As a business owner or manager in the Philippines, do you know when you should be withholding tax and what the requirements are for reporting? If you aren’t fully clear about your withholding obligations, don’t worry – you are not alone! This article outlines the general requirements for withholding taxes in the Philippines and deals with a number of commonly asked questions.
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Many businesses in the Philippines have difficulty navigating their way through the rates, timing and reporting of withholding taxes. The tax compliance system has become even more complex with the introduction of new regulations on withholding taxes arising from TRAIN Law.
This article includes a comprehensive guide on withholding taxes in the Philippines. Who is a withholding agent? How much tax should a business withhold? What are the requirements for reporting to the Bureau of Internal Revenue (BIR)? And more…
- 1 What is withholding tax?
- 2 Is a business required to deduct withholding tax from every supplier?
- 3 Who are the Top Withholding Agents (TWA)?
- 4 How do you know if your business has been designated a TWA?
- 5 What are the laws governing the withholding of taxes?
- 6 Changes in Withholding Taxes after TRAIN Law
- 7 What forms are required for submitting withholding taxes?
- 8 What do you do if you have been notified that you are a TWA?
What is withholding tax?
Withholding tax is when a business withholds a portion of a payment for services or goods to a supplier and remits that portion to the government on behalf of its supplier. This is a tax compliance method utilized by governments to ensure that taxes are remitted properly by a business and on a timely basis.
In other words, the government is shifting the burden of tax collection from the BIR to the businesses.
The business (as a tax withholding agent) is required to provide BIR Form 2307 (or Form 2306 in certain cases) to the supplier as proof of the withholding. The supplier can then use that form as evidence of payment. The amount of taxes withheld should then be deducted from the taxpayer’s income tax at the end of the year.
If you are a tax withholding agent, you are, in general, required to deduct 1% of the value of payments for purchases of goods and 2% for purchase of services from all local suppliers. A tax withholding agent is also required to withhold tax from non-resident aliens engaged in trade or business in the Philippines.
Non-compliance on withholding tax requirements?
As a withholding agent, if you do not comply with the withholding tax requirements, those expenses would be treated as non-deductible for the computation of your taxable income. Remember – the income tax rate is 30%! So indirectly, not applying the correct withholding tax could cost a business 30% of these expenses in additional income tax.
Is a business required to deduct withholding tax from every supplier?
No. The supplier must be a regular supplier, meaning the withholding agent has transacted at least 6 times (last year or in the current year) with that supplier. If, however, there has been a single purchase transaction of at least P10,000, withholding tax has to be applied.
Aside from the purchase of goods and services, there are other forms of withholding taxes. For example, rental of buildings requires a 5% withholding tax on the gross rental payment. For a full list of withholding taxes under Philippines law, see the BIR’s list of withholding taxes.
Who are the Top Withholding Agents (TWA)?
TWAs are those businesses that were previously identified by the BIR as TWAs (and have not been de-classified), plus those that have been newly identified under the Taxpayer Account Management Program (TAMP).
Revenue Regulation 11-2018 has designated the following taxpayers as Top Withholding Agents:
- Large Taxpayer under Revenue Regulation No. 1-1998, as amended by Sections 4.5, 5.1 and 5.2 under RR 17-2010
- The Top 20,000 private companies under RR No. 6-2009
- The Top 25,000 individual taxpayers under RR No. 6-2009
- Medium Taxpayers as defined under RMO 17-2017, these are the top 500 non-individual taxpayers that meet the requirements of a Large Taxpayer, but have not yet been designated by the BIR
- All those that are identified under the Taxpayer Account Management Program (TAMP) as per RR 10-2014.
How do you know if your business has been designated a TWA?
There are two ways to find out if your business has been designated a TWA:
- The BIR will issue a Revenue Memorandum Circular listing the new TWAs, which must be published in a newspaper of general circulation. It will also be published on the BIR website. A company is deemed notified that they are a TWA as of the date of the publication. A business should therefore keep watch on the daily newspapers and BIR website frequently!
