I. Overview: the Philippine Withholding Tax System

Withholding tax is a method of collecting income tax at the source. Instead of waiting for the payee to file and pay income tax later, the law requires the payer (the “withholding agent”) to deduct a prescribed amount from a payment and remit it to the Bureau of Internal Revenue (BIR). The withheld amount is either:

Creditable Withholding Tax (CWT/EWT) – an advance payment of income tax creditable against the payee’s annual income tax; or
Final Withholding Tax (FWT) – a full and final tax on that specific income, so the payee no longer includes it in regular taxable income.

Three core statutes govern the topic:

National Internal Revenue Code (NIRC), as amended – primary legal basis.
BIR regulations/revenue issuances – provide the detailed list and rates.
Special laws and tax treaties – modify or override general rules in defined cases.

II. Who Must Withhold?

A. General rule

Any person or entity required by the NIRC or BIR regulations to withhold becomes a withholding agent. This includes:

Corporations, partnerships, and cooperative entities
Sole proprietors and professionals engaged in business
The national government, LGUs, and government-owned or -controlled corporations
Top withholding agents as designated by the BIR

B. Nature of obligation

The duty to withhold is mandatory once a payment falls within a category subject to withholding. Failure makes the withholding agent:

Personally liable for the tax not withheld/remitted, plus
Surcharges, interest, and penalties, and
Potential disallowance of expense deductions.

III. Payments Subject to Creditable/Expanded Withholding Tax (EWT/CWT)

EWT applies mostly to business and professional income. The withheld tax is creditable to the payee.

A. Compensation income (wages, salaries, etc.) – Withholding Tax on Compensation

Subject payments include:

Salaries, wages, overtime pay, holiday pay
Allowances and benefits treated as taxable compensation (e.g., certain transportation, representation, housing beyond thresholds)
Fees paid to employees that are really compensation
Taxable bonuses, commissions, profit sharing
Fringe benefits not subject to fringe benefit tax (see below)

Key points

The employer withholds based on BIR withholding tables and rules.
Certain benefits are exempt (e.g., de minimis benefits within limits, 13th month/other benefits up to statutory cap).

B. Professional fees

Payments to:

Lawyers, CPAs, engineers, architects, doctors, consultants
Talent fees, directors’ fees (if not treated as compensation)
Management/technical advisory services

Typical basis: gross professional fee, regardless of whether paid in cash or applied by offset.

C. Rental income

Payments for lease of:

Real property (land, buildings, office spaces, warehouses)
Personal property (equipment, vehicles, machinery, containers)

Includes advance rentals and lease-related charges if part of consideration.

D. Contractors and service providers

Payments for services rendered in the course of trade or business, such as:

General contractors and subcontractors
Security, janitorial, manpower, and agencies
Repairs/maintenance, construction, fabrications
IT development, digital marketing, BPO-type services
Freight, forwarding, and other logistics services (when classified as service income)

E. Suppliers of goods / merchandise

Payments for purchase of goods from local suppliers generally attract EWT when paid by withholding agents (especially government and top agents). This includes:

Raw materials
Merchandise and inventory
Packaging supplies

F. Commissions, rebates, and similar payments

Subject to EWT when paid in business context, including:

Sales commissions to brokers/agents
Finder’s fees
Marketing incentives
Rebates and discounts that are effectively income to the recipient

G. Payments to certain intermediaries

Brokerage fees
Talent agency fees
Advertising agency costs/production services
Collection agency fees
Shipping/handling charges (if separable service income)

H. “Other income payments” under EWT rules

This is a catch-all category interpreted through BIR issuances. Common inclusions:

Prizes and winnings paid to suppliers or business entities (not individuals under final tax rules)
Payments to medical/diagnostic clinics for services
Fees to training providers, seminar speakers
Membership/retainer fees if effectively service income

IV. Payments Subject to Final Withholding Tax (FWT)

FWT applies to income specifically listed by law as “final,” meaning the withheld tax settles the income tax liability on that item.

A. Passive income of residents

Interest
- Interest on bank deposits
- Deposit substitutes
- Trust funds and similar arrangements General principle: banks/financial institutions withhold final tax at source.
Royalties
- Royalties from books, literary works, musical compositions
- Royalties from other intellectual property (e.g., software licensing), unless treated as business income Final tax applies to individuals unless income is effectively connected with business.
Dividends
- Cash or property dividends from domestic corporations to individual shareholders (resident citizens and resident aliens) Domestic corp withholds final tax upon declaration/payment.
Prizes and winnings (individuals)
- Lottery, sweepstakes, games, contests (Subject to thresholds/exemptions depending on type.)

B. Capital gains treated as final tax

Sale of real property classified as capital asset
- By individuals and domestic corporations not engaged in real estate business Final tax based on gross selling price/fair market value whichever is higher, withheld/paid by seller through return, with buyer often acting as collecting agent in practice.
Sale of shares of stock not traded in the stock exchange
- Capital gains tax imposed and remitted through required filings; buyer may be required to withhold in certain cases.
Sale of shares traded through local stock exchange
- Subject to stock transaction tax (a different final tax system collected through brokers).

