I. Framing the Question

In practice, this is the real issue behind the question:

“If my sale is VAT zero-rated (0% VAT), does my customer still have to withhold Expanded Withholding Tax (EWT) from my income?”

Short answer: Yes, a VAT zero-rated sale can still be subject to Expanded Withholding Tax.

VAT zero-rating affects indirect tax (VAT); EWT is a mechanism of income taxation. These are two different tax systems. Unless the income is itself exempt from income tax or specifically not covered by withholding rules, zero-rating of VAT does not exempt the payment from EWT.

The rest of this article explains why, with Philippine-specific legal and practical context.

II. Basic Legal Concepts

1. Value-Added Tax (VAT)

VAT is an indirect tax on consumption imposed under the National Internal Revenue Code (NIRC). For a VAT-registered seller:

Regular (standard-rated) sale:
- Output VAT: 12%
- Sales Invoice shows:
  - Selling Price (net of VAT)
  - 12% VAT
  - Total Invoice Amount (Selling Price + VAT)
Zero-rated sale:
- Output VAT: 0%
- Sale is still VAT-taxable, but at 0% rate, usually because the destination or nature of the transaction warrants it (e.g., export sales, certain sales to export enterprises or ecozones, certain foreign currency–denominated services).

Zero-rated ≠ VAT-exempt:

Zero-rated: Taxable but at 0%; seller may claim input VAT credits or refund related to these sales.
VAT-exempt: Not subject to VAT at all; seller cannot claim input VAT credits on related purchases.

2. Expanded Withholding Tax (EWT)

EWT is a creditable withholding tax on income, also under the NIRC. It’s:

Withheld by the payor (withholding agent) at source.
Creditable against the payee’s income tax (quarterly and annual).
Implemented through a detailed schedule of income payments and rates (e.g., rentals, professional fees, payments to suppliers, etc.).

Key points:

EWT is concerned with income tax, not VAT.
The tax base is the gross amount of income (usually exclusive of VAT if VAT is separately billed).

III. Independence of VAT and EWT

A crucial principle:

VAT characterization (12%, 0%, or exempt) is a separate question from whether a payment is subject to EWT.

You can have:

12% VAT + EWT
0% VAT (zero-rated) + EWT
VAT-exempt + EWT
Or no EWT at all if:
- the income is not listed as subject to withholding; or
- the payee is income tax–exempt (or covered by special rules).

What determines EWT is the income tax rule on the payment, not the VAT treatment.

IV. Legal Bases in Simplified Form

VAT Zero-Rating
- Found in provisions on zero-rated sales of goods and services (e.g., export sales, certain foreign currency denominated sales).
- Zero-rating depends on:
  - Destination (e.g., sale to a foreign buyer / export enterprise),
  - Payment in acceptable foreign currency through BSP-authorized banks, and
  - The buyer and seller meeting the statutory and regulatory conditions.
Expanded Withholding Tax
- Implemented under the NIRC provisions on withholding of creditable income tax, and detailed in revenue regulations and circulars (e.g., rules on what types of income payments are subject to withholding and at what rates).

Nothing in the VAT zero-rating provisions says that income from zero-rated sales is exempt from income tax or exempt from EWT. Unless a special law or regulation says otherwise, the general EWT rules still apply.

V. Practical Rule: When Are Zero-Rated Sales Subject to EWT?

Think in two steps:

Is the income payment of a kind that is normally subject to EWT? (e.g., rental income, professional fees, payments for services to top withholding agents, certain commissions, contractor payments, etc.)
Is the payee actually subject to income tax on that income?
- Not a tax-exempt entity?
- Not covered by a special regime where income is subject to final tax and thus no more creditable withholding?

If both are yes, then EWT applies, even if the sale is VAT zero-rated.

VI. Common Scenarios

1. Zero-Rated Export of Services (e.g., BPO provider)

A Philippine VAT-registered corporation renders services to a foreign client.
VAT treatment:
- If requirements are satisfied, the sale is 0% VAT (export services).
EWT treatment:
- The client is a nonresident and is not a Philippine withholding agent, so no Philippine EWT is actually withheld (because EWT is withheld by Philippine entities on income payments they make).
- Absence of EWT here is not because of zero-rating, but because the payor is outside the Philippine tax withholding system.

If a Philippine entity pays for services that are treated as zero-rated VAT (special case), and those services are normally covered by EWT rules, EWT can apply.

