ACCTAX1 - Income Taxation

Withholding of Taxes

Philippine Withholding Tax System

 The withholding taxes in the Philippines may either be creditable or final

 The liability for payment of the tax rests primarily on the payor as a withholding agent
o Who are the Withholding Agents  Persons required to deduct and withhold
 Obligation to withhold is imposed upon the buyer-payor of income
 Although, the burden of tax is really upon the seller-income earner/payee

Final Withholding Tax (FWT) Creditable Withholding Tax (CWT)

 Income tax withheld by the withholding agent is constituted as a
full and final payment of the income tax due from the payee on
the said income.
 Payee is not required to file an income tax return for the particular
income.
 Liability for the payment of the tax rests primarily on the
withholding agent
 Taxes withheld are intended to equal or at least approximate the
tax due from the payee on the said income.
 Tax withheld shall be allowed as a tax credit against the income
tax liability of the payee in the quarter of the taxable year in which
the income is earned.
 Payee is still required to report the income (file ITR) and pay the
difference between the tax withheld and the tax due.
 Taxes withheld on income payments covered by the expanded
withholding tax (EWT) and compensation income or
Withholding Tax in Wages (WTW) are creditable in nature.

Types of Withholding Taxes

- Final Tax:
o Fringe Benefit Tax (FBT)
o Final Withholding Tax (FWT)

- Creditable Withholding Tax (CWT)

o Expanded Withholding Tax (EWT)
o Withholding Tax in Wages (WTW)
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Withholding of Taxes

Expanded Withholding Tax (EWT)

Nature of EWT / Basic Principles
 It is a means of collecting the income tax in advance.
 It is creditable against the payee’s income tax liability.
 Only payments enumerated under the EWT regulations are subject to EWT
 The payee and the payor must be residents of the Philippines (except in the case of payments to NRAETB in the Philippines)
 EWT is not a final tax

Exemptions from Withholding  No withholding is required on income payments to the following:

1. National government and its instrumentalities, including provincial, city, or municipal governments and barangays except GOCCs
2. Persons enjoying exemption of income taxes pursuant to the provisions of any law, general or special
 Sales of real property by a corporation which is registered with and certified by HLURB or HUDCC as engaged in socialized housing project
 Corporations duly registered with BOI, PEZA, and SBMA enjoying exemption from income tax
 GOCCs that are exempt from income tax  GSIS, SSS, PHIC, & Local Water Districts (before PCSO is also exempted)
i. However, income payments arising from any activity which is conducted for profit or income derived from real or personal property
shall be subject to withholding tax.
 Other exempt organizations under Section 30 of Tax Code (check for complete list)
 General Professional Partnerships
 Joint Ventures or constortia 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 government.

o Concerned withholding agents shall require all individuals and entities claiming exemption to provide a copy of a valid, current and subsisting
tax exemption certificate or ruling before payment of the related income.
 Which must explicitly recognize the grant of tax-exemption, as well as the corresponding exemption from imposition of withholding
tax.
3. Non-withholding on tax exempt individuals/entities  Individual seller-income earner/payee may not be subjected to withholding (CWT) if
the source of income comes from a lone income tax payor and the total payment is less than P250,000 in a taxable year. Upon
compliance with the ff. requirements:
 The individual has executed an Income Payee’s Sworn Declaration of gross receipts/sales
 The income payor/withholding agent shall in turn execute its own Income Payor / Withholding Agent’s Sworn
Declaration stating the number of payees’ sworn declarations and copies of COR
 The sworn declaration has been submitted to the lone income payor/withholding agent on or before January 15 of each year
or before the initial income payment, whichever is applicable.

 If the individual’s payee’s cumulative gross receipts in a year exceed P250,000  the income payor/withholding agent shall
withhold the prescribed withholding tax based on the amount in excess of threshold, despite the prior submission of the individual
income payee’s sworn declaration.
 On the other hand, if the individual income payee failed to submit an income payee’s sworn declaration to the lone income
payor/withholding agent, the income payment shall be subject to the applicable withholding tax even though in a taxable year the
income is P250,000 and below.

