Overview
This lecture covers the fundamentals of the Philippine withholding tax system, types of withholding taxes, computation methods, and practical examples for preparing withholding tax returns.
Withholding Tax System in the Philippines
- Withholding tax is a system where the government collects taxes in advance through designated agents (withholding agents).
- The Bureau of Internal Revenue (BIR) collects taxes from withholding agents monthly, improving government cash flow.
- Withholding agents (buyers) deduct taxes from payments made to suppliers (sellers) and remit them to the BIR.
- Supplier taxpayers can claim these withheld taxes as tax credits when they file their annual returns.
Types of Withholding Taxes
- Final Withholding Tax (FWT): Applied to passive incomes (e.g., interest, dividends); the receiver is not required to file the income.
- Creditable/Expanded Withholding Tax (CWT/EWT): Applied to income payments (goods/services); receiver can claim tax credits and must file returns.
- Withholding Tax on Compensation: Applied to salaries; employees may claim credits for withheld taxes when filing returns.
Comparison of Withholding Tax Types
- FWT: Imposed on passive income within the Philippines, withheld at source, payer withholds, final liability, forms 0619F (monthly), 1601FQ (quarterly).
- CWT/EWT: Imposed on payments by buyer to supplier, also withheld at source, buyer as withholding agent, income must be reported by supplier, forms 0619E (monthly), 1601EQ (quarterly).
- Compensation: On employee salaries, employer withholds, always monthly, form 1601C.
Important Deadlines & Forms
- Monthly returns: On/before the 10th of the following month (FWT, CWT/EWT, Compensation).
- Quarterly returns: On/before the 25th day after the quarter ends (FWT, CWT/EWT).
Computation Examples
- For FWT: Tax is withheld from passive income (e.g., 20% on savings interest, 10% on cash dividends).
- For CWT/EWT: Tax rates depend on type and amount of payment (e.g., 5% on rent over ₱10,000/year, 5% or 10% on professional fees based on annual gross income).
- VAT must be excluded before computing withholding tax rates (divide by 112% if amount includes 12% VAT).
Key Terms & Definitions
- Withholding Agent — The payer who withholds tax from payments to suppliers or employees and remits to BIR.
- Supplier Taxpayer — The recipient of payment subject to tax withholding.
- Final Withholding Tax (FWT) — Tax where no further tax is required; receiver need not file for this income.
- Creditable Withholding Tax (CWT/EWT) — Tax credited against final income tax liability; receiver must still file.
- Withholding Tax on Compensation — Tax withheld from employees' salaries.
- Tax Credit — Amount of tax already withheld and credited against a taxpayer’s annual tax due.
Action Items / Next Steps
- Review sample computations for both FWT and CWT/EWT.
- Practice preparing BIR forms 0619F, 0619E, 1601FQ, and 1601EQ.
- Watch the next video for demonstrations on how to fill out BIR forms for withholding taxes.