Creditable withholding tax (CWT) is the tax which is withheld by the buyer/withholding agent from his payment to the seller for the sale of the seller’s ordinary asset/services, and which tax is creditable against the income tax payable of the seller. I know this sounds confusing so let me tell you about the withholding tax system first.
Disclaimer: While great effort has been taken to ensure the accuracy of the discussion here as of its writing, this is not intended to replace seeking professional services. Do read up on the relevant laws and regulations also.
Background on the Withholding Tax System
We all know that the ordinary income of a person/corporation is subject to regular income tax. Under the withholding tax system, the government gives the buyer the responsibility to withhold a certain percentage of his payment to the seller and remit the same to the government. Thus, the amount remitted by the buyer to the seller is less than the purchase price. The buyer should provide the seller with BIR Form No. 2307 (Certificate of Creditable Taxes Withheld) which states the amount of the taxes he withheld.
The tax withheld is called the withholding tax and the buyer in this case is called a withholding agent. Please note that this only applies to the ordinary income of the seller, as opposed to his capital gain. Please refer to my earlier post on the difference between ordinary assets and capital assets.
“What is the rationale for this system?”, you may ask.
To put it simply, the tax withheld by the buyer acts as the advanced payment of the seller’s taxes. Since the seller will only pay income taxes on a quarterly basis, and the government spends all throughout the year, it would be difficult for the government to operate if it only gets income taxes quarterly. Also, since the buyer withholds only a small percentage of the seller’s gross receipts (let’s say 2%), the government is alerted that the seller realized income to the extent of the grossed-up amount of the taxes withheld.
For example, P2,000.00 which pertains to 2% withholding tax means that the seller sold P100,000.00 worth of assets/services for which he should pay income taxes. When the time comes for the payment by the seller of his income taxes, and he doesn’t declare the income from which the buyer withheld taxes, a discrepancy will arise and the government will have a tip to investigate whether the seller is paying the correct taxes.
Take note, the Bureau of Internal Revenue (BIR) already has computer software in place which determines discrepancies automatically.
On the part of the buyer, he must withhold taxes, otherwise, he will not be able to deduct his expense. For example, if his expense is P100,000.00 and he is required to withhold 2% of this or P2,000.00 and he does not withhold and remit this amount, for income tax computation purposes, he may not deduct his P100,000 expense from his taxable income.
Thus, if his gross income is P200,000.00 and he may not deduct the P100,000.00 expense (assuming there are no other deductible expenses of course), he will pay taxes based on a net income of P200,000.00 instead of P100,000.00.
On the part of the seller, since the taxes withheld act as his advanced payment of his income tax, when the time comes for the quarterly payment of income taxes, he will subtract the tax withheld from his income tax payable. For example, if his income tax payable is P32,000.00 and the tax withheld from him is P2,000.00, then he will only pay P30,000.00 income tax.
As proof of the taxes withheld, he should attach the BIR Form No. 2307 (Certificate of Creditable Taxes Withheld) provided by the buyer to his income tax return.
Creditable Withholding Taxes On Real Estate Transactions
As earlier noted, this only applies to the sale of real estate which are ordinary assets of the seller. Thus, when the real estate sold is a capital asset to the seller, his income from the sale of real estate will be subject to capital gains tax, and no creditable withholding tax shall be imposed on the transaction.
Please refer to my earlier post about ordinary assets vs. capital assets. From hereon we will assume that we are talking about the sale of ordinary real estate assets.
Going now to the creditable withholding tax base, the withholding agent/buyer is required to withhold a creditable withholding tax based on the higher of the following:
a) gross selling price/total amount of consideration, orb) the fair market value determined in accordance with Section 6(E) of the Code.
Under Section 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001, the percentages of taxes to be withheld are as follows:
A. Upon the following values of real property where the seller /transferor is habitually engaged in the real estate business as per proof of registration with the HLURB or the HUDCC or other satisfactory evidence (for example, he/it consummated during the preceding year at least six taxable real estate transactions, regardless of amount):
| a)With a selling price of Seven Hundred Fifty Thousand Pesos (P500.000.00) or less | 1.5% |
| b)With a selling price of more than Five Hundred Thousand Pesos but not more than Two Million Pesos (2,000,000.00) | 3.0% |
| c)With a selling price of more than Two Million Pesos (2,000,000.00) | 5.0% |
B.
| Where the seller/transferor is not habitually engaged in the real estate business (but the real estate sold is an ordinary asset) | 6.0% |
C.
| Where the seller/transferor is exempt from creditable withholding tax in accordance with Section 2.57.5 of Revenue Regulations No. 2-98 [When the seller is exempt from income taxes. As earlier noted, the creditable taxes withheld serve as advance payment of income taxes. So when a seller is tax-exempt, it follows that no tax should be withheld from his income.] | Exempt |
Please note that the sale of foreclosed properties by banks is subject to creditable withholding tax of 6% because banks are not considered as habitually engaged in the real estate business, and properties acquired by banks through foreclosure sales are considered as ordinary assets pursuant to Revenue Regulations No. 7-2003.
