• 1000

As featured on PhilStar:  When in doubt withhold.


There is a concept in taxation that is something every working individual in the Philippines is familiar with – withholding tax. But what exactly is this tax?

There are several Supreme Court (SC) decisions wherein it was explained that the main purpose of withholding tax is for the efficient collection of taxes which reduces effort on the part of the government to collect taxes. It is essentially a method or mode of collecting tax in advance to facilitate the collection of income tax. Under the Tax Code, the withholding agent or income payor is mandated to withhold the tax due and remit the said taxes to the BIR.

Generally, there are two kinds of withholding tax, final withholding tax (FWT) and creditable withholding taxes (CWT).

Under the FWT system, the amount of income tax withheld by the withholding agent is considered the full and final payment of income tax due on the income. The FWT applies only to certain categories of income, such as royalties, interest, cash and property dividends, and capital gains on the sale of real property, among others.

For CWT, sometimes called expanded withholding tax or EWT, the withholding agent or income payor will withhold tax that approximates the tax due on the payment. The income payee will report the income and pay any income tax still due after deducting the CWT withheld as tax credits. Simply put, CWT is an advance income tax due to the payee.

Not every taxpayer, however, is liable to pay creditable withholding tax.  Under Section 2.57.5 (A) of Revenue Regulations (RR) No. 2-98, as amended, CWT does not apply to income payments made to national government agencies and its instrumentalities, including provincial, city, municipal governments and barangays, except government-owned or -controlled corporations, among others. 

But what about payments by national government agencies and their instrumentalities, are they subject to CWT?

In a 2021 SC decision, it was ruled that the Commission on Election (COMELEC) is not exempt from the obligation to withhold EWT. The case arose from a deficiency assessment issued by the BIR on the payments made by the COMELEC to its suppliers for the lease of electronic voting machines. The COMELEC argued that the non-withholding was based on the belief that the procurement of election materials and equipment are free from taxes and import duties under Section 12 of Republic Act (RA) No. 8436 or the Election Modernization Act of 1997, as amended.

In ruling for the BIR, the SC pointed out that the payments made to the suppliers are not part of the list of taxpayers exempted from withholding under Section 2.57.5 of RR No. 2-98, as amended. The SC noted that unless the income recipient is exempt from income tax, the payor is generally required to deduct and withhold EWT on income payments made.

Hence, even if the COMELEC is exempted from payment of taxes and import duties for the purchase, lease, rent, or other forms of acquisition of election supplies, the COMELEC is still obliged to withhold the applicable withholding tax on its income payments to suppliers since the tax exemption being invoked is distinct from its liability as a withholding agent. Further, as expressly provided for under the withholding tax regulations, all government offices are constituted as withholding agents of the government for EWT purposes.

The basic rule in taxation is that tax exemptions are strictly construed strictissimi juris against the taxpayer and liberally in favor of the government. These exemptions are not to be presumed. In the absence of clear and express exemption from income tax or unless the payee falls under the list of those exempted from withholding, a withholding agent must comply with the obligation to deduct and withhold tax on income payments.  In this case, the suppliers were taxable entities, and the EWT due on the payments made by COMELEC to the suppliers should have been withheld and remitted to the BIR.

Note that the withholding tax system encompasses private individuals, organizations, corporations, and the Government, its instrumentalities, political subdivisions, and government-owned or controlled corporations. As such, taxpayers should be mindful of the withholding tax regulations lest they risk being assessed not only of the basic tax due but of any penalties applicable.

Carla Joy M. Verceles
KPMG in the Philippines

Carla Joy M. Verceles is a Supervisor from the Tax group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as Tier 1 in Transfer Pricing Practice and General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Tax Supervisor Carla Joy Verceles or Tax Partner Mary Karen E. Quizon-Sakkam through ph-kpmgmla@kpmg.com, social media, or visit www.home.kpmg/ph.

This article is for general information purposes only and should not be considered professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.