I. Introduction

A common misconception in Philippine taxation is that a business which is non-VAT registered is also exempt from withholding tax obligations. This is not correct.

In the Philippine tax system, value-added tax registration and expanded withholding tax obligations are separate matters. VAT concerns the tax imposed on the sale, barter, exchange, or lease of goods, properties, or services. Expanded withholding tax, on the other hand, is a mechanism for collecting income tax in advance from certain income payments.

Thus, the fact that a business is non-VAT registered does not, by itself, determine whether it must deduct or withhold expanded withholding tax. The real question is whether the business is making a type of payment that is subject to expanded withholding tax and whether it is considered a withholding agent under Philippine tax rules.

The short answer is: Yes, a non-VAT registered business may be required to deduct expanded withholding tax if it is making income payments subject to withholding and is required by law or regulation to act as a withholding agent.

II. Meaning of a Non-VAT Registered Business

A non-VAT registered business is a business that is not registered with the Bureau of Internal Revenue as a VAT taxpayer. This may happen because:

Its gross sales or receipts do not exceed the VAT threshold;
Its transactions are VAT-exempt;
It is subject to percentage tax instead of VAT;
It has elected or is required to be registered under a non-VAT tax type; or
Its business activity is not subject to VAT under applicable tax rules.

A non-VAT business usually issues non-VAT official receipts or invoices, and it does not charge 12% VAT on its sales. Instead, depending on the nature of its business, it may be subject to percentage tax, income tax, and other applicable taxes.

However, non-VAT registration only answers the question: “Should this business charge VAT on its sales?”

It does not answer the separate question: “Should this business withhold tax from payments it makes to others?”

III. What Is Expanded Withholding Tax?

Expanded withholding tax, also known as creditable withholding tax, is a tax withheld by a payor from certain income payments made to a payee. The tax withheld is not usually the final tax due from the payee. Rather, it is credited against the payee’s income tax liability.

For example, if a business pays professional fees to an accountant, lawyer, consultant, or other professional, the business may be required to deduct a percentage of the payment as expanded withholding tax and remit it to the BIR. The professional may later claim the withheld amount as a tax credit in the professional’s income tax return.

Expanded withholding tax is therefore a collection mechanism. It helps the government collect income tax closer to the time income is earned.

IV. VAT and Expanded Withholding Tax Are Different Taxes

The most important principle is that VAT registration and withholding tax obligation are independent of each other.

VAT is an indirect tax imposed on consumption. Expanded withholding tax is a method of collecting income tax. A business may be:

VAT-registered but not required to withhold on a particular payment;
Non-VAT registered but required to withhold on a particular payment;
VAT-registered and also a withholding agent;
Non-VAT registered and not required to withhold, depending on the circumstances.

Therefore, a business cannot avoid expanded withholding tax obligations merely by saying that it is non-VAT registered.

V. The General Rule

A non-VAT registered business is required to deduct expanded withholding tax when all of the following are present:

It makes an income payment to another person or entity;
The payment is one of the income payments subject to expanded withholding tax under Philippine tax rules;
The business is required to act as a withholding agent; and
No exemption or exception applies.

The withholding obligation is attached to the nature of the payment and the status of the payor as a withholding agent, not simply to the VAT status of the payor.

VI. When a Non-VAT Business May Be a Withholding Agent

A withholding agent is a person or entity required to deduct and remit tax from payments made to another taxpayer.

A non-VAT registered business may be a withholding agent if it is engaged in trade or business and makes payments covered by withholding tax rules. This can include:

Corporations and partnerships;
Sole proprietors engaged in business;
Professionals engaged in practice;
Non-stock and non-profit entities when making taxable income payments;
Government offices and instrumentalities;
Estates, trusts, and other entities required to withhold;
Taxpayers specifically classified by the BIR as withholding agents, such as top withholding agents.

The important point is that withholding agent status is not limited to VAT-registered taxpayers.

