Law Summary
Nature and Effect of Final Withholding Tax
- The final withholding tax acts as a procedure for collecting income tax on particular income.
- Once withheld and remitted by the payor, the income earned need not be declared again by the recipient for income tax purposes.
- The income recipient is exempted from further income tax payments on that income after withholding.
Continued Applicability of Percentage Tax
- Despite final withholding tax, the income including the withheld amount remains subject to percentage (gross receipts) tax if applicable.
- The gross receipts tax base includes both:
- The amount actually received by the taxpayer.
- The amount constructively received, i.e., the withheld tax amount credited against the recipient’s income tax liability.
Tax Base and Constructive Receipt Doctrine
- Gross receipts tax is computed on the amount of income actually or constructively received during the taxable period.
- Constructive receipt includes income represented by the final withholding tax withheld and remitted by the payor.
- This means the gross receipts tax base is the gross income before deduction of the withholding tax.
Application to Financial Institutions
- In the case of banks or finance companies earning interest income or discounts on government securities and deposit substitutes:
- Interest income subject to a 20% final withholding tax is still subject to gross receipts tax computed on the gross amount before deduction.
- The gross receipts tax under Sections 121 and 122 of the Tax Code is imposed on the full gross interest income inclusive of withholding taxes.
Administrative Guidance
- All internal revenue officers and employees are directed to widely disseminate this interpretation to ensure uniform compliance.
- The circular was adopted on November 14, 2002, by the Commissioner of Internal Revenue Guillermo L. Parayno, Jr., for clarifying the proper tax treatment of gross receipts and final withholding tax.