8 Pointers for Expanded Withholding Taxes in the Philippines | GPP & CO.

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ABOUT US
8 Pointers for Expanded Withholding Taxes in the Philippines
Our Path to Pursue NOVEMBER 3, 2014

Our Commitments
Expanded Withholding Tax (EWT) or Creditable Withholding Tax (CWT) in the Philippines is a tax
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type that each taxpayer should be aware of as it is being made a mandatory for income tax
deductibility of certain expenses in the Philippines. Failure to comply with the requirements of this
Partners
withholding tax in the Philippines could prove to be inconvenient, if  not costly. To facilitate learning of
Our Clients the basic concepts of expanded withholding tax in the Philippines, the below pointers are being
enumerated.

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Tax Compliance
1. A system of advance collection of income taxes
Financial Process Outsourcing
Income tax in the Philippines is normally taken up at the end of taxable year of taxpayers where the
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annual income tax return in the Philippines is being filed. Under the expanded withholding tax system,
the payor or withholding agent is mandated to withhold and remit withheld taxes not later than the
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10th day (or 15th day for month of December) of the month following the month of payment or accrual
Visa and Immigration thereof.  This would mean that the tax authority would collect the income tax of the payee on such
income even before the payee files its income tax return in the Philippines.

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8 Pointers for Expanded Withholding Taxes in the Philippines | GPP & CO. CPAS

2. A check and balance mechanism 

Mind you, the withholding tax system had been an effective way to check on whether the payee
reported its income or whether the payor reported the corresponding expense or income payment.
This is made through the matching of withholding tax reports and returns filed by the payee – the BIR
Form No. 1601-E and online monthly alphalist of payees (MAP), and that of the payor – the value
added tax return (VAT) and income tax return (ITR) with summary alphalist of withholding taxes
(SAWT). This would mean that taxpayers should e extra careful in dealing with items subjected to
withholding taxes.

3. Not all payor’s are required to withhold

While income payments enumerated under Revenue Regulations No. 2-1998, as amended are
normally subject to expanded withholding tax, please bear in mind that not all payor’s are required to
withhold. As a general rule, only payor’s who are engaged in trade or business or those engaged in
the practice of  profession are automatically constituted as withholding agent for the expanded
withholding tax in the Philippines.

4. Income tax-exempt taxpayers and income are withheld

As stated above, expanded withholding tax is an advance collection of payee’s income tax.  This
would mean that if the income payment or if the payee entity is exempted from income tax in the
Philippines, then, the same is not subject to expanded withholding tax tax in the Philippines.
Examples of this is payments to a general professional partnerships (GPP), payments to government
entities, payments to foundations, PEZA-registered entities, BOI-registered entities under income tax
holiday (ITH). For those income payments exempted from withholding tax, the payor-taxpayer is
required to secure proof of such exemption such as a certificate of tax exemption (CTE) or tax
exemption rulings, if applicable, and without such proof of exemption, penalties could be applicable.

5. Only specific income payments are subject to expanded withholding taxes

The common misconception is that all expenses are subject to expanded withholding tax. This is not
what it seems. For a payor taxpayer who is not a top-twenty thousand corporation (TTC), top-five
thousand individual (TFI), or a government entity payor, only those enumerated under Revenue
Regulations No. 2-98, as amended, are subject to expanded withholding tax such as but not limited
to the following:

Professional fees of 10% or 15%;

Rentals for real and personal properties of 5%;

Contractors and sub-contractors of certain services of 2%;

Commissions of 10%;

Payments of credit card companies of .5%;

Payments by funeral companies to embalmers of 1%;

Payments by pre-need companies to funeral parlors of 1%;

Tolling fees paid to refineries of 5%;

Income payments not specifically enumerated in Revenue Regulations No. 2-98, as amended, are not
subject to expanded withholding tax in the Philippines.

6. Mandatory withholding tax of top-twenty thousand corporations (TTC) 

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8 Pointers for Expanded Withholding Taxes in the Philippines | GPP & CO. CPAS

As a matter of exception to the rule, top-twenty thousand corporation (TTC) and top-five thousand
individuals (TFI) are mandated to withhold the following rates on income payments to regular suppliers
and casual purchases other than those income payments enumerated under Revenue Regulations
No. 2-98, as amended:

Purchase of services of 2%;

Purchase of goods of 1%.

Regular suppliers would mean that the payor had at least six (6) transactions with the payee, and
casual purchase would mean a transaction from a non-regular supplier of at least P10,000.00. The
above mandatory rates are likewise applicable to government entity payors regarless of whether or
not they are regular suppliers or casual purchase.

7. Withholding tax certificates (Form No. 2307) sufficient proof of withholding

To support a claim for tax credit, payor-issued withholding tax certificate or BIR Form No. 2307 in the
Philippines is a sufficient proof of the payee that the withheld taxes are remitted to the BIR or tax
authority. Payee is not mandated to establish proof that the payor has indeed, remitted to the BIR the
amount withheld as taxes, and the confirmation of the payor by the signature on the portion of the
BIR Form No. 2307 is sufficient to claim tax credit for income tax returns filing.

8. Income and related Form 2307 must be claimed in the same taxable year

The simple rule is to claim the tax credits supported by BIR Form No. 2307 in the same year the
income has been recorded. Out-of-period claims of BIR Form No. 2307 in subsequent years shall be
disallowed and penalty will be imposed. To avoid such scenario, payees are encouraged to monitor
their withholding tax certificates and ensure that they are properly claimed in the taxable quarter
where income is earned or realized or at least within the taxable year. The common remedy for BIR
Form No. 2307 furnished late by payors is to amend the income tax return for the applicable year, in
case no tax examination yet, and carry-over the excess tax credits to subsequent taxable quarter or
year.

References:

Revenue Regulations No. 2-1998, as amended,

Revenue Memorandum Circular No. 8-2014

By: Garry S. Pagaspas, CPA

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert
opinion. Please contact us or consult your preferred tax and/or legal consultant for the specific details
applicable to your circumstances. For comments, you may please send mail at info@gppcpas.com)

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