BIR Form 2307 for Debt Collection Agency Fees: Which Withholding Rate Applies

A bank, lending company, retail chain, or other business that pays a third-party debt collection agency to recover overdue receivables generally withholds 2% expanded withholding tax (EWT) under RR No. 2-98, Section 2.57.2(E), and issues BIR Form 2307 — but only on the agency’s own collection fee, not on the underlying debt it recovers. The distinction matters because a collection agency often handles two very different amounts in the same engagement: its own service fee, and the client’s receivable passing through its hands.

This guide is part of the BIR Form 2307 series. It covers who withholds on a debt collection agency’s fee, why the recovered receivable itself isn’t part of the withholding base, the applicable ATC codes, and a worked contingency-fee example.

Who withholds on a debt collection agency’s fee? #

The same payor-status test this series applies to every business-service supplier decides the outcome here: a corporation or business-connected individual withholds, a private individual generally does not. RR No. 2-98 sets the test this way:

“(A) In general, any juridical person, whether or not engaged in trade or business; (B) An individual, with respect to payments made in connection with his trade or business…”

— RR No. 2-98, Section 2.57.3(A)–(B)

A bank, financing company, hospital, or retail chain that engages a third-party agency to chase overdue accounts receivable is a withholding agent under clause (A) or (B), because the payment is connected to the business’s own trade. A private individual who separately hires the same agency to recover a personal loan from a friend, with no business behind the payment, generally falls outside the rule.

What EWT rate and ATC code apply to the agency’s fee? #

Debt collection is not named as its own separate line item in RR No. 2-98 — it falls under the same flat 2% general contractor/business-services catch-all that covers pest control, waste hauling, security, and other recurring business-service suppliers elsewhere in this series, most directly comparable to BIR Form 2307 for Pest Control and Waste Hauling Services and BIR Form 2307 for Contractors and Subcontractors.

Why the recovered debt itself isn’t part of the withholding base #

A collection agency typically moves two distinct amounts through the engagement, and only one of them is the agency’s income. The principal receivable the agency recovers from the debtor and remits back to the client was never the agency’s income — it’s the client’s own asset passing through the agency’s hands, the same pass-through logic covered in Do You Withhold Tax on Reimbursement of Out-of-Pocket Expenses Billed Separately From a Service Fee? The agency’s own collection fee — whether a flat retainer, a per-account rate, or a percentage of what it successfully recovers — is the only amount that represents income to the agency, and that fee alone is what gets withheld at 2%.

Worked example: a retail chain’s contingency-fee collection engagement #

Mercado Retail Corp. engages Litis Recovery Solutions Inc. on a contingency basis to collect ₱2,000,000 in overdue customer receivables, at a 15% contingency fee on whatever is actually recovered.

Mercado Retail Corp. remits the full ₱800,000 recovered receivable to Litis Recovery’s collection account, which is then passed back to Mercado in full — no withholding applies to that ₱800,000, since it was never Litis Recovery’s income. Mercado withholds only on the ₱120,000 contingency fee, remits the ₱2,400 EWT through BIR Form 0619-E monthly and BIR Form 1601-EQ quarterly, and issues Litis Recovery a BIR Form 2307 documenting the fee and the tax withheld for the period.

Frequently asked questions #

Does a company have to withhold tax when paying a third-party debt collection agency? #

Yes, if the company paying the agency is a corporation or a business-registered individual. Under RR No. 2-98, Section 2.57.3(A)-(B), any juridical person or business-connected individual that pays a collection agency for recovering overdue accounts is a withholding agent and must withhold expanded withholding tax and issue BIR Form 2307.

What withholding tax rate and ATC code apply to debt collection agency fees? #

A debt collection agency’s own service fee falls under the flat 2% general contractor/business-services bracket under RR No. 2-98, Section 2.57.2(E), as amended by RR No. 11-2018 — ATC WI120 if the agency is individually owned, or WC120 if it is organized as a corporation.

Is the amount the collection agency recovers from the debtor part of the withholding base? #

No. Only the agency’s own collection fee or commission — what the agency itself earns for performing the service — is subject to withholding. The principal amount of the debt the agency collects and remits back to the client is a pass-through recovery of the client’s own receivable, not income to the agency, so it sits outside the EWT base.

How is a contingency-fee collection agency (paid a percentage of what it recovers) withheld? #

The same 2% rate applies to whatever fee the agency actually earns, computed however the contract defines it — a flat retainer, a per-account fee, or a percentage of the amount successfully recovered. The client withholds 2% on the fee amount once it is determined and paid, accrued, or invoiced, not on the gross amount recovered from the debtor.

Does an individual withhold tax when hiring a collection agency to recover a personal debt? #

Generally no. Under RR No. 2-98, Section 2.57.3(B), an individual only withholds on payments connected to a trade or business. A private individual hiring a collection agency to recover a personal loan to a friend or relative, with no business behind the payment, is generally not a withholding agent for that fee.

Summary #

A third-party debt collection agency’s own fee — not the receivable it recovers — sits in the flat 2% general business-services bracket (ATC WI120/WC120) under RR No. 2-98, Section 2.57.2(E), the same bracket covering pest control, waste hauling, and other recurring business-service contractors elsewhere in this series. The recovered debt itself passes through as the client’s own asset and is never part of the withholding base, whether the agency is paid a flat retainer or a contingency percentage. See BIR Form 2307 for Contractors and Subcontractors for the general 2% bracket this rate draws from and Do You Withhold Tax on Reimbursement of Out-of-Pocket Expenses Billed Separately From a Service Fee? for the pass-through principle that keeps the recovered debt out of the withholding base.