2. Sales of Goods to Export or Ecozone Enterprises (Domestic Supplier)

Example:

A domestic VAT-registered supplier sells goods to an export enterprise or PEZA / ecozone enterprise.
Sale qualifies as VAT zero-rated if all legal and document requirements are met.

VAT:

Output VAT: 0%
Invoices show Selling Price with no VAT line (but often annotated “VAT Zero-Rated Sale pursuant to …”).

EWT:

Question: Is the payment to the supplier covered by EWT rules (e.g., purchase of goods from regular suppliers by a withholding agent)?
If the buyer is a withholding agent and the income payment type falls under EWT rules, then:
- EWT is withheld from the payment to the supplier at the applicable rate (e.g., a percentage of the gross amount).
- The base is the gross amount (since there is no VAT component anyway for zero-rated sales).

So in this scenario: 0% VAT, but EWT still applies.

3. Government Purchases from a Zero-Rated Supplier

Here we must distinguish:

Final Withholding VAT (FWVAT) – this is a special VAT withholding regime on government contracts (e.g., 5% or 7% of gross payment treated as final VAT).
Expanded Withholding Tax (EWT) – creditable withholding income tax.

For zero-rated VAT transactions, there is no VAT to withhold, so there is no final withholding VAT.
However, the payment may still be subject to EWT, depending on the nature of the income (e.g., contractor’s income, services, supplies) and prevailing EWT rules.

So in government contracts, a zero-rated supplier may experience:

No VAT billed and no final VAT withheld, but still EWT at the creditable income tax withholding rate.

4. Rentals and Professional Fees That Are Zero-Rated VAT

A landlord or professional can, in rare cases, have clients who are export or ecozone enterprises such that the fees or rentals might qualify as zero-rated VAT (subject to strict conditions).

VAT: 0% rate, if legally qualified.
Income: Rental or professional income is generally subject to income tax, unless a special income tax exemption applies.
EWT: These are typically listed in the EWT regulations (with specific rates).
- So, even if VAT is zero-rated, the rental or professional fees are still subject to EWT.

VII. How to Compute EWT on Zero-Rated vs VATable Sales

1. VATable at 12% (for comparison)

Assume:

Contract price exclusive of VAT: ₱100,000
Output VAT at 12%: ₱12,000
Total invoice: ₱112,000
EWT rate applied on income (exclusive of VAT): say 2%

Computation:

EWT = 2% × ₱100,000 = ₱2,000
Customer pays: ₱112,000 – ₱2,000 = ₱110,000
Seller records:
- Sales: ₱100,000
- Output VAT: ₱12,000
- EWT (as tax withheld/credit): ₱2,000

2. Zero-Rated VAT Sale

Assume the same contract price, but sale is zero-rated:

Selling price: ₱100,000
VAT: 0% → ₱0
Total invoice: ₱100,000
EWT rate on income: 2%

Computation:

EWT = 2% × ₱100,000 = ₱2,000
Customer pays: ₱100,000 – ₱2,000 = ₱98,000
Seller records:
- Sales: ₱100,000
- Output VAT: ₱0
- EWT (creditable): ₱2,000

Conclusion: The EWT still exists and is calculated on the same income base, regardless of VAT zero-rating.

VIII. Effect of EWT on VAT Refunds or Credits

A common confusion:

“If I have EWT on my zero-rated sales, can I use that in my VAT refund claim?”

No. EWT is a credit against income tax, not VAT.

VAT refunds or tax credits relate to input VAT attributable to zero-rated sales (e.g., VAT on purchases of goods/services used in zero-rated activity).
EWT credits appear in income tax returns (quarterly and annual), not in VAT returns.

So a zero-rated seller may have both:

A VAT refund or tax credit claim (for excess input VAT due to zero-rated sales), and
EWT credits to be applied against regular income tax.

They are tracked and utilized separately.

