I.

Importance of Withholding Taxes

Withholding tax is a method of collecting income tax in advance from the taxable income of the
recipient of income. Thus, if the income of the recipient is exempt from income tax, no
withholding of tax is required to be made by the payor of such income, which is constituted as a
withholding agent.
The withholding of income tax on compensation income, on certain income payments made to
resident taxpayers, and on income payments made to non-resident taxpayers is very important for
all taxpayers, because the obligation to withhold and remit the tax is mandatory and prescribed by
law. Also, expenses that are subject withholding tax are disallowed by revenue officers as
deductions from gross income of the taxpayer.

II.

Types of Withholding Taxes

a) Final Withholding Tax
Under the final withholding tax system, the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due from
payee on the said income. Instances when the income is subject to final withholding taxes
are listed in Sec.57(A) of the Tax Code. The liability for payment of the tax rests
primarily on the payor as a withholding agent. The finality of the withholding tax is
limited only to the payees income tax liability on the particular income. It does not
extend to payees other tax liability on said income, such as when the said income is
further subject to a percentage tax, such as gross receipts tax in the case of a bank.
b) Creditable Withholding Tax
The Secretary of Finance may, upon the recommendation of the Commissioner, require
the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof,
which shall be credited against the income tax liability of the taxpayer for the taxable
year.
Under the creditable withholding tax system, taxes withheld on certain income payments
are intended to equal or at least approximate the tax due of the payee on said income. The
income recipient is still required to file an income tax return, as prescribed in Sec. 51 and
52 of the Tax Code, to report the income and/or pay the difference between the tax
withheld and the tax due on the income. Taxes withheld on income payments covered by
the expanded withholding tax and compensation income are creditable from the ordinary
income tax of an individual or a corporation.
1. Types of creditable withholding taxes

 Expanded withholding tax on certain income payments made by private

persons to resident taxpayers;
Withholding tax on compensation income for services done in the
Philippines; and
Withholding tax on money payments of the government.
2. Conditions that must concur in order to be subject to the expanded withholding
tax
i.

An expense is paid or payable by the taxpayer, which is income to the

ii.
iii.

recipient thereof subject to income tax;

The income is fixed or determinable at the time of payment;
The income is one of the income payments listed in the regulations that
is subject to withholding tax, unless the payor of the income is a Top
20,000 Corporations or Top 5,000 Individual, where the regulations
require the withholding of the creditable income tax on purchases of
goods or services from regular suppliers, regardless of amount, or from

iv.

irregular suppliers, where the amount is P10,000 or more;

The income of the recipient is a resident of the Philippines liable to

income tax; and

v.
The payor-withhholding agent is also a resident of the Philippines.
3. Persons exempt from the creditable withholding tax
i.
National government and its instrumentalities, including provincial, city
ii.

or municipal governments and barangays, except GOCCs;

Persons enjoying exemption from payment of income taxes pursuant to
the provisions of any law, general or special, such as but not limited to
the following:
a. Sales of real property by a corporation which is registered with
and certified by HLRUB or HUDCC as engaged in socialized
housing project where the selling price of the house and lot or
only the lot does not exceed P400,00.00;
b. Corporations registered with the BOI, PEZA and SBMA,
enjoying exemption from income tax under E.O.226, RA 7916,
and RA 7227, respectively;
c. Corporations which are exempt from under Sec. 30 of the Tax
Code, Such as SSS, GSIS, and PHIC;
d. General professional partnerships;
e. Joint ventures or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating

or consortium agreement under a service contract with the

f.

government; and
Revenues derived from carriage of persons, cargo or mail
originating from the Philippine up to final destination, paid to
international shipping line or through its shipping agent in the
Philippines, subject to the 2.5% final on Gross Philippines
Billings.

III. Persons constituted as withholding agents:

1
2

In general, any juridical person, whether or not engaged in trade or business

An individual, with respect to payments made in connection with his trade or business. However,
insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who

are not engaged in trade or business are also constituted as withholding agents.
All government offices, including GOCCs, as well as provincial city, and municipal governments
and barangays.

IV. Time to withhold the tax

Withholding tax shall be deducted and withheld by the withholding agent when the income
payment is paid or payable or accrued, or the income payment is accrued or recorded as an
expense or asset, whichever is applicable, in the payors book, whichever comes first. The term
payable refers to the date the obligation becomes due, and demandable or legally enforceable of
the return period in which the same is claimed as an expense or amortized for tax purpose.

