Claiming a Tax Refund tax on withholding tax on compensation in the Philippines

21 December 2022
Mazars shares a short guide on defining and claiming a Tax Refund in the Philippines.

Taxes are mandated for every individual and entity operating in the Philippines, from the single individual to the largest enterprise; all must pay their due taxes as instructed by the Bureau of Internal Revenue (BIR). However, there are instances where some of these taxes are returned to the payer; these are called Tax Refunds. 

Tax refunds are defined in the country as “the excess payments a person has remitted from the government” occurring when taxes are overpaid. Owning property is among the most critical steps in establishing a business in the Philippines. Owning your base of operations will give your brand much-needed prestige; it may even attract attention from both customers and potential business partners. As such, as a business owner, it is imperative that you have a particular claim of title over your property that can be a basis for inferring possession. 

Tax Refund eligibility 

Annual tax refunds commonly originate from employers withholding the excess tax from their employee’s gross income (Salaries). Employees who become eligible for a tax depends on if their employers withhold too much tax when submitting their salaries. 

Discrepancies between an employee’s withholding tax and their actual withheld tax in the Philippines often appear due to several factors, one of which is the “transition to a new company” leading to excess taxation from their new employer. 

Taxpayers are defined in the Tax Code of the Philippines as “any person subject to tax on income.” Additionally, the supreme court states that a “person liable for tax” is now regarded as a “person subject to tax” and will henceforth be considered a “taxpayer..” In most cases, all taxpayers paying income tax are eligible for tax refunds, such as: 

  1. Employees 
  2. Registered businesses, including self-employed individuals, freelancers 
  3. Juridical Persons like Corporations and Partnerships. 

Requirements for filing Tax Refund 

Philippine law clarifies the requirements needed to file a tax refund or tax credit; these are the following:  

  1. A written claim for refund filed by the taxpayer with the official approval of the Commissioner 
  2. The submitted claim for refund must be in categorical demand for reimbursement 
  3. The pending refund claim must be filed no longer than two (2) years from the tax payment date or tax penalty date, regardless of any intervening factors. 

Availing of a Tax Refund claim 

There are two options for availing a tax refund depending on whether:   

  • The Employee qualifies for substituted feeling –  
    In cases like these, an employee has overpaid taxes without having control over their payments due to their employers filing their income tax return on their behalf. 
    Employees in situations like these are qualified for substituted filing. They do not need to apply for tax refunds since their employers will be the ones to return their excess tax payments in an automatic process called ‘year-end adjustments. 
  • The Employee is not qualified for substituted filing and business owners –  
    These taxpayers are mandated to file their taxes through their tax returns. These taxpayers include freelancers, licensed professionals, and self-employed individuals; all must submit evidence proving overpayment by presenting two withholding tax certificates, ‘BIR Form 2307’ for businesses and ‘BIR Form 2316’ for employees. 

The amount within the certificates will be considered as its ‘creditable withholding tax’ (CWT) for the entire year. Taxpayers whose tax dues are less than the certificate’s CWT are allowed the following options:  

  • Carry over the amount to the next taxable year to help pay the taxes of the succeeding year, or  
  • Avail a tax refund