- A business may also be notified by the BIR through a written letter. However, there may be cases where a business will not receive the letter, on time or at all, so make sure to read the papers and visit the BIR website!
What are the laws governing the withholding of taxes?
Previously, rules governing withholding taxes in the Philippines were covered by Revenue Regulation 2-98. However, with the introduction of TRAIN Law, new regulations now apply.
RMC 01-2018, Revenue Regulation 11-2018 and Revenue Regulation 26-2018 are relevant regulations, while RMO 17-2017 (Medium Taxpayers) and RR 6-2009 (Taxpayer Account Management Program (TAMP) are also applicable.
TAMP is BIR’s most recently introduced program for monitoring taxpayers more closely and has the ultimate aim of increasing the rate of collection.
This can seem like a complicated web to navigate. CloudCfo are experts in this field and can assist your business with achieving compliance. Contact us now for your free consultation!
Changes in Withholding Taxes after TRAIN Law
TRAIN law made some notable changes to payments around employee compensation, professional fees and payments to individuals.
TRAIN Law reduced the amount of taxes to be paid by employed individuals.
Under the old tax rates, the payroll of employees is subject to rates of up to 30%, with a minimum taxable amount of P10,000. Under the TRAIN Law, a tax exemption was applied to those earning less than P250,000 a year. The maximum tax rate was also increased to 35%, but this is for those earning above P8 million each year.
All (a) professional fees, talent fees for services rendered, (b) income paid to certain brokers and agents and (c) commissions of independent and/or exclusive sales representatives and marketing agents of companies were previously taxed at 8% for individuals and 10% or 15% for Non-individuals. The tax rate is now based on the gross income for the current year of those individuals.
For individuals, if the annual gross income does not exceed P3 Million, 5% withholding must be applied. Otherwise, a 10% withholding tax must be applied.
Non-individuals have a lower income bracket but have higher withholding rates. If the gross income for the year does not exceed P720,000, then a 10% withholding is required. If the gross income is higher than P720,000, a 15% withholding tax based on the gross income should be applied.
Tax exemption for individuals earning less than P250,000
An individual earning less than P250,000 a year is exempted from withholding tax, where the income is coming only from a single payor (i.e. a tax withholding agent).
What forms are required for submitting withholding taxes?
All TWAs are required to remit taxes monthly using BIR Form 0619E. The form must be submitted on the 10th calendar date after the month the tax has been withheld. EFPS users (i.e. those who pay their taxes online) can file up to the 15th of the month. The form should be submitted every February, March, May, June, August, September, November and December.
For example, if you are an EFPS user, withheld taxes for April must be paid on May 15th.
For quarterly tax payments, Form 1601EQ must be filed every January, April, July and October. The deadline is the last day of the month after the quarter ends. So for the 1st quarter ending in March, the deadline is April 30.
Together with your 1601EQ, a business must submit a Quarterly Alphalist of Payees (1604E or 1604F). This is a list of all payees from whom a business withheld taxes and includes their Tax Identification Numbers, the amount withheld and business addresses, in addition to other relevant information. The Alphalist Data Entry and Validation Module must first be downloaded from the BIR website to complete this.
What do you do if you have been notified that you are a TWA?
If it hasn’t been done already, you should make sure your tax compliance systems and processes are in place and up to date! Review your prior tax submissions and business payments and make sure that you are in full compliance with your tax withholding obligations!
There is an easy way to ensure tax compliance. You can get in touch with CloudCfo and let us help! CloudCFO can file your monthly and quarterly tax forms. We can also help you with the submission of the Alphalist in addition to all other tax compliance related activities.
CloudCfo provides accounting and bookkeeping services in the Philippines with the highest level of quality service for all of our clients. We are an accounting firm that takes pride in the growth and success of our clients.