Withholding Tax on Transactions Without VAT (Philippines)

Overview

In the Philippines, withholding tax is a collection mechanism that requires the payor of income to deduct and remit a portion of the payment to the Bureau of Internal Revenue (BIR) on behalf of the payee. This system operates independently of Value-Added Tax (VAT). As a result, transactions that are not subject to VAT—because the seller is non-VAT registered, the sale is VAT-exempt, or the seller is under the percentage-tax or 8% income-tax option—can still be subject to withholding tax if the payment falls within categories identified by law and regulations.

This article synthesizes the core rules, who is covered, compliance steps, common pitfalls, and practical examples—focusing squarely on Philippine law and BIR practice.

Legal Foundations

National Internal Revenue Code (NIRC) of 1997, as amended
- Sec. 57–58: Withholding of tax at source; return and payment of taxes withheld.
- Sec. 73, 80–83, 114–116, 128: Special rules for certain income, compensation, VAT/percentage tax, and other compliance.
Revenue Regulations (RR) No. 2-98, as amended (the master schedule for withholding tax on income payments), plus related Revenue Regulations and Memorandum Circulars.
TRAIN Law (RA 10963) and CREATE Law (RA 11534), among others, which modified rates, deadlines, and some definitions.
Tax Treaties (for cross-border payments), implemented through BIR rulings and revenue issuances.

Key principle: VAT status does not determine withholding. Whether a transaction is VAT-able, VAT-exempt, or outside the VAT system has no direct bearing on whether withholding applies. The nature of the income payment and the identity of the payor/payee drive withholding.

The Three Main Withholding Regimes

Creditable/Expanded Withholding Tax (CWT/EWT)
- Who bears it? The payee (income earner); the tax withheld is a prepayment of their income tax, creditable in quarterly and annual returns.
- When used? For recurring business payments identified in RR 2-98 (e.g., professional fees, contractor services, rentals, commissions, purchase of goods/services from designated agents, etc.).
- Certificate: BIR Form 2307 (Certificate of Creditable Tax Withheld at Source).
Final Withholding Tax (FWT)
- Who bears it? The payee, but the amount withheld is final—no further income tax on that item.
- When used? For specific passive income and certain special payments (e.g., some payments to nonresidents, certain prizes, etc., as enumerated in law/regulations).
- Certificate: BIR Form 2306 (Certificate of Final Tax Withheld at Source).
Withholding on Compensation
- For employment income. Not the focus here, but included for completeness.
- Certificate: BIR Form 2316.

Even if a seller is non-VAT (e.g., percentage-tax payer or availing the 8% option), the same EWT/FWT rules apply if the payment is within the covered categories.

Who Must Withhold?

Government agencies/instrumentalities (always withholding agents).
Designated private withholding agents, including:
- Top Withholding Agents (TWAs) (formerly “Top 20,000/5,000” taxpayers, Top E-filers, etc.)—required to withhold on purchases of goods and services from suppliers at prescribed creditable rates.
- Regular business payors—must withhold when making payments specifically listed in RR 2-98 (e.g., professional fees, rentals, contractors, commissions). You do not need to be a TWA to withhold on these items; you need only be a payor making a covered payment.
Any person required by law or regulation to withhold on a particular transaction.

Payees (sellers/suppliers) do not withhold on what they receive (except for employee payroll). Their role is to receive certificates (2307/2306) and claim credits or recognize final taxes appropriately.

When Withholding Applies to Transactions Without VAT

Payments to suppliers by TWAs
- Purchase of goods and services are typically subject to creditable withholding whether the supplier is VAT-registered, non-VAT, or VAT-exempt.
- The VAT status or percentage-tax status of the supplier is irrelevant to the obligation to withhold.
Professional, talent, management, and technical fees
- Payments to individual professionals (e.g., lawyers, CPAs, consultants) and to professional partnerships/corporations are generally subject to EWT, regardless of VAT status.
Contractor services and casual labor
- Payments to independent contractors (e.g., repair, fabrication, construction subcontractors, IT services) are typically covered by EWT.
Rentals
- Real property (commercial or residential used in business), equipment, and other property rentals commonly trigger EWT.
Commissions, brokerage, agency fees, and similar
- Usually subject to EWT.
Certain payments to nonresidents
- Often subject to FWT at treaty or statutory rates (e.g., royalties, interest, services performed in the Philippines). VAT may be out of scope or zero-rated for these items, but withholding can still be required.

