A Comprehensive Overview of Creditable Withholding Tax and Section 2.57.2 of RR No. 11-2018

Tax is an essential way for a country to raise revenue, and in the Philippines, one of the main methods used to collect taxes is the withholding tax system. A key part of this system is Section 2.57.2 of Revenue Regulation No. 11-2018, which explains which types of income are subject to withholding tax and the rates that apply to them. Both taxpayers and tax experts must understand this rule to handle taxes properly and avoid any issues.

What is Creditable Withholding Tax?

This tax is a system where the payer of income (employer, corporation, or other entities) withholds a percentage of the income due to the payee (such as an employee or a contractor). The amount withheld is then remitted to the Bureau of Internal Revenue (BIR).

The term “creditable” refers to the amount of tax withheld that can be credited against the taxpayer’s total tax liability for the year. Essentially, the tax withheld is a prepayment of the taxpayer’s income tax, which is later deducted from their final tax due when they file their income tax return.

A Guide to the Fundamental Aspects of Section 2.57.2

Section 2.57.2 deals explicitly with the types of income payments subject to creditable withholding tax (CWT), the rates at which these taxes are withheld, and the procedure for remitting the tax to the BIR.

Here are the essential points covered in this section:

1. Income Payments Covered by Section 2.57.2
   Section 2.57.2 applies to certain types of income, including:
   • Income payments to professionals, contractors, and service providers include fees for services rendered by self-employed individuals, freelancers, and independent contractors. It can apply to individuals in various professions like consultants, doctors, lawyers, and accountants.
   • Payments to businesses for particular services or contracts: If a corporation or business receives income in exchange for providing services, this too may be subject to withholding tax.
   • Income payments to certain types of employees: While employees typically have taxes withheld based on a separate payroll tax system, there are instances where income payments outside of regular salaries (such as bonuses, fees, or allowances) may also fall under the scope of creditable withholding taxes.
   • Other miscellaneous payments: This includes income like interest, dividends, and royalties, where withholding tax is applicable, though this falls more under different sections of the Tax Code.
2. Prescribed Rates of Creditable Withholding Tax
   One of the most important aspects of Section 2.57.2 is the specification of tax rates. These rates vary depending on the income’s nature and the payment’s recipient. The rates are typically progressive and are set by the BIR based on the type of income being paid.
   For example:
   • Professional fees and contractor services:
     The standard creditable withholding tax rate on payments for professional fees (e.g., lawyers, consultants) is usually 10% for individuals and 15% for corporations or partnerships, depending on the contract value and other factors.
   • Payments to suppliers and vendors:
     When payments are made to purchase goods or services from suppliers, withholding tax may also apply. This is typically at a rate of 1% to 3% of the gross payment, depending on the nature of the transaction.
   • Rental income
     Rent payments to individuals or businesses are often subject to a creditable withholding tax rate of 5%. However, exceptions depend on the amount and type of property being rented.
3. Who Should Withhold the Tax?
   Under Section 2.57.2, the payor (the entity or individual making the payment) withholds the tax. This includes businesses, corporations, and even individual taxpayers who make payments for services or income subject to withholding tax.
   It’s critical that the payor correctly calculates the tax due, withholds it from the payment, and remits it to the BIR on time. Failure to do so can result in penalties and interest charges.
4. Can You Claim the Tax?
   Yes! The amount of tax withheld can be credited against the total tax you owe when you file your tax return at the end of the year. For example, if a freelancer receives P100,000 for a service and the payer deducts a 10% withholding tax (P10,000), you can claim P10,000 as a credit when filing your taxes. It counts as part of your tax payment.
5. Compliance and Filing Requirements
   The payor must comply with monthly and quarterly filing requirements for remitting the withheld tax. This includes filing the necessary tax returns, such as:
   • BIR Form 1601-E: For Monthly Remittance of Creditable Income Taxes Withheld (Expanded).
   • BIR Form 1601-F: For Monthly Remittance of Final Income Taxes Withheld.

Additionally, the payor must issue a Certificate of Creditable Tax Withheld (BIR Form 2307) to the payee. This certificate serves as proof of the withholding tax that has been remitted to the BIR and is used by the payee to claim the credit on their tax return.

Avoiding Common Mistakes

Despite its simplicity, the creditable withholding tax system can be tricky to navigate. Some of the common issues taxpayers face include:

• Incorrect withholding rates: If the wrong tax rate is applied, the taxpayer or the payor may face penalties or have to pay additional taxes later.
• Failure to issue BIR Form 2307: If a business or payor fails to issue the required certificate, the payee may struggle to claim the credit for the tax already withheld.
• Non-compliance with filing deadlines: Failure to remit the withholding tax on time can result in interest charges and penalties, accumulating quickly if not addressed promptly.

Section 2.57.2 of the Tax Code is pivotal in ensuring that taxes are withheld at source, making it easier for the government to collect tax revenue. It’s crucial for businesses and individuals making income payments to understand which fees are subject to creditable withholding tax, the applicable rates, and the filing requirements.

By adhering to the provisions of Section 2.57.2, taxpayers avoid penalties, ensure that they comply with the law, and minimize any potential issues with the BIR.The person or company making the payment is the one who withholds the tax. So, if you’re a business that hires a contractor or pays for services, it’s your job to deduct the correct tax and send it to the BIR.