Withholding Taxes: Are you on top?

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Taxwise Or Otherwise

The withholding tax system, specifically that of the creditable/expanded withholding tax or “EWT,” is a means of approximating and collecting in advance the income tax liability of a payee or income earner for certain types of income payments.

Income taxes due are paid upon the filing of the quarterly and annual income tax returns. However, the withholding tax system allows the government to collect the income tax monthly, which is ahead of the payees’ quarterly income tax payment. Because the EWT is deducted regularly from the income of the payee, the monthly requirement to withhold and remit EWT on the part of the income payor guarantees continuous revenue inflows to the National Treasury and helps prevent delinquencies or revenue loss.

Moreover, during a tax audit, the Bureau of Internal Revenue (BIR) normally assesses any discrepancy between purchases/expenses subjected to withholding tax by the income payor vis-a-vis sales/revenue declared by the income earner.

The Consolidated Withholding Tax Regulations or Revenue Regulations No. 2-98 (RR No. 2-98), as amended, enumerates the types of income payments to persons residing in the Philippines that are subject to EWT. Generally, the list is specific to:

a) The types of income (e.g., rentals, professional fees, commissions, and purchases of specific goods such as sugar, mineral products, and quarry resources);

b) The types of payee (e.g., contractors, partners of a general professional partnership, beneficiaries of estates and trusts, and specific brokers/agents); and

c) The types of payor (e.g., government offices, political parties/candidates, top corporations, and individual taxpayers).

For top corporate taxpayers, they would most likely point to Section 2.57.2(I), as amended by RR No. 11-2018, as the most challenging EWT provision to implement administratively even with advances in technology for bookkeeping and accounting-related systems. Under this catch-all provision, private corporations classified as Top Withholding Agents (TWAs) are required to withhold 1% and 2% EWT on their local/resident suppliers of goods and services, respectively, if the local purchases are not covered by the other EWT rates.

Prior to the 2018 RR, only Top 20,000 private corporations duly informed by the BIR as such were required to withhold 1% and 2% EWT rates on their regular purchases. In 2018, RR No. 11-2018 introduced the TWA classification which expanded the scope to include Medium Taxpayers and those taxpayers under the Taxpayer Account Management Program (TAMP).

In a more recent BIR issuance, RR No. 7-2019 further amended the TWA criteria to include taxpayers whose gross sales/receipts or gross purchases/claimed deductible itemized expenses amounted to P12 million pesos during the preceding taxable year.

At first glance, the threshold amount of P12 million may appear high. However, it is easy to breach because the rule provides two ways of measuring the threshold amount, that is either by calculating the: a) gross sales/receipts; or b) gross purchases/deductible expenses. Thus, it would not be outside the realm of possibility for some medium-sized businesses to suddenly earn the TWA classification, and assume the administrative burden and obligation that comes with it.

Does this make a taxpayer automatically a TWA the following year upon breaching the P12 million threshold? Fortunately, the answer is no.

Under the RR, the BIR is required to serve notice by publishing the list of TWAs in a newspaper of general circulation or to post it on the BIR website. After being notified, the obligation of the TWAs to withhold 1% and 2% EWT shall commence on the first day of the month following the month of publication. This rule shall apply to all TWAs except those already classified as TWAs under RR No. 11-2018 including the Top 20,000 private corporations identified in previous regulations.

Thus, the “notice by publication” rule means that breaching the P12 million threshold does not automatically make one a TWA. Instead, taxpayers that earned gross sales/receipts or incurred gross purchases/deductible expenses of at least P12 million during the previous taxable year can take a breather in the meantime until the BIR updates and publishes the new list of TWAs. For now, they can heave a sigh of relief until the directive to withhold 1% and 2% EWT is handed down.

It would not be difficult to assume that the new regulation is another way for the BIR to broaden its tax base and to improve tax administration. Expanding the scope of the EWT would make taxpayers more transparent about their transactions and how they declare these in their tax returns.

Although RR No. 7-2019 clarified the definition of TWAs, it did not make the lives of corporate finance and tax personnel, especially of newly classified TWAs, any simpler. Unfortunately, some multinational companies and large corporations consider EWT a challenging obligation added to their fair share of work.

No matter what, the policy is the way it is for now. As a word of advice, it is probably best for TWAs to go the extra mile in monitoring their transactions and prudently ask, “Are we on top of our withholding taxes?”

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Crystabelle Cruz Lucas is a manager at Tax Services Department of Isla Lipana & Co., the Philippine member firm of PwC network. Readers may call +63 (2) 845-2728 or e-mail the author at for questions or feedback.