Philippine Supreme Court ruling in G&W Architects case sets dangerous precedent on shifting EWT burden to payee
The Supreme Court of the Philippines has ruled that the Bureau of Internal Revenue can assess deficiency expanded withholding tax directly against an income earner when its payors fail to withhold, even if the payor relied in good faith on the taxpayer's representations. The dissenting opinion warns
The Supreme Court of the Philippines, in its decision in Commissioner of Internal Revenue v. G&W Architects, Engineers, and Project Development Consultants Co. (G.R. No. 246026), has upheld the Bureau of Internal Revenue's (BIR) assessment of deficiency expanded withholding tax (EWT) directly against the income earner, G&W Architects, even though the legal duty to withhold rested on the payors — the unit buyers in the company's condominium projects. The case arose from the BIR's retroactive revocation of confirmatory rulings that had classified G&W Architects' Build-to-Own scheme as a non-taxable arrangement, after a field investigation revealed the scheme was a disguised pre-selling contract of sale.
The majority of the Court reclassified the arrangement from a contract for a piece of work to a contract of sale, holding G&W Architects liable for both documentary stamp tax and EWT. In addressing the EWT assessment, the majority acknowledged that withholding tax is normally remitted at source by the payor as a government collecting agent, but found that the unit buyers had relied in good faith on G&W Architects' representations that it was tax exempt. The Court therefore shifted the deficiency EWT liability to the income recipient.
The dissenting opinion, however, warned that this approach creates a dangerous precedent. Under Section 57(B) of the Tax Code, the legal obligation to withhold and remit EWT rests squarely on the payor, not on the income recipient. The dissent noted that EWT is merely an advance deposit toward the payee's final annual income tax; if the payee has already paid its corporate income tax in full, forcing it to pay deficiency EWT on the same income results in unjust double taxation without the benefit of a tax credit. The BIR made no finding that G&W Architects failed to pay its regular corporate income taxes.
The dissenting justice further argued that tax statutes are strictly construed against the government and liberally in favour of the taxpayer. Shifting the EWT burden to the payee because the payor acted in good faith sets aside explicit statutory liability and threatens to disrupt administrative tax enforcement. If the precedent is extended, the BIR could bypass withholding agents and assess deficiency EWT directly against income earners in other contexts, including cross-border payments to non-resident foreign corporations and separation pay to retrenched employees.
The decision also underscores the critical importance of securing and managing formal Certificates of Tax Exemption (CTEs) and confirmatory rulings from the BIR. Under Philippine tax practice, payors must withhold taxes on income payments unless the payee presents a valid, subsisting BIR CTE or ruling. A mere claim of exemption by a payee is legally insufficient. Tax practitioners and taxpayers must now prepare for the BIR to formalise this doctrine into audit guidelines, potentially assessing deficiency EWT directly against income earners rather than the statutory withholding agent.
Runell Alvyn V. Sarmiento, a manager from the Tax Advisory & Compliance practice area at P&A Grant Thornton, wrote that the government's remedy when it fails to collect EWT from statutory withholding agents lies against those agents, not against the payee under the guise of equity. If the State wants the power to hold income earners directly liable for unwithheld taxes in cases of misrepresentation, it must ask Congress to amend the Tax Code.
