SC: 'Withholding taxes = internal revenue taxes'

Withholding taxes are internal revenue taxes covered by Section 203 of the NIRC.

Under the existing Philippine withholding tax system, the withholding agent retains a portion of the amount received by the income earner. In turn, the said amount is credited to the total income tax payable in transactions covered by the Expanded Withholding Tax (EWT). On the other hand, in cases of income payments subject to Withholding Tax on Compensation (WTC) and Final Withholding Tax (FWT), the amount withheld is already the entire tax to be paid for the particular source of income. Thus, it can readily be seen that the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts as the government's agent for the collection of the tax in order to ensure its payment.[1]

As a consequence of the withholding tax system, two distinct liabilities arise — one for the income earner/payee and another for the withholding agent.

In Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue,[2] the Court explained that the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer — he is the person subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him — he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since the government's cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer.

Based on the foregoing, the liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him.The liability of the withholding agent is distinct and separate from the tax liability of the income earner. It is premised on its duty to withhold the taxes paid to the payee. Should the withholding agent fail to deduct the required amount from its payment to the payee, it is liable for deficiency taxes and applicable penalties. [3]

It is true that withholding tax is a method of collecting tax in advance[4] and that a withholding tax on income necessarily implies that the amount of tax withheld comes from the income earned by the taxpayer/payee.[5] Withholding tax assessments are NOT merely an imposition of a penalty on the withholding agent, and thus, withholding tax assessments are WITHIN the coverage of Section 203 of the NIRC.

The word "penalty" was used to underscore the dynamics in the withholding tax system that it is the income of the payee being subjected to tax and not of the withholding agent. It was never meant to mean that withholding taxes do not fall within the definition of internal revenue taxes, especially considering that income taxes are the ones withheld by the withholding agent. Withholding taxes do not cease to become income taxes just because it is collected and paid by the withholding agent. (G.R. No. 211289, January 14, 2019)

Section 203 of the National Internal Revenue Code (NIRC) provides for the ordinary prescriptive period for the assessment and collection of taxes, to wit:
SEC. 203. Period of Limitation Upon Assessment and Collection. — Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.
On the other hand, Section 222(a)[18] of the NIRC provides for instances where the ordinary prescriptive period of three years for the assessment and collection of taxes is extended to 10 years, i.e., false return, fraudulent returns, or failure to file a return. In short, the relevant provisions in the NIRC concerning the prescriptive period for the assessment of internal revenue taxes provide for an ordinary and extraordinary period for assessment.


The CIR ERRONEOUSLY argued that the prescriptive period under Section 203 of the NIRC does not apply to withholding agents such as La Flor. It explained that the amount collected from them is not the tax itself but rather a penalty. The CIR pointed out that the provision of Section 203 of the NIRC only mentions assessment of taxes as distinguished from assessment of penalties. It highlighted that La Flor was made liable for EWT and WTC deficiencies in its capacity as a withholding agent and not in its personality as a taxpayer.

In response, the Supreme Court said: "Withholding taxes are internal revenue taxes covered by Section 203 of the NIRC."

[1] LG Electronics Philippines, Inc. v. Commissioner of Internal Revenue, 149 Phil. 155, 181 (2014).

[2] 672 Phil. 514, 528-529 (2011).

[3] G.R. No. 211289, January 14, 2019.

[4] Filipinas Synthetic Fiber Corporation v. Court of Appeals, 374 Phil. 835, 841 (1999).

[5] Philippine National Bank v. Commissioner of Internal Revenue, 562 Phil. 575, 582 (2007).

[6] G.R. No. 211289, January 14, 2019.