BIR Form 2307 for Rice Mills: Withholding Tax on Palay Drying and Milling Service Fees

A rice trader, farmer-cooperative, or trading company that pays a rice mill a fee to dry and mill palay withholds 2% expanded withholding tax (EWT) on that service fee and issues BIR Form 2307 to the mill — even though the milling service itself is exempt from the 12% value-added tax (VAT) under NIRC Section 109(F). VAT exemption and withholding tax exemption are two separate rules under two separate parts of the Tax Code, and conflating them is the single most common mistake in this transaction.

This guide is part of the BIR Form 2307 series. It covers why a VAT-exempt milling fee still carries creditable withholding, the rate and ATC codes that apply, why the separate agricultural-goods withholding exemption does not reach a milling fee, and a worked drying-and-milling example.

Why doesn’t VAT exemption also exempt the milling fee from withholding tax? #

VAT and creditable withholding tax (CWT) sit in different parts of the Tax Code and answer different questions — one asks whether the transaction carries a 12% consumption tax, the other asks whether the payor must withhold an advance against the payee’s income tax — so a service can be exempt from one and still fully subject to the other. NIRC Section 109(F) exempts “services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar” from VAT. That exemption is about the output tax the mill would otherwise charge the trader on top of its fee. It says nothing about whether the trader, as the party making the payment, must withhold a percentage of that fee as a creditable advance on the mill’s income tax — a separate obligation under RR No. 2-98, as amended by RR No. 11-2018.

“Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar.”

— NIRC Section 109(F)

As the companion VAT guide on this site explains in detail, Are Contract Growing and Milling Services VAT-Exempt? NIRC Section 109(F) Explained covers the exemption’s scope and its “packaged milling-for-others” boundary. That post stops at VAT. This post picks up where it leaves off: the same milling fee, analyzed for income tax withholding instead.

Who withholds on the milling fee, and at what rate? #

The rice trader, cooperative, or other party paying the mill is the withholding agent, and the milling fee is withheld at a flat 2% under the general contractor/business-services bracket of RR No. 2-98, Section 2.57.2(E), as amended by RR No. 11-2018 — the same bracket this series covers for other processing and contracted-service payments, from general building contractors down to car wash and pool-maintenance operators. Milling palay is, for withholding purposes, a service performed on the trader’s (or farmer’s) own grain, billed as a processing fee — not a sale of goods by the mill.

Any juridical person making the payment in connection with its trade or business is a withholding agent, and so is an individual with respect to payments connected to a trade or business:

“(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)

That covers a corporate rice trader, a registered farmer-cooperative conducting trading activity, or a sole proprietor rice dealer — any of them paying a mill for drying and milling work withholds, regardless of whether the mill itself is a sole proprietorship, a corporation, or a cooperative.

This is the identical rate and ATC pair this site already covers for general contracting work — see BIR Form 2307 for Contractors and Subcontractors: 2% EWT Rate and ATC Codes for the broader coverage list that milling falls under as a contracted processing service.

Why doesn’t the agricultural-products withholding exemption cover a milling fee? #

The Top Withholding Agent exemption for agricultural, forest, and marine food products in their original state applies to buying the raw product itself — unmilled palay, live poultry, fresh catch — not to paying someone to process a product the buyer already owns. Do You Withhold Tax When Buying Agricultural, Marine, or Forest Products? The Top Withholding Agent Exemption explains why a Top Withholding Agent buying unmilled palay directly from a farmer withholds nothing on that purchase, because unmilled palay in its original state falls outside RR No. 11-2018’s definition of “goods” for the 1% TWA rule.

That exemption tracks a goods purchase — the trader acquiring ownership of palay from a farmer-supplier. Paying a mill to dry and mill palay the trader already owns (or is processing on a cooperative’s behalf) is a different transaction entirely: it is a services payment, not a goods purchase, so the agricultural-goods carve-out was never built to reach it. That sibling post makes the same point directly: a TWA that separately buys milling or logistics services from a third-party processor withholds under the services rule (2% under Section 2.57.2(E)) on that payment, on its own terms, regardless of how the underlying palay purchase was treated.

Four rows, four different rules — and only one of them (the second) results in withholding. That’s the distinction readers most often miss: a VAT-exempt, goods-adjacent transaction still generates a 2% EWT obligation once it’s structured as a service fee.

