner on the date prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall, upon notice and demand by the Commissioner, be paid by the person failing to file, keep or supply the same, One thousand pesos (P1,000) for each such failure: Provided, however, That the aggregate amount to be imposed for all such failures during a calendar year shall not exceed twenty-five thousand pesos (P25,000)”.

Moreover, should employers, including the government or any of its political subdivisions or GOCCs fail to file the BIR Form No. 2316 for two (2) consecutive years, they will be penalized in accordance with Section 255 of the Tax Code. Said section provides that, “any person required under this Code or by rules and regulations promulgated thereunder to pay any tax, make a return, keep any record, or supply correct and accurate information, who willfully fails to pay such tax, make such return, keep such record, or supply such 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”. In addition, should the employer or withholding agent wish to settle this situation, the compromise fee shall be one thousand pesos (P1,000) for each BIR Form No. 2316 not filed and this is without any threshold.

Thus, compliance with RR No. 11-2013 should not be taken lightly. Non-compliance could result in substantial penalties and fines. Moreover, responsible officers of companies (private or public) could face imprisonment for violations of RR No. 11-2013. In the cases of Mendez vs. People of the Philippines, C.T.A. En Banc Criminal Case Nos. 014 & 015, Dec. 11, 2012 and Kintanar vs. People of the Philippines, C.T.A. En Banc Criminal Case No. 012, May 7, 2012, the individual taxpayers (accused) were sentenced to imprisonment because of failure to file a return in violation of Section 255 of the Tax Code.

We understand that the BIR is doing its best to improve the tax compliance of taxpayers to improve tax collection. Unfortunately, we do not see how the issuance of RR No. 11-2013 will improve the tax collection efforts of the BIR.

Mark Nette E. Concepcion is a supervisor from the tax group of Manabat Sanagutin & Co. (MS & Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected]