By: Cecile Maglunob-Pagaspas, CPA
The Covid-19 pandemic has significantly changed the landscape of the workforce from the typical corporate office setting to a work from home environment. Along with this, many companies have opted to work with digital freelancers instead of employing a regular employee to manage their business risk while it is still uncertain as to when this difficult time would end. Despite the savings and lower business risks of this set-up, business owners should bear in mind the related tax implications of their transactions with digital freelancers and should ensure to properly apply the rules on withholding tax for every payment made to them.
Revenue Regulation 11-2018 specifically states that “Persons engaged in the sale of computer services, computer programmers, software/program developer/designer, internet service providers, web page designing, computer data processing, conversion or base services and other computer related activities” are categorized as Other Contractors and payments made to them should be withheld with 2%.
You have contracted Mr. F, an IT programmer, to do your website for a contract amounting to PhP 1,000,000 (VAT exclusive). Based on your agreement, you have to pay 50% of the contract price upon contract signing and 50% upon completion.
Professional Fee (50%) PhP 500,000
Less: 2% Withholding Tax (10,000)
Net Payment PhP 490,000
Applying the rule, you should pay Mr. F an amount of PhP 490,000 on the first payment and remit to the BIR the PhP 10,000 as withholding tax on or before the 10th day of the following month. It should be included in your monthly remittance to the BIR using BIR Form 0619-E and quarterly reporting for expanded withholding tax using BIR Form 1601-EQ. The same principle applies when you pay the other part of the contract upon completion.
Failure to withhold the correct amount will expose the buyer of the service to tax penalties due to non-compliance. As a rule, the buyer is considered to be a withholding agent and the same should ensure that the amount entitled to the government is properly withheld and paid on the prescribed date. As an implication, the buyer will be penalized by the BIR for such failure wherein a surcharge of 25% on the amount due will be imposed or 50% on the amount due for the willful neglect of the rules. On top of that, an interest penalty of 20% per annum will be imposed which shall be computed from the date such amount is required to be paid up to the settlement date.
The BIR found out your failure to remit the required withholding tax on your payment to the IT programmer 12 months after the transaction.
Withholding tax due – Php 20,000
Surcharge Penalty PhP 5,000
Withholding tax due – PhP 20,000
Interest for 12 months 20% (12% under TRAIN)
Interest Penalty PhP 4,000
Total amount to be remitted to the BIR
Withholding Tax: PhP 20,000
Surcharge Penalty: 5,000
Interest Penalty: 4,000
Total Amount Due: PhP 29,000
Using the illustration above, you will end up paying a significantly higher amount to the tax authorities for such failure to withhold and remit the withholding tax.
How probable the tax authorities would catch you for such non-compliance? There is no definite answer for that question, but one thing is for sure, the BIR normally checks this area based on our observations no matter the size of the business entity.
Many would argue as well that a lot of business entities employing freelancers do not withhold taxes for the payments made. Unless you want to pay a significantly higher amount with the BIR when the time comes and be noted as one of those tax violators, then you are free to follow the same practice.
Our stand as professional accountants is always on the correct compliance and we highly encourage business owners to develop the same mindset to save their business from unnecessary penalties.
About the writer: Ces is the VP-Operations of Tax & Accounting Center, Inc. and the head of the Outsourcing Service of G. Pagaspas Partners & Co., CPAs, the affiliate accounting firm of Tax & Accounting Center, Inc. She is dedicating her professional practice on advocating proper Philippine Tax Compliance of MSMEs in the hope that these entrepreneurs will be able to save their businesses from unnecessary penalties due to non-compliance. For further inquiries and clarifications, feel free to email us at email@example.com.
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