Worked example: ₱80,000 to dry and mill 10 tons of palay #

A rice trader paying a local mill ₱80,000 to dry and mill 10 tons of palay withholds ₱1,600 (2%) from that fee, remits it with the trader’s EWT returns, and issues the mill a BIR Form 2307 for ₱80,000 gross and ₱1,600 withheld — with no VAT added to the ₱80,000, because the milling service is VAT-exempt under Section 109(F).

Mabuhay Grains Trading, a sole proprietor rice trader, delivers 10 tons of freshly harvested palay it already purchased from local farmers to Bayanihan Rice Mill, a corporation, for drying and milling into finished rice. Bayanihan bills a flat processing fee of ₱80,000 for the batch.

Mabuhay Grains remits the ₱1,600 through its monthly BIR Form 0619-E and quarterly BIR Form 1601-EQ filings, lists Bayanihan Rice Mill on its Quarterly Alphalist of Payees, and issues Bayanihan a BIR Form 2307 showing ₱80,000 as the income payment, ATC WC120, and ₱1,600 as tax withheld. Bayanihan credits that ₱1,600 against its own income tax due for the period, supported by the certificate.

If Bayanihan had instead sold Mabuhay Grains 10 tons of its own milled rice outright — a goods sale rather than a milling-for-others service on Mabuhay’s palay — that sale would be analyzed separately: still VAT-exempt as an agricultural food product under Section 109(A), and generally outside the TWA goods-withholding rule for the same original-state reason covered in the agricultural-exemption guide. The milling-fee scenario above is specifically the service transaction, not the eventual goods sale.

Frequently asked questions #

Is a rice mill’s drying and milling fee subject to BIR Form 2307 withholding? #

Yes. A rice trader, farmer-cooperative, or other business that pays a rice mill a fee to dry and mill palay withholds 2% expanded withholding tax on that service fee under RR No. 11-2018 and issues BIR Form 2307 to the mill, even though the fee itself is exempt from VAT under NIRC Section 109(F).

If milling is VAT-exempt, why is it still withheld for income tax? #

VAT and creditable withholding tax are two separate tax regimes under different parts of the Tax Code. NIRC Section 109(F) exempts the milling service from the 12% value-added tax, but the fee the mill earns is still ordinary business income subject to income tax, and RR No. 11-2018 requires the payor to withhold a creditable advance against that income tax when paying a contractor-type service — VAT exemption does not create a withholding tax exemption.

Does the agricultural products withholding exemption cover a milling service fee? #

No. The Top Withholding Agent exemption for agricultural, forest, and marine food products in their original state applies to purchases of goods like unmilled palay itself, not to a fee paid for a milling service performed on palay the buyer already owns or is processing on another party’s behalf. A milling fee is a payment for labor and processing, not a goods purchase, so it falls under the ordinary 2% services withholding rate instead.

What ATC code does a rice mill’s BIR Form 2307 use? #

ATC WI120 applies when the rice mill is operated by an individual, and ATC WC120 applies when the mill is organized as a corporation or cooperative — both at the flat 2% rate under RR No. 11-2018’s general contractor/business-services bracket.

Does a farmer-cooperative have to withhold tax when it pays a mill? #

Yes, if the cooperative is making the payment as part of its trade or business. Any juridical person — including a cooperative — paying for services in connection with its business activity is a withholding agent under RR No. 2-98, Section 2.57.3, and must withhold and issue BIR Form 2307 on the milling fee regardless of the cooperative’s own income tax status.

Summary #

A rice mill’s drying and milling fee is exempt from VAT under NIRC Section 109(F), but that exemption covers the 12% consumption tax only — it has no bearing on the separate 2% creditable withholding tax that the paying trader or cooperative owes under RR No. 2-98, Section 2.57.2(E), as amended by RR No. 11-2018. The agricultural-goods carve-out that exempts a TWA from withholding on unmilled palay purchases likewise does not extend to a milling service fee, because a service payment is not a goods purchase. Treat the VAT question and the withholding question as two separate checks on the same transaction, use ATC WI120/WC120 at 2%, and issue the certificate on the service fee alone. For the broader contractor-withholding framework, see BIR Form 2307 for Contractors and Subcontractors; for the raw-palay purchase side of the same supply chain, see Do You Withhold Tax When Buying Agricultural, Marine, or Forest Products?; and for the VAT side of the milling fee itself, see Are Contract Growing and Milling Services VAT-Exempt? NIRC Section 109(F) Explained.