Many companies in the Philippines do not fully understand their tax obligations and as a consequence are exposed to tax deficiencies and significant penalties. One of the least understood tax types is the withholding tax, this is why we decided to focus on this specific subject in our very first tax blog.
This first tax blog article will be followed by other insightful articles that aim to help SMEs navigate their way through the complex tax system of the Philippines.
This article will provide general information about the withholding taxes in the Philippines and will answer many questions like :
What are the different withholding tax types ? Am I a withholding agent ? How (and When) should I file and remit my withholding taxes ?
What is Withholding Tax ?
Withholding taxes - or WHT - are amounts withheld in the payments of services or goods and remitted directly to the government on behalf of your suppliers and/or employees.
Due to changes brought in 2018 by Republic Act No. 10963 also known as Tax Reform for Acceleration and Inclusion (TRAIN Law), withholding taxes are now governed by a set of different rulings (1) that we will consider and summarize in this article.
With the withholding tax system, the government shifts the responsibility of tax collection from the Bureau of Internal Revenue (BIR) to the individual or businesses, the Withholding Agents. A Withholding Agent is a person or entity who is in control of the payment that is subject to withholding tax (the tax amount deducted from the payment made and remitted by the withholding agent directly to the government).
In this system, businesses have a heavy responsibility as they are deemed informed that they are withholding agents and aware of the tax types and amounts to deduct and remit.
There are three kinds of withholding taxes that are vital to businesses: the Withholding Tax on Compensation, the Expanded Withholding Tax, and the Final Withholding Tax.
Withholding Tax on Compensation
Withholding Tax on Compensation - or WTC - is a tax withheld from an employee’s compensation. Compensation is defined as all remuneration arising from services rendered by an individual in an employee-employer relationship.
There are some items part of the employee’s compensation that are considered exempted by law (i.e. de minimis allowance, Php 90,000 amount for 13th month and bonus, etc.)
As an employer, the business is a withholding agent with the responsibility of withholding and remitting taxes to BIR based on the Withholding on Compensation Tax table.
See below a summary of the current monthly tax table:
|Compensation Range||Prescribed Withholding Tax|
|Php 20,833 and below||none|
|Php 20,833 - Php 33,332||20% over Php 20,833|
|Php 33,333 - Php 66,666||Php 2,500.00 + 25% over Php 33,333|
|Php 66,667 - Php 166,666||Php 10,833.33 + 30% over Php 66,667|
|Php 166,667 - Php 666,666||Php 40,833.33 +32% over Php 166,667|
|Php 666,667 and above||Php 200,833.33 +35% over Php 666,667|
Example : For an employee with a monthly taxable compensation of Php 50,000. The employer shall deduct and remit monthly a WTC amounting Php 2,500 + 25% x (Php 50,000 - Php 33,333) = Php 6,666.75
Expanded Withholding Tax
Expanded withholding Tax - or EWT - is the tax withheld on certain income payments to suppliers. For the suppliers, the amounts withheld are creditable against the income tax due for the taxable year.
The rules on EWT do not require all businesses to withhold from all their suppliers. This is only applicable to some businesses that have been specifically identified by the Bureau of Internal Revenue (BIR) as Top Withholding Agents (TWA):
|Income Payment made by top withholding agents to their local/resident suppliers of goods||1% EWT|
|Income Payment made by top withholding agents to their local/resident suppliers of services||2% EWT|
Here are few examples below:
|Professional fees (company)||10% EWT if yearly gross income (of supplier) < Php 720k |
15% EWT if yearly gross income (of supplier) > Php 720k
|Director’s fees||5% EWT if yearly gross income (of director) < Php 3M |
10% EWT if yearly gross income (of director) > Php 3M
|Gross rental or lease||5% EWT|
How to know if you are classified as a Top Withholding Agent (TWA) ?
Since 2018, Top Withholding Agents include the Large Taxpayers, the Top 20,000 private companies, the Top 25,000 individual taxpayers, the Medium Taxpayers and all those that have been identified under the Taxpayer Account Management Program (TAMP).
To know if you are a TWA, you have to regularly check the BIR website’s publications. You will sometimes receive a notice letter from the Bureau of Internal Revenue (BIR), but this is not always the case !
Final Withholding Tax
Final Withholding Tax - or WF - is the tax withheld on certain income payments and is considered as a full and final payment of income tax due from the payee of the said income.
The taxes rate can be viewed in the Final Withholding Tax Table.
See below a few examples of Final withholding tax rates:
|Interest from currency deposits, trust funds and deposit substitutes (passive income)||20% WF|
|Cash dividend payment by domestic corporation to citizens and residents aliens (Individual)||10% WF|
|Cash dividend payment by domestic corporation to Non-Resident Foreign Corporation||15% WF|
Forms and Submission of Withholding Taxes
Now that you have a better understanding of the different withholding tax types, here are the forms that you must know and their related remittance schedule :
|Forms||Withholding tax type||Remittance schedule|
|0619-E||Creditable Income Taxes Withheld (Expanded)||Monthly|
|0619-F||Final Income Taxes Withheld||Monthly|
|1601-C||Income Taxes Withheld on Compensation||Monthly|
|1601-EQ||Creditable Income Taxes Withheld (Expanded)||Quarterly|
|1601-FQ||Final Income Taxes Withheld||Quarterly|
|2316||Certificate of Compensation Payment/Tax Withheld||Annual|
|1604-C||Income Taxes Withheld on Compensation||Annual|
|1604-E||Creditable Income Taxes Withheld (Expanded)||Annual|
|1604-F||Final Income Taxes Withheld||Annual|
Managing your tax obligations yourself from end-to-end in the Philippines is not always a good idea considering the complexity of the tax system in the country. For most startups and SMEs, it makes more sense to focus on your core business and outsource your finance and tax requirements to a professional like Proseso Consulting.
(1) RMC 01-2018 Prescribes the use of withholding tax table and changes in creditable taxes withheld for self-employed individuals and professionals;
RR 11-2018 Implemented the provisions of RA No. 10963 (TRAIN Law) relative to some changes in the rate of Creditable Withholding Tax on certain income payments;
RR 26-2018 Implemented the 90-Day Processing of claim for VAT refund under Section 112 (C) of the Tax Code of 1997, as amended by R.A. No. 10963;
RMO 17-2017 (Medium Taxpayers) Prescribing policies and procedures in monitoring compliance of Top Taxpayers in Revenue Regions;
RR 6-2009 Taxpayer Account Management Program (TAMP), providing for an additional criterion in the determination of Top 20,000 Private Corporations, including the threshold on their purchases of agricultural products, and additional transactions subject to creditable withholding tax on income payments made by the Top 5,000 Individual Taxpayers engaged in trade/business or practice of profession.
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For more information on this matter or if you have any questions you may contact me directly at email@example.com.
Proseso Consulting provides tailored business advisory and finance managed services (bookkeeping, payroll, tax, etc.). We are implemented in the Philippines and in France and our objective is to support the projects of ambitious companies and professionals. We are here to help you achieve your long-term business goals !
Ninoy Salmon is a seasoned business and finance professional with extensive experience working with both fast growing startups and international companies
This blog article does not constitute professional or legal advice. It is only intended to provide general information on a subject.