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7 Features of Withholding Tax System in the

Philippines

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Withholding tax is the most basic tax type that each and every taxpayer engaged in trade or
business or in the practice of profession must learn. Upon registration of their respective

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business entities, withholding tax type is a must and it may come in three (3) tax types as sub
classifications as follows:
1. Expanded withholding tax (EWT) or Creditable withholding tax (CWT) under
monthly BIR Form No. 1601E and annual BIR Form No. 1604E with Alphalist of Payees;
2. Withholding tax on compensation (WC) under monthly BIR Form No. 1601C and part
of annual BIR Form No. 1604CF with Alphalist of Employees;
3. Final withholding tax (FWT) under monthly BIR Form No. 1601F and part of annual BIR
No. 1604CF with Alphalist of Employees/Payees;

Seminar Schedules
MAY 2014
May 15-16, 2014 - Basic
Business Accounting and BIR VAT
Compliance

To develop a deeper understanding of the withholding tax system in the Philippines, let us

May 23-24, 2014 - Basic

discuss some of its basic features.

Business Accounting and BIR Non

1. Automatic constitution of resident payor of income as withholding agents.

By force of the law, a Philippine resident payor of specific income payments are mandated by
law to withhold, whether he likes it or not. Non-resident foreign corporations and non-resident
alien payors are not included because of obvious logical reasons Philippine government does
not have jurisdiction over them, and could not run after in case of non-compliance. Specific
items of income payments are enumerated in the regulations and once the payment is made
upon such items, withholding taxes applies. Example, if a taxpayer pays a rental for its office
space, it is mandated to withhold 5% of the gross rental payment.

2. A system of advance collection of payees income tax liability

- VAT Compliance
May 30, 2014 - Withholding
Taxes, Subjects & Application
JUNE 2014
June 6, 2014- BIR Examination:
Their Procedures and Our
Defenses
June 19, 2014 - Compensation:
Computations and Must Know

What is withheld is the income tax liability of the payee upon actual payment or upon accrual.
Income tax returns are filed quarterly and annual and under pay-as-you-file system, income
taxes are paid upon filing. However, with the withholding tax, the government gets the income
tax on the 10 th day of the month following the month of payment or accrual, ahead of the
quarterly payment of payees income. Example, Company A pays Atty. A professional fees
amounting to P100,000 on January 2012 and the applicable withholding tax of 15% or P15,000
was withheld. Atty. A is required to file and pay quarterly income tax (BIR Form No. 1701Q) on
April 15, 2012, but, before he could file and pay, the government already collected in advance
the P15,000 that was remitted by A Company not later than February 10, 2012 (BIR Form
1601E).

3. Amount withheld is a trust fund for the government

Exemptions
June 27, 2014 - Value Added
Tax In and Out
JULY 2014
July 3-4, 2014 - Basic Business
Taxation Simplified
July 10-11, 2014 - Basic
Business Accounting and BIR VAT
Compliance

At provided in Section 57(A) of the Tax Code, the taxes deducted and withheld by the
withholding agent shall be held as a special fund in trust for the government until paid to the
collecting officers. The withholding agent, as trustee of the funds withheld cannot use the funds
in any other purpose, but should remit the same to the Bureau of Internal Revenue (BIR)

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through the authorized agent banks (AABs) or other payment facilities.

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4. Amount withheld is creditable or final income tax due of the payees.

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Expanded withholding tax rates are carefully studied and crafted to reasonably estimate
payees income tax liability depending on the industry type and nature of payment. This is the
reason why withholding tax rates are varying and is challenging to memorize for proper
application. Upon filing of quarterly and/or annual income tax of the payee, the amount
withheld will be deducted from its income tax liabilities and there would be fewer amounts due

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because of the withholding tax duly supported by creditable withholding tax certificates BIR
Form No. 2307/2316. On the other hand, final withholding taxes are the same rates imposed in
the Tax Code for specific payments. As such, they constitute full payment of payees income tax

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and no additional tax liabilities would arise under final withholding tax on top of the amount
withheld.

5. Check and balance mechanism

Monthly withholding tax returns of the payor attaches a monthly alphalist of payees (MAP) with
the details of the payee and the income payments the name address of payee, and the
amounts of income payment and corresponding tax withheld. When the payee files a quarterly
and annual income tax returns, it attaches the summary alphalist of withholding taxes (SAWT)
with the details of the payor and the income payment. With these reports, the BIR could easily
determine whether or not the payee declared the income payment, or whether or not the payor
correctly declared the expense. As such, this becomes an easy tool in the third party
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7 Features of Withholding Tax System in the Philippines > Tax and Accounting Center Inc. Tax and Accounting Center, Inc.

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information procedures of the BIR to catch up tax evaders.

6. A mandatory requirement for deductibility of an expense.

In effect, Section 34(K) of the tax Code, as amended, provides that if an expense is subject to

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withholding tax, it will not be allowed as a deduction for income tax unless it could be shown
that withholding taxes has been paid to the BIR. This explains why assessment of withholding
tax has a dual effect disallowance of expense deduction in income tax computation for failure

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to withhold, and assessment for withholding tax liabilities. Upon payment of withholding taxes,
the income tax assessment based on failure to withhold is automatically dropped.