If a payment type appears in RR 2-98 (as amended) or a special issuance, you generally must withhold, even if the seller is non-VAT, VAT-exempt, or the sale is not subject to VAT.

Rates

Rates are set by regulation (primarily RR 2-98, as amended) and vary by income type and payee (individual vs corporation, resident vs nonresident, etc.).
Common categories have well-known ranges (e.g., goods/services purchased by TWAs, professional fees, rentals, commissions), but rates change over time due to new laws and issuances.
Always consult the current withholding tax schedules applicable to:
- The nature of the payment (what you’re paying for),
- The status of the payee (individual/corporation, resident/nonresident), and
- Any thresholds or special conditions (e.g., de minimis transaction amounts, sworn declarations, exemptions).

Practical tip: Build an internal withholding matrix keyed to your vendor master (payee type + payment nature) so your AP team applies the correct rate automatically.

Interaction With Percentage Tax and the 8% Income-Tax Option

Percentage-tax taxpayers (Sec. 116) and individuals availing the 8% income-tax option may still be subject to EWT on payments they receive.
The withheld amounts (2307) are creditable against their income tax due.
Percentage tax (or the 8% option) is separate from withholding. A supplier’s non-VAT status does not block the payor’s withholding obligation if the payment type is covered.

Documentation & Substantiation

Contracts/Invoices/ORs
- Ensure the nature of the service or supply is clearly stated to map to the proper withholding category.
Certificates to Payees
- 2307 for creditable tax; 2306 for final tax.
- Provide timely and accurate certificates; payees need these to claim credits or recognize final tax.
Books & Returns
- Payees record gross income and withholding tax credits (from 2307) in their books and claim them in quarterly/annual income tax returns.
- Unused credits carry forward until utilized (subject to rules on matching periods and substantiation).

Filing, Payment & Reporting (Payor/Withholding Agent)

The exact forms and eFPS/eBIR deadlines can vary by taxpayer class; below is the standard framework.

Monthly remittance of taxes withheld:
- Creditable (EWT/CWT): BIR Form 0619-E
- Final (FWT): BIR Form 0619-F
Quarterly withholding returns:
- Creditable (EWT/CWT): BIR Form 1601-EQ (+ Quarterly Alphalist of Payees/QAP)
- Final (FWT): BIR Form 1601-FQ (+ QAP)
Annual Information Return / Alphalists:
- Submission of alphalists of payees as required (separate from the annual compensation filings).

Key controls:

Tie out gross payments per vendor against QAP totals.
Reconcile 0619-E/F payments with 1601-EQ/FQ quarterly totals.
Automate certificate (2307/2306) generation from AP data to avoid mismatches.

Claiming the Credit (Payee)

When to claim:
- Quarterly (individuals & corporations) and annual income tax returns.
How to claim:
- Present Form 2307 details (TINs, period, amount withheld, nature of income) and attach or upload per prevailing BIR rules.
Limits:
- Credits are only valid if:
  1. The payment is truly income,
  2. It is properly covered by EWT, and
  3. You possess the matching 2307 issued by the payor and remitted by them.
Common issue: Payors withhold but fail to remit or mis-classify. Reconcile early to prevent denied credits.

Special Topics

1) Nonresident Payees (Cross-Border)

Many cross-border payments (royalties, interest, technical services, dividends) are subject to FWT.
Tax treaties may reduce rates; compliance generally requires treaty relief documentation under current BIR procedures (e.g., forms, consularized certificates of residency, on-file notifications).
VAT treatment (zero-rated vs not in scope) is separate from FWT.

2) Mixed Transactions & Composite Invoices

If a single invoice covers multiple fee types (e.g., service fee + reimbursable supplies), separate the items in the contract and invoice to apply the correct withholding base.
Pure reimbursements properly documented may be excluded from the base, but “lump-sum” arrangements are often fully subject to withholding.

3) Declarations & Thresholds

Some categories allow sworn declarations (e.g., payee status or income level) or have de minimis transaction thresholds.
Keep current templates and refresh annually from vendors; outdated declarations are a frequent audit finding.

4) Government Procurement

Government as payor typically withholds both income taxes (as required) and may apply separate VAT-withholding rules (for VAT-registered suppliers).
For non-VAT suppliers to government, income-withholding rules still apply if the payment falls under EWT/FWT schedules.

