Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977
TAX.3104.0
Withholding Tax System
SALIENT FEATURES OF WITHHOLDING TAX SYSTEM
1. System of collecting money
2. Constitution of payor as withholding agent
3. A system of advance collection of payee’s
income tax liability
4. Amount withheld is a trust fund for the
government
KINDS OF WITHHOLDING TAX
Final Withholding Tax (FWT/FT)
Definition is a tax wherein the payer withholds an
amount from the payee’s income, and pays
this amount to the government on behalf of
the payee. The payee then no longer needs to
file an income tax return for this income.
Nature and 1. Constituted as full and final
characteristics settlement of tax liability on such
income
2. Not creditable in nature
3. Recipient of income is NOT required to
report the income in income tax
return
Examples 1. FT on certain passive incomes
2. Capital gains on sale of:
a. Shares of Stock Not Listed
b. Real Property classified as capital
asset,
3. Fringe benefits to managerial
employees
4. Final VAT on Sale to government
(Note: Conversion to CWT on January
1, 2021)
TAXPAYERS IN WITHHOLDING TAX SYSTEM
1. Withholding Agent – the payor, or person who
has control over the funds, is constituted as an
agent of the government in the collection of the
taxes. If the WA failed to make the withholding,
he/it shall pay the tax in the form of PENALTY.
Duties of Withholding Agent:
a. To register
b. To deduct and withhold
c. To remit the tax withheld to the BIR
d. To file withholding tax returns
e. To issue withholding tax certificate (Form
2306/2307)
2. Income Earner – payee / income recipient
EXEMPTION FROM WITHHOLDING TAX
1. National government agencies, and its
instrumentalities, including provincial, city,
municipal governments and barangays except
GOCCs
2. Persons enjoying exemption from payment of
income taxes pursuant to the provisions of any
law, general or special, such as but not limited to
the following:
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NARANJO/GUDANI/SIAPIAN
OCTOBER 2021
5. Amount withheld is creditable or final income tax
due of the payees
6. Source of third-party information
7. Penal provision in case of failure to uphold the
duty
Creditable Withholding Tax (CWT)
is the tax withheld from income payments which
is allowed to be credited against the taxpayer’s
final tax liability which is then adjusted
accordingly. The amount withheld is only an
estimate of the income tax that should be paid.
The payee is still required to file an income tax
return on that particular income but needs to pay
only the difference between the estimated
amount withheld and the actual amount of tax
due
1. Advance payment of tax only (estimate)
2. Creditable in nature
3. Recipient of income is required to report
the income in annual ITR (ordinary/active
income)
1. Withholding Tax on Compensation (WTC)
2. Expanded Withholding Tax (EWT) –
income payment other than compensation
a. Sales of real property by a corporation
which is registered with and certified by
the Housing and Land Use Regulatory
Board (HLURB) or the Housing and Urban
Development Coordinating Council
(HUDCC) as engaged in socialized housing
project where the selling price of the house
and lot or only lot does not exceed the
socialized housing price applicable to the
area as prescribed and certified by the said
board/council as provided under Republic
Act No. 7279 and its implementing
regulations
b. Corporations duly registered with the BOI,
PEZA, SBMA under EO 226 (with Income
Tax Holiday or under preferential tax
regime)
c. Exempt Corporations (under Sec. 30 of the
Tax)
d. Government-owned or controlled
corporations exempt from income tax
(GSIS, SSS, PhilHealth and Local Water
Districts). However, the income payments
arising from any activity which is
conducted for profit or income derived
from real or personal property shall be
subject to withholding tax as prescribed in
these regulations.
TAX.3104.0
EXCEL PROFESSIONAL SERVICES, INC.