7. Exclusive enumeration of items subject to withholding taxes.

Revenue Regulations 2-98, as amended, is the main regulation enumerating the income
payments subject to creditable withholding tax. Enumeration of expanded withholding tax
therein is exclusive and whatever is not included is deemed not subject to creditable
withholding tax. This means to say that as a rule, not all expenses are subject to withholding.
Exception to this rule is the rule on Top Twenty Thousand Corporation (TTC) or Top Five
Thousand Individuals duly selected and notified as such by the BIR. On top of those

Blog & Updates

Penalties for Failure to Pay Tax
Philippines
New 2013 Income Tax Returns
ITR Philippines
2014 Filing of Audited Financial
Statements with SEC Philippines

enumerated in Revenue Regulations 2-98, as amended, they are mandated to withhold on

Van and Car for Rent Philippines

income payments to regular supplies of goods 1% or of services 2%, and from casual

Requirements for BIR Tax

Exemption of Non-stock, Nonprofit in Philippines

purchases amounting to P10,000 in a single transaction.

Failure of the taxpayer to comply the obligation to withhold would expose a taxpayer-agent
with the following consequences:
Non-deductibility of a business expense for income tax computation for failure to withhold
until after payment of the withholding tax and related penalties;
Payment of the basic withholding tax that should have been withheld;
One-time surcharge of 25%, or 50% for willful neglect or fraudulent filing;
Interest on 20% on annual basis based on the basic withholding tax that should have been
withheld;
Compromise penalties ranging from P200 to P50,000 based on the amount of basic
withholding tax that should have been withheld;
Or worst, criminal prosecution and imprisonment for willful neglect or fraudulent filing of
withholding tax returns
You would not enjoy paying the above penalties, and wasting your hard earned money from
your business undertakings and simple ignorance of the above obligation. Its the proper time
now to educate and you have all the time and opportunity to do it before it is too late.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an
expert opinion. Please consult your preferred tax and/or legal consultant for the specific details
applicable to your circumstances.
Related Services
Quality Seminars, Trainings and Workshops. We conduct tax seminars and workshops on
withholding tax such as the following:
Withholding tax, Subjects and Applications - One day program once a month
Compensation, Computations and Must Know Exemptions - One day program once a
month
Tax Management and Compliance Consultancies. With our tax services, we can assist you
ensure tax compliance and in the management of such continuing compliance. Proper
compliance would bring about tax savings form avoiding being penalized to tax minimization
strategies. Likewise, we could assist you in securing a BIR ruling confirming the applicable tax
exemptions.(Post viewed 11374 times)
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Tags: Alphalist of employees, BIR Form No. 1601C, BIR Form No. 1601E, BIR Form No. 1601F, BIR Form No.
1604CF, BIR Form No. 1604E, BIR Form No. 2307, BIR Form No. 2316, BIR seminars 2012, creditable
withholding tax, expanded withholding tax, final withholding tax, MAP, SAWT, withholding tax, withholding tax on
compensation

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http://taxacctgcenter.org/features-of-withholding-tax-system-in-the-philippines/[6/4/2014 12:54:57 PM]

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7 Features of Withholding Tax System in the Philippines > Tax and Accounting Center Inc. Tax and Accounting Center, Inc.

TaxAcctgCenter says:
July 7, 2012 at 12:26 am

Seminar schedule on July 11, 2012 for Withholding Taxes, Subjects and Applications

Arwin says:
November 27, 2012 at 5:37 am

Hello,
If a company A (included in the Top 20,000) purchase goods from another company B (not
included in the Top 20,000), does company A need to withhold 1% to that purchase? thank
you very much.

TaxAcctgCenter says:
November 28, 2012 at 3:25 am

Yes Arwin. Top 20,000 buyers are required even if suppliers are not Tp 20,000.

Arwin says:
November 28, 2012 at 4:00 am

How about the other way around, Company B (not included in Top 20,000) p
Company A (Top 20,000)., does company B required to withheld? thank you

TaxAcctgCenter says:
November 28, 2012 at 7:25 am

Yes, required on specific expenses (e.g. 5% rental) only but the

supplier does not apply.

Mike says:
November 28, 2012 at 1:17 am

hi., regarding the inclusion to top 20,000 corporation, if a company satisfies atleast one of
the criteria for inclusion in the top 20,000 corporation under RR 14-2008, but not yet notified
by the BIR, is the company required now to withhold 1%/2% to their purchases? or will wait
until notify by the BIR? thank you and more power.

TaxAcctgCenter says:
November 28, 2012 at 3:23 am

It is not automatic Mike. BIR will notify the taxpayer and they will decide who will be
considered as a top twenty thousand corpporation.

Martin says:
November 28, 2012 at 8:28 am

hi to all, i have something to ask. our company is a non-vat registered entity, and have rent
to a vat registered entity., and as i read in other post, input tax will become part of cost, my
question is, what will be the basis of our 5 % withholding tax., the amount gross of VAT
(with input tax) or the amount net of VAT (before input tax)? thank you very much..
very informative website and keep updating us.. thank you.

TaxAcctgCenter says:
November 28, 2012 at 8:42 am

5% should be based on amount excluding VAT.thanks Martin.

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Christian Parone Teomera NDMC

Hello.. After the remittance of the expanded withholding tax from our
payment to a non resident alien not engage in trade in Phil, how
would we encode this to the alpha list data where there is a need to
put the TIN of the payee?
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