CWT certificates: Tax savings in disguise

Just as blood circulates through the body to nourish and support vital organs, taxes flow into government coffers to fund essential public services such as health care, education and infrastructure. Without taxes – much like the absence of blood – a government cannot function and serve its people. While taxes are critical to a thriving society, it is natural for taxpayers to seek ways to minimize their tax burden and pay only what is necessary.

As the tax filing season approaches, many business owners may feel pressure from their tax liabilities. To reduce this liability, it is important to understand the exemptions and deductions available to one’s business.

However, many business owners focus primarily on deductions and overlook another powerful tool: tax credits.

Tax credits can significantly lower a taxpayer’s tax liability but are often underutilized. Unlike deductions, which reduce taxable income, tax credits directly reduce the amount of tax owed. After determining taxable income and applying any relevant deductions, tax liability is calculated as a percentage of the income after deductions. From that amount, any applicable tax credits are subtracted from the calculated liability, and the result is the final tax due.

One underutilized tax credit is the Certificate of Creditable Tax Withheld at Source (CWT Certificate or BIR Form 2307). Many taxpayers fail to recognize the value of these certificates, even though they can significantly reduce overall tax liability.

Revenue Regulations 02-98, as amended, outlines the rules for claiming CWT as a refund or tax credit. It states that the amount of creditable tax withheld can be used as a tax credit against the payee’s income tax liability for the taxable quarter in which the income was earned or received.

Additionally, this section stipulates that claims for a tax credit or refund of CWT on income payments will only be considered if it can be demonstrated that the income is included in the payee’s gross income, and if the withholding is supported by a copy of the withholding tax statement (BIR Form 2307) issued by the payor to the payee, clearly indicating the amount paid and the tax withheld. The withholding agent is responsible for providing proof of remittance.

While the regulation is clear, taxpayers often overlook its significance. The disallowance of CWTs remains a common issue in BIR tax audits, typically due to inadequate substantiation or improper documentation. CWT disallowances often arise from insufficient documentation, such as submitting copies instead of the original certificates – usually because the originals are missing or not preserved – or when the information provided is too vague. Other rejections stem from errors in the certificates themselves, with common issues including incorrect or missing details, such as the Taxpayer Identification Number (TIN), name, or address or the absence of the payor’s signature or that of their authorized representative.

Taxpayers should treat CWT certificates like they would a birth certificate or identification card – important documents that hold essential information that uniquely identify them. Just as a birth certificate must be accurate and precise, the information on CWT certificates must also be correct to establish entitlement to the tax credit.

Given these challenges, taxpayers must ensure that CWT certificates are fully and accurately completed, avoiding reliance on incomplete certificates. When engaging with payors, payees should establish clear expectations and insist on the inclusion of all necessary and accurate information in the CWT certificates. Failing to do so could lead to the disallowance of claimed CWTs and may result in the BIR imposing deficiency income tax during an audit.

Ellaine Jane Milca is an analyst from the Tax Group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Tax Analyst Ellaine Jane Milca or Tax Principal Manuel Salvador III through [email protected], social media or visit www.home.kpmg/ph.