[TOPIC 16] WITHHOLDING TAX SYSTEM | Final and Creditable (Expanded) Withholding Taxes

Raz

6 chapters7 takeaways10 key terms5 questions

Overview

This video explains the withholding tax system in the Philippines, focusing on its purpose, mechanics, and different types. It details how withholding taxes serve as an advance payment mechanism to ensure a steady cash flow for the government, benefiting both the government and taxpayers. The lesson differentiates between Final Withholding Tax (FWT), Creditable Withholding Tax (CWT or EWT), and Withholding Tax on Compensation, outlining their applicability, withholding agents, and remittance procedures. Practical examples are provided to illustrate the computation and application of these taxes on various income payments.

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Chapters

Withholding tax is a method of collecting income taxes in advance to ensure consistent government revenue.
It shifts the responsibility of tax collection from the taxpayer to the payer of income (withholding agent).
Withholding agents deduct a portion of payments made to suppliers or employees and remit it to the Bureau of Internal Revenue (BIR).
This system benefits taxpayers by allowing them to claim withheld taxes as advance payments or tax credits against their final tax liability.
The BIR benefits from a smoother and more predictable cash inflow of tax revenues.

Understanding the purpose and mechanics of withholding tax is crucial for both payers and recipients of income, as it impacts cash flow and tax compliance.

A buyer (withholding agent) pays a supplier P100,000 but deducts P2,000 as withholding tax, paying the supplier only P98,000. The P2,000 is remitted to the BIR as an advance payment for the supplier's income tax.

Final Withholding Tax (FWT): Applied to passive incomes; the tax withheld is final, and the recipient is not required to file a tax return for that income.
Creditable Withholding Tax (CWT/EWT): Applied to various income payments; the tax withheld can be claimed as a tax credit by the recipient against their income tax liability.
Withholding Tax on Compensation: Deducted by employers from employee salaries and wages; can be claimed as a tax credit by the employee.

Differentiating between these types is essential because each has different implications for tax filing obligations and the final tax liability of the recipient.

Interest earned from a bank deposit is subject to FWT, meaning the bank deducts the tax, and the depositor doesn't need to declare that interest income again. Rent income is subject to CWT, where the lessee withholds tax, and the lessor declares the rent income but claims the withheld tax as a credit.

FWT is imposed on passive incomes earned within the Philippines.
The payer of the income (e.g., bank, corporation) is responsible for withholding and remitting the tax.
The recipient of the income has no further tax filing obligation for that specific income as the tax is considered final.
Common examples include interest on bank deposits, royalties, and dividends, with varying tax rates depending on the income type and source.

Recognizing FWT ensures correct tax treatment for passive income, preventing unnecessary tax filings and double taxation.

A bank withholds 20% final tax on P20,000 interest earned by a depositor. The depositor receives P16,000 net, and the P4,000 withheld tax is the final tax due on that interest income.

CWT is applied to payments made by buyers to suppliers for goods or services.
The buyer (withholding agent) deducts the CWT before paying the supplier.
The supplier can claim the withheld amount as a tax credit when filing their income tax returns.
Applicable rates vary based on the type of payment (e.g., rental payments, professional fees) and the income level of the recipient.

CWT allows taxpayers to pay their income tax liability gradually throughout the year, reducing the burden of a large lump-sum payment at year-end.

A lessee pays P112,000 for rent (inclusive of VAT). After excluding VAT (P112,000 / 1.12 = P100,000), the lessee withholds 5% of P100,000 (P5,000) and remits it to the BIR. The lessor receives P107,000 and can claim the P5,000 as a tax credit.

This applies to salaries, wages, and other forms of remuneration paid to employees.
Employers are mandated to withhold taxes from employee compensation.
The withheld tax is creditable against the employee's annual income tax liability.
Employees can claim the total taxes withheld by their employer as a credit when filing their annual income tax return.

This ensures that income earned from employment is taxed progressively as it is earned, simplifying the employee's year-end tax obligations.

An employer deducts a certain amount from an employee's monthly salary as withholding tax. The employee can use this total deducted amount as a credit towards their final income tax due when filing their annual tax return.

Withheld taxes must be remitted to the BIR within specific deadlines.
Deadlines vary: generally by the 10th day of the following month for monthly remittances, with quarterly returns due by the 25th day of the following month for the last month of the quarter.
Specific BIR forms are used for filing and remittance (e.g., 0619-F for monthly FWT, 1601-EQ for quarterly CWT, 1601-C for monthly compensation withholding tax).
Withholding tax on compensation has a strict monthly filing and remittance deadline without quarterly options.

Adhering to remittance deadlines and using correct forms is critical to avoid penalties and ensure compliance with BIR regulations.

Taxes withheld in January must be remitted by February 10th. Taxes withheld in March (the last month of the first quarter) must be remitted by April 25th using the quarterly form.

Key takeaways

1The withholding tax system is a government mechanism to collect taxes in advance, ensuring steady revenue and simplifying tax payments for taxpayers.
2Final Withholding Tax (FWT) is a conclusive tax on passive income, meaning no further filing is required by the recipient.
3Creditable Withholding Tax (CWT/EWT) and Withholding Tax on Compensation allow recipients to claim the withheld amounts as credits against their final tax liabilities.
4Withholding agents (payers) are responsible for deducting, remitting taxes, and filing the correct BIR forms by the stipulated deadlines.
5It is crucial to exclude Value Added Tax (VAT) from the base amount when calculating withholding taxes on payments that include VAT.
6Understanding the different types of withholding taxes and their respective rules is essential for accurate tax compliance for both payers and recipients.
7The system benefits the government through consistent cash flow and taxpayers by spreading tax payments throughout the year.

Key terms

Withholding Tax SystemWithholding AgentBureau of Internal Revenue (BIR)Final Withholding Tax (FWT)Creditable Withholding Tax (CWT)Expanded Withholding Tax (EWT)Withholding Tax on CompensationPassive IncomeTax CreditRemittance

Test your understanding

1What is the primary purpose of the withholding tax system in the Philippines?
2How does the withholding tax system benefit both the government and the taxpayer?
3What is the key difference between Final Withholding Tax (FWT) and Creditable Withholding Tax (CWT)?
4When a payment includes VAT, how should the withholding tax be computed?
5What is the responsibility of a withholding agent regarding taxes deducted from payments?