Withholding Taxes

Learning Objectives:

1. Define Withholding Tax

2. Determine the Tax Treatment in Withholding Tax
3. Know who are Liable to Withholding Tax, Exempted from Withholding Tax and the Large
Taxpayers

Withholding Taxes
Withholding of taxes is a systematic way of collecting taxes at source, an indispensable method
of collecting taxes to ensure adequate revenue for the government.

The withholding tax agent who is usually an employer or a person from whom the income is
derived this process through withholding the appropriate amount of taxes from taxpayers. It is
designed to ensure the collection at source of income taxes.

If withholding tax is not withheld from income payments, there will be a disallowance of
deductible business expenses claimed by the withholding agent in his income tax return or a
penalty imposed on the withholding tax agent for failure to withhold the tax.

Withhold Tax at Source

A taxation at source is that part of tax system which collects through withholding agents or
employers the appropriate income taxes due as they are earned before earnings are paid to the
payees or employees.

The primary objective of the system is to ensure accurate payment of taxes and to be use taxes
collected at an earlier time to finance the operations and projects of the government.

Classification of Withholding Tax at Source

1. Final Withholding Tax
The amount of 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. The liability for
the payment of the tax rests primarily on the payor as a withholding agent. Thus, in case
of failure to withhold or in case of under withholding, the deficiency tax shall be
collected from the payor/withholding agent. The payee is not required to file an income
tax return for the particular income, the final tax on which has been withheld. The
finality of the withholding tax is limited only to the payee or the recipient’s income tax
liability on the particular income. It does not extend to the payee’s other tax liability on
said income, such as when the said income is further subjected to a percentage.
 a. 1601-F
Nature of Income Rate on Individual Taxpayer Rate of Corporate Taxpayer
 Interest on foreign loans 20%
payable to nonresident
foreign corporations
 Interest and other income 10%
payments on foreign
currency transactions
payable to OBU’s and
FCDU’s
 Cash or property dividend 10%
payment by domestic
corporation to citizen and
resident aliens
 Cash or property dividend
payment by domestic
corporation to nonresident
foreign corporation

Without reciprocity rule 30%

With reciprocity rule 15%
 Cash or property dividend 20%
payment by domestic
corporation to nonresident
alien, doing business in the
Philippines
 Distributive share of 10%
individual partner in
general commercial
partnership
 Share of nonresident alien 20%
in the distributable income
of general commercial
partnership
 All kinds of royalty 20% 20%
payments to citizen,
resident alien, nonresident
alien doing business in the
Philippines, domestic and
resident corporation except
 royalty income on books
and cinematographic films
 On prizes exceeding 10,000 20%
and other winnings paid to
individuals
 Branch remittance by all 15%
corporations except PEZA,
SBMA, and CDA registered
 Gross rentals, lease and 4.5%
charter fees paid to
nonresident lessor of
foreign lessor
 Gross rentals, lease and 7.5%
charter fees paid to
nonresident lessor of
foreign aircraft, machinery
and equipment
 On payments to oil 8% 8%
exploration service
contractors/sub-
contractors
 Payments to citizen or alien 15%
employed by Foreign
Petroleum Service
Contractors/sub-
contractors, OBU and
regional operating
headquarters of
Multinational Companies
occupying executive,
managerial and technical
employees
 Payments to nonresident 25%
aliens of doing business in
the Philippines, except on
sale of shares of stock and
real property
 Payments to nonresident 25% 25%
individual/foreign
corporate cinematographic
film owners/lessors or
distributors
 Other payments to 30%
nonresident foreign
corporations
 Royalties paid to 25%
nonresident aliens doing
business in the Philippines
on cinematographic films
and similar works
 Final tax on interest or 30%
other payments upon tax-
free covenant bonds,
mortgages, deeds of trust
or other obligations
 Royalties paid to citizens, 10%
resident and nonresident
aliens doing business in the
Philippines on books, other
literary works, and musical
composition
 Tax informer’s cash reward 10% 10%

b. 1602
Nature of Interest Income Rate on Individual Payee Rate on Corporate Payee
 On peso savings deposits 20% 20%
 On peso time deposits 20% 20%
 On deposit substitutes 20% 20%
 On government securities 20% 20%
 On pre-terminated long-
term deposit:
Less than 3 years 20% 20%
3 years to less than 4 12% 20%
years 5% 20%
4 years to less than 5
years
 On foreign currency 7.5% 7.5%
deposits