Effects of Failure to Withhold

 Disallowance of expense as a deduction for income tax purposes

o No deduction will be allowed notwithstanding payments of withholding tax at the time of the audit investigation / reconsideration in
cases where no withholding of tax was made.
 Fines and Penalties
o 25%  if not due to willful neglect
o 50%  if due to willful neglect or with intent to defraud the government
 Interests  20% per annum or the prevailing market rate, fixed and published by the Central Bank on the first Monday of each month
(known as the Manila Reference Rate), whichever is higher.
 Fines and imprisonment
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Withholding of Taxes

oTaxpayer/withholding agent may be subject to criminal liability for non-withholding of the tax. Said liability, however, may be extra
judicially settled through compromise.
 Other penalties
o If the withholding agent is the government or any of its agencies political subdivisions or instrumentalities of GOCCs, the employee
responsible for the withholding and remittance of the tax is liable to a fine of P5,000 to P50,000; or
o Imprisonment of not less than 6 months and 1 day, but not more than 2 years; or both

 In case of failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent.
 Unjustifiable refusal of the seller-income earner to be subjected to withholding shall be ground for the mandatory audit of his income tax
liabilities (including withholding tax) upon verified complaint of the buyer-payor.

EWT Base

o When payments made to a Non-VAT registered supplier of goods or services

 Basis shall be the gross billing
o When payments made to a VAT registered supplier of goods or services
 Basis shall be the gross amount paid exclusively or net of VAT

 Purchase of services  should be properly supported with Official Receipts (ORs)

 Purchase of goods  should be properly supported with Invoices

o If not properly supported,

 Basis should be the amount paid inclusive of VAT

Timing of Withholding (EWT)

o The obligation of the payor to deduct and withhold the tax arises at the time an income payment is
1) Paid, or
2) Payable, or
 “Payable” refers to the date the obligation becomes due, demandable or legally enforceable
3) Accrued or Recorded as an expense or asset, whichever is applicable in the payor’s book
 Where the income is not yet paid or payable, but at the same time has been recorded an expense or asset, whichever is
applicable, in the payors books, the obligation to withhold shall arise in the last month of return period (e.g. last month of the
quarter) in which the same is claimed as an expense or amortized for tax purpose.
o WHICHEVER COMES FIRST (EARLIEST)

EXPANDED WITHHOLDING TAX RATES

Tax-Base Rates

Individual payee:
 If gross income for the current year did not exceed P3M  5%
Gross professional promotional and
Professional fees,  Otherwise  10%
talent fees, or any other form of
talent fees, etc. for
remuneration NOT subject to
services rendered Non-individual payee:
withholding tax on compensation.
 If gross income for the current year did not exceed P720K  10%
 Otherwise  15%

Note: Individuals and non-individual payee’s whose gross receipts/sales in the taxable year shall not exceed P3M and P720K respectively is
required to submit a sworn declaration of his/her gross receipts/sales together with a copy of COR, to all income payor/withholding agents
not later than January 15 of each year or at least prior the initial payment of professional fees etc. in order for them to avail the 5% / 10% tax
rate respectively. Otherwise, individuals and non-individuals will be subjected to 10% and 15% respectively if they failed to provide such
declaration
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Withholding of Taxes

Gross Rentals or Lease

 For personalty, in in excess of P10K annually except if 5%

Rentals
accumulated gross rental or lease paid by the lessee to
the same lessor exceeds or is reasonably expected to
exceed P10K threshold within the year)

Income distributed to the beneficiaries except those that are subject

Income distribution to the beneficiaries 15%
to final withholding tax and tax exempt income
If the gross income for the
Income payments made periodically or at the end of the current year does not exceed
Income payments to partners of general
taxable year by a GPP to the partners (e.g. drawings, advances, P720K  10%
professional partnerships
allowances etc.)
Otherwise  15%
 Where the seller is exempt from CWT  exempt
Gross selling price /  For seller habitually engaged. With SP of:
Sale of real property classified as ordinary total amount of  P500K or less  1.5%
asset consideration; or the  More than P500K but not more than P2M 3%
FMV whichever is higher  With SP of more than P2M  5%
 For seller not habitually engaged  6%
Mandatory withholding of top withholding Income payments made by any Top Withholding Agents to
agents either private corporations or their local/resident supplier of goods/services, including
individuals, to their local/resident supplier NRAETB Supplier of goods  1%
of goods and local/resident supplier of Supplier of services  2%
services other than those covered by Note: Definition of Top Withholding Agents  see RR11-18 page
other rates of withholding tax 12