e. General professional partnerships project and that international bidding is

f. Joint ventures or consortium formed for
the purpose of undertaking construction
projects or engaging in petroleum, coal,
geothermal and other energy operations
pursuant to an operating or consortium
agreement under a service contract with
the government:
Requirements:
i. Should be licensed as general
contractor by the Philippine
Contractors Accreditation Board
(PCAB) of the Department of Trade
and Industry (DTI);
ii. These local contractors are engaged
in construction business; and
iii. The Joint Venture itself must
likewise be duly licensed as such by
the PCAB of the DTI.
Joint ventures involving foreign contractors
may also be treated as a nontaxable
corporation only if the member foreign
contractor is covered by a special license
as contractor by the PCAB of the DTI; and
the construction project is certified by the
appropriate Tendering Agency
(government office) that the project is a
foreign financed/internationally-funded
allowed under the Bilateral Agreement
entered into by and between the Philippine
Government and the foreign/international
financing institution pursuant to the
implementing rules and regulations of
Republic Act No. 4566 otherwise known as
Contractor’s License Law.
g. Individuals who earn ₱250,000.00 and
below from a lone income payor upon
compliance with the following
requirements:
i. The individual has executed a
payee’s sworn declaration of gross
receipts not exceeding
Php250,000;
The sworn declaration has been submitted to the lone
income payor/withholding agent on or before January 15
of each year or before the initial income payment,
whichever is applicable.
TIME OF WITHHOLDING
The obligation of the payor to deduct and withhold the tax
arises at the time an income payment is PAID or PAYABLE,
or the income payment is ACCRUED or RECORDED as an
expense or asset, whichever is applicable, in the payor’s
books, whichever comes first.

EXERCISES

Income Payment Withholding Agent Income Earner

Ordinary Interest
Interest from bank deposits
Dividends
Royalty (franchise)
Rent
Compensation
Professional/management fees
Commission
Sale of real property

WITHHOLDING TAX RETURNS

FINAL TAX Form or Return Attachment Deadline

(FWT)
Monthly 0619F None 10th day of the following
Remittance Form month
Quarterly Filing 1601-FQ Quarterly Alphalist of Payees Before the last day of the
(QAP) month following the close of
Final tax on 1602 the quarter
interest on bank
deposits
Fringe Benefit Tax 1603
Annual 1604-F Alphalist of Payees (Annual) January 31
Information
Return
Certificate of Final 2306 None 20 days from close of quarter
Tax Withheld At OR upon request,
Source simultaneous with
withholding
EXPANDED Form or Return Attachment Deadline
WITHHOLDING
TAX (EWT)
Monthly 0619E None 10th day of the following
Remittance Form month
Quarterly Filing 1601-EQ Quarterly Alphalist of Payees Before the last day of the
(QAP) month following the close of
the quarter
Annual 1604-E Alphalist of Payees (Annual) March 1
Information
Return

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EXCEL PROFESSIONAL SERVICES, INC.

Certificate of 2307 None 20 days from close of quarter

Creditable Tax (proof of tax credit of payee OR upon request,
Withheld At or income earner) simultaneous with
Source withholding

WITHHOLDING Form or Return Attachment Deadline

TAX ON
COMPENSATION
Monthly 1601-C Summary Alphalist of 10th day of the following
Remittance Form Withholding Tax at Source month (for month of
(SAWT) December - Jan 15)
Annual 1604-C Alphalist of Employees January 31
Information (Annual)
Return
Certificate of 2316 None On or before January 31 OR
Compensation (proof of tax credit of in cases of termination of
Payment employee or income earner) employment, on the same
day the last payment of
wages is made.

FINAL TAX 3. The information lead to the discovery of fraud

4. Resulted to recovery of revenues, surcharges
CERTAIN PASSIVE INCOME SUBJECT TO FINAL TAX – and fees and or conviction of the guilty party
Philippines (See Schedule) or imposition of any fine or penalty
1. Interest income from bank deposits in the 5. The informer is other than a/an:
Philippines a. Internal Revenue officials or employees
2. Interest income from expanded foreign currency b. Other public officials or employees (if
deposits connected with their work, they are
3. Dividends prohibited, if there is no connection,
4. Royalties allowed)
5. Prizes c. Relatives of those in a. and b. within the 6
6. Informer’s reward - A cash reward may be given to degree of consanguinity (no provision for
any person instrumental in the affinity)
a. discovery of violations of the National
Internal Revenue Code or Cash Reward – Whichever is the lower of the
b. discovery and seizure of smuggled goods following per case:
1. 10% of revenues, surcharges or fees
Requisites: recovered and or fine or penalty imposed and
1. Sworn statement of informer collected or
2. Information is not yet in the possession of the 2. P1,000,000
BIR

EXERCISES – FINAL TAX (see Schedule)

INTEREST

A taxpayer earned the following interest income from local bank deposits:

Local Currency Deposits:

6-month time deposit 10,000.00
2-year time deposit 10,000.00
5-year time deposit* 10,000.00
*on its sixth year

Compute the final tax required to be withheld by the bank if the taxpayer is:

Taxpayer Type of Deposit Amount FT Rate Final Tax Net cash

6-month 10,000
RC 2-year 10,000
5-year 10,000
6-month 10,000
NRC 2-year 10,000
5-year 10,000
6-month 10,000
RA 2-year 10,000
5-year 10,000
6-month 10,000
NRAETB 2-year 10,000
5-year 10,000
6-month 10,000
NRANETB 2-year 10,000
5-year 10,000

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EXCEL PROFESSIONAL SERVICES, INC.

6-month 10,000
DC 2-year 10,000
5-year 10,000
6-month 10,000
RFC 2-year 10,000
5-year 10,000
6-month 10,000
NRFC 2-year 10,000
5-year 10,000

DIVIDENDS

ABC Corp., a domestic corporation, declared dividends to its stockholders of record as of December 31, 2020. Addition
information below was made available:

Nicanor, a resident citizen 100,000

Rian, a non-resident citizen 100,000
Bryan, a resident alien 100,000
Zac, a non-resident alien engaged in trade 100,000
Angelo, a non-resident alien not engaged in trade or business 100,000
DEF Corp, a domestic corporation 100,000
GHI Corp, a resident foreign corporation 100,000
XYZ, a non-resident foreign corporation (with reciprocity) 100,000
ZYX, a non-resident foreign corporation (without reciprocity) 100,000

Compute the final tax required to be withheld on the following taxpayers:

Taxpayer Dividend FT Rate Final Tax Net cash

Income
RC
NRC
RA
NRAETB
NRANETB
DC
RFC
NRFC with reciprocity*
NRFC without reciprocity
Total Withholding
*Old rate is 30%

ROYALTY

1.Starbecks Coffee Corp. (franchisor) is a company organized and established under the laws of the United States
and maintains its head office in Seattle, Washington DC. It entered into a franchise agreement with Kapeng
Barako Corp. (franchisee), a domestic corporation. The agreement provides that a Starbecks franchise will be
opened in Macabebe, Pampanga. The following information were made available:

• Kapeng Barako Corp. shall pay Starbecks 10% of the sales for the rights to use Starbecks’ brand
• Kapeng Barako Corp.’s gross receipts amounted to Php 10,000,000.00 in 2018

Compute the final tax required to be withheld and remitted to the Bureau of Internal Revenue by Kapeng Barako Corp.
and the amount of cash to be remitted to the payee

2. Nicanor established the “Salamat na Lang Melk Tea”, a tea shop. His store became popular and hence became
open to franchising. For a fee of Php 100,000, one can use his brand and can sell his products. Inday paid the
franchise fee. Compute the final tax (if any) and the amount of cash Inday has to pay Nicanor.

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EXCEL PROFESSIONAL SERVICES, INC.

PRIZES

1. Nicanor won Php 1,000,000 in a TV game show. Compute the final tax required to be withheld and remitted to
the Bureau of Internal Revenue and the net cash to be received by Nicanor

2. Nicanor won Php 10,000 during their Company’s Christmas Party. Compute the final tax required to be withheld
and remitted to the Bureau of Internal Revenue

LOTTO WINNING

1. Nicanor won Php 10,000 in lotto. Compute the final tax required to be withheld and remitted to the Bureau of
Internal Revenue and the net cash to be received by Nicanor

2. Nicanor won Php 1,000,000 in lotto. Compute the final tax required to be withheld and remitted to the Bureau of
Internal Revenue and the net cash to be received by Nicanor

INFORMER’S REWARD

1.Nicanor provided information to the BIR leading to the assessment of Php 50,000,000 but a collection of Php
25,000,000.00. Compute the final tax to be withheld and net cash to be received by Nicanor.

2.Nicanor provided information to the BIR leading to the collection of Php 1,000,000.00. Compute the final tax to be
withheld by the BIR and net cash to be received by Nicanor.