2. Creditable Withholding Tax

Taxes withheld in certain payments are intended to equal or at least approximate the
tax due of the payee on said income. The income still required to file his income tax
 return either to report the income and/or pay the difference between the tax withheld
and the tax due on the income.
a. 1602-E
Nature of Income Rate on Individual Rate on Corporate Taxpayer
Taxpayer
 Professional, talent fees
Annual income does not 10%
exceed 720,000
Annual income exceeds 15%
720,000
 Management and technical 10%
consultants
 Bookkeeping agents and 10%
agencies
 Insurance agents and 10%
adjusters
 Fees of directors who are not 15%
employees of the company
 Real property rentals 5% 5%
 Cinematographic film rentals 5% 5%
 Prime-contractors/sub- 2% 2%
contractors
 Income distribution to 15%
beneficiaries
 Brokers and agents 10% 10%
 Income payments to partners
of GPP
720,000 below 10%
720,000 above 15%
 Payments by credit card 0.5% 0.5%
 Payments by government
units to:
Local suppliers 1% 1%
Suppliers of services 2% 2%
 Income payments by top 1% 1%
5,000 corporations to their
local suppliers
 Additional payments to 15%
government personnel from
importers, shipping and airline
 companies for overtime
services

b. 1606
Transaction Tax Rate
 Transaction of realtor duly registered and
certified by the Housing and Land Use
Regulatory Board as engaged in socialized
housing projects. The selling price of the
house and lot or only the lot does not
0%
exceed 180,000 in Metro Manila and other
highly urbanized areas or 150,000 in other
areas or on the adjusted amount of selling
price for socialized housing as may be
determined later by HLURB
 Not registered with the HLURB as engaged
in socialized housing project, the seller is 1.5%
habitually engaged in real estate business,
the selling price is not over 500,000
 Not registered with the HLURB as engaged
in socialized housing project, the seller is 3%
habitually engaged in real estate business,
the selling price is over 500,000, but not
over 2,000,000
 Not registered with the HLURB as engaged
in socialized housing project, the seller is 5%
habitually engaged in real estate business,
the selling price is over 2,000,000
 When the seller is not habitually engaged in 6%
the real estate business

Withholding Tax on Compensation Income

Not subjected to withholding tax:
1. Commissions paid by an insurance agent to his sub-agents
2. Compensation for services by a citizen or resident of the Philippines for a foreign
government or an international organization
3. Remuneration for casual labor not in the course of employer’s trade or business
4. Remuneration for private service performed by maids, cooks, gardeners, family drivers,
etc.
5. Remuneration paid to agricultural labor and paid entirely in products of the farm
Liability for Tax
These are the persons who are liable for the payment of withholding tax on compensation
income:
1. Employer – he shall be responsible for the withholding and remittance of the right
amount of tax needed by deducting and withholding from his employees’
compensation. He is required to collect, account and remit any tax. If he fails, he is liable
to a penalty equal to the total amount of refund.
2. Employee – if an employee fails to file the BIR form no. 2305, the tax to be withheld by
the employer shall be collected plus the penalties.

Exemption from Withholding

1. Compensation income of individuals not exceeding the statutory minimum wage.
2. Compensation income of employees of the government
3. The national government
4. Individuals enjoying exemption from payment of income taxes

Large Taxpayer
1. Business Tax – paid or payable of 100,000php for any quarter.
2. Excise Tax – paid or payable of 1,000,000php for the preceding taxable year.
3. Corporate Income Tax – paid or payable of 1,000,000php for the preceding taxable
year.
4. Withholding Tax – payment or remittance of 1,000,000php of the preceding taxable
year.
5. Documentary Stamp Tax – aggregate annual taxes of 1,000,000php.
References:
National Internal Revenue Code of 1997. (n.d.). Retrieved from
https://www.bir.gov.ph/index.php/tax-code.html
Aduana, N. L. (2012). Simplified and procedural handbook on income taxation (2nd Edition ed.).
Quezon City: C & E Publishing Inc.
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.). Quezon City: Good
Dreams Publishing.
Valencia, E. G., Roxas, G. F., & author. (2016). Income taxation: principles and laws with
accounting applications. Baguio City: Published and distributed by Valencia Educational Supply.