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Creditable withholding tax (CWT) is the tax which is withheld by the buyer/withholding agent
from his payment to the seller for the sale of the sellers ordinary asset/services, and which
tax is creditable against the income tax payable of the seller. I know this sounds confusing
so let me tell you about the withholding tax system first.
The tax withheld is called the withholding tax and the buyer in this case is called a
withholding agent. Please note that this only applies to the ordinary income of the seller,
as opposed to his capital gain. Please refer to my earlier post on the difference between
ordinary assets and capital assets.
To put it simply, the tax withheld by the buyer acts as the advanced payment of the
sellers taxes. Since the seller will only pay income taxes on a quarterly basis, and the
government spends all throughout the year, it would be difficult for the government to
operate if it only gets income taxes quarterly. Also, since the buyer withholds only a
small percentage of the sellers gross receipts (lets say 2%), the government is alerted
that the seller realized income to the extent of the grossed-up amount of the taxes
withheld.
For example, P2,000.00 which pertains to 2% withholding tax means that the seller sold
P100,000.00 worth of assets/services for which he should pay income taxes. When the
time comes for the payment by the seller of his income taxes, and he doesnt declare
the income from which the buyer withheld taxes, a discrepancy will arise and the
government will have a tip to investigate whether the seller is paying the correct taxes.
Take note, the Bureau of Internal Revenue (BIR) already has computer software in
place which determines discrepancies automatically.
On the part of the buyer, he must withhold taxes, otherwise, he will not be able to
deduct his expense. For example, if his expense is P100,000.00 and he is required to
withhold 2% of this or P2,000.00 and he does not withhold and remit this amount, for
income tax computation purposes, he may not deduct his P100,000 expense from his
taxable income.
Thus, if his gross income is P200,000.00 and he may not deduct the P100,000.00
expense (assuming there are no other deductible expenses of course), he will pay taxes
based on a net income of P200,000.00 instead of P100,000.00.
On the part of the seller, since the taxes withheld act as his advanced payment of his
income tax, when the time comes for the quarterly payment of income taxes, he will
subtract the tax withheld from his income tax payable. For example, if his income tax
payable is P32,000.00 and the tax withheld from him is P2,000.00, then he will only pay
P30,000.00 income tax.
As proof of the taxes withheld, he should attach the BIR Form No. 2307 (Certificate of
Creditable Taxes Withheld) provided by the buyer to his income tax return.
Please refer to my earlier post about ordinary assets vs. capital assets. From hereon we
will assume that we are talking about the sale of ordinary real estate assets.
Going now to the creditable withholding tax base, the withholding agent/buyer is
required to withhold a creditable withholding tax based on the higher of the following:
b) the fair market value determined in accordance with Section 6(E) of the Code.
Under Section 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as amended by RR
No. 6-2001, the percentages of taxes to be withheld are as follows:
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 the
HUDCC or other satisfactory evidence (for example, he/it consummated during the
preceding year at least six taxable real estate transactions, regardless of amount):
a)With a selling price of Seven Hundred Fifty Thousand Pesos (P500.000.00) or less 1.5%
b)With a selling price of more than Five Hundred Thousand Pesos but not more than Two Million
3.0%
Pesos (2,000,000.00)
c)With a selling price of more than Two Million Pesos (2,000,000.00) 5.0%
B.
Where the seller/transferor is not habitually engaged in the real estate business (but the real
6.0%
estate sold is an ordinary asset)
C.
Where the seller/transferor is exempt from creditable withholding tax in accordance with
Section 2.57.5 of Revenue Regulations No. 2-98 [When the seller is exempt from income taxes.
Exempt
As earlier noted, the creditable taxes withheld serve as advance payment of income taxes. So
when a seller is tax-exempt, it follows that no tax should be withheld from his income.]
Please note that the sale of foreclosed properties by banks is subject to creditable
withholding tax of 6% because banks are not considered as habitually engaged in the
real estate business, and properties acquired by banks through foreclosure sales are
considered as ordinary assets pursuant to Revenue Regulations No. 7-2003.
Section 4 of RR No. 004-08 dated February 19, 2008 provides for the time and place of
payment of creditable withholding tax and DST on the sale, exchange or other mode of
onerous disposition of real properties classified as ordinary assets.
Rules under Section 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as
amended by RR No. 17-2003, in cases where the buyers are engaged or
not engaged in trade or business:
1. Installment Sale
Under Section 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as amended by RR
No. 17-2003, if the sale is a sale of property on the installment plan (i.e., payments in
the year of sale do not exceed twenty five percent (25%) of the selling price), no
withholding is required to be made on the periodic installment payments.
In such a case, the applicable rate of tax based on the gross selling price or fair market
value of the property at the time of the execution of the contract to sell, whichever is
higher, shall be withheld on the last installment or installments immediately prior to such
last installment, if the last installment is not sufficient to cover the tax due, to be paid to
the seller until the tax is fully paid.
1. Installment Sale
If the sale is a sale of property on the installment plan [i.e., payments in the year of sale
do not exceed twenty five percent (25%) of the selling price], the tax shall be deducted
and withheld by the buyer from every installment which tax shall be based on the ratio
of actual collection of the consideration against the agreed consideration appearing in
the Contract to Sell applied to the gross selling price or fair market value of the property
at the time of the execution of the Contract to Sell, whichever is higher.
For the sale of property on installment basis or deferred payment basis where the
Contract to Sell is always executed before the execution of the Deed of Sale, the said
Contract to Sell must be attached to the Deed of Absolute Sale executed upon
completion of the payments and the duly notarized original duplicate copy of both
documents must be presented to the RDO having jurisdiction of the place where the
property is located for validation of the correctness of issuance of CAR/TCL.
If upon completion of the payment of the purchase price of real property classified as
ordinary asset, but before the execution of the Deed of Sale, the buyer decides to
assign his right over the property to another person for a consideration, the assignment
shall be considered a separate sale of real property and, therefore, subject to the
creditable/expanded withholding tax (EWT) or final withholding of capital gains tax, as
the case may be, which shall be withheld by the assignee of such property based on the
consideration per Deed of Assignment or the fair market value of such property at the
time of assignment, whichever is higher, and to the DST imposed under Sec. 196 of the
same Code using the same basis.
Conclusion
As you may have noticed, there are many nuances to the CWT so I hope youll
understand the delay in the release of this post. Just post your questions, if any, in the
comments section so that my wife can research on them and I can get back to you. If
theres a delay once again, please be patient as I cant force my wife. The more I tell her
to do something, the more she doesnt do it. =)