COMPREHENSIVE PROBLEM
Consider the following information by a resident citizen in answering the questions below:

Gross income from business 90,000

Allowable deductions 60,000
Interest income on short term bank deposits:
From bank in the Philippines 80,000
From bank in the U.S. 50,000
Dividend income from a domestic corp 30,000
Dividend income from a foreign corp 70,000
Royalty income from books 20,000
Prizes 25,000

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EXCEL PROFESSIONAL SERVICES, INC.

Compute the following:

Taxable net income Passive income (final tax) Final tax

EXPANDED WITHHOLDING TAX

Exception: No withholding is necessary if casual purchase
Examples of Income Payments subject to EWT: of goods/services from a non-regular supplier and
• Professional fees (not made to General oftentimes involve single purchase.
Professional Partnerships)
• Management fees Notes:
• Consultancy fees • If single purchase is Php 10,000 or more,
• Director’s fees (payment to members of the BOD withholding is required
who are not employees) • Regular suppliers refer to suppliers engaged in
• Rental business or practice of profession with whom the
• Commissions (payment to brokers who are not taxpayer/buyer has transacted at least six (6)
employees) transactions regardless of amount either in
• Payments to partners in a GPP previous or current year
• Payments to beneficiaries of estates and trusts • Goods pertain to tangible personal property. It
• Payments to Contractors or Sub-contractors dies not include intangible personal property as
o Security well as agricultural products
o Janitorial • Taxpayer will be notified through publication in the
o Advertising newspaper of general circulation or BIR website
o Other specialized services • Withholding shall commence on the 1st day of the
• Payments by Top Withholding Agents month following the month of publication
o Goods Criteria:
o Services RDO Group Classification Gross Sales/Receipts OR
(RMO 13-2018) Gross Purchases on
TOP WITHHOLDING AGENT (TWA) preceding taxable year
Group A and B Php 12 Million
Rates: Groups C, D and E Php 5 Million
1. Regular Supplier of Tangible Goods – 1%
2. Regular Supplier of Services – 2%

EXERCISES – EXPANDED WITHHOLDING TAX (see Schedule)

EWT Net Cash

1. Nicanor pays monthly rent of Php 10,000 on his place of business owned
by Jose, a lessor of properties. Compute the EWT to be withheld and the
total cash to be paid by Nicanor to Jose.
2. Nicanor pays his accountant a monthly retainer fee of Php 10,000.
Compute the EWT to be withheld and the total cash to be paid by Nicanor
to his Accountant.
3. Nicanor pays his accountant a monthly retainer fee of Php 10,000.
Compute the EWT to be withheld and the total cash to be paid by Nicanor
to his Accountant.
4. Nicanor, a TWA, bought goods from his regular supplier in the amount of
Php 10,000. Compute the EWT to be withheld and the total cash to be
paid by Nicanor to the supplier.
5. Nicanor, a TWA, paid his regular service center Php 10,000 for the repair
of his delivery car. Compute the EWT to be withheld and the total cash to
be paid by Nicanor to the supplier.
6. Nicanor, a TWA, paid his regular service center Php 10,000 for the repair
of his delivery car. Compute the EWT to be withheld and the total cash to
be paid by Nicanor to the supplier.

COMPREHENSIVE PROBLEMS

1. Professional Fee (not GPP and not more than Php 3Million)
ABC Corp. engaged the services of Nicanor as a tax and legal consultant. Monthly retainer fees agreed by the
parties is Php 100,000.00. Assume the following: (1) ABC Corp. is the only client of Nicanor, (2) it is Nicanor’s
only source of income, (3) no claimable cost of service/deductible expense, compute the following (annual for
Nicanor):

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EXCEL PROFESSIONAL SERVICES, INC.

Amount of EWT to be withheld Tax payable of Nicanor under Taxable payable of Nicanor
by ABC Corp. per month 8% regime under graduated tax

2. Rent
ABC Corp. leased the property owned by Nicanor, a lessor of properties. Monthly rent agreed by the parties is
Php 100,000.00. Assuming ABC Corp. is the only lessee of Nicanor and thus the only source of income, compute
the following (annual for Nicanor):
Amount of EWT to be withheld Taxable payable of Nicanor Taxable payable of Nicanor
by ABC Corp. per month under 8% regime under graduated tax (OSD)

