The Expanded Withholding Tax (EWT) in the Philippines is a critical component of the country’s tax system, designed to collect income tax in advance from certain types of transactions.
Administered under the Tax Code and governed by the Bureau of Internal Revenue (BIR), EWT applies to specific income payments such as professional fees, rentals, and contractor payments. Understanding how to compute EWT is essential for businesses, freelancers, and individuals to ensure compliance and avoid penalties. This guide breaks down the process in a clear, step-by-step manner.
What is Expanded Withholding Tax?
EWT, also known as Creditable Withholding Tax (CWT), is a tax withheld by the payor (withholding agent) on income payments made to suppliers, service providers, or other payees. The withheld amount is remitted to the BIR and credited against the payee’s income tax liability at the end of the taxable year. EWT covers a wide range of transactions, including professional fees, commissions, rentals, and payments to contractors, as outlined in BIR regulations like Revenue Regulations No. 2-98, as amended.
Step-by-Step Guide to Computing EWT
1. Identify the Nature of the Transaction
The first step is to determine whether the payment is subject to EWT. The BIR provides a list of income payments and their corresponding tax rates in the Revenue Regulations.
There are many types of transactions covered by EWT that you can find in the BIR’s EWT type table. Common examples include:
- Professional fees (e.g., doctors, lawyers, accountants): 10% or 5%, depending on gross income thresholds.
- Rental payments (e.g., real property or equipment): 5%.
- Payments to contractors (e.g., construction, janitorial services): 2%.
- Commissions to brokers or agents: 10%.
Consult a tax professional or industry expert to verify if your business transactions are subject to EWT and to determine the applicable rates.
2. Verify the Payee’s Status
The tax rate may vary based on the payee’s status:
- Individuals: For professionals, the rate is 5% if their gross income for the current year does not exceed PHP 3 million; otherwise, it’s 10%.
- Corporations: The rate is typically 10% for professional fees or as specified for other services (e.g., 2% for contractors).
- VAT-Registered vs. Non-VAT Payees: If the payee is VAT-registered, ensure the payment excludes VAT before computing EWT. For non-VAT payees, the gross amount (including VAT, if applicable) is used.
3. Determine the Tax Base
The tax base is the amount subject to EWT. For most transactions, this is the gross amount of the payment before VAT. For example:
- VAT-Registered Payee: If the payee charges VAT (12%), exclude it from the total payment to find the tax base. For example, a PHP 112,000 invoice includes PHP 12,000 VAT, so the tax base is PHP 100,000 (112,000 – 12,000).
- Non-VAT-Registered Payee: If no VAT is charged, the full payment (e.g., PHP 100,000) is the tax base.
Why exclude VAT? EWT applies only to the income, not the VAT, which is a separate tax remitted to the BIR. Always check the payee’s VAT status to get the tax base right.
4. Apply the EWT Rate
Multiply the tax base by the applicable EWT rate. For instance:
- For a PHP 100,000 professional fee to an individual with gross income below PHP 3 million: PHP 100,000 × 5% = PHP 5,000 EWT.
- For a PHP 200,000 rental payment: PHP 200,000 × 5% = PHP 10,000 EWT.
The range of transactions subject to EWT and their corresponding rates is extensive.
5. Issue a Certificate of Tax Withheld (BIR Form 2307)
The withholding agent must issue BIR Form 2307 to the payee, detailing the amount withheld. This certificate is submitted by the payee during their annual income tax filing to claim the withheld tax as a credit.
6. Remit the Withheld Tax to the BIR
The withholding agent must remit the EWT to the BIR using BIR Form 1601-E, filed monthly by the 10th day of the following month (or 11th if filed electronically). Ensure timely remittance to avoid penalties.
Let’s Review All the Steps Using a Practical Example
Suppose a company pays PHP 150,000 (excluding VAT) to a non-VAT registered self-employed lawyer (not part of a partnership or corporation) whose gross income is below PHP 3 million.
The steps are:
- Confirm the transaction: Professional fee, subject to 5% EWT.
- Verify payee status: Individual, non-VAT, gross income below PHP 3 million.
- Determine tax base: PHP 150,000.
- Compute EWT: PHP 150,000 × 5% = PHP 7,500.
- Issue BIR Form 2307 for PHP 7,500.
- Remit PHP 7,500 to the BIR via BIR Form 1601-E.
The company pays the consultant PHP 142,500 (PHP 150,000 – PHP 7,500) and remits PHP 7,500 to the BIR.
Key Reminders
- Maintain Accurate Records: Keep copies of BIR Form 2307 and payment records for audits.
- Stay Updated: This guide is accurate as of 2025. BIR regulations may change, so monitor updates via the BIR website or consult a tax expert.
- Penalties for Non-Compliance: Late filing or failure to withhold EWT can result in penalties, including surcharges and interest.
Final Thoughts
Computing EWT in the Philippines requires careful attention to BIR regulations, accurate identification of transactions, and proper documentation. But by following the steps outlined in our guide, you can ensure compliance and streamline your tax obligations. For complex transactions, consulting a certified public accountant or tax professional is advisable to ensure compliance with the latest BIR rules.
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