Introduction

In the Philippine tax system, withholding taxes serve as a mechanism to ensure the efficient collection of income taxes at the source. This approach minimizes tax evasion and facilitates compliance by shifting the burden of tax remittance from the income recipient to the payor. A common query in this domain revolves around the withholding of taxes on purchases, particularly whether this obligation is exclusive to designated "Top Withholding Agents" (TWAs). This article explores the legal framework governing withholding taxes on purchases under Philippine law, drawing from the National Internal Revenue Code of 1997 (NIRC), as amended by Republic Act No. 10963 (TRAIN Law), Republic Act No. 11534 (CREATE Act), and relevant Bureau of Internal Revenue (BIR) regulations. It examines the scope, requirements, and limitations of withholding on purchases, clarifying that while TWAs bear a specific mandate in this area, the broader withholding system extends beyond them.

Legal Basis for Withholding Taxes

The foundation for withholding taxes in the Philippines is found in Sections 57 and 58 of the NIRC. Section 57 authorizes the Secretary of Finance, upon recommendation of the BIR Commissioner, to require the withholding of taxes on certain income payments subject to tax. This includes final withholding taxes (where the withheld amount constitutes the full tax liability) and creditable withholding taxes (where the withheld amount is creditable against the recipient's total income tax due).

Revenue Regulations (RR) No. 2-98, as amended by various issuances such as RR No. 11-2018, RR No. 30-2003, and RR No. 14-2002, operationalizes these provisions by detailing the types of income subject to withholding, the applicable rates, and the entities responsible for withholding. Withholding agents are defined under Section 2.57.3 of RR No. 2-98 as any person or entity required to deduct and withhold taxes, including individuals engaged in trade or business, corporations, government agencies, and even non-residents in certain cases.

Withholding on purchases typically falls under the Expanded Withholding Tax (EWT) regime, which applies to various income payments such as professional fees, rentals, commissions, and purchases of goods and services. However, the specific rule for withholding on general purchases of goods and services is not universal but targeted at certain withholding agents.

Who Are Top Withholding Agents?

Top Withholding Agents are a subset of withholding agents designated by the BIR based on specific criteria outlined in RR No. 11-2018 and subsequent regulations like RR No. 7-2019 and RR No. 12-2021. These include:

Top 20,000 Private Corporations: Ranked by gross sales or receipts, gross purchases, or gross payments, as determined from income tax returns, withholding tax returns, and other relevant data.
Top 5,000 Individuals: Engaged in trade or business, selected based on similar criteria such as gross income or payments.
Government Entities: Including national government agencies, government-owned and controlled corporations (GOCCs), and local government units (LGUs) with significant procurement activities.
Other Designated Entities: Such as medium and large taxpayers under the BIR's Large Taxpayer Service, or those specifically notified by the BIR.

The BIR publishes lists of TWAs periodically through Revenue Memorandum Orders (RMOs), such as RMO No. 46-2018 and updates thereto. Entities can also be added or delisted based on annual reviews or upon request, provided they meet or fail to meet the thresholds (e.g., gross sales exceeding PHP 100 million for corporations).

TWAs are subject to enhanced withholding obligations, including the requirement to withhold on purchases from regular suppliers, which is not imposed on non-TWAs.

Withholding on Purchases: The Rule for Top Withholding Agents

Under Section 2.57.2(M) of RR No. 2-98, as amended by RR No. 11-2018, TWAs are required to withhold taxes on purchases of goods and services from their regular suppliers at the following rates:

1% on the gross purchase price for goods (other than agricultural products).
2% on the gross purchase price for services.

A "regular supplier" is defined as a supplier from whom the TWA has made at least six purchases within a taxable year, regardless of amount, or from whom purchases aggregate at least PHP 100,000 in a year. This withholding applies only to purchases not already subject to other EWT rates (e.g., if a purchase involves professional services, the standard 5% or 10% rate under Section 2.57.2(A) applies instead).

Importantly, this specific withholding on purchases is mandatory only for TWAs. Non-TWAs are not required to withhold under this provision. The rationale is to target large entities with substantial procurement volumes, ensuring better tax compliance from suppliers who might otherwise underreport income. The withheld amounts are creditable against the supplier's income tax liability, and TWAs must issue BIR Form No. 2307 (Certificate of Creditable Tax Withheld at Source) to the supplier.

Failure by a TWA to withhold under this rule can result in penalties under Section 251 of the NIRC, including fines ranging from PHP 5,000 to PHP 50,000 per violation, plus interest and potential criminal liability for willful neglect.

