Can PEZA‑Approved Zero‑Rated Companies Withhold EWT on Their Collections?
A Philippine‑law deep dive
1. Setting the Scene: PEZA Incentives and “Zero‑Rating”
Concept | Key statutory basis | Practical effect |
---|---|---|
PEZA registration | R.A. 7916 (Philippine Economic Zone Authority Act), as amended | An enterprise located inside a proclaimed ecozone may qualify for Income‑Tax Holiday (ITH) followed by the 5 % gross income tax (GIT) “in lieu of all national & local taxes,” plus exemption from customs duties. |
Zero‑rated VAT | NIRC §106(A)(2)(a), §108(B)(3); CREATE Act (R.A. 11534) §294 (D)(8) and BIR RR No. 21‑2021 | A PEZA “export enterprise” enjoys 0 % VAT on its sales of goods/services to non‑residents or other registered ecozone/export entities. Local suppliers that sell to it may likewise enjoy 0 % VAT if supporting documents are present. |
Take‑away: “Zero‑rating” concerns Value‑Added Tax (an indirect tax on consumption), while EWT concerns income tax. They operate on different statutory tracks, but they meet in practice when money changes hands.
2. Primer on Expanded Withholding Tax (EWT)
Provision | Essence |
---|---|
NIRC §57(B) and §58; BIR RR No. 2‑98 (as amended) | Certain income payments (e.g., professional, rental, contractor’s fees) must be withheld at source by the payor and remitted to the BIR as “creditable” advance income tax of the payee. |
Who is a “withholding agent”? | Any person or entity (a) in control of the payment and (b) required by regulation to withhold—even if itself exempt from income tax (RR 11‑2005). |
Rates (selected) | 2 %—professional/technical services; 5 %—income payments to top 15,000 corporations; others per Annex B‑1 of RR 2‑98. |
3. Are PEZA Enterprises Themselves Required to Withhold EWT When Paying Suppliers?
Yes. BIR position:
- RR 11‑2005 §2 expressly states that entities enjoying tax exemption or preferential rates “are nonetheless constituted as withholding agents.”*
- Confirmed in numerous BIR Rulings (e.g., BIR Rulings Nos. 020‑13, 342‑11).
Rationale—being exempt from their own income tax liability does not relieve them of the agent’s duty to collect the Government’s tax from other taxpayers.
Scope—payments for services, rentals, commissions, purchase of goods under RR 2‑98 Annexes A & B; compensation withholding (WTC) for employees also applies.
4. The Harder Question: Should a PEZA Zero‑Rated Enterprise Allow Customers to Withhold EWT From the Amounts It Collects?
Situation | Standard rule | Does EWT apply? | Why / why not |
---|---|---|---|
Within PEZA / ecozone, transaction between two registered export enterprises | Both parties under 0 % VAT; income of payee remains subject either to ITH or 5 % GIT | No EWT | Where the payee is already paying the final 5 % GIT (or still in ITH), BIR treats that tax as a substitute for regular income tax; no “advance” is needed. • See BIR Rulings DA‑175‑05, DA‑591‑09. |
Domestic customer outside PEZA buys exported goods/services from PEZA enterprise (zero‑rated VAT) | Payee either (a) under ITH or (b) paying final 5 % GIT | Generally No EWT | • If ITH: payee has no income tax base, so nothing to credit. • If 5 % GIT: tax is final & already satisfied by enterprise itself (not by customer). • RR 2‑98 treats income “subject to final tax” as outside EWT coverage. |
PEZA enterprise still subject to regular 25 % income tax (e.g., sunset period or industry not qualified for GIT) | Income payments fall under Annex B‑1 | Yes, 1–5 % EWT | Because income is not covered by final 5 % GIT; ordinary creditable withholding resumes. |
Special items (royalties, interest, rent, director’s fees) | See Sections 2.57.2 & 2.57.3, RR 2‑98 | Depends | Some items (e.g., royalties) may be subject to final withholding even for PEZA; domestic customers must follow rate tables. |
Tip for practitioners: Always check the PEZA Registration Certificate & Board Resolution to see (i) current incentive tier, (ii) expiry of ITH, and (iii) whether the “5 % in lieu of all taxes” phrase appears. These determine the EWT tag per transaction.
5. “Zero‑Rated” Does Not Convert Income Into “Income Exempt From Tax”
Confusion often arises because 0 % VAT looks like exemption.
For income‑tax purposes, the PEZA enterprise could still be:
- (a) under ITH (so exempt for X years), or
- (b) under 5 % final GIT (tax already paid direct to PEZA/BIR), or
- (c) under regular income tax if incentives lapsed.
Only in (c) does EWT on collections revive.
6. Documentary & Compliance Checklist
Document | Purpose | Who prepares |
---|---|---|
BIR Form 2306 (Certificate of Creditable Tax Withheld at Source) | Proof if EWT applies | Customer (payor) |
BIR Form 2307 (for expanded withholding) | Attached by PEZA enterprise to quarterly/annual ITR to credit the tax | Customer (payor) |
Certification of PEZA Registration & Incentive Tier | Shared with customer to justify non‑withholding | PEZA enterprise |
VAT zero‑rating support (Electronic ATP, import/export docs, BOI/PEZA certifications) | Allows supplier to treat sale at 0 % VAT | PEZA enterprise & supplier |
7. Frequently Litigated Points
Issue | Leading guidance |
---|---|
Is the 5 % GIT truly “in lieu of ALL taxes,” including EWT? | Commissioner of Internal Revenue v. CBK Power Company Ltd., G.R. No. 193550, 03 Jan 2019: the 5 % is a final income tax; but CBK (a BOI enterprise) was still required to withhold on its payments to contractors. |
Must a PEZA enterprise file monthly/quarterly withholding returns even if it believes it is exempt? | Yes. Non‑filing triggers penalties; one must file “no‑payment” returns or returns indicating zero EWT remittances. |
Can BIR assess the customer for deficiency EWT if it wrongfully relied on PEZA status? | Yes. Under NIRC §57(C), the withholding agent is liable for any un‑withheld tax, plus interest & surcharges. Obtain documentary proof! |
8. Practical Workflow for Tax Teams
Classify the PEZA enterprise’s current incentive status (ITH, 5 % GIT, post‑sunset).
Tag each revenue stream (export sale, domestic market sale, passive income, others).
Decide on withholding:
- If ITH or 5 % GIT: issue a certification of non‑withholding to customers.
- If regular income tax: instruct customers to withhold per RR 2‑98.
Maintain a matrix linking every customer and every type of payment to its correct EWT/VAT treatment.
Update annually—CREATE’s sunset rules phase out incentives over 10 years; EWT exposure changes as soon as the enterprise migrates to regular 25 % CIT.
9. Conclusions
- *PEZA‑approved, zero‑rated enterprises do not generally suffer EWT on the amounts they collect while they (i) enjoy an Income‑Tax Holiday or (ii) pay the 5 % final GIT.
- They still act as withholding agents on their own disbursements to suppliers, regardless of their tax holiday.
- Once incentives lapse, customers must revert to the ordinary 1–5 % creditable withholding scheme on payments to the enterprise.
- Zero‑rating is a VAT concept; it does not, by itself, determine EWT. Always look at the income‑tax status driving the withholding rule.
Proper documentation and continual status‑checking are the taxpayer’s best defenses against deficiency EWT assessments in the evolving post‑CREATE landscape.