VII. Common Payments Subject to Expanded Withholding Tax

A non-VAT registered business may be required to deduct expanded withholding tax from payments such as the following:

1. Professional Fees

Payments to lawyers, accountants, doctors, engineers, architects, consultants, brokers, and other professionals may be subject to expanded withholding tax.

For example, a non-VAT sole proprietor who pays an accountant for bookkeeping or tax services may be required to withhold expanded withholding tax from the professional fee, depending on the applicable rules and rate.

2. Rental Payments

Rent paid for office space, warehouses, commercial units, equipment, or other business property is commonly subject to expanded withholding tax.

For example, a non-VAT retail store renting a commercial stall may be required to withhold tax from its monthly rental payments to the lessor.

3. Payments to Contractors

Payments to contractors, subcontractors, service providers, and certain suppliers may be subject to withholding tax.

This may include construction contractors, janitorial agencies, security agencies, repair providers, maintenance providers, and similar service contractors.

4. Commissions

Commission payments to agents, brokers, sales representatives, or intermediaries may be subject to expanded withholding tax.

5. Management and Technical Service Fees

Payments for management, consultancy, technical, administrative, and similar services may fall within the withholding tax system.

6. Payments to Certain Suppliers

If the payor is classified as a top withholding agent, payments to regular suppliers of goods or services may be subject to withholding, generally at different rates depending on whether the payment is for goods or services.

7. Other Income Payments Specifically Covered by Regulations

Expanded withholding tax applies only when the law or BIR regulations classify the payment as subject to withholding. Not every business expense automatically requires withholding.

VIII. Non-VAT Status Does Not Remove the Duty to Withhold

The duty to withhold arises from the National Internal Revenue Code and BIR regulations on withholding taxes. It is not dependent on whether the payor is VAT or non-VAT.

For example:

A non-VAT registered business pays monthly rent of ₱50,000 for its office. Rent is an income payment commonly subject to expanded withholding tax. The business may be required to deduct the applicable withholding tax from the rental payment and remit it to the BIR.

In this example, the business cannot say: “I am non-VAT, so I do not need to withhold.” VAT status is irrelevant to the withholding obligation.

IX. The Non-VAT Business as Payor

When the non-VAT business is the one making payment, it must determine whether it has a withholding obligation.

The business should ask:

What is the nature of the payment?
Is the payment subject to expanded withholding tax?
Is the recipient taxable or exempt?
Is the payor required to withhold?
What withholding tax rate applies?
What BIR form must be filed?
When must the tax be remitted?
Must BIR Form 2307 be issued to the payee?

If the payment is subject to withholding, the non-VAT business must deduct the tax before paying the net amount to the payee.

For example, if the gross payment is ₱100,000 and the applicable expanded withholding tax rate is 5%, the payor deducts ₱5,000 and pays ₱95,000 to the payee. The ₱5,000 is remitted to the BIR and may be claimed by the payee as a tax credit.

X. The Non-VAT Business as Payee

A non-VAT registered business may also be on the receiving end of expanded withholding tax.

For example, a non-VAT service provider issues an invoice to a client. The client, being a withholding agent, deducts expanded withholding tax from the payment and issues BIR Form 2307 to the non-VAT service provider.

This is generally proper if the payment is subject to withholding.

The non-VAT business should not treat the withheld amount as lost income. Instead, it should treat it as a tax credit against its income tax liability, provided it has the proper certificate of creditable tax withheld.

XI. Is the Customer Allowed to Withhold from a Non-VAT Supplier?

Yes, a customer may be required to withhold expanded withholding tax from payments to a non-VAT supplier if the payment is covered by withholding tax rules.

The supplier’s non-VAT status does not automatically exempt it from being subjected to withholding tax.

For example, a non-VAT consultant may bill a corporate client ₱80,000 for services. If the corporate client is required to withhold, it may deduct the applicable expanded withholding tax and issue BIR Form 2307. The consultant may then claim the withheld amount as a tax credit.

XII. Is the Non-VAT Business Required to Withhold from Its Suppliers?

It depends.