Time and Place of Payment of Creditable Withholding Tax
A. General Rule
Section 4 of RR No. 004-08 dated February 19, 2008 provides for the time and place of payment of creditable withholding tax and DST on the sale, exchange or other mode of onerous disposition of real properties classified as ordinary assets.
Creditable withholding taxes deducted and withheld by the withholding agent/buyer on the sale, transfer or exchange of real property classified as ordinary asset, shall be paid by the withholding agent/buyer upon filing of the return with the Authorized Agent Bank (AAB) located within the Revenue District Office (RDO) having jurisdiction over the place where the property being transferred is located within ten (10) days following the end of the month in which the transaction occurred. The creditable withholding tax return is BIR Form 1606.
Taxes withheld in December shall be filed on or before January 15 of the following year. Please note that this is subject to the rules prescribed by Electronic Filing and Payment System (EFPS) regulations in case the taxpayer is an EFPS taxpayer. Useful tip: You can find the AAB’s for each RDO in the BIR website. Just click on the RDO number concerned.
Rules under Section 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 17-2003, in cases where the buyers are engaged or not engaged in trade or business:
B. Buyer is not engaged in trade or business
Under Section 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 17-2003, if the sale is a sale of property on the installment plan (i.e., payments in the year of sale do not exceed twenty five percent (25%) of the selling price), no withholding is required to be made on the periodic installment payments.
In such a case, the applicable rate of tax based on the gross selling price or fair market value of the property at the time of the execution of the contract to sell, whichever is higher, shall be withheld on the last installment or installments immediately prior to such last installment, if the last installment is not sufficient to cover the tax due, to be paid to the seller until the tax is fully paid.
If the sale is on a “cash basis” or is a “deferred-payment sale not on the installment plan” (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first installment.
C. Buyer is engaged in trade or business
If the sale is a sale of property on the installment plan [i.e., payments in the year of sale do not exceed twenty five percent (25%) of the selling price], the tax shall be deducted and withheld by the buyer from every installment which tax shall be based on the ratio of actual collection of the consideration against the agreed consideration appearing in the Contract to Sell applied to the gross selling price or fair market value of the property at the time of the execution of the Contract to Sell, whichever is higher.
If the sale is on a “cash basis” or is a “deferred-payment sale not on the installment plan” (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first installment.
In any case, no Certificate Authorizing Registration (CAR)/Tax Clearance Certificate (TCL), shall be issued to the buyer unless the withholding tax due on the sale, transfer, or exchange of real property has been fully paid.
For the sale of property on installment basis or deferred payment basis where the Contract to Sell is always executed before the execution of the Deed of Sale, the said Contract to Sell must be attached to the Deed of Absolute Sale executed upon completion of the payments and the duly notarized original duplicate copy of both documents must be presented to the RDO having jurisdiction of the place where the property is located for validation of the correctness of issuance of CAR/TCL.
If upon completion of the payment of the purchase price of real property classified as ordinary asset, but before the execution of the Deed of Sale, the buyer decides to assign his right over the property to another person for a consideration, the assignment shall be considered a separate sale of real property and, therefore, subject to the creditable/expanded withholding tax (EWT) or final withholding of capital gains tax, as the case may be, which shall be withheld by the assignee of such property based on the consideration per Deed of Assignment or the fair market value of such property at the time of assignment, whichever is higher, and to the DST imposed under Sec. 196 of the same Code using the same basis.
It is to be clarified, however, that sale of interest in real property (real property purchased on installment covered by Contract to Sell which was sold by the original buyer before it was fully paid) shall be taxable on the part of the original buyer (now seller) based on the realized gain thereon which is measured by the difference between the agreed consideration and the amount actually paid by the said original buyer.
Conclusion
As you may have noticed, there are many nuances to the CWT so I hope you’ll understand the delay in the release of this post. Just post your questions, if any, in the comments section so that my wife can research on them and I can get back to you. If there’s a delay once again, please be patient as I can’t force my wife. The more I tell her to do something, the more she doesn’t do it. =)
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i am a real estate broker and registered as a corporation. so i received net commissions of 90 percent after deducting the CWT. now i have to pay commissions to the real estate salesperson under me from the same transactions. how much CWT must i withold from the agent na nag override lang ako 10 per cent ba or subcon tax lamang na 2 per cent ,this are the licensed salespersons under the RESA law.
