When Is Creditable Withholding Tax (CWT) Required in the Philippines?

A practice-ready guide for accountants, founders, procurement teams, and independent professionals.

1) What CWT is—and how it differs from Final Withholding and Compensation Withholding

CreditabIe Withholding Tax (CWT)—also called Expanded Withholding Tax (EWT)—is income tax withheld at source on certain payments to resident payees. It is not the final tax; instead, the amount withheld becomes a tax credit against the payee’s annual or quarterly income tax due.
Final Withholding Tax (FWT) applies to specific income (e.g., certain passive income) where the withheld tax is the final tax; the payee no longer pays income tax on that income in the annual return.
Withholding on Compensation is a separate system for salaries/wages under payroll rules.

Legal anchors: National Internal Revenue Code (NIRC), particularly Secs. 57–58 (withholding at source) and the long-standing Withholding Tax Regulations (commonly cited as RR 2-98, as amended).

2) The basic trigger: a taxable income payment to a resident payee that is listed by the BIR as subject to CWT

CWT is required when all of the following exist:

There is a payor (“withholding agent”) making a covered payment in the course of trade or business (this includes corporations, partnerships, self-employed taxpayers, government agencies, and designated “top withholding agents”).
There is a payee who is a resident (individual, estate, trust, corporation, or partnership) receiving gross income from the payor.
The type of income is expressly identified by regulation as subject to CWT; and
No exemption (statutory or specific ruling) applies.

If a payment is not on the list of CWT-covered items, the payor does not withhold CWT (though other regimes—e.g., Final Withholding or payroll withholding—might apply).

3) Common income payments subject to CWT (high-frequency list)

Exact rates and documentary conditions are set in regulations (rates can change). Always follow the current BIR certificate of registration (Form 2303) and the latest instructions in the BIR eFPS/eBIRForms.

Professional and talent fees to lawyers, CPAs, doctors, engineers, architects, consultants, creatives, trainers, directors’ fees, speakers, resource persons.
Contractors and service providers (janitorial, security, IT/BPO, maintenance, repairs, trucking, messengerial, warehousing, sub-contracted services).
Rentals (real property, equipment, vehicles).
Commissions (sales agents, marketing, brokers, insurance agents—subject to rules per industry).
Advertising and media services.
Royalties and license fees paid to resident owners.
Prizes and certain incentives paid in the course of business (non-final categories).
Government money payments to private suppliers/contractors (the Government acts as withholding agent for both CWT and, separately, withholding VAT when applicable).
Purchases of goods and services by “Top Withholding Agents” (TWAs) from their regular suppliers, at low, single-digit creditable rates set by regulation.
Other industry-specific payments listed by the BIR (e.g., tolling, printing, cinematographic film lessor, carriers and freight—subject to detailed rules).

4) Payments generally not subject to CWT (unless re-characterized)

Payroll (covered by compensation withholding, not CWT).
Pure reimbursement under a compliant accountable plan (where the expense legally belongs to the payor, supported by official receipts/invoices in the payor’s name, and any cash advances are liquidated; otherwise, the “reimbursement” can be treated as taxable income to the recipient).
Purchases of goods/services not listed as CWT-covered (except when the buyer is a TWA—see §7 below).
Payments to non-residents (these typically fall under Final Withholding Tax or treaty rules, not CWT).
Amounts that are VAT-only pass-throughs (VAT is separate from income tax; CWT applies on the net income payment base defined by regulation).
Transactions with entities enjoying specific statutory exemptions (subject to proof).

5) Who must withhold (withholding agents)

Private entities and individuals engaged in business or practice of profession who make covered payments.
Government offices/instrumentalities, including GOCCs.
Top Withholding Agents (TWAs) designated by the BIR (large or high-impact buyers) who must withhold on ordinary purchases of goods/services from regular suppliers at prescribed creditable rates even if the payment wouldn’t otherwise be CWT-covered.

Failure to withhold when required shifts exposure to the payor (tax + surcharges + interest + possible compromise penalties), and the expense may risk non-deductibility if withholding rules were willfully ignored.

6) The tax base, timing, and invoicing

Tax base is defined per category (e.g., gross professional fee, gross rental, gross contract price). Some categories allow exclusions (e.g., VAT component) per the specific rule.
Timing: Withhold upon payment (cash, check, wire) or upon accrual/constructive payment, depending on the regulation’s trigger. If down payments/retentions are made, withholding typically applies when those amounts are paid or credited.
Invoicing: Payee issues OR/invoice for the gross amount. Payor deducts the CWT and remits to the BIR; payee receives the net cash but recognizes gross income and later claims the CWT via BIR Form 2307.

7) Special case: Top Withholding Agents (TWAs)

If the buyer is a TWA, it must withhold creditable tax at prescribed low rates on purchases of goods and services from regular suppliers, even if those purchases aren’t on the ordinary CWT list.
Suppliers selling to TWAs should expect reduced net collections (gross minus CWT) and must secure BIR Form 2307 from the TWA to credit the withheld amounts in their quarterly/annual returns.

8) Professional fees & the “higher or lower rate” rule of thumb

For many professional-fee categories, regulations provide tiered rates (a lower rate if the professional’s projected/actual gross is within a threshold, and a higher rate if not). In practice:

The professional furnishes a sworn declaration or proof to support the lower rate;
Absent such proof, payors usually apply the higher prescribed rate;
Directors’ fees and certain specialized services have their own fixed rates.

(Exact percentages and thresholds are regulatory—and do get amended from time to time. Follow the current BIR circulars and the rate tables embedded in eFPS/eBIRForms.)

