Do you still withhold tax if you pay a supplier in goods instead of cash?

Yes. Expanded withholding tax attaches to the income payment itself, not to the form the payment takes. Paying a supplier in goods, inventory, or services instead of cash is still an income payment at the fair market value of what was transferred, and BIR Form 2307 must still be issued for that value if the payment type is otherwise subject to withholding.

What if two companies simply offset what they owe each other instead of exchanging cash?

Offsetting (netting) a mutual debt is still treated as payment of both obligations to the extent they offset, because each party effectively satisfies what it owes the other. If either side of that netted amount is an income payment that would normally require withholding, the withholding obligation applies to the offset amount just as it would to a cash payment of the same size.

How do you value a non-cash payment for withholding tax purposes?

The fair market value of the goods or services transferred, at the time of the exchange, stands in for the cash amount that would otherwise be withheld on. If the parties have already agreed on a peso value for the goods or services as part of the transaction (such as an invoiced amount), that agreed value is ordinarily used unless it does not reflect fair market value.

When does the withholding obligation arise for a non-cash or offset payment?

At the same trigger point as any other income payment under Section 2.57.4 of Revenue Regulations No. 2-98: when the payment is made, becomes payable, or is accrued or recorded as an expense in the payor's books — whichever comes first. An offsetting entry recorded in the books counts as satisfying the obligation at that point, even without cash moving.

Can a payor issue BIR Form 2307 for a payment that was never in cash?

Yes, and it should. BIR Form 2307 certifies the amount withheld on an income payment, regardless of how that payment was settled. A payee who received part of their compensation in goods, services, or through a debt offset still needs a BIR Form 2307 reflecting the value withheld on, to support their own creditable withholding tax claim.

BIR Form 2307 When Payment Is Made Partly in Kind or Through Offsetting Instead of Cash

Expanded withholding tax and the duty to issue BIR Form 2307 do not disappear just because a payment is settled in goods, services, or by offsetting what two parties owe each other instead of exchanging cash. The withholding rule attaches to the income payment itself — its fair market value — not to the mechanics of how it was settled. A payor who gives a contractor inventory instead of cash, or who nets a supplier’s invoice against an amount that supplier owes them, still owes withholding tax on that payment the same way a cash transaction would require it.

This is part of the BIR Form 2307 series. For the underlying timing rule this builds on, see BIR Form 2307 on Progress Billings and Mobilization Fees, and for the base rate schedule, see BIR Form 2307 for Contractors and Subcontractors.

Generate a BIR Form 2307 for a Non-Cash Payment FREE →

Why does withholding apply to a non-cash or offset payment at all? #

Withholding tax is a tax on the income payment, not on cash as a payment instrument — so a payor cannot avoid the obligation to withhold simply by settling in goods, services, or by netting a mutual debt instead of transferring money. Section 2.57.4 of Revenue Regulations (RR) No. 2-98, as amended by RR No. 12-2001, fixes the trigger point for every withholding obligation regardless of how the payment is ultimately settled:

“…the obligation of the payor to deduct and withhold the tax under this Section arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books, whichever comes first.”
— Section 2.57.4, Revenue Regulations No. 2-98, as amended by RR No. 12-2001

Nothing in that rule conditions the obligation on the payment being made in cash. A payment “made” in goods satisfies the obligation it discharges the same way cash would; an offsetting entry that cancels out a mutual debt is “accrued or recorded” in the books at the moment the netting happens. Either way, one of the three triggers in Section 2.57.4 has occurred, and withholding attaches.

How do you value a non-cash payment for withholding? #

The fair market value of what the payee actually received stands in for the cash amount that would otherwise be withheld on — not the payor’s book cost of the goods or an arbitrary internal transfer price. In practice, this usually isn’t a difficult valuation exercise, because the parties have typically already agreed on a peso figure as part of the underlying transaction:

Payment in goods or inventory: use the invoiced or agreed transaction value of the goods transferred, provided it reflects fair market value rather than an understated internal cost.
Payment in services rendered back to the payor: use the value the recipient would otherwise have billed for those services.
Offsetting (netting) a mutual debt: use the amount actually offset — the portion of each party’s obligation that was extinguished by the netting, not the full face value of either underlying invoice if only part of it was netted.

Settlement method	What stands in for “the payment”	Withholding tax base
Cash	The cash amount transferred	The cash amount
Goods or inventory	Fair market/invoiced value of goods transferred	That fair market value
Services rendered in return	Value of services as would normally be billed	That billed-equivalent value
Debt offsetting (netting)	The amount actually offset between the two obligations	The offset amount

Worked example: a packaging supplier paid partly in product, partly by offset #

Bulacan Packaging Solutions supplies corrugated boxes to Riverside Snacks Corp., a food manufacturer, under a ₱500,000 purchase order for the quarter. Riverside also sells Bulacan a batch of surplus packaging machinery parts worth ₱80,000, which the two companies agree to net against Bulacan’s invoice instead of Riverside paying for the parts separately.

Transaction leg	Amount	Treatment
Bulacan’s packaging invoice to Riverside	₱500,000.00	Income payment to Bulacan — base for EWT
Riverside’s machinery-parts invoice to Bulacan, netted against the above	(₱80,000.00)	Reduces the cash Riverside actually pays, but does not reduce the withholding base
Net cash Riverside pays Bulacan	₱420,000.00	Cash settlement of the balance
EWT withholding base (goods, 1% TWA rate, if Riverside is a Top Withholding Agent)	₱500,000.00	Full invoiced value, not the net cash paid

Riverside withholds expanded withholding tax on the full ₱500,000 invoice value of what it purchased from Bulacan — not on the ₱420,000 net cash that actually changed hands — because the ₱80,000 offset is itself a form of payment Bulacan received (in the form of the machinery parts and the debt relief), not a discount on the purchase price. Riverside issues BIR Form 2307 to Bulacan reflecting the ₱500,000 payment and the tax withheld on it, and separately, if Riverside’s own parts sale to Bulacan is itself subject to withholding, that leg is evaluated on its own terms.

Summary #

The form a payment takes — cash, goods, services, or a debt offset — does not change whether expanded withholding tax applies or how much BIR Form 2307 should certify. Section 2.57.4 of RR No. 2-98 ties the obligation to the income payment being paid, payable, or accrued, and a non-cash settlement satisfies that trigger the same way cash does. Value the non-cash or offset amount at fair market value, withhold on that full value, and issue BIR Form 2307 accordingly — treating an in-kind or netted payment as somehow exempt from withholding is a common and costly misreading of the rule.