“Notice of Inclusion” as a Corporate Withholding-Tax Agent
Philippine Bureau of Internal Revenue (BIR)
1. Executive Overview
A Notice of Inclusion (sometimes styled “Authority to Withhold” or “Notice of Classification”) is the formal written communication by which the Philippine Bureau of Internal Revenue (BIR) informs a business entity that, effective a stated date, it has been designated a withholding-tax agent. From that date forward the company must withhold and remit specific taxes on payments it makes to third parties, in addition to the taxes on its own income. The notice typically covers one or more of the following regimes:
| Regime | Governing Issuance | Current Statutory Rate(s) | Quarterly/Monthly Return |
|---|---|---|---|
| Expanded (Creditable) Withholding Tax (EWT) | §57(B), §58 NIRC; RR 2-98 (as amended, esp. RR 11-2018, RR 31-2020) | 1 % on purchase of goods; 2 % on purchase of services (unless a higher schedule rate applies) | Form 0619-E (monthly), 1601-EQ (quarterly) |
| Final Withholding Tax (FWT) | §57(A), §58 NIRC; schedule in §24/§25/§27 | Various (e.g., 15 % on royalties to residents; 20 % on bank deposits) | Form 0619-F / 1601-FQ |
| 5 % Withholding VAT (W-VAT) | §114(C) NIRC; RR 14-2021 | 5 % of gross payment to VAT-registered suppliers | Form 1600-VT |
| Percentage-Tax Withholding (W-PT) | §116 NIRC; RR 11-2021 | 3 % of gross payment to non-VAT suppliers | Form 1600-PT |
Failure to register, withhold, or remit after receipt of the notice exposes the entity to civil penalties, criminal sanctions, and, in serious cases, disallowance of the payee’s expense deduction.
2. Statutory and Regulatory Basis
National Internal Revenue Code of 1997 (as amended)
- §57 – Withholding of tax at source (Final and Creditable).
- §58 – Returns and payment of taxes withheld.
- §114(C) – Mandatory VAT withholding by “Top Withholding Agents.”
Core Revenue Regulations (RR) & Revenue Memorandum Circulars (RMC)
- RR 2-98 – Master rules on Creditable and Final withholding; repeatedly amended to identify Top Withholding Agents (TWA).
- RR 11-2018 & RR 31-2020 – Set quantitative criteria (₱ 100 M annual purchases/sales* or other risk-based metrics) and empowered the Commissioner to update lists semi-annually.
- RR 14-2021 – Aligned 5 % VAT-withholding with CREATE Act changes.
- RMC 5-2023 (illustrative) – Publishes updated lists and FAQs; encloses pro-forma notice.
- RR 12-2022 – Introduced electronic BIR Registration Updates (eREGUD); notices may now be served electronically.
CREATE Act (RA 11534, 2021) – Adjusted corporate rates but left withholding mechanics intact; clarified that inclusions/exclusions are “Commissioner-initiated and appealable.”
*The Commissioner may override the purely financial threshold and include entities based on industry risk (e.g., construction, online platforms).
3. Mechanics of Issuance
| Stage | Description | Typical Timeline |
|---|---|---|
| Data-driven Identification | BIR Analytics Service mines income tax returns, VAT declarations, and third-party information returns (e.g., Alphalist Form 1604-C) to shortlist candidates. | Continuous |
| Approval & Control Numbering | List endorsed by the Large Taxpayers Service or Revenue Region, approved by the Commissioner/Deputy Commissioner-Operations. | Monthly/Semi-annual |
| Service of Notice | Delivered by Revenue Officer, sent by email, or posted in the taxpayer’s eTIS account. Includes: effective date, legal basis, obligations, and appeal window (15 days). | At least 15 days before effectivity |
| Publication | Consolidated list posted on BIR website and two newspapers of general circulation. | Same week as service |
A notice remains in force until formally revoked by a Notice of Exclusion or by the automatic sunset clause in the governing RR (usually after two years, subject to renewal).
4. Effects on the Taxpayer
Start Withholding – On the effectivity date, the entity must compute and retain the correct tax from every covered payment, except those expressly exempt (e.g., zero-rated VAT sales, income subject to FWT at source).
System & Contract Updates –
- Amend vendor master files to tag suppliers as “withholdable/non-withholdable.”
- Include withholding clauses in purchase orders and service contracts.
- Configure ERP/finance software to generate BIR Form 2307 (Creditable) or 2306 (Final) on demand.
Filing & Remittance –
- Monthly: Forms 0619-E/F or 1600-VT/PT, on or before the 10th day following the month of withholding (for large taxpayers using eFPS: 5th day).