A non-VAT business is not automatically required to withhold from every supplier. The obligation depends on the type of payment and the taxpayer’s status.

The business may be required to withhold if it pays for items such as:

Rent;
Professional services;
Contractor services;
Commissions;
Management or technical services;
Payments to suppliers covered by top withholding agent rules;
Other income payments specifically subject to expanded withholding tax.

But if the payment is not covered by withholding tax rules, the non-VAT business does not withhold simply because it is engaged in business.

XIII. Effect of Being a Top Withholding Agent

A business classified by the BIR as a top withholding agent has broader withholding obligations.

Top withholding agents are generally required to withhold on payments to regular suppliers of goods and services. The applicable withholding rate depends on the type of payment, commonly distinguished between goods and services.

A business may be non-VAT but still be designated or treated as a withholding agent under applicable rules. Therefore, if a non-VAT taxpayer receives notice or classification from the BIR as a top withholding agent, it must comply with the withholding obligations attached to that classification.

XIV. Usual Expanded Withholding Tax Rates

The applicable rate depends on the nature of the income payment and the status of the payee. Common examples include withholding on:

Professional fees;
Rental payments;
Contractor payments;
Commission payments;
Payments to suppliers by top withholding agents;
Income payments to certain brokers, agents, entertainers, athletes, directors, and other categories of payees.

The rate may vary depending on whether the recipient is an individual, corporation, professional, non-professional, VAT-registered, non-VAT, or subject to special rules.

Because withholding tax rates are highly category-specific, the correct treatment requires checking the exact nature of the payment and the current applicable BIR regulation.

XV. How Expanded Withholding Tax Is Computed

The general formula is:

Expanded Withholding Tax = Tax Base × Applicable EWT Rate

The tax base is usually the gross income payment, excluding VAT where applicable. For a non-VAT payee, there is no VAT component in the billing, so the withholding is usually computed on the gross amount billed or paid, subject to applicable rules.

Example:

A non-VAT business pays professional fees of ₱50,000 to a consultant. If the applicable EWT rate is 5%, the withholding tax is:

₱50,000 × 5% = ₱2,500

The business pays the consultant:

₱50,000 − ₱2,500 = ₱47,500

The business remits ₱2,500 to the BIR and issues BIR Form 2307 to the consultant.

XVI. Invoicing and Documentation

A non-VAT business that withholds expanded withholding tax should maintain proper documentation, including:

Supplier invoice or official receipt;
Contract, billing statement, or statement of account;
Proof of payment;
BIR Form 2307 issued to the payee;
BIR Form 0619-E, when applicable;
BIR Form 1601-EQ, when applicable;
Quarterly alphalist of payees;
Accounting entries showing the withholding tax payable;
Proof of remittance to the BIR.

Proper documentation is important because withholding tax affects both the deductibility of the expense by the payor and the tax credit claim of the payee.

XVII. BIR Form 2307

BIR Form 2307 is the Certificate of Creditable Tax Withheld at Source.

When a non-VAT business withholds expanded withholding tax from a supplier, it must issue BIR Form 2307 to the supplier. The supplier uses this certificate to claim the withheld amount as a tax credit.

Likewise, when a non-VAT business is the payee and its client withholds tax, the business should request and keep BIR Form 2307.

Without BIR Form 2307, the payee may have difficulty substantiating the tax credit in its income tax return.

XVIII. Filing and Remittance Obligations

A withholding agent must generally remit the tax withheld to the BIR using the proper withholding tax forms.

Common forms include:

BIR Form 0619-E — monthly remittance form for expanded withholding tax, generally used for the first two months of a quarter;
BIR Form 1601-EQ — quarterly remittance return for expanded withholding tax;
BIR Form 2307 — certificate issued to payees for creditable tax withheld;
Quarterly alphalist of payees — supporting schedule identifying payees and amounts withheld;
Annual information return, when applicable.

The exact filing deadlines may depend on the taxpayer’s filing system, BIR rules, and whether the taxpayer is required to use electronic filing and payment facilities.

