Creditable Withholding Tax
Creditable Withholding Taxes
What is the Creditable Withholding Tax (CWT)?
The creditable withholding tax is an amount that is withheld from income payments. However, this amount is only an estimate of the income tax that should be paid. The payee is still required to file an income tax return on that particular income; however, he need only pay the difference between the estimated amount withheld and the real amount of tax due. That is why the tax is creditable – one no longer needs to pay the amount that has already been withheld. The CWT includes the expanded withholding tax and compensation income tax.
What is the difference between the Final Withholding Tax (FWT) and the CWT?
The FWT and the CWT are the two basic kinds of withholding taxes. The FWT is a tax wherein the payer withholds an amount from the payee’s income, and pays this amount to the government instead on behalf of the payee. The payee then no longer needs to file an income tax return for this income. The CWT is similar in the sense that the payer also withholds an amount of the payee’s income and pays this to the government. However, this amount withheld is usually just an estimate – the payee is still required to file an income tax return to report the income and to pay the difference between the tax withheld and the real amount due on the income.
The FWT is usually applicable to indirect sources of income, such as income from dividends, interest, royalties, capital gains from sale of property, etc, and income of foreign companies and their employees. The CWT, on the other hand, is usually applicable to income of Filipinos from employment and/or fees received.
What kinds of income are subject to the CWT?
Basically, incomes that are subject to the CWT are incomes from employment (compensation income), and fees such as professional fees, talent fees, rental income, service income, etc.
At what rates is the CWT imposed?
Like the final withholding tax, the CWT is imposed at different rated, depending on the type of income being taxed.
- Expanded Withholding Tax
1. Professional fees and talent fees for services rendered by individuals (this now includes board directors, even if they are not employed by the corporation)
-
-
-
- 10%
2. Rentals of property
-
-
-
-
-
- 5%
-
-
-
-
3. Film rentals
-
-
-
-
- 5%
-
-
-
-
4. Income payments to certain contractors
-
-
-
-
- 1%
-
-
-
-
5. Income to beneficiaries of estates, trusts, etc.
-
-
-
-
- 15%
-
-
-
-
6. Income payments to brokers and agents
-
-
-
-
- 5%
-
-
-
-
7. Income payments to partners of professional partnerships
-
-
-
-
- 10%
-
-
-
-
-
a. If registered with the Housing and Land Use Regulatory Board or the Housing and Urban Development Coordinating Council (must show proof of registration) to be habitually engaged in real estate
8. Income payments to medical practitioners
9. Sale of property:
-
-
-
-
-
- 1.5%, 3%, 5%
-
-
-
-
-
b. If not habitually engaged in real estate
-
-
-
-
-
- 7.5%
-
-
-
-
10. Overtime payments to government personnel by importers, shipping companies, airlines, etc.
-
-
-
-
- 15%
-
-
-
-
11. Payments made by credit card companies for services or goods
-
-
-
-
- .5%
-
-
-
-
12. Payments made by any of the top 5,000 corporations (determined by the Commissioner) to their local suppliers of goods (this is applicable only if the supplier is a regular supplier, of the transaction involved P100,000 or more)
-
-
-
-
- 1%
-
-
-
-
13. Payments made by government offices or government-owned or government-controlled corporations to their local suppliers
-
-
-
-
- 1%
-
-
b. Compensation Income Tax
Compensation income is defined as salaries or fees, taxable bonuses, and fringe benefits which are exempted from the fringe benefits tax. These include:
1. Compensation paid in kind (services paid for in something other than money)
2. Living quarters or meals provided by the employer in addition to the employee’s salary
-
- If these are furnished for the convenience of the employer, they are not included as compensation income.
3. Pensions, retirement, and separation pay (except for some exemptions)
4. Transportation, representation, and other allowances
-
- Amounts paid specifically for traveling, representation, or other necessary expenses reasonably expected to be incurred by the employees are not included as compensation if certain conditions are met.
5. Vacation and sick leave allowances
-
- Monetized value of unused vacation leave credits of 10 days or less within a year are not included as compensation income.
6. Service fees paid to an employee of a nonresident alien individual or a foreign entity
7. Payment for services performed outside the Philippines by a resident citizen for any individual or entity in the Philippines (regardless whether they are domestic or foreign)
Compensation income withheld is a creditable tax, meaning one no longer has to pay the amount that has already been withheld when filing an income tax return. The compensation income is creditable to regular income tax, and so therefore has the same rates.
Income tax rates:
| P10,000 and below | 5% |
| P10,000 to P30,000 | P500 + 10% of the excess over P10,000 |
| P30,000 to P70,000 | P2,500 + 15% of the excess over P30,000 |
| P70,000 to P140,000 | P8,500 + 20% of the excess over P70,000 |
| P140,000 to P250,000 | P22,500 + 25% of the excess over P140,000 |
| P250,000 to P500,000 | P50,000 + 30% of the excess over P250,000 |
| P500,000 and above | P125,000 + 35%* of the excess over P500,000 |
What are the benefits exempted from the withholding tax on compensation?
- Retirement benefits provided for by the law and those received under a reasonable private benefit plan maintained by the employer
- Amounts received by an official or employee or his heirs due to death, sickness, etc., or any cause beyond the employee’s control
- Social security benefits, pensions, and the like received from foreign government agencies by Filipino citizens or resident aliens.
- Benefits due to any individual residing in the Philippines under U.S. laws administered by the U.S. Veterans Administration
- SSS benefits
- GSIS benefits
- Facilities and privileges of a relatively small value and furnished by an employer as a means of promoting goodwill, efficiency of an employee, etc.
- Tips or gratuities paid to an employee by customers
- Payment for agricultural labor paid entirely in products of the farm where the labor was performed
- Income from domestic services in a private home
- Payment for occasional or incidental labor which is not done in connection to the employer’s trade or business
- Payment for services by a citizen or resident of the Philippines by a foreign government or an international organization
- Proceeds of life insurance paid to the beneficiaries upon death of the insured
- Amount received by the insured as a return of premium
- Compensation for injuries, sickness, or damages awarded by suit or agreement
- Income exempt under treaty
- 13th month pay and other benefits not exceeding P30,000
- GSIS, SSS, union dues, and other contributions by individual employees
Are there any exemptions from the compensation income withholding tax?
If an individual receives an annual income of P60,000 (P5,000 per month) or less, he has the option of either having compensation income withheld (he no longer needs to file his income tax), or simply filing his income tax (compensation will no longer be subject to withholding).
When do the payers who withhold income payments pay these as tax to the government?
For ordinary withholding agents, the deadline for paying the withheld tax is on or before the 10th day following the month in which the withholding was made. However, if income was withheld from the compensation income of December, then the deadline of payment is January 25 of the next year.
For large taxpayers, the deadline is on or before the 25th day of the following month.
Where does one file and pay the withheld tax?
Filing and payment is made with authorized agent banks in the Revenue District Office that has jurisdiction over the area of the business of the payer who is withholding the income.