- Quarterly: Forms 1601-EQ/FQ within the last day of the month following the close of the quarter.
- Annual Alphalist (for income taxes): Form 1604-E / 1604-F every 31 Jan (or 28 Feb if eFPS).
Certification – Issue Forms 2307/2306 to payees within 20 days after each quarter-end (or upon request) so suppliers can claim the credit/refund or prove final tax payment.
Record-Keeping – Books, BIR-registered loose-leaf certificate books, and copies of e-filed returns must be retained for ten (10) years.
5. Common Compliance Pitfalls
| Pitfall | Consequence | Best Practice |
|---|---|---|
| Ignoring small purchases (“de minimis”) | BIR disallows expense; 25 % surcharge + 12 % interest | Apply withholding even on petty cash unless exempted. |
| Using wrong rate (e.g., 1 % vs 2 %) | Deficiency assessment + penalties | Maintain a matrix of services vs goods vs special rates (architects 5 %, talent fees 10 %, etc.). |
| Late filing due to decentralized units | Interest accrues daily | Centralize withholding in Treasury; adopt cut-off calendar (e.g., Day 3 after month-end). |
| Failure to issue Form 2307 | Suppliers threaten to gross-up or refuse renewal | Automate certificate generation; integrate digital signature. |
| Treating VAT exemption as exemption from EWT | Both regimes operate independently | Review zero-rated v. VAT-exempt v. EWT-exempt status per vendor. |
6. Disputing or Seeking Exclusion
Grounds: Not meeting quantitative criteria, cessation of business, conversion to non-stock non-profit, or placement under liquidation.
Procedure:
- File Request for Exclusion with supporting audited FS and tax returns within 30 days of notice or within 30 days after the end of the fiscal year.
- Revenue District Office (RDO) evaluates; endorsement to National Office.
- Commissioner issues Notice of Exclusion (NE) or a denial.
Effectivity: NE takes effect the first day of the month following approval. Until then, taxpayer must continue withholding.
7. Penalties for Non-Compliance
| Violation | Statutory Citation | Penalty |
|---|---|---|
| Failure to withhold | §251 NIRC | 25 % surcharge + 12 % annual interest + compromise (₱ 1,000–25,000) |
| Failure to remit | §255 NIRC | Same as above; may escalate to criminal complaint |
| Willful refusal or falsification | §254 NIRC | Fine ₱ 500 k–10 M + imprisonment 6 mos–10 yrs |
| Habitual failure (≥3 counts) | RR 19-2015 | Suspension or temporary closure of business |
The BIR may also assess the payee for the tax but, once the payor is found remiss, the payee’s expense deduction shall be disallowed regardless of subsequent payments.
8. Interaction with Other Regimes
- Large Taxpayers (LT) Program – LT-registered firms are almost automatically TWAs; obligations overlap but LT deadlines (5th/14th day) prevail.
- Government-Owned or -Controlled Corporations (GOCC) – GOCCs are perpetual withholding agents under Executive Order 93-87, separate from Notices of Inclusion.
- eFPS vs eBIRForms – Entities mandated to file via eFPS (based on AONET list or gross assets) must enroll; failure to e-file is considered late filing even if manual return is timely.
9. Practical Checklist for Newly-Included Corporations
- Acknowledge Notice (sign & return receiving copy).
- Update BIR COR (Form 2303) to reflect “Withholding Agent” and amend registration in eTIS.
- Update Books of Accounts (rebate control, SL for withheld taxes).
- Train AP & Treasury Teams; circulate rate matrix and cut-off calendars.
- Re-paper Contracts – insert gross-up / VAT-withholding clauses.
- Enroll in eFPS/eBIRForms; set up ePayment (G-Cash, DBP, etc.).
- Generate Certificates every quarter without prompting.
- Monitor BIR Advisories for list updates and new RMCs.
10. Future Developments
- e-Invoicing & e-Receipts (EIS) – Once universal, withholding computations may autopopulate returns.
- Digital Service Providers (DSP) – Likely inclusion as TWAs regardless of domicile; draft RR circulating (2025).
- Data-Matching With LGUs – Joint audit pilots between BIR and city treasurers may flag non-withholding in local permits renewal.
Conclusion
Receiving a BIR Notice of Inclusion is more than an administrative footnote; it transforms a corporation into a quasi-tax collector for the State. Immediate organizational, contractual, and systems adjustments are essential to avoid punitive assessments. While the compliance load is significant, timely withholding also protects the company: liabilities for non-withholding almost always exceed the inconvenience of monthly filings. Firms should therefore treat the notice as a high-priority legal order, institutionalize robust controls, and continuously monitor BIR issuances to stay ahead of changing rates and coverage rules.