XIX. Accounting Treatment

From the perspective of the payor, the amount withheld is a liability to the government.

For example, if a non-VAT business incurs a professional fee expense of ₱100,000 and withholds ₱5,000, the accounting treatment generally recognizes:

Professional fee expense: ₱100,000;
Cash paid to supplier: ₱95,000;
Withholding tax payable: ₱5,000.

When the ₱5,000 is remitted to the BIR, the withholding tax payable is closed.

From the perspective of the payee, the withheld amount is a creditable tax withheld. The payee records the gross income and recognizes the withheld tax as an asset or tax credit.

XX. Effect on Deductibility of Expenses

Failure to withhold may affect the deductibility of the related expense for income tax purposes.

As a general rule, expenses must be properly substantiated and must comply with withholding tax requirements when applicable. If a taxpayer fails to withhold tax on an expense subject to withholding, the BIR may disallow the deduction or require payment of the withholding tax, surcharge, interest, and penalties.

This means that a non-VAT business that fails to withhold on rent, professional fees, or other covered payments may face tax exposure even if it properly recorded the expense in its books.

XXI. Consequences of Failure to Withhold

A non-VAT registered business that is required to withhold but fails to do so may be exposed to:

Deficiency withholding tax;
Surcharge;
Interest;
Compromise penalties;
Disallowance of related expense deductions;
Assessment during BIR audit;
Administrative penalties for failure to file returns;
Possible issues in renewing registrations or securing tax clearance, depending on the circumstances.

The withholding agent is responsible for the tax that should have been withheld. The BIR may pursue the withholding agent even if the income recipient separately reports the income.

XXII. Common Misconceptions

Misconception 1: “I am non-VAT, so I do not need to withhold.”

Incorrect. VAT status does not determine withholding tax obligations.

Misconception 2: “Only corporations are required to withhold.”

Incorrect. Individuals engaged in business or practice of profession may also have withholding obligations.

Misconception 3: “Small businesses are never withholding agents.”

Incorrect. A small business may still be required to withhold on certain payments, such as rent or professional fees.

Misconception 4: “If the supplier is non-VAT, no withholding applies.”

Incorrect. The supplier’s non-VAT status does not automatically exempt the payment from expanded withholding tax.

Misconception 5: “Withholding tax is an additional cost to the payor.”

Not usually. Expanded withholding tax is deducted from the payment to the payee and remitted to the BIR. However, failure to withhold can become a cost if the payor is assessed for deficiency withholding tax and penalties.

XXIII. Practical Examples

Example 1: Non-VAT Retail Store Paying Rent

A non-VAT retail store leases commercial space. It pays monthly rent to the lessor.

Rental payments are commonly subject to expanded withholding tax. The store may be required to deduct the applicable withholding tax from the rent, remit it to the BIR, and issue BIR Form 2307 to the lessor.

The store’s non-VAT status does not remove the withholding obligation.

Example 2: Non-VAT Freelancer Receiving Payment from a Corporation

A non-VAT graphic designer bills a corporation for design services. The corporation withholds expanded withholding tax and pays the net amount.

This is generally proper if the payment is subject to withholding. The designer should request BIR Form 2307 and claim the withheld amount as a tax credit.

Example 3: Non-VAT Sole Proprietor Paying an Accountant

A non-VAT sole proprietor hires an accountant for tax compliance work.

Professional fees may be subject to expanded withholding tax. The sole proprietor may be required to withhold, remit the tax, and issue BIR Form 2307.

Example 4: Non-VAT Business Buying Ordinary Supplies

A non-VAT business buys office supplies from a store.

If the business is not a top withholding agent and the transaction is not otherwise subject to withholding, the business may not be required to withhold expanded withholding tax on the purchase.

Example 5: Non-VAT Business Classified as Top Withholding Agent

A non-VAT business is designated by the BIR as a top withholding agent. It regularly purchases goods and services from suppliers.

