Navigating the Philippine tax landscape is often the most daunting challenge for newly incorporated entities. Under the National Internal Revenue Code (NIRC), as amended by the TRAIN Law and the CREATE Act, a corporation is not merely a taxpayer but also a constituted agent of the government—tasked with the legal responsibility to withhold, report, and remit taxes on certain income payments.
Failure to comply results in significant penalties, including surcharges, interest, and the disallowance of expense deductions for income tax purposes.
I. The Nature of the Withholding Tax System
In the Philippines, the withholding tax system is a method of collecting tax in advance. The payor (the corporation) deducts a specific percentage from its payment to the payee (the seller/service provider) and remits it directly to the Bureau of Internal Revenue (BIR).
There are three primary types of withholding taxes that a new corporation must manage:
- Withholding Tax on Compensation (WTC)
- Expanded Withholding Tax (EWT) / Creditable Withholding Tax (CWT)
- Final Withholding Tax (FWT)
II. Withholding Tax on Compensation (WTC)
Once a corporation hires its first employee, it becomes an employer with the obligation to withhold tax on salaries and wages.
- The Threshold: Under the current law, employees earning ₱250,000 or less annually are exempt from withholding tax.
- De Minimis Benefits: Small-value benefits (e.g., rice subsidy, uniform allowance within limits) are exempt from both income tax and withholding tax.
- Remittance: Use BIR Form 1601-C. Generally due on or before the 10th day of the following month (or 15th for EFPS filers).
- Annualization: At the end of the calendar year, the corporation must perform "Year-End Adjustment" to ensure the total tax withheld matches the employee's actual tax liability.
III. Expanded Withholding Tax (EWT)
The EWT is a system where the tax withheld is credited against the income tax liability of the payee. For a new corporation, this is the most active area of compliance.
Common payments subject to EWT include:
- Professional Fees: (e.g., Lawyers, Accountants, Consultants) – Usually 5% or 10%.
- Rentals: Real or personal property used in business – 5%.
- Contractors: Payments to certain service contractors – 2%.
- Top Withholding Agents (TWA): If the BIR designates the corporation as a TWA, it must withhold 1% (goods) or 2% (services) from all local suppliers, even those not specifically listed in EWT regulations.
Compliance Requirements:
- Filing: Use BIR Form 1601-EQ (Quarterly) and BIR Form 0619-E (Monthly for the first two months of the quarter).
- Certificate: The corporation must issue BIR Form 2307 to the payee. This serves as the payee’s proof of tax payment which they will use to deduct from their own income tax due.
IV. Final Withholding Tax (FWT)
Unlike EWT, the tax withheld under FWT is considered the full and final payment of the tax due. The payee no longer includes this income in their income tax return.
- Common Examples: Dividends paid to shareholders, royalties, and interest on debt instruments.
- Filing: Use BIR Form 1601-FQ (Quarterly) and BIR Form 0619-F (Monthly).
V. Administrative Obligations and Deadlines
For a newly established corporation, the following administrative steps are non-negotiable:
| Requirement | Description |
|---|---|
| Registration | Ensure "Withholding Tax" types are ticked in the Certificate of Registration (BIR Form 2303). |
| Books of Accounts | Maintain a "Withholding Tax" column in the Cash Disbursement Journal to track taxes withheld. |
| Alphabetical List (Alphalist) | Submit an Alphalist of Payees via the BIR’s electronic portal (eSPS/eAFS) together with the quarterly and annual returns. |
| Annual Return | File BIR Form 1604-C (for Compensation) and 1604-E (for EWT) on or before January 31 of the following year. |
VI. Consequences of Non-Compliance
The BIR employs a "No Withholding, No Deduction" rule. If a corporation fails to withhold the required tax on an expense (such as rent or professional fees), that expense will be disallowed as a deduction from the corporation's gross income. This effectively increases the corporation’s taxable income and resulting Income Tax Payable.
Furthermore, statutory penalties apply:
- Surcharge: 25% of the tax due (50% in cases of willful neglect or fraud).
- Interest: 12% per annum (under the TRAIN Law).
- Compromise Penalties: Based on a schedule provided by the BIR (RMO 7-2015).
VII. Summary of Forms for New Corporations
- 1601-C: Monthly remittance for employee compensation.
- 0619-E / 1601-EQ: Monthly/Quarterly remittance for EWT (Rent, Prof Fees).
- 2307: Certificate given to suppliers (crucial for maintaining business relationships).
- 2316: Certificate given to employees annually.