INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

2nd Sem
Department of Accountancy 2020-2021
INCOME TAXATION

MODULE 4 – WITHHOLDING TAX SYSTEM

SALIENT FEATURES OF WITHHOLDING TAX SYSTEM

➢ System of collecting money
➢ Constitution of payor as withholding agent
➢ A system of advance collection of payee’s income tax liability
➢ Amount withheld is a trust fund for the government
➢ Amount withheld is creditable or final income tax due of the payees
➢ Source of third-party information
➢ Penal provision in case of failure to uphold the duty
KINDS OF WITHHOLDING TAX
Final Withholding Tax (FWT/FT) Creditable Withholding Tax (CWT)
Definition is a tax wherein the payer withholds an is the tax withheld from income
amount from the payee’s income, and pays payments which is allowed to be
this amount to the government on behalf of credited against the taxpayer’s final
the payee. The payee then no longer needs tax liability which is then adjusted
to file an income tax return for this income. 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
Nature and 1. Constituted as full and final 1. Advance payment of tax only
characteristics settlement of tax liability on such (estimate)
income 2. Creditable in nature
2. Not creditable in nature 3. Recipient of income is
3. Recipient of income is NOT required required to report the
to report the income in income tax income in annual ITR
return (ordinary/active income)
Examples 1. FT on certain passive incomes 1. Withholding Tax on
2. Capital gains on sale of: Compensation (WTC)
a. Shares of Stock Not Listed 2. Expanded Withholding Tax
b. Real Property classified as capital (EWT) – income payment
asset, other than compensation
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

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INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
2nd Sem
Department of Accountancy 2020-2021
INCOME TAXATION

e. To issue withholding tax certificate (Form 2306/2307)

2. Income Earner – payee / income recipient
TOP WITHHOLDING AGENT (TWA)
Rates:
1. Regular Supplier of Tangible Goods – 1%
2. Regular Supplier of Services – 2%

Exception: No withholding is necessary if casual purchase of goods/services from a non-regular supplier

and oftentimes involve single purchase.

Notes:
• If single purchase is Php 10,000 or more, withholding is required
• Regular suppliers refer to suppliers engaged in business or practice of profession with whom the
taxpayer/buyer has transacted at least six (6) transactions regardless of amount either in
previous or current year
• Taxpayer will be notified through publication in the newspaper of general circulation or BIR
website
• Withholding shall commence on the 1st day of the month following the month of publication

Criteria:
RDO Group Classification (RMO 13-2018) Gross Sales/Receipts OR Gross Purchases on
preceding taxable year
Group A and B Php 12 Million
Groups C, D and E Php 5 Million
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
CERTAIN PASSIVE INCOME SUBJECT TO FINAL TAX (See Schedule)
1. Interest income from bank deposits in the Philippines
2. Interest income from expanded foreign currency deposits
3. Dividends
4. Royalties
5. Prizes
6. Informer’s reward - A cash reward may be given to any person instrumental in the
a. discovery of violations of the National Internal Revenue Code or
b. discovery and seizure of smuggled goods

Requisites:
1. Sworn statement of informer
2. Information is not yet in the possession of the BIR
3. The information lead to the discovery of fraud
4. Resulted to recovery of revenues, surcharges and fees and or conviction of the guilty party or

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INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
2nd Sem
Department of Accountancy 2020-2021
INCOME TAXATION

imposition of any fine or penalty

5. The informer is other than a/an:
a. Internal Revenue officials or employees
b. Other public officials or employees (if connected with their work, they are prohibited, if
there is no connection, allowed)
c. Relatives of those in a. and b. within the 6 degree of consanguinity (no provision for
affinity)

Cash Reward – Whichever is the lower of the following per case:

1. 10% of revenues, surcharges or fees recovered and or fine or penalty imposed and collected
or
2. P1,000,000
EXERCISES: WITHHOLDING TAX ON COMPENSATION
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
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:
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.
e. General professional partnerships
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

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INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
2nd Sem
Department of Accountancy 2020-2021
INCOME TAXATION

project is a foreign financed/internationally-funded project and that international bidding is 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;
ii. 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.
WITHHOLDING TAX RETURNS
FINAL TAX (FWT) Form or Return Attachment Deadline
Monthly 0619F None 10th day of the following
Remittance Form month
Quarterly Filing 1601-FQ Quarterly Alphalist of Before the last day of
Payees (QAP) the month following the
Final tax on interest 1602 close of the quarter
on bank deposits
Fringe Benefit Tax 1603
Annual Information 1604-F Alphalist of Payees January 31
Return (Annual)
Certificate of Final 2306 None 20 days from close of
Tax Withheld At quarter OR upon
Source request, 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 Before the last day of
Payees (QAP) the month following the
close of the quarter
Annual Information 1604-E Alphalist of Payees March 1
Return (Annual)
Certificate of 2307 None 20 days from close of
Creditable Tax (proof of tax credit of payee quarter OR upon
Withheld At Source or income earner) request, simultaneous
with withholding

WITHHOLDING TAX Form or Return Attachment Deadline

ON
COMPENSATION
Monthly 1601-C Summary Alphalist of 10th day of the following

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INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
2nd Sem
Department of Accountancy 2020-2021
INCOME TAXATION

Remittance Form Withholding Tax at month (for month of

Source (SAWT) December - Jan 15)
Annual Information 1604-C Alphalist of January 31
Return Employees (Annual)
Certificate of 2316 None On or before January 31
Compensation (proof of tax credit of OR in cases of
Payment employee or income earner) termination of
employment, on the
same day the last
payment of wages is
made.

END

References:
1. Republic Act No. 8424 – National Internal Revenue Code of 1997 (NIRC)
2. Republic Act No. 10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN)

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