Expanded Withholding Tax (EWT) Treatment for Service Charge Payments in the Philippines

(Comprehensive legal‐practice article, updated to June 9 2025)

1. Conceptual Framework

Key Term	Meaning under Philippine law
Service charge (general tax use)	Any remuneration for the performance of services (professional, technical, managerial, or labor-only contracting) paid by one party (the payor/withholding agent) to another (the service provider).
Service charge (hospitality law)	Mandatory/voluntary 10 % surcharge collected by hotels/restaurants under R.A. 11360; distributed to staff. This specific hospitality “service charge” is not* covered by EWT* (see §5-C).
Expanded Withholding Tax (EWT)	A creditable tax prescribed in §§ 57–58, 72 & 245(N) of the National Internal Revenue Code (NIRC, as amended) and Revenue Regulations (RR) 2-98; the payor withholds a portion of the income tax due on certain payments for services and remits it to the Bureau of Internal Revenue (BIR).

2. Statutory & Regulatory Basis

National Internal Revenue Code (1997, as amended):
- §57(B) – creditable withholding on certain income.
- §58 – duties of withholding agents; penalties under §251, §255 & §264.
Revenue Regulations 2-98 (and amendments up to RR 16-2023): master list of EWT classifications & rates.
Key circulars, e.g.:
- RMC 50-2018 – consolidated withholding table post-TRAIN.
- RMC 43-2021 – electronic filing of BIR Form 0619-E and 1601-EQ.
- RMO 14-2021 – treaty-based relief for service fees paid to non-residents.

3. When Are Service Payments Subject to EWT?

Nature of service payment	Typical EWT rate*	Legal/Reg basis
Professional & consulting fees (lawyers, CPAs, architects, IT consultants, etc.)	10 % if individual, 15 % if gross income > ₱720 k in preceding year	RR 2-98 §2.57.2(A)(1)
General “services” (janitorial, security, independent contractors, repair & maintenance, digital platform services, BPO sub-contracts)	2 %	RR 2-98 §2.57.2(A)(2)
Contractors for government projects	2 % or 1 % (goods)	RR 17-2003
Talent fees to non-employee artists, athletes	10 % / 15 %	RR 11-2018
Fees to non-resident foreign corporations for services rendered in Philippines	25 % FINAL (no credit) – unless reduced by tax treaty & duly applied for (RMO 1-2020)	NIRC §28(B)(1), RR 11-2018

*Always confirm latest BIR issuance; rates have remained constant since the TRAIN Law (R.A. 10963) but sub-classifications expand periodically.

4. Basic Compliance Workflow

Step	Form	Due date (eFPS Category A shown; add 5 days for non-eFPS)
Withhold correct amount upon payment or accrual, whichever comes first	—	Same day as payment/booking
Remit monthly	BIR Form 0619-E	10th day of following month
Quarterly return	BIR 1601-EQ + SAWT file	Last day of month following quarter (Apr 30, Jul 31, Oct 31, Jan 31)
Issue certificate to payee	BIR 2307	Within 20 days after close of quarter
Annual alphalist of payees (MAP)	Attachment to 1604-E	Jan 31 of following year

Late or non-compliance triggers: 25 % surcharge, 20 % p.a. interest (or 12 % deficiency interest after R.A. 10963), and compromise penalties (₱1,000–₱25,000).

5. Special Topics & Frequent Questions

A. Service Charges vs. Value-Added Tax (VAT)

EWT is independent of VAT. Example: A security agency bills ₱100,000 + ₱12,000 VAT. The withholding base is ₱100,000; the VAT is ignored for EWT purposes.

B. Split Contracts & Misclassification

Attempting to label labor as “purchase of goods” (1 %) or to break invoices into sub-₱10,000 chunks does not exempt the payor from 2 %/10 % EWT. BIR examiners routinely reclassify and assess deficiency tax plus penalties.

C. RA 11360 “Service Charge Law” (hospitality sector)

The 10 % service charge pooled and distributed to employees is treated as additional compensation, exempt from EWT but subject to compensation withholding tax if total pay exceeds the withholding thresholds. Management’s 85 % portion (before the 2019 amendment) is now abolished; what is distributed to managerial employees follows the same rule.

D. Fringe Benefit vs. Service Fee

If a company pays a service provider that is actually its employee’s alter ego (e.g., “consultancy” by a retired officer), BIR may recharacterize the amount as fringe benefit (35 % FBT) or compensation (wage-rate table), not 2 % EWT.