9) Documentation the payee needs to claim the credit

BIR Form 2307 (Certificate of Creditable Tax Withheld at Source)—issued by the payor/withholding agent to the payee, showing the gross payment, CWT base, rate, and tax withheld.
The payee attaches/encodes 2307 data in quarterly income tax returns and the annual return (BIR Form 1701/1701A/1702, as applicable). Without 2307, the BIR may disallow the credit even if the payor claims to have remitted.

10) Returns, remittances, and schedules (for payors)

Monthly remittance of CWT via the current monthly/quarterly forms (e.g., the remittance form and quarterly withholding tax return).
Quarterly summary with Schedule/Alphalist of Payees (SAWT/QAP), listing each payee, TIN, nature of income, gross amounts, and tax withheld.
Annual information return of income payments subjected to withholding (with complete alphalist).
Issuance of BIR Form 2307 to payees on time (statutorily required).
Books/records must reconcile billings, payments, and withholding entries.

(Exact form numbers and deadlines have evolved—always follow the currently prescribed remittance and quarterly/annual forms and cut-offs.)

11) Interplay with VAT and Percentage Tax

CWT is income-tax related; VAT (or percentage tax) is a separate indirect tax.
A supplier may be VAT-registered or non-VAT while still being CWT-subject on the income payment.
For government transactions, a separate withholding VAT mechanism can apply in addition to CWT. Don’t confuse the two.

12) Typical gray areas—and how to handle them

“Reimbursements” to freelancers or employees: If ORs are not in the company’s name or liquidation is weak, the “reimbursement” can be treated as taxable income to the recipient → CWT may apply (for non-employees).
Bundled contracts (e.g., “design-and-build”): Disaggregate goods vs services if rules impose different CWT treatments.
Pass-through payments: Only genuine agency/escrow pass-throughs escape CWT; otherwise the recipient is the income earner.
Retention money in construction: Withhold on amounts actually paid or credited; check the contract’s milestones and the regulation’s timing rule.
Related-party charges: If there is income to the Philippine entity or resident recipient, CWT rules still apply notwithstanding affiliation.
Advance payments/credit memos: If they constitute income or constructive payment, withhold accordingly.

13) Consequences of non-compliance (for payors)

Deficiency withholding tax assessment (basic tax not withheld or under-withheld), plus surcharges and interest.
Compromise penalties and potential criminal exposure for willful violations.
Expense disallowance risks (especially where failure to withhold was deliberate).
Supplier relations impact if 2307s are late or erroneous (payees can’t claim credits).

14) Consequences and strategies for payees

If a payor fails to withhold, the payee still owes income tax in full.
If the payor withheld but didn’t issue 2307, insist on it; otherwise, keep correspondence and proof of net-of-withholding payment while pursuing the certificate.
Quarterly monitoring avoids year-end surprises. Reconcile your books to all received 2307s.

15) Contracting and procurement tips

Put the CWT clause in every contract/PO: state the nature of income, applicable creditable rate, and the payor’s duty to issue 2307.
Require suppliers to provide TINs and updated registration.
For professionals, require the sworn declaration and registration pages to support the correct tier (if a tiered rate applies).
For TWAs, notify suppliers upfront about the TWA CWT on ordinary purchases.

16) Special entities and edge cases

Cooperatives, PEZA/BOI-registered enterprises, and entities with special tax regimes: The entity’s income tax position doesn’t automatically remove CWT on payments to them unless a specific exemption applies and is properly documented.
Joint ventures/consortia: Determine who the payee is (unincorporated JV vs members).
Franchisees and dealers: Commissions/over-riders are often CWT-covered; inventory buy-sell margins usually are not (unless TWA rules apply).

17) Quick decision flow (payor’s perspective)

Is the payee a resident? If no, check FWT/treaty; if yes, continue.
Is the payment on the BIR’s CWT list—or am I a TWA buying goods/services? If yes, continue.
Identify the correct category (professional fee, rent, contractor, commission, etc.).
Determine the proper base and rate (check the latest table; obtain any needed sworn declaration).
Withhold upon payment/credit, issue 2307, remit and file on schedule.
Record and reconcile for QAP/alphalist and year-end reporting.

18) Practical FAQs

Q: I bought goods from a small neighborhood supplier. Do I withhold CWT? If you are a TWA, likely yes at the TWA creditable rate. If not a TWA, ordinary retail purchases of goods are generally not CWT-covered unless a specific rule says otherwise.

Q: We hired a freelance designer for a project. CWT? Yes—professional fee category. Withhold and issue 2307.

Q: We rent an office floor from a local lessor. CWT? Yes—rental category. Withhold on the gross rental base defined by regulation.

Q: Payee didn’t give a TIN. Can we skip withholding? No. You must still withhold (and you also need the TIN for reporting). Lack of TIN is a red flag for both parties.

Q: The payee insists they’re VAT-exempt; does that remove CWT? No. VAT status is separate. CWT depends on income type, residency, and regulatory listing, not VAT class.

Q: Can a payee “opt out” of CWT to improve cash flow? No. If the payment is CWT-covered, the payor must withhold.

19) Bottom line

CWT is required whenever a covered income payment is made to a resident payee by a withholding agent, as identified by the NIRC and withholding regulations. The safest operational posture is to (i) map the payment to a CWT category or TWA rule, (ii) withhold and remit on time, (iii) issue/collect 2307s, and (iv) keep your books and alphalists in sync. Rates and forms are regulatory and do change—so keep your internal manuals updated and align your contracts, procurement, and AP/AR workflows accordingly.

This material is for general guidance only and is not a substitute for tailored legal or tax advice on specific facts.