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Hi Jay,
Been reading your posts again and again, they have been my handy/quick/simplified guide on my real estate venture, so thankful I found your useful and informative site..as i admittedly
say that I’m a newbie on this industry coming from telecoms business…
Anyways just want to seek your expertise on how to handle transferring of title..What are the docs , fees required and how long does it normally takes to process it..please include the procedure on how to get a TCT from a Spanish title that we only have for our property in the province…
Thanks so much for the anticipated assistance…have a blessed day!
Until when is creditable withholding tax be utilized?
my mistake. BPI will be the one to pay the P120,000.
we are buying a foreclosed property (house and lot) from BPI. total purchase price is P2M. as i was going thru the list of additional payments we (as the buyer) have to make (such as DST, transfer tax, registration fee, etc.), i noticed that BPI is also asking us to pay the CWT amounting to P120,000.00. shouldn’t we (as the buyer) be withholding this amount from the total purchase price of P2M? in effect, on TOP OF THE P2M purchase price, we are also going to pay an additional P120,000. if i understand correctly, if BPI is asking us to pay the P120,000 CWT, then we should be able to deduct this amount from the total purchase price of P2M. we should only be paying BPI P1,880,000.00. am i correct?
@ Jay Ballesteros: I, too, would like to get those materials please? My email address is [email protected]. Thanks in advance for your kindness.
Dear all,
For those of you who would like to know more about the taxation on the real estate industry, I can share some materials. I’m a Tax Professional from the leading professional services firm in the country. Thanks!
Jay Ballesteros
Hi Jay!
Si Chebay to. Jay Castillo is my husband. Pwede pahingi ng materials? 🙂
Best regards,
Chebay
Hi Chebay, I’ll do that next week 🙂
Sir Jay,
Would you please send me a copy of those materials. My email address is [email protected].
Thanks so much!
RC
can I have that materials too?? this is my email ad
[email protected].
Hi Jay, can you send me those materials too? I would really love to have them, my email address is [email protected] Thank you so much in advance.
Hi Jay! Thanks for the info you’re sharing, may I have a copy too? My email add is [email protected] Thank you!
Sir Jay,
Can you send me those materials, that would be of great help. my email add is [email protected]
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hi,
I’m working under a leasing industry. I know that in a rental income, the lessee is required to withhold tax. So, upon payment, I would expect to receive payment net of the withholding tax. But what if the lessee paid the gross amount to the lessor and this particular lessee is then asking from us BIR Form 2307? Maybe she was thinking that from her gross payment, we took the 5% CWT and we, the lessor, took the responsibility to remit the said tax to BIR. That’s why she’s now asking from us the tax certificate. Is the lessee right? Personally, I think she took it wrong. If so, how can I explain it to her in a simpler way so she can understand? I need your assistance.
Thank you.
Hi RC,
Thank you for pointing that out! So sorry for the mistake! I told Jay to edit it already.
Best regards,
Cherry
HI JAY,
ON RR 6-2001, THE SALES AMOUNT MENTIONED IS ACTUALLY P500,000 NOT P750,000. WOULD YOU PLEASE CLARIFY?
THANKS!
RC
Hi Jay,
I just got around to reading this because I was looking for some more material on CWT. After reading your wife’s article, I must say I’m still confused. So maybe if you can help me with this example, I’ll understand it better:
Assumptions:
1. I’m the condo buyer for residential purposes.
2. Condo unit price is P3,000,000 (CWT is 5% since condo is an ordinary asset)
3. TCP is higher than zonal value
Would I be correct to say that:
1. CWT to be paid to the BIR is P150,000
2. If buyer so chooses, he can deduct the P150,000 from the TCP and pay it to the BIR, then present the BIR form 2307 or the tax clearance certificate to the seller/developer
3. If buyer pays the TCP w/o withholding the CWT, the seller/developer should be the one to pay the BIR the P150,000
My questions:
1. Whose income tax return is credited by the CWT, the buyer’s or the seller’s?
2. What advantages (or disadvantages) can be gained by the buyer paying the CWT directly to the BIR instead of just letting the seller/developer do it? Which is preferable to you?
Thanks very much for your help!
– jon
Good day,
Please give your advice on this, If a buyer on a real estate property who is not a withholding agent does not withhold the EWT on purchase property is the seller who is a withholding agent is the one required to remit the EWT with the BIR?
