ii. Final vs. Creditable Withholding Tax

Final Withholding Tax

(Rev. Regs. 02-98, Sec. 2.57)¹

The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income.

The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent.

The payee is not required to file an income tax return for the particular income. Note, however, that individual and corporate taxpayers will now be required to declare in the ITR items which have been subjected to final tax.

The finality of the withholding tax is limited only to the payee’s income tax liability on the particular income. It does not extend to the payee's other tax liability on said income, e.g., percentage tax.

Formula:

Note: Deductions and/or personal exemptions are not allowed.

Creditable Withholding Tax

(Rev. Regs.02-98, Sec. 2.57)²

Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient generally files an income tax return to report the income and/or pay the difference between the tax withheld and the tax due on the income, except where an employee qualifies for substituted filing under NIRC, Sec. 51-A. Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable in nature.

A CWT is considered a prepayment or an advance payment of eventual income taxes due at the end of the taxable year

Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income.

The payor endorses the pertinent Certificate of Creditable Tax Withheld at Source to the payee for use by the payee against his tax liability at the end of a taxable year.

The following are creditable withholding taxes:

• Expanded Withholding Tax (EWT) on certain income payments
• Withholding Tax on Compensation
• Creditable withholding tax on specified income payments made by government offices to suppliers or other payees

i. Expanded withholding tax

Expanded withholding tax will apply:

• The payor makes an income payment covered by the expanded withholding tax rules to a recipient subject to income tax; the payor need not treat the payment as an expense;
• Income is fixed or determinable at the time of payment
• Income is one of the income payments listed in the regulations; and
• Income recipient is a resident of the Philippines liable to income tax
• For a non-resident taxpayer, determine whether withholding is final or creditable under the NIRC provision governing the particular recipient and income payment (NIRC, Secs. 25 and 28; Revenue Regulations No. 2-98, as amended)
• Payor-withholding agent is also a resident of the Philippines (Ingles)

ii. Withholding tax on compensation

The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It generally applies to taxable compensation for services rendered in the Philippines, whether received by a citizen or an alien, subject to statutory exemptions, including those for minimum wage earners. The employer is constituted as the withholding agent. (Rev. Regs. 02-98, Sec. 2.78)³

If the employee has other items of income that are subject to regular income tax such as income from business or professions, income from other employment or casual income, he must file a consolidated income tax return to include such items of income for the entire taxable year. The withholding on compensation is credited against the total tax due in the consolidated income tax return. (Banggawan)