In the Philippines, the Expanded Withholding Tax (EWT), also known as Creditable Withholding Tax (CWT), is a vital mechanism for collecting income tax in advance on certain income payments. Administered by the Bureau of Internal Revenue (BIR) under the Tax Code, EWT ensures that taxes are withheld at the source of income, simplifying tax compliance for both payors and payees.
This blog post explains what EWT is, why it matters, and provides a step-by-step guide to computing it, helping businesses, freelancers, and individuals stay meet their tax obligations.
Understanding Expanded Withholding Tax
EWT is a tax deducted by the payor (withholding agent) from payments made to suppliers, service providers, or other payees for specific transactions, such as professional fees, rentals, commissions, or contractor services. The withheld amount is remitted to the BIR and credited against the payee’s income tax liability during their annual tax filing.
The primary purpose of EWT is to ensure tax collection at the point of payment, reducing the risk of tax evasion. For payees, it serves as an advance payment of their income tax, which they can claim via BIR Form 2307 when filing their annual return. For payors, proper withholding and remittance are critical to avoid BIR penalties, including surcharges and interest.
Transactions Covered by EWT
EWT applies to various income payments, with rates specified by the BIR. Common examples include:
- Professional fees (e.g., for lawyers, doctors, accountants): 5% or 10%, depending on the payee’s gross income.
- Rentals (e.g., real property, equipment): 5%.
- Contractor payments (e.g., construction, janitorial services): 2%.
- Commissions (e.g., to brokers or agents): 10%.
This guide highlights only a few common transactions subject to EWT and their rates. Enlisting a tax consultation service is recommended especially for more complex business transactions.
How to Compute EWT: A Step-by-Step Guide
Computing EWT involves a clear process to determine the correct tax amount to withhold and remit. Follow these steps:
1. Identify the Transaction Type
Confirm whether the payment is subject to EWT by checking the BIR’s regulations. For example, a payment for legal services is subject to EWT, while a payment for goods typically is not. The BIR’s EWT table details all covered transactions and their rates here.
2. Verify the Payee’s Status
The EWT rate varies based on the payee’s status. For example, professional services such as legal or accounting fees have these rates:
- Individuals: 5% if gross income for the year is PHP 3 million or less; 10% if it exceeds PHP 3 million.
- Corporations: Typically 10% for professional fees or as specified (e.g., 2% for contractors).
- VAT Status: For VAT-registered payees, exclude 12% VAT from the tax base. For non-VAT payees, use the full gross amount.
Request a sworn declaration or BIR Certificate of Registration to confirm the payee’s status.
3. Determine the Tax Base
The tax base is the amount subject to EWT, usually the gross payment before VAT.
- Example 1: For non-VAT registered, a PHP 100,000 professional fee has a tax base of PHP 100,000.
- Example 2: For a VAT-registered payee, a PHP 112,000 invoice (PHP 100,000 fee + PHP 12,000 VAT) has a tax base of PHP 100,000.
Calculate the EWT
Multiply the tax base by the applicable EWT rate. For instance:
- Example 1: Individual with gross income ≤ PHP 3 million: PHP 100,000 × 5% = PHP 5,000 EWT.
- Corporation (EWT is fixed at 10% with a few exceptions): PHP 100,000 × 10% = PHP 10,000 EWT.
5. Issue BIR Form 2307
Provide the payee with BIR Form 2307, detailing the withheld amount. This form is used by the payee to claim the tax credit during annual filing.
6. Remit the Tax
File and remit the withheld EWT to the BIR using BIR Form 1601-E by the 10th day of the following month (or 11th if filed electronically). Timely remittance avoids penalties.
Let’s Use All the Steps in a Practical Example
A company pays a non-VAT-registered architect (gross income ≤ PHP 3 million) PHP 150,000. The steps are:
- Transaction: Professional fee, 5% EWT.
- Payee: Individual, non-VAT, gross income ≤ PHP 3 million.
- Tax base: PHP 150,000.
- EWT: PHP 150,000 × 5% = PHP 7,500.
- Issue BIR Form 2307 for PHP 7,500.
- Remit PHP 7,500 via BIR Form 1601-E.
The company pays PHP 142,500 (PHP 150,000 – PHP 7,500) to the consultant.
Tips for Compliance
- Keep Records: Store BIR Form 2307 and payment details for BIR audits.
- Stay Updated: Monitor BIR updates, as rates or rules may change.
- Seek Expertise: Consult a professional legal or accounting company to navigate complex cases.
Summary
Expanded Withholding Tax is an important part of the Philippines’ tax system, ensuring efficient tax collection on income payments. By understanding its scope and following the computation steps—identifying transactions, verifying payee status, calculating the tax, and fulfilling BIR requirements—you can meet your tax obligations.
This guide covers the basics of EWT. To get the best compliance advice for your business, we recommend consulting a tax professional.
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