Income payments to certain contractors 2% Gross payments (whether individual or corporate)

Additional income payments to
government personnel from importers, 15% Gross additional payments by importers, shipping, and airline companies, or their agents to
shipping and airline companies or their government personnel for overtime services as authorized by law
agents
Credit income payments made by credit
½ of 1% of gross payments
card companies
Government money payments to Supplier of goods  1%
suppliers Supplier of services  2%
Tolling fees paid to refineries 5% of tolling fees
Pre-need company payments to funeral
1%
parlors
Income payments to embalmers 1%
Income payments to agricultural
1%
products suppliers
EIT (Real Estate Investment Trust) 1%
locally produced sugar 1%
Payments for minerals, mineral
5%/1% for BSP
products, and quarry resources
political contributions 5% of gross contribution
interest income other than from deposit
substitutes
15% starting 2019 (previously 20%)
15% starting 2019 (previously, 25% if with active contracts; 32% if non-active)
MERALCO refund/interest payments interest income on meter deposit: 10% for residential and general service; 15% starting 2019 (previously 20%) for
non-resident service customers
Refund paid either through direct payment or application against customers’ billings by other electric Interest income on meter deposit: 10% for residential
Distribution Utilities (DUs) in accordance with the rules embodied in ERC Resolution No. 8, Series of 2008, and general service; 15% starting 2019 (previously
dated June 4, 2008, governing the refund of meter deposits 20%) for non-resident service customers
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Withholding of Taxes

 Top Withholding Agent

o Yes
 Income payments enumerated under Revenue Regulation
 Yes  Subject to EWT
 No  Subject to EWT
o Services  2% EWT
o Goods 1 % EWT
o No
 Income payments enumerated under Revenue Regulation
 Yes  Subject to EWT
 No  No EWT

 EWT on Reimbursements:
o If the problem is silent use the HIGHER rate.
o Maximum rate for individual – 10%
o Maximum rate for corporation – 15%

 Buyer – Selling Price or FMV (whichever is higher)

 Individual
 Installment Payments > 25% of Contract Price
o No  Withhold on Last Installment
o Yes  Deferred/Cash  Withhold outright at the time of sale
 Corporation
 Installment Payments > 25% of Contract Price
o No  Withhold every installment
o Yes  Deferred Payment  Withhold entire amount at the time of sale

WITHHOLDING TAX IN WAGES (WTW)

 The withholding of tax on compensation income is method of collecting the income tax at source upon receipt of the income. It applies to
all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines.
 The employer is constituted as the withholding agents.

DEADLINES:

Manual EFPS
Filing
Monthly Filing & Payment: 11th to 15th day of the following month
WTW (old & new) 10th day of the following month Payment
FWT (old) (Except for December which shall be filed/paid on or Within 15 days after the end of each month
EWT (old) before January 15 of the following year) (Except for December which shall be filed/paid on or
before January 20 of the following year)

First two months of the quarter First two months of the quarter
FWT (new) 10th day of the following month 15th day of the following month
EWT (new) Quarter Quarter
End of the month following the end of quarter End of the month following the end of quarter

o 1st Quarter  April 30

o 2nd Quarter  July 31
o 3rd Quarter  October 31
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Withholding of Taxes

o Annual  January 31

o Monthly Filing & Payment (FWT & EWT)

 Manual  10th day of the following months
 Except for December which shall be filed/paid on or before January 15 of the following year

 EFPS
 Filing  11th to 15th (staggered filing depending on industry classification)
 Payment  within 15 days after the end of each month
o Except for taxes withheld in December which shall be paid on or before January 20 of the
following year.

 WTW
o Manual  January to November  10th day
o EFPS  January to November  11th to 15th day

General Rule on Individuals:

Sworn declaration that gross receipts/sales do not exceed 250K NO EWT

Income is received from lone payor
Certificate of Registration

EWT Implications:

1. Interests on loans obtained from non-bank  20%EWT; 15% EWT

2. Interests on loans obtained from banks (not securitized, assigned or participated out)
a. Borrower is top withholding holder  2% EWT
b. Borrower is not top withholding holder  20% EWT; 15% EWT