Thank you. Please reply me…
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Hi, i just would like to ask, re: CWT remittances. Aside from the BIR Form 1606, does the seller (real estate developer) need to have the signed Contract to Sell of the buyer before remitting the CWT? Or regardless of buyer’s submission of the Contract to Sell, the CWT must be remitted. Would appreciate your reply soonest. Thanks!
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Dear Jay,
Thank you very much for the valuable information.
We would highly appreciate if you could comment on our inquiry about our property in Imus, Cavite. We moved in here June 2008 and was greatly disappointed with our investment. Total cost is Php2,505,000.00 and we are almost dying with our in-house financing, Php41,000.00. Balance to-date is almost Php1.9m. We have planned to sell the property but was informed that we have pay almost Php123,000.00 CWT before the title is transferred to the buyer. The developer informed us that they paid this tax when we have paid 20% of the property.
Once again thank you for your comment and very useful information.
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thanks a lot jay! would very much appreciate it if you could share with me again whatever you will gather from your bir source.
@Anonymous, first of all, sorry if I am still in catchup mode. I got sick last week and now I am back in the office, though I am still sick and I have so much pending work to finish, can’t wait to get out of the rat-race!!!
Anyway, back to your questions, 5 or 6 real estate transactions in a year are the threshold as mentioned to me by someone I know in the real estate business but I have yet to confirm this with someone from the BIR. I will have to check this out.
If your sister is then classified as habitually engaged in real estate, instead of CGT, CWT will be the major tax to be paid in addition to DST, Transfer Tax, VAT(if applicable) and other local taxes that may apply. Glad to be of help! Kudos to your sis, this is one great strategy that I would also want to do in the future!
Jay, thanks for the reply. as a follow up, hope you could give me your opinion regarding this:
my sister recently bought a 2 hectare property in pampanga for investment and plans to subdivide this property into 10 lots so she could easily resell it at bargain price but all taxes will be shouldered by the buyers. my sister is not a broker or agent and is not affiliated with any real estate firm. this is the first time that she will be doing this and if the investment is profitable, she might want to do this again.
my questions are:
1. if my sister successfully sells the 10 subdivided lots within the year, will she be considered habitually engaged in real estate business?
2. depending on your answer for item no. 1, what type of taxes will her buyers pay? (it was agreed that all taxes will be paid by the buyers)
what type of taxes will my sister pay?
thanks in advance for your reply jay. your website is really very informative and such a big help for us newbies in real estate.
@Stephanie, For bank financing, you basically take out a loan from a bank and the maximum loanable amount would be about 70% to 80% of the appraised value of the property and then you just pay monthly amortizations.
I believe the seller is already shouldering the CGT which is the norm but it would be better to confirm this. It would also be better to ask for a computation on how he arrived at the 70K for DST and transfer fees. May I ask what is the TCP and zonal value of the property so I can also do an estimate?
@Anonymous, I suppose an example would be when a property is part of a business transaction between corporations.
hi jay. can you please provide more example (except for the banks)- Where the seller/transferor is not habitually engaged in the real estate business (but the real estate sold is an ordinary asset)
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Hi Stephanie, let me study you questions first and I’ll get back to you asap. Congratulations by the way for deciding to invest!
@Joey, sorry if at times comments are not displayed immediately. I have enabled comment moderation as I noticed there have been a lot of spam comments lately. Comments will appear after being verified as not spam and approved.
With regards to your query, I will be sharing a rent to own contract in one of my next posts, please watch out for it. I agree with you that Think Rich Pinoy is most beneficial to beginning investors in the Philippines as it offers a step by step approach to foreclosure investing in the Philippine setting.
Hi Jay your blog is useful and instructive. I hope you can help me.
Actually I am planning to invest for a condo in Quezon City. Can you help me what are other things I should need to know aside from the details below that had been discussed.
According to the seller the title was clean and the condo was never been used so they required for a cash payment. I bargain if I can pay the half price in cash basis and the balance would be paid by banking and finance. The banking loans was an idea I get from the book “Think Rich Pinoy” and luckily the seller agree because there is also one prospect buyer who would like to do the same thing. (Do you have an idea how the banking and finance works?)
The condo was former Condo Hotel before it was fully develop as residential condo in year 1999. The unit I am looking at is 35 sqm studio type and it is ready for occupancy.
Aside from the total contract price the seller raised for additional P70,000 for other taxes and fees. He only mentioned about documentary tax, and file transfer fees. Do you think this amount is fair enough? I have read about your article about CGT or Capital Gain Tax or Creditable Withholding Tax in Real State Transaction. Do you think it is part of the assessment of the seller or do I need to ask this question to them?
