What Happens When a Philippine Company Fails to Withhold Tax on Overseas Payments?

A Philippine company that fails to withhold tax on taxable payments to foreign businesses may become responsible for the unpaid tax, interest, and penalties imposed by the Bureau of Internal Revenue (BIR). Even if the foreign recipient has received full payment, the Philippine company may still have to settle the outstanding amount.

What are the financial consequences of failing to withhold tax?

A company may become liable for unpaid withholding tax if it fails to deduct the required amount, applies an incorrect rate, or claims tax treaty relief without meeting the necessary conditions.

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Failure to file a required withholding tax return or pay tax by the deadline can attract a 25 percent surcharge and interest generally calculated at 12 percent annually. Qualifying micro and small taxpayers benefit from reduced rates of 10 percent and 6 percent, respectively.

A 50 percent surcharge may apply when a company deliberately fails to file a required tax return or submits a fraudulent return. Serious, intentional violations may also lead to criminal penalties.

For example, suppose a Philippine subsidiary pays PHP 2 million (US$33,300) to its foreign parent company, and the payment is subject to a 25 percent withholding tax. The required withholding tax would be PHP 500,000 (US$8,300). If the subsidiary fails to deduct and remit this amount, it may become liable for the unpaid tax and applicable charges.

If the foreign parent has already received the full payment, the subsidiary may need to cover the tax using its own funds. Whether it can recover the amount depends on the payment agreement, including any provisions determining who bears the tax.

Does failure to withhold tax affect the deductibility of business expenses?

For taxable years beginning January 1, 2024, failure to withhold tax no longer automatically prevents a Philippine company from deducting the related expense when calculating corporate income tax.

The Ease of Paying Taxes Act removed the previous requirement to comply with withholding tax obligations before claiming certain business expenses as deductions.

An expense may remain deductible if it meets the normal tax requirements, even when the company failed to withhold tax, as clarified by the BIR in Revenue Memorandum Circular No. 60-2024.

For taxable periods before January 1, 2024, the previous rules remain relevant. The BIR may question deductions where the company failed to comply with the withholding requirements.

What happens when the BIR identifies unpaid withholding tax?

The BIR may identify unpaid withholding tax by comparing a company’s financial statements, accounting records, tax returns, and payments to foreign businesses.

During an audit, the BIR may request contracts, invoices, payment records, and documents supporting the withholding tax treatment applied. If the company used a reduced rate under a tax treaty, it may also need to demonstrate that the foreign recipient qualified for that rate.

Where the BIR identifies unpaid tax, it will generally issue a Preliminary Assessment Notice (PAN), giving the company 15 days to respond.

However, a PAN is not required in certain circumstances. For example, if a company deducted withholding tax but failed to remit the correct amount, the BIR may proceed directly to a final assessment.

If the matter remains unresolved, the BIR may issue a Formal Letter of Demand and Final Assessment Notice stating the amount it believes the company owes.

The company generally has 30 days from receiving the final assessment to challenge it through the BIR’s administrative protest process. Failure to respond within this period may cause the assessment to become final, allowing the BIR to pursue collection.

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An unresolved assessment may also affect an acquisition. A prospective buyer could identify unpaid withholding taxes during due diligence and require the liability to be settled or reflected in the purchase price.

How can a Philippine company correct a withholding tax failure?

A company should review the affected overseas payments, contracts, invoices, and accounting entries to determine whether withholding tax was required and how much should have been deducted.

The review should also establish when the withholding obligation arose, as tax may become due before the overseas payment is made.

If a reduced treaty rate is applied, the company should verify the foreign recipient’s eligibility and the supporting documentation.

For payments subject to final withholding tax, corrections may involve missing or amended BIR Form 0619-F for monthly remittances and Form 1601-FQ for quarterly reporting. The appropriate forms depend on the transaction and reporting period.

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Speak with our tax advisors to review your company's cross-border withholding tax obligations.

The company must settle the unpaid tax and applicable charges. If the BIR has already started an audit or issued an assessment, corrections should follow the applicable examination or assessment procedures rather than relying on an amended return alone.

Afterward, the company should reconcile its accounting records and retain evidence of the corrected filings and payments.

Where the review identifies repeated errors involving intercompany payments, the company should revise its payment and tax reporting procedures.

How Dezan Shira & Associates can assist

Dezan Shira & Associates, through its Philippine professional network, assists foreign-invested companies with withholding tax reviews, compliance corrections, and BIR assessments.

Businesses facing withholding tax liabilities in the Philippines can seek professional assistance from our tax advisory team.

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