Is the withholding tax system really effective?

ACCORDING to the Bureau of Internal Revenue (BIR), the withholding system is “considered an effective tool in tax collection” because it “encourages voluntary compliance”, “reduces the cost of the collection effort” , “prevents bad debts and loss of income,” and “prevents [a] period of drought in the fiscal conditions of the government by ensuring income throughout the taxable year.

In 2018, the BIR began distributing a list of “Principal Withholding Agents” or TWAs who are required to withhold taxes on purchases of goods and services. Additional listings continue to be released, including those delisted by the bureau or those previously listed as TWA and no longer required to hold.

If we are to assess the existing regulations, we can say that the selective process is becoming somewhat of a flawed tax collection tool. Let’s go back to the reasons listed by the BIR: It encourages voluntary tax compliance. The voluntary term may not work for the majority of business owners, especially during this pandemic, even though they are forced to withhold taxes. Regular suppliers and service providers who may not be aware of TWA regulations may no longer do business with customers if taxes are withheld. Withholding tax officers can either resort to gross payment to these income recipients and then assume the burden of remitting applicable withholding taxes just to comply with the requirement. Reduces the cost of the collection effort. In the government’s drive to collect more taxes through aggressive audit approaches, there is a need for the BIR to reconsider the cost versus the benefits of its tax collection efforts. Being selective about which taxpayers withheld from income recipients does not reduce the cost of collection efforts, as not everyone is required to comply. Prevents delinquencies and loss of income. The process of selecting and deleting taxpayers may not prevent delinquencies and loss of income. It is always possible that the payee and the payer agree not to report a particular transaction and that no lead is established. Prevents periods of drought in government fiscal conditions by providing income throughout the tax year. The train law triggered the drought by increasing the income tax exemption for wage earners to 250,000 pesos. While it is true that mandatory withholding by those listed as TWA can generate income throughout the tax year, one can only hope that these taxpayers correctly report the income of their suppliers or service providers. thanks to the correct application of withholding taxes.

In order for the withholding tax system to maximize its goal of effectively collecting taxes from employees, the BIR should consider requiring all taxpayers to withhold all their purchases of goods and services. In this way, reconciliation of income and expenditure is possible and a reduction in costs and tax collection efforts is achievable. Chapter. The views and opinions expressed in this article are hers.

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