V. Bases of withholding tax

Withholding tax based on gross income

General rule- the gross amount of income payment shall be used as basis in computing
the expanded withholding tax. However, the following are the exceptions to the general
rule where the basis of the withholding tax is not just the income but may include return
of capital, which is not subject to income tax:
1

Gross payments to resident individuals and

5%

corporate cinematographic film owners,

lessors or distributors
2 . Gross payments to contractors

2%

3. gross selling price paid to sellers or real property

1.5%-6%

classified as ordinary asset

4. gross amounts paid by any credit card company to

% of 1%

any business entity representing sale of goods or

services
5. income payments made to any of the top 10,000
corporations to their regular suppliers or
a. goods
b. services
6. income payments by the government on their

a
b

1%
2%

2%

purchases of goods from local suppliers

B. With respect to real property other than capital assets

Withholding tax based on gross selling price or fair market value, whichever is higher.

A creditable withholding tax based on the gross selling price/total amount of

consideration or the fair market value, whichever is higher, paid to the seller/owner for
the sale. Transfer or exchange of real property, other than capital asset, shall be imposed
upon the withholding agent/buyer, in accordance with the following schedule:
a

Upon the following values of real property, where the seller/transferor is habitually
engaged in the real estate business as per proof of registration with the HLURB or
HUDCC:
With selling price of P500,000.00 or less---------------------1.5%
With a selling price of more than P500k
But not more than P2M-------------------------------------------3.0%
With a selling price more than P2M----------------------------5.0%

Where the seller/transferor is not

Habitually engaged in the real eastate business-------------6.0%

Where the seller is exempt from creditable withholding tax

In accordance with 2.57 of rev. regs. No. 2-98------------------exempt

C. Withholding tax rates applied on income payments liable to income tax are as follows.

1. professional fees for services rendered by

individuals, including professional real estate
practitioners (brokers, appraisers, and consultants)
as well as professional entertainers and athletes,
and directors:
If gross income for current year exceeds P720k, or
professional does not file Sworn Decalration for

--15%

first semester of the year with BIR, regardless of

gross income. If gross income for current year does
not exceed P720k
2.Rental income
Real properties

5%

Personal properties

5%

Poles, satellites and transmission facilities

5%

Billboards

5%

3 . gross payments to resident individuals and

corporate cinematographic film owners, lessors or
distributors
4 . Gross payments to certain contractors

5%
2%

5 . income didtribution to beneficiaries

6. income payments to certain brokers, including

15%

real estate brokers who did not pass the Board

10%

examination , and agents

7. income payments to partners of GPP:
If gross income for current year exceeds P720k

15%

If gross income for current year does not

10%

exceedsP720k
8. gross additional payments to government
personnel from importers, shipping and airline
companies, or their agents
9. commission of independent and exclusive
distributors, medical/ technical and sales
representative, and marketing agents of multi-level

15%

marketing companies
10. tolling fees paid to refineries
11. income payments made by pre-need companies
to funeral parlor
12. payments made to embalmers
13. one-half of gross payments made by any credit
card company in the Philippines
14. income payments made by any Top 20K

10%
1%
1%
2%

Corporation
Suppliers of goods

1%

Supplier of services
15. Income payments made to suppliers of

2%
1%

agricultural products
16. income payments on purchase of minerals,

10%

mineral products and quarry resources

17. political contributions to candidates

5%

D. Venue for filing withholding tax return and time for payment of the tax
Creditable withholding taxes deducted and withheld by the withholding agent/buyer on the sale, transfer
or exchange or real property classified as ordinary asset will be paid by the withholding agent/buyer upon
filing of the return with the Authorized Agent Bank located within the principal place of business of the
withholding agent. However, expanded withholding taxes on the sale, transfer or exchange of real
property classified as ordinary asset, shall be paid by the withholding agent/buyer upon filing of the return
with the authorized agent bank located within the Revenue District Office having jurisdiction over the
place where the property being transferred is located within 10 days following the end of the month in
which the transaction occurred, provided, however, that taxes withheld in December will be filed on or
before January 25 of the following year.