Compliance Workflow (Step-by-Step)

For the Payor (Withholding Agent)

Classify the payee (individual/corporation; resident/nonresident; VAT/non-VAT is not decisive for withholding).
Classify the payment (map to RR 2-98 category).
Apply the correct EWT/FWT rate (per current schedules).
Withhold upon payment or accrual (per your method).
Remit monthly via the proper 0619 form.
File quarterly 1601-EQ/1601-FQ with QAP.
Issue 2307/2306 to the payee within expected timelines.
Maintain reconciliations (AP ledger ↔ remittances ↔ certificates ↔ QAP).

For the Payee (Supplier)

Verify your vendor master data (TIN, registration status, addresses).
Ensure invoices/ORs clearly state the nature of income.
Collect 2307/2306 and reconcile to your books.
Claim credits (for EWT) in your quarterly/annual returns; track unutilized credits.
Resolve gaps early (missing or incorrect certificates; unremitted withholdings).

Illustrative Scenarios

Non-VAT contractor servicing a TWA
- A TWA pays a non-VAT contractor for repair services.
- EWT applies at the services rate for TWAs.
- Contractor issues OR without VAT, but the TWA still withholds and remits; issues 2307.
Professional fees to a non-VAT individual
- A company engages an individual consultant who is a percentage-tax payer (non-VAT).
- EWT on professional fees applies. The consultant’s VAT status doesn’t matter for withholding.
Commercial rent from a non-VAT lessor
- A corporation rents office space from a lessor who is non-VAT.
- EWT on rentals applies. The tenant withholds and issues 2307.
Royalty to a nonresident
- A Philippine company pays royalties to a nonresident corporation.
- FWT (possibly treaty-reduced) applies—regardless of VAT. The Philippine payor withholds final tax and issues 2306.

Penalties & Risk Management

Failure to withhold/remit/file can trigger:
- Surcharge (e.g., for late filing),
- Interest (computed under the NIRC using the prevailing legal interest framework), and
- Compromise or criminal penalties in severe cases.
Denial of payee’s credits may occur if the payor mis-reports or fails to remit.
Practical controls:
- Centralize rate tables; lock AP categories.
- Require vendor TIN and registration docs before onboarding.
- Monthly AP ↔ 0619 tie-outs; quarterly QAP reviews.
- Calendar-based certificate (2307/2306) release.

Frequently Asked Questions

1) Our supplier is non-VAT. Do we still withhold? Yes—if the payment is a covered income payment under RR 2-98 (as amended). VAT status is not a defense against withholding.

2) We didn’t receive 2307 from our customer. Can we still claim a credit? You need 2307 (or verifiable equivalent, per current rules) because the BIR requires substantiation. Work with the customer to obtain it and reconcile with the QAP.

3) Does the 8% income-tax option affect withholding? No. It affects the payee’s income-tax computation, not the payor’s obligation to withhold where applicable.

4) Can we “gross up” to keep the supplier whole? Commercially yes (by contract), but tax-wise the withholding must still be computed on the proper base and remitted; the gross-up becomes part of the payee’s income.

5) Are small, one-off purchases exempt? Some categories have thresholds or de minimis rules, but these are specific and change over time. Always check the current schedule for the payment type.

Practical Checklist

Identify if you are a withholding agent (TWA, government, or payor of covered payments).
Map each payment category in your AP to the correct withholding rule.
Capture payee status (individual/corp; resident/nonresident; TIN).
Apply current rates and bases; consider thresholds.
Withhold at payment/accrual; remit monthly; file quarterly with QAP.
Issue 2307/2306; collect and reconcile on the payee side.
Maintain evidence (contracts, invoices, certificates, reconciliations).
Review new BIR issuances periodically; update your matrices and SOPs.

Bottom Line

Withholding tax is a separate regime from VAT.
Transactions without VAT can still be fully within the withholding net if they match covered income payments.
The nature of the payment and the status of the parties drive the obligation to withhold, not the presence or absence of VAT on the invoice.
Robust classification, documentation, and reconciliation keep both payors and payees compliant and audit-ready.

Note: Specific rates, thresholds, forms, and deadlines are subject to change through laws and BIR issuances. For live transactions, verify the current RR 2-98 schedules and any recent circulars that update rates or compliance timetables.