If there’s anything I miss to answer my questions. You can email me at [email protected].
Best,
Stephanie
Hi Jay, I’m newbie, but very much interested in really learning everything I can on how to be an expert in buying and selling foreclosed properties. I already posted a comment a while ago, but i dunno where it was placed… as mentioned i have read 5 books this month (Rich Dad Poor Dad Books, Guide to Investing in Real Estate, Cashflow Quadrant, Think Rich Pinoy, and Grow and Think Rich). Among the 5 books I read this month, I must say that the Think Rich Pinoy is the most beneficial since it really gave me a formula to follow. however, one thing I noticed was that there was no template given on how a “Rent-to-Own” contract must be drafted. In this regard, would you be kind enough po to share it with us? This is my first time to visit your blog, and I must say, it is truly very informative. My apologies, coz I might be asking a query which you might have answered already before. But then again, i do hope for your kind assistance on my concern. Thanks and best regards.
Hi Jay,
I’m newbie, but very much interested in really learning everything I can on how to be an expert in buying and selling foreclosed properties. I already posted a comment a while ago, but i dunno where it was placed… as mentioned i have read 5 books this month (Rich Dad Poor Dad Books, Guide to Investing in Real Estate, Cashflow Quadrant, Think Rich Pinoy, and Grow and Think Rich). Among the 5 books I read this month, I must say that the Think Rich Pinoy is the most beneficial since it really gave me a formula to follow. however, one thing I noticed was that there was no template given on how a “Rent-to-Own” contract must be drafted. In this regard, would you be kind enough po to share it with us? This is my first time to visit your blog, and I must say, it is truly very informative. My apologies, coz I might be asking a query which you might have answered already before. But then again, i do hope for your kind assistance on my concern. Thanks and best regards.
Hi Rumposts, sorry if it took a long time for me to answer your question. After my research, I can only conclude that the only way to transfer the title back to the seller’s name is by treating it as a new sale, which means CGT and DST will have to be paid again. I suppose the expenses should be chargeable to the party that caused the cancellation of the transaction but you might find it hard to enforce unless this was made as part of the agreement to begin with, maybe as a clause in the deed of conditional sale for example.
i address u sir as my respect. sir thanks for doing so the research. first time also this situation. thanks a llot.
@Rumposts, thanks for the clarification, this is the first time encountered this situation. Although the transaction is being canceled, I’m really not sure if the new title can also be canceled and if all paid taxes like CGT and DST can be refunded. Otherwise, the implication I see is the possibility of double taxation when the title is transferred back to the seller. Let me research on this first then I’ll update you of what I find. By the way, “Jay” would be fine, no need for the “sir”. =)
gud pm mr jay castillo. yes sir the new title has been created and relesade by the register of deeds. since they are not interested to pursue transaction. what tax consequence would be adopted? no selling has been done anymore.thanks a lot mr. jay.
Hi Rumposts, I just want to clarify the following: You mentioned the buyer already paid the CGT and DST but they no longer want to push through with the transaction, am I correct to say that the buyer just wants to return the title to the seller? Has a new TCT been created already in the name of the buyer?
mr. jay gud pm i have a client got loan approval at pag ibig when the transfer of title done the seller and the buyer agreed again not to continue the transaction for such reason the buyer approach how the transfer of the title would be done that they have paid the cgt and dst. do they need to pay again taxes to transfer again the title to the seller? Thanks a lot. rumposts
Hi Rumposts, thanks! Thank you also for dropping by and I hope to see you here more often.
mr. jay castillo gud evening. I learned a lot from your post. thank you and more power. continue good deeds. [email protected]
@Noel, thanks for the honest feedback. This deserves a follow-up post on how to easily calculate CWT. Watch out for it.
@Dinah, I almost forgot about that thread, thank you for mentioning it! I promised to share this post there when it was ready. =)
Jay, nosebleed ako 🙂
but in fairness, you made a disclaimer and I will bookmark this post for future reference. I think sa journey ko into building my dream house, eh wala pa ako dito.
anyway, i also like the forum thread at Pinoy Money Talk, where I see you are also a commenter.
It’s really a headache for me.I wasn’t able to read the whole blog. I guess I have to read it again sometime to understand this topic.
Hope you could give an example or two to make things clear.
Thanks.
After reading this again, does anyone else feel like having a nosebleed or is it just me? Come on, be honest! I think it would be better if I ask my wife to make an example based on an actual foreclosed property for sale. Don’t you agree?
Hi Vicky, you’re welcome and thanks for visiting!
Hello Jay, good morning.
Thank you for sharing this information.
Vicky