3. Security Fee
ABC Corp. contracted the services of Bryan Macho Security Corp, a security agency. The terms of the agreement
include the payment of salary of the security guards in the total amount of Php 100,000 per month plus the 20%
security (agency) fee. Assuming ABC Corp. is the only client of BMSC, and thus the only source of income,
compute the following (annual for BMSC):
Amount of EWT to be withheld by ABC Corp. Tax payable of BMSC using OSD as method of
per month deduction. Only cost is the salary of guards

4. Janitorial Fee
ABC Corp. contracted the services of Bryan Macho Janitorial Corp, a janitorial agency. The terms of the
agreement include the payment of salary of the janitors in the total amount of Php 100,000 per month plus the
20% agency fee. Assuming ABC Corp. is the only client of BMJC, and thus the only source of income, compute
the following (annual for BMJC):
Amount of EWT to be withheld by ABC Corp. Tax payable of BMJC using OSD as method of
per month deduction. Only cost is the salary of guards

COMPREHENSIVE PROBLEM

ABC Corp., a Top Withholding Agent (TWA) as published in the BIR website. The following are culled from the records of
the Company:
• Purchase of goods – Php 1,000,000
• Purchase of service – Php 1,000,000
• Payment to Meralco – Php 1,000,000
• Professional fees (GPP) – Php 1,000,000
• Professional fees (made to small time practitioners-STP) – Php 1,000,000
• Rent – Php 1,000,000

In filing the BIR Forms 1601EQ, compute (1) the expanded withholding tax and (2) the amount of cash to pay the
payee:
Income Payment Amount EWT Rate EWT Amount to Pay
Purchase of goods
Purchase of service
Payment to Meralco
Professional fees- GPP
Professional fees - STP
Rent
Total

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EXCEL PROFESSIONAL SERVICES, INC.

COMPREHENSIVE PROBLEM

ABC Corp., a Top Withholding Agent (TWA) is under BIR audit. As Revenue Officer, it is your duty to determine exposure
to EWT. Hence, you requested the Company’s Income Statement and compared the amounts in the BIR Form 1601-EQ
and the alpha list of payees.

A summary of the amounts per I/S and BIR Forms 1601EQ and alpha list of payees showed the following:

Income Payment Inc Statement Subjected to EWT EWT Rates Tax withheld
Purchase of goods 1,000,000 500,000 1% 5,000
Purchase of service 1,000,000 800,000 2% 16,000
Professional fees- GPP 1,000,000 1,000,000 0% 0
Professional fees - STP 1,000,000 500,000 5% 25,000
Rent 1,000,000 1,000,000 5% 50,000
Total 5,000,000 2,800,000 96,000

Compute possible deficiency expanded withholding tax. Note: The EWT rates are correct.

Income Payment Amount EWT EWT Tax withheld Deficiency

Rates
Purchase of goods
Purchase of service
Prof fees - STP
Rent
Total

Assuming, further, that the covered year of audit is 2019 and today is June 30, 2021, compute the (1) increments or
penalties and (2) total amount payable.

Deficiency EWT
Add: Surcharge (25%)
Interest (12%)
Compromise Penalty
TOTAL AMOUNT PAYABLE

WITHHOLDING TAX ON COMPENSATION 2. Exempt from Withholding

o Basic Minimum Wages including Holiday
1. Compensation subject to withholding Pay, Overtime Pay, Night Shift Differential
Regular Compensation: and Hazard Pay
o Basic salary o Salary of employees whose income does
o Fixed allowance for Representation not exceed Php 250,000 per year
o Fixed allowance for Transportation o 13th month pay and other benefits not
o Fixed housing allowance exceeding Php 90,000
o Cost of Living Allowance (COLA) o Mandatory contributions (employee share
Supplementary Compensation: in SSS, GSIS, Pag-ibig) and union dues
o Commission o De Minimis benefits
o Profit Sharing o Salary of Kasambahay (Batas Kasambahay
o Fees including Director’s fees (member of Law)
Board of Director who is an employees) o Casual labor
o Excess 13th month pay

EXERCISES – WITHHOLDING TAX ON COMPENSATION (see Schedule)

Taxable Compensation Income (2020) Tax Due

1. Php 1,000 daily wage
2. Php 20,000 weekly
3. Php 15,000 semi-monthly
4. Php 30,000 monthly
5. Php 100,000 monthly

END of TAX.3014.0

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