IX. When Zero-Rated Sales Are Not Subject to EWT

Zero-rating alone does not remove EWT, but the following situations can:

Payee is Income Tax–Exempt

If the seller (payee) is a tax-exempt entity by law (or its income is exempt), then income is not subject to income tax and generally not subject to EWT, provided the exemption is properly documented and recognized.
Income Category Not Listed as Subject to EWT

The EWT regime is not universal. Only certain types of income are required to be subjected to creditable withholding at source. If the payment falls outside these enumerated types, there is simply no EWT obligation—even if the sale is VAT-zero-rated, VAT-exempt, or VAT-taxable.
Payor Is Not a Withholding Agent

EWT requires a withholding agent designated under the rules:
- Many individuals, small entities, and non-top withholding taxpayers may not be required to withhold on certain payments.
- In such cases, even payments for goods/services that would normally be subject to EWT may not be withheld simply because the payor is not required to do so.
Final Income Tax Regimes / Special Laws

Where a special law provides that a certain income is subject to a final tax at source (instead of normal income tax), creditable EWT does not apply—because withholding in that case is already final, not creditable. VAT characterization (standard, zero-rated, or exempt) remains a separate issue.

X. Documentation and Compliance

For a taxpayer involved in VAT zero-rated sales, documentation is everything.

VAT Zero-Rated Documentation
- VAT registration documents.
- Contracts, purchase orders, export documents (e.g., bills of lading, airway bills).
- Certifications from export or ecozone authorities (PEZA, investment promotion agencies, etc.).
- Proof of inward remittance in acceptable foreign currency when required.
- Proper invoices stating zero-rated VAT and legal basis (e.g., citing relevant provisions/regulations).
EWT Documentation
- BIR Form 2307 (Certificate of Creditable Tax Withheld at Source) issued by the payor.
- Schedules of income payments and corresponding withholding.
- Proper matching of EWT per 2307 with those claimed in quarterly and annual income tax returns.
Books and Returns
- Separate tracking of:
  - VAT zero-rated sales vs VATable and exempt sales.
  - EWT credits vs VAT input tax credits.
- Correct reflection in:
  - VAT returns (monthly/quarterly), and
  - Income tax returns (quarterly and annual).

XI. Common Misconceptions

“Zero-rated means no tax at all.” False. It only means 0% VAT output. Income tax is still there, and EWT is just a collection method for income tax.
“If my buyer doesn’t withhold EWT, the sale isn’t subject to EWT.” Not necessarily. The legal requirement to withhold still applies. Failure to withhold exposes the buyer to deficiency tax and penalties. The seller’s income tax is still due on the full income.
“I can include VAT in the EWT base even on zero-rated sales.” On zero-rated sales, there is no VAT component at all. For standard-rated sales, the EWT base is the net of VAT income amount; the same logic (income-only base) applies conceptually—the only difference is that zero-rated sales simply have no separate VAT line.
“If my sale is VAT-exempt, then there must be no EWT.” VAT exemption and income tax exemption are two separate matters. A VAT-exempt income (e.g., sale of certain goods or services) may still be subject to income tax and EWT, unless income tax law says otherwise.

XII. Practical Checklist for Taxpayers

Whenever faced with the question “Should EWT still apply?” on a VAT zero-rated sale, ask:

What is the nature of the income?
- Sale of goods? Services? Lease? Professional fee? Commission? Contracting?
Is this type of income listed in the prevailing EWT rules as subject to creditable withholding?
- Check the relevant schedules of EWT categories and rates.
Is the payee (seller) subject to income tax on this income?
- Not tax-exempt? Not under a special final tax regime for this income?
Is the payor a withholding agent for this type of transaction?
- Top withholding agent? Government? Large taxpayer? Entity required to withhold?

If the answers are yes, then EWT generally applies, regardless of whether the sale is:

12% VATable,
0% VAT zero-rated, or
VAT-exempt.

XIII. Conclusion

To directly answer the question:

Are VAT Zero-Rated Sales Still Subject to Expanded Withholding Tax in the Philippines?

Yes. As a general rule, VAT zero-rating does not remove the obligation to withhold Expanded Withholding Tax on payments that are otherwise covered by EWT rules and where the payee is subject to income tax on that income.

VAT zero-rating is a feature of the indirect tax system (VAT).
EWT is a collection mechanism of the direct tax system (income tax).

Unless a specific exemption or special rule applies (income tax exemption, payor not a withholding agent, payment not listed under EWT, special final tax regime), zero-rated sales remain within the scope of the EWT system.

Because EWT rates and coverage can change through new revenue regulations and laws, it’s important in practice to:

Review current BIR issuances on EWT and VAT zero-rating, and
Align actual contracts, invoicing, and tax reporting with the latest rules and the specific circumstances of each transaction.