BIR Form 2307 for Toll Manufacturing and Contract Manufacturing Arrangements

A brand owner that supplies its own raw materials to a toll manufacturer and pays only a processing fee to convert them into finished goods withholds 2% expanded withholding tax (EWT) under RR No. 2-98, Section 2.57.2(E), and issues BIR Form 2307 — because the payment is for a processing service, not a purchase of goods the manufacturer itself owns and sells.

This guide is part of the BIR Form 2307 series. It covers who withholds on a toll manufacturing payment, how it differs from a straight purchase of finished goods, and a worked toll-processing example.

Who withholds on a toll manufacturing payment? #

The obligation follows the same payor-status test this series applies to every business-service supplier: 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 cosmetics brand supplying its own formula and raw ingredients to a toll manufacturer for filling and packaging, or a food company supplying its own recipe ingredients to a co-packer for processing into finished product, is a withholding agent under clause (A) or (B).

Processing service (2%), not a purchase of goods #

Toll manufacturing is a processing service — the brand owner already owns the raw materials and pays only for the labor and use of equipment to convert them into finished goods — which places the processing fee under the same flat 2% general contractor/business-services catch-all covered in BIR Form 2307 for Contractors and Subcontractors.

This is a different transaction from a full contract manufacturing arrangement where the manufacturer supplies some or all of its own materials and sells a finished product outright — that arrangement can shift closer to a goods purchase, potentially reaching the 1% rate for a Top Withholding Agent instead of the 2% service rate. Because the line between a processing service and a goods sale depends on who owns the materials and what the invoice actually documents, businesses should review each manufacturing agreement’s specific supply terms rather than apply one treatment across every contract.

Worked example: a cosmetics brand’s toll-filling arrangement #

Luminesse Beauty Corp. supplies its own formulated bulk product and packaging components to ToolTech Manufacturing Inc., which fills, labels, and packs the finished units for a per-unit processing fee.

Luminesse withholds ₱4,000 on ToolTech’s processing fee — since Luminesse itself supplied the bulk product and packaging being processed — and issues ToolTech a BIR Form 2307 for the quarter’s cumulative processing fees, ATC WC120. If ToolTech instead sourced and owned the bulk formulation itself and sold Luminesse a finished packaged product, the transaction would more closely resemble a goods purchase rather than a toll-processing service.

Frequently asked questions #

Does a business have to withhold tax when paying a toll or contract manufacturer? #

Yes, if the payor is a corporation or a business-registered individual, and specifically if it is a Top Withholding Agent (TWA) purchasing goods or services, or if the manufacturer’s service otherwise falls under an EWT-covered category. A brand owner paying a manufacturer to process its own supplied materials into finished goods is a withholding agent under RR No. 2-98, Section 2.57.3(A)-(B).

What withholding tax rate applies to a toll manufacturer’s processing fee? #

A toll manufacturer’s processing fee — for converting the brand owner’s own supplied raw materials into finished goods — generally falls under the 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 for an individually run manufacturer or WC120 for one organized as a corporation.

How is toll manufacturing different from a straight purchase of finished goods? #

In toll manufacturing, the brand owner supplies the raw materials and only pays the manufacturer a processing fee for converting them into finished product — this is a service. In a straight purchase of already-manufactured goods, the manufacturer owns the materials and sells a finished product outright, which can instead fall under the 1% goods-purchase rate for a Top Withholding Agent under RR No. 11-2018, as this series covers in the goods-purchases guide.

Does the withholding treatment change