C. Fringe Benefit Tax (FBT)

Paid by employer, withheld as final tax on the benefit value granted to managerial/supervisory employees, such as:

Housing, vehicles, household personnel at employer cost
Expense accounts of personal nature
Club memberships
Foreign travel for personal benefit If subject to FBT, it is not treated under compensation withholding.

D. Income of non-residents (see also Section V)

Many payments to non-residents are subject to final withholding at treaty-adjusted or statutory rates.

V. Withholding on Payments to Non-Residents / Foreign Corporations

A. Basic rule

Payments of Philippine-sourced income to non-resident aliens or foreign corporations are generally subject to final withholding tax, unless:

reduced by a tax treaty, or
exempt under special law.

B. Common payments subject to final withholding

Royalties to non-resident licensors
Interest on foreign loans or credit arrangements
Dividends to foreign shareholders from domestic corporations
Service fees where the service is performed or deemed sourced in the Philippines, including:
- Technical services, management services
- Consultancy performed in the Philippines
- Fees for use of foreign personnel in PH projects
Rentals or lease payments for property used in the Philippines
Gross income from all PH sources of non-resident foreign corporations not engaged in trade/business in PH.

C. Treaty relief

If a treaty applies, the withholding agent must usually:

confirm residency and treaty entitlement;
ensure compliance with BIR treaty procedures; and
apply the reduced rate only when validly supported.

VI. “Money Payments” That Trigger Withholding: Practical Classification

A payment is subject to withholding if it is:

Income to the recipient, and
Covered by a withholding category, and
Paid by a person required to withhold.

This includes payments in any form, not just cash:

check, bank transfer, digital payment
set-off or compensation of obligations
property transfers in settlement of service/goods
constructive payments (income made available without actual transfer)

VII. Payments Not Subject to Withholding (Common Exclusions)

Not all disbursements are “income payments.” Typical exclusions:

Reimbursements supported by receipts and not marked-up
- If reimbursement is bundled with a service fee, the fee portion is subject to withholding.
Capital contributions or loan proceeds
- Not income.
Pure advances
- If later liquidated properly; otherwise may be treated as income.
Payments to entities expressly exempt
- Certain government bodies, duly registered tax-exempt entities, and organizations with valid exemption rulings.
De minimis benefits and exempt compensation within statutory ceilings.
Transactions subject to other regimes
- For example, payments that are not income but are subject to VAT, documentary stamp tax, or excise taxes.

VIII. Timing and Basis of Withholding

A. When to withhold

Generally upon payment or accrual/constructive payment, whichever comes first, depending on the category and regulations.

B. Tax base

Usually gross amount paid without deduction, unless a rule provides otherwise. For example:

Rentals: gross rent
Professional fees: gross fee
Goods purchases: gross purchase price

IX. Compliance Duties of the Withholding Agent

Correct tax type (EWT vs FWT vs compensation vs FBT)
Correct rate and base
Timely remittance using prescribed forms and deadlines
Issuance of BIR Form 2307 (EWT certificate) for creditable tax
Annual information returns (alphalists, summary lists)
Recordkeeping for audits

Noncompliance exposes the withholding agent to:

tax deficiency assessment,
penalties,
disallowance of deductions,
possible criminal liability in willful cases.

X. Special Situations and Edge Cases

A. Mixed contracts (goods + services)

If a contract involves both goods and services:

segregate the amounts; apply EWT to relevant portions separately.
If not segregated, BIR may treat the whole as subject to service withholding.

B. Government payments

Government agencies and GOCCs are typically required to withhold on most supplier and contractor payments, often at higher or more consistently enforced coverage.

C. “Top withholding agents”

Entities classified as top withholding agents must withhold on a broadened range of payments to local suppliers under EWT rules.

D. Payments to individuals not engaged in business

If a payment is not business-related (e.g., casual one-time sale of personal property), EWT may not apply unless expressly covered.

XI. Summary List (Conceptual Map)

Creditable/Expanded Withholding (advance tax):

Compensation income (wages/salaries)
Professional fees
Rentals
Service contractors
Local purchases of goods by withholding agents
Commissions, rebates, marketing fees
Other business income payments listed by regulations

Final Withholding (tax is final):

Passive income: interest, royalties, dividends, certain prizes/winnings
Capital gains on capital-asset real property and unlisted share sales
Stock transaction tax for listed shares
Fringe benefits to managerial/supervisory employees
Most PH-sourced income paid to non-residents

XII. Closing Note

In the Philippines, whether a “money payment” is subject to withholding is determined less by the label used in a contract and more by its true nature as income and by the statutory/regulatory category it falls under. The safest approach for payers is to (1) classify correctly, (2) withhold when in doubt if clearly covered, and (3) keep clean documentation—because the burden of withholding compliance rests on the withholding agent.