E. Payments to PEZA/CSEZ locators and RBEs

Under CREATE Act (R.A. 11534) and BIR RR 21-2021, income tax of registered business enterprises enjoying the 5 % GIT or special rate is not exempt from creditable withholding. Continue applying standard EWT unless a specific BIR ruling grants exemption.

F. Digital & Cross-Border Services

TRAIN introduced §105-A (VAT on digital services supplied by non-resident digital service providers) but withholding on cross-border services still follows §28(B)(1) & treaty rules. If services are rendered abroad, the income is foreign-sourced and not subject to Philippine EWT—yet payors must prove the “place of service” (e.g., through contracts & logs).

6. Non-Resident Services & Tax Treaties

Default rule: 25 % Final withholding on NRFC/NRA-NR for services performed in the Philippines.
Treaty override: If the relevant tax treaty (e.g., PH-US, PH-Japan) limits the tax on “Independent Personal Services” or “Business Profits,” payor may apply a reduced rate or 0 %, but must:
- File a Tax Treaty Relief Application (TTRA) before the first payment (RMO 14-2021).
- Withhold at treaty rate upon approval; if pending, withhold at 25 % then refund/credit after ruling.

7. Government-Related Service Fees

All national gov’t agencies, GOCCs, LGUs, and government-owned universities must withhold EWT on service contracts (e.g., janitorial, consulting). They file BIR 1601-EQ and remit through Authorized Government Depository Banks (AGDB) or G-Cash/BIR Payment Portal under RMC 29-2024.

8. Documentary Requirements & Record-Keeping

3-year statute of limitations (extendable to 10 years if fraudulent or no return filed).
Keep: contracts, invoices, official receipts, proofs of remittance, Form 2307, TTRA approvals.
BIR can disallow expense deduction if no 2307 issued (RR 12-2013).

9. Illustrative Example

Scenario: On 15 March 2025, ABC Corp. engages XYZ Security Agency (VAT-registered) for ₱150,000 monthly service fee + VAT. Computation: Base ₱150,000 × 2 % = ₱3,000 EWT Net payable to XYZ = ₱150,000 + ₱18,000 VAT – ₱3,000 EWT = ₱165,000 Journal Entry (ABC):
Dr. Security expense      150,000  
Dr. Input VAT              18,000  
    Cr. Cash/Bank                   165,000  
    Cr. Withholding tax payable      3,000
Compliance: File Form 0619-E by 10 April 2025, indicate Q1 on Form 1601-EQ by 30 April 2025, and issue 2307 to XYZ by 20 April 2025.

10. Penalties Spotlight

Violation	Surcharge	Interest	Compromise (₱)	Offenders
Failure to withhold	25 % of tax not withheld	12 % p.a. (def-int)	1,000–25,000	Withholding Agent
Failure to remit on time	Same as above	Same	Same	Withholding Agent
Failure to issue 2307	—	—	1,000 per certificate (max ₱25 k/yr)	Withholding Agent

Criminal sanctions under §255 (Fine ₱10-100 k & imprisonment 1–4 yrs) may be imposed for willful refusal.

11. Best Practice Checklist for Businesses

Map every supplier against BIR’s latest EWT table.
Automate: integrate ERP with eFPS to auto-generate 0619-E, 1601-EQ & 2307 PDFs.
Update vendor masterfiles yearly (TIN, registration, VAT status, gross income tier for professionals).
Secure BIR rulings for gray areas (e.g., SaaS cross-border support, bundled goods-services).
Train AP staff on distinguishing “purchase of goods” (1 %) vs. “services” (2 %/10 %).
Schedule internal audits before BIR Letter of Authority is issued; reconcile alphalist vs. GL.

12. Conclusion

Expanded Withholding Tax on service charge payments remains one of the BIR’s most aggressively enforced compliance areas. Understanding the interplay between classification, proper rate, timely remittance, and correct documentation protects both the payor (withholding agent) and the service provider from disallowed deductions, deficiency assessments, and penalties. Although the core rules under RR 2-98 have been stable since TRAIN, new business models (digital platforms, foreign technical services) and CREATE Act incentives demand continuous monitoring of BIR circulars. When in doubt—secure a ruling, apply the higher rate provisionally, and document every step.

(Prepared June 9 2025. This article summarizes the law and BIR issuances available as of that date; practitioners should check for subsequent regulations or court decisions.)