Are Non-Top Withholding Agents Prohibited from Withholding on Purchases?

The question of whether only TWAs are "allowed" to withhold on purchases requires nuance. Philippine tax law does not prohibit non-TWAs from withholding taxes; rather, it does not mandate them to do so for general purchases under Section 2.57.2(M). However:

Mandatory Withholding for All Agents in Other Cases: Non-TWAs must still withhold on other income payments subject to EWT, such as:
- 5% or 10% on professional fees (Section 2.57.2(A)).
- 5% on rentals (Section 2.57.2(E)).
- 2% on certain contractor payments (Section 2.57.2(F)). These apply universally to all withholding agents, not just TWAs.
Voluntary Withholding: There is no explicit prohibition against voluntary withholding by non-TWAs on purchases, but it is not encouraged or standard practice. If a non-TWA withholds voluntarily, it must comply with remittance and reporting requirements (e.g., filing BIR Form No. 1601-EQ for quarterly remittances). However, suppliers might object, as it could complicate their tax crediting. The BIR generally expects withholding only where mandated to avoid administrative confusion.
Special Cases: Certain entities, even if not TWAs, may be required to withhold on purchases if they fall under other categories. For instance:
- Government agencies (which are often TWAs anyway) must withhold under Government Procurement Reform Act (RA 9184) rules.
- Importers withholding on customs duties and VAT, though this is distinct from income tax withholding.
- Non-residents withholding on payments to Philippine residents, but this is rare for purchases.

Thus, while TWAs have an exclusive mandate for withholding on regular purchases of goods and services, the overall withholding system is broader, and non-TWAs are neither strictly prohibited nor required in this specific context.

Exemptions and Exceptions

Several exemptions apply to withholding on purchases, even for TWAs:

Exempt Suppliers: No withholding if the supplier is exempt from income tax (e.g., non-profit organizations under Section 30 of the NIRC) or if the income is exempt (e.g., agricultural products sold by producers).
Threshold Amounts: Withholding applies only if the payment exceeds PHP 10,000 per transaction or if the supplier is regular.
VAT Implications: Withholding on purchases is separate from Value-Added Tax (VAT) withholding, which may apply concurrently under RR No. 16-2005 for government payments (5% VAT withholding).
CREATE Act Adjustments: The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act reduced certain EWT rates but did not alter the TWA-specific rule for purchases.
De Minimis Purchases: Small-value purchases below BIR thresholds may be exempt from documentation requirements, though withholding still applies if mandated.

Suppliers can claim refunds for over-withheld taxes via BIR Form No. 1914, but this is uncommon for purchase withholdings.

Implications for Businesses and Compliance

For TWAs, compliance involves maintaining records of regular suppliers, integrating withholding into procurement processes, and timely remittance (by the 10th day of the following month for eFPS filers). Non-compliance can lead to assessments during BIR audits, with deficiencies treated as understated expenses, potentially increasing taxable income.

For suppliers, withheld taxes reduce cash flow but provide proof of income for tax crediting. Small suppliers dealing with TWAs may face competitive disadvantages if unable to absorb the withholding impact.

From a policy perspective, limiting this withholding to TWAs streamlines administration, focusing enforcement on high-impact entities while reducing burdens on smaller businesses. However, it has drawn criticism for creating uneven playing fields, prompting calls for broader application or simplification.

Recent Developments and Amendments

Amendments under the TRAIN Law (2018) expanded TWA criteria and clarified regular supplier definitions. The CREATE Act (2021) focused on rate reductions but retained the structure. BIR issuances like Revenue Memorandum Circular (RMC) No. 88-2018 provide guidelines on TWA delisting, while RMC No. 124-2020 addressed COVID-19-related extensions for filings.

Future reforms under the Comprehensive Tax Reform Program may harmonize withholding rules, potentially extending or modifying TWA obligations.

Conclusion

In summary, only Top Withholding Agents are required to withhold taxes on purchases from regular suppliers under the specific provisions of Philippine tax law, at rates of 1% for goods and 2% for services. This is not a blanket restriction; non-TWAs must withhold on other qualifying payments and are not expressly barred from voluntary withholding on purchases, though it is not standard. Understanding these distinctions is crucial for compliance, as misapplication can result in penalties or lost tax credits. Businesses should consult BIR rulings or tax professionals for entity-specific advice, ensuring alignment with evolving regulations.