It may be required to withhold on payments to regular suppliers, even though it is non-VAT registered.

XXIV. Difference Between Expanded Withholding Tax and Final Withholding Tax

Expanded withholding tax is generally creditable against the income tax liability of the payee.

Final withholding tax, on the other hand, is the final tax on the income. Once final tax is properly withheld, the income recipient generally no longer includes that income in computing regular income tax, subject to applicable rules.

The topic discussed here concerns expanded withholding tax, not final withholding tax. However, a non-VAT business may also encounter final withholding tax in transactions such as certain interest, dividends, royalties, or payments to non-residents.

XXV. Difference Between Expanded Withholding Tax and VAT Withholding

Expanded withholding tax should also be distinguished from VAT withholding.

Expanded withholding tax is related to income tax. VAT withholding, where applicable, concerns value-added tax. Government entities and certain payors may be required to withhold VAT on payments to VAT-registered suppliers.

A non-VAT supplier generally does not charge VAT, so VAT withholding is not usually applicable to payments to that supplier. But expanded withholding tax may still apply because it is based on income payment, not VAT registration.

XXVI. What the Non-VAT Business Should Do

A non-VAT business should not assume that it has no withholding obligations. It should review its common payments and classify them properly.

The business should identify payments for:

Rent;
Professional fees;
Contractors;
Commissions;
Service providers;
Suppliers;
Management or technical services;
Other recurring business expenses.

For each payment, it should determine whether withholding applies, the correct rate, the correct form, and the required supporting documents.

XXVII. Checklist for Compliance

A non-VAT business should observe the following compliance checklist:

Check the BIR Certificate of Registration to know registered tax types.
Determine whether the business is required to file withholding tax returns.
Identify recurring payments subject to withholding.
Determine whether the payee is an individual, corporation, professional, non-professional, resident, non-resident, VAT, or non-VAT.
Apply the correct withholding tax rate.
Deduct the tax from the gross payment.
Remit the tax to the BIR on time.
File the proper withholding tax return.
Issue BIR Form 2307 to the payee.
Keep invoices, receipts, contracts, returns, proof of payment, and alphalists.
Reconcile withholding tax accounts regularly.
Claim creditable withholding tax only when supported by proper certificates.
Review BIR notices, especially if classified as a top withholding agent.

XXVIII. Does the Business Need to Register Withholding Tax as a Tax Type?

If a business is required to withhold, it may need to ensure that its BIR registration includes the proper withholding tax type.

A non-VAT business may be registered for income tax and percentage tax but may also need to be registered for expanded withholding tax if it is required to withhold. The absence of withholding tax as a registered tax type does not necessarily mean the business has no withholding obligation. If the obligation exists, the taxpayer should regularize its registration and comply.

XXIX. Treatment of Withheld Tax by the Payee

When a non-VAT business receives BIR Form 2307 from a client, it should:

Record the gross income, not merely the net amount received;
Record the withheld tax as creditable withholding tax;
Keep the certificate as support;
Claim the amount as tax credit in the appropriate income tax return;
Reconcile the amount with the alphalist and books.

For example, if the non-VAT business bills ₱100,000 and the client withholds ₱5,000, the business should generally recognize ₱100,000 as gross income and ₱5,000 as creditable tax withheld.

XXX. Can a Non-VAT Business Refuse Withholding by Its Customer?

Generally, no. If the customer is legally required to withhold, the payee cannot defeat the withholding obligation by refusing it.

The proper remedy is not to object merely because the business is non-VAT. Instead, the payee should request BIR Form 2307 and claim the withheld tax as a credit.

However, if the customer applies the wrong rate or withholds on a payment that is not subject to withholding, the parties should review the classification of the payment and correct the treatment.

XXXI. Gross-Up Issues

Some contracts provide that the payor must shoulder taxes or pay a net amount to the supplier. In those cases, the parties should be careful with gross-up provisions.

If the contract states that the supplier must receive a fixed net amount, the payor may need to compute the gross amount such that, after withholding, the supplier receives the agreed net amount. This may increase the payor’s cost.

