Features
of
Withholding
Tax
System
in
the
Philippines
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
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;
To
develop
a
deeper
understanding
of
the
withholding
tax
system
in
the
Philippines,
let
us
discuss
some
of
its
basic
features.
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
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
10th
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
100,000
on
January
2012
and
the
applicable
withholding
tax
of
15%
or
15,000
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
15,000
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
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)
through
the
authorized
agent
banks
(AABs)
or
other
payment
facilities.
4.
Amount
withheld
ibis
creditable
or
final
income
tax
due
of
the
payees.
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
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
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
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
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
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
enumerated
in
Revenue
Regulations
2-98,
as
amended,
they
are
mandated
to
withhold
on
income
payments
to
regular
supplies
of
goods
1%
or
of
services
2%,
and
from
casual
purchases
amounting
to
10,000
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
wilful
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
200
to
50,000
based
on
the
amount
of
basic
withholding
tax
that
should
have
been
withheld;
Or
worst,
criminal
prosecution
and
imprisonment
for
wilful
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.