Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

TAXATION C. NARANJO/ A. SIAPIAN/ V. GUDANIO

TAX.3004 – Withholding Tax System MAY 2021

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
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
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 payments
amount from the payee’s income, and pays which is allowed to be credited against the
this amount to the government on behalf of taxpayer’s final tax liability which is then
the payee. The payee then no longer needs to adjusted accordingly. The amount withheld is
file an income tax return for this income. 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 settlement of 1. Advance payment of tax only (estimate)
characteristics tax liability on such income 2. Creditable in nature
2. Not creditable in nature 3. Recipient of income is required to report
3. Recipient of income is NOT required to the income in annual ITR (ordinary/active
report the income in income tax return income)
Examples 1. FT on certain passive incomes 1. Withholding Tax on Compensation (WTC)
2. Capital gains on sale of: 2. Expanded Withholding Tax (EWT) –
a. Shares of Stock Not Listed income payment other than compensation
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
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

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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 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 – FINAL TAX
INTEREST
1.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 FT Net cash
RC
NRC
RA
NRAETB
NRANETB
DC
RFC
NRFC

DIVIDENDS
2. ABC Corp., a domestic corporation, declared dividends to its stockholders of record as of December 31, 2018.
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 100,000

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

Taxpayer Dividend Income FT Rate Final Tax Net cash
RC 100,000
NRC 100,000
RA 100,000
NRAETB 100,000
NRANETB 100,000
DC 100,000
RFC 100,000
NRFC* (15% or 30%) 100,000
Total Withholding

ROYALTY
3.Starbacks 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 Starbacks franchise will be
opened in Macabebe, Pampanga. The following information were made available:

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

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The final tax required to be withheld and remitted to the Bureau of Internal Revenue by Kapeng Barako Corp. is
P__________________

INFORMER’S REWARD
4.Nicanor provided information to the BIR leading to the collection of Php 25,000,000.00. Compute the net cash to
be received by Nicanor.

Consider the following information by a resident citizen in answering the questions below:
5. 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

Compute the following:

Taxable net income Passive income (final tax) Final tax

EXERCISES – EXPANDED WITHHOLDING TAX

1. Professional Fee (not GPP and not more than Php 3Million)
ABC Corp. engaged the services of Atty. Raygun 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 Atty. Raygun, (2) the
only source of income, (3) no claimable cost of service/deductible expense, compute the following (annual for
Atty. Raygun):
Amount of EWT to be withheld Tax payable of Atty. Raygun Taxable payable of Atty.
by ABC Corp. per month under 8% regime Raygun under graduated tax

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

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Amount of EWT to be withheld by ABC Corp. Tax payable of BMJSC using OSD as method of
per month deduction. Only cost is the salary of guards

EXERCISES:
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
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 Remittance 0619F None 10th day of the following
Form month
Quarterly Filing 1601-FQ Quarterly Alphalist of Before the last day of the
Payees (QAP) month following the close
Final tax on interest 1602 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 request,
Source simultaneous with
withholding

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EXPANDED Form or Return Attachment Deadline

WITHHOLDING
TAX (EWT)
Monthly Remittance 0619E None 10th day of the following
Form month
Quarterly Filing 1601-EQ Quarterly Alphalist of Before the last day of the
Payees (QAP) 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 request,
Withheld At Source or income earner) simultaneous with
withholding

WITHHOLDING Form or Return Attachment Deadline

TAX ON
COMPENSATION
Monthly Remittance 1601-C Summary Alphalist of 10th day of the following
Form Withholding Tax at month (for month of
Source (SAWT) December - Jan 15)
Annual Information 1604-C Alphalist of Employees January 31
Return (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.

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