Withholding Tax in the Philippines
Withholding tax is a tax system in the Philippines where the government collects taxes at the source of income. This ensures that taxes are paid progressively throughout the year rather than at the end of the fiscal year. It applies to individuals, businesses, and other entities.
Withholding tax is not a separate tax but a method of collecting tax at the source of income. It’s a mechanism used by governments to ensure timely and regular tax collection from taxpayers.
Key Points: Why Withholding Tax Is Not a Tax
- Prepaid Tax Mechanism:
- Withholding tax is a portion of the taxpayer’s income that is deducted at the time of payment (e.g., salary, professional fees, rent).
- It is considered an advance payment of income tax. The withheld amount is credited to the taxpayer’s final tax liability at the end of the year.
- Facilitates Tax Compliance:
- It simplifies tax collection by requiring employers, payers, or withholding agents to deduct and remit taxes on behalf of the taxpayer.
- Reduces the burden of a lump-sum tax payment for the taxpayer at year-end.
Types of Withholding Tax
- Withholding Tax on Compensation:
- Deducted by employers from employees’ salaries.
- Based on graduated income tax rates as per the TRAIN Law.
- Employers must remit the withheld tax using BIR Form 1601-C monthly and submit an annual BIR Form 2316.
- Expanded Withholding Tax (EWT):
- Deducted from income payments made to suppliers, contractors, and service providers.
- Common rates are 1%, 2%, 5%, or 10%, depending on the type of transaction.
- Remitted using BIR Form 1601-E (monthly) and BIR Form 1604-E (annual).
- Final Withholding Tax (FWT):
- Applied to income payments like dividends, royalties, or certain passive income.
- Rates vary based on the type of income and the recipient (e.g., non-residents may have specific rates).
- Withholding Tax on Government Money Payments:
- Applies to payments made by government offices, such as for supplies or services.
- Covered under BIR Form 1601-F and 1604-F.
- Withholding VAT:
- A 5% VAT withheld on transactions with suppliers by government agencies or VAT-registered entities.
- Filed using BIR Form 1600.
Steps in Withholding and Remittance
- Determine the Applicable Tax:
- Identify the type of withholding tax (e.g., compensation, expanded, final).
- Refer to the withholding tax rates in the BIR table or rulings.
- Deduct the Tax:
- Compute the tax and deduct it from the payment to the recipient.
- File and Pay:
- File the correct withholding tax return (e.g., BIR Form 1601-C for compensation).
- Remit the withheld amount to an Authorized Agent Bank (AAB) or through eFPS/eBIRForms.
- Issue Certificates:
- Provide BIR Form 2307 for EWT or 2316 for compensation tax withheld to recipients or employees.
Common Filing Deadlines
- Monthly Filing:
- By the 10th, 15th, or 20th day of the following month, depending on the type of taxpayer and filing platform (manual or electronic).
- Annual Filing:
- Compensation (BIR Form 1604-CF): January 31.
- Expanded and Final (BIR Form 1604-E/F): March 1.