To avoid disputes, contracts should clearly state whether fees are gross of withholding tax or net of withholding tax.

XXXII. Contract Drafting Considerations

Contracts involving non-VAT businesses should include tax provisions addressing:

Whether the amount is VAT-inclusive, VAT-exclusive, or non-VAT;
Whether withholding tax applies;
Whether the stated price is gross or net of withholding tax;
Which party will bear taxes;
When BIR Form 2307 will be issued;
Whether payments are subject to adjustment if BIR rules require a different tax treatment;
Whether the payee must provide registration documents or tax classification documents.

Clear drafting prevents later disputes when the payor deducts withholding tax from payment.

XXXIII. Special Issue: Percentage Tax

A non-VAT business may be subject to percentage tax. Percentage tax is separate from expanded withholding tax.

The fact that a business pays percentage tax does not exempt it from being subjected to expanded withholding tax as a payee, nor does it exempt it from withholding tax obligations as a payor.

For example, a non-VAT service provider subject to percentage tax may still have clients withholding expanded withholding tax from its service fees.

XXXIV. Special Issue: Individuals Engaged in Business

Individuals often believe that withholding rules apply only to companies. This is not always true.

A sole proprietor or professional who is registered as non-VAT may still be required to withhold expanded withholding tax on payments made in the course of business, such as rent or professional fees.

The key question is whether the payment is a covered income payment and whether the individual is acting in the course of trade, business, or profession.

XXXV. Special Issue: Mixed Transactions

Some businesses have both VAT and non-VAT transactions, or they may shift from non-VAT to VAT status when they exceed the VAT threshold. These changes do not automatically change the withholding treatment of payments.

Withholding tax must still be analyzed based on the nature of the income payment and the applicable withholding tax rules.

XXXVI. Special Issue: Exempt Payees

Some payees may be exempt from income tax or from withholding tax under special laws, treaties, certificates, or BIR rulings. In such cases, the payor should require proper documentation before not withholding.

A mere verbal statement that the payee is exempt is not enough. The payor should keep proof of exemption because the payor may be held liable if it fails to withhold without basis.

XXXVII. Special Issue: Incorrect Withholding

Incorrect withholding may happen in several ways:

Withholding when no withholding is required;
Failing to withhold when withholding is required;
Applying the wrong rate;
Withholding from the wrong tax base;
Failing to remit the amount withheld;
Failing to issue BIR Form 2307;
Reporting the wrong payee information.

The correction depends on the type of error, whether the tax has already been remitted, and whether returns have already been filed.

XXXVIII. Best Practices for Non-VAT Businesses

A non-VAT business should adopt the following practices:

Do not assume that non-VAT means no withholding.
Classify expenses before payment.
Maintain a list of payments subject to withholding.
Secure supplier tax information before paying.
Withhold based on the gross taxable payment.
Remit taxes on time.
Issue BIR Form 2307 promptly.
Reconcile withholding tax payable monthly and quarterly.
Keep tax documents organized.
Review BIR registration and update tax types when necessary.
Seek professional review for unusual payments, large contracts, foreign payments, and exempt entities.

XXXIX. Conclusion

A non-VAT registered business may be required to deduct expanded withholding tax in the Philippines. The obligation does not depend solely on whether the business is VAT or non-VAT. It depends on the nature of the payment, the status of the payor as a withholding agent, the classification of the payee, and the applicable withholding tax rules.

Non-VAT registration means the business does not charge VAT on its sales. It does not mean that the business is exempt from withholding tax duties. A non-VAT business may still be required to withhold from rent, professional fees, contractor payments, commissions, and other income payments subject to expanded withholding tax. It may also be subjected to withholding when it receives payments from clients who are required to withhold.

The controlling principle is simple: non-VAT status is not an exemption from expanded withholding tax. A non-VAT business must still determine, for every relevant transaction, whether withholding is required, what rate applies, what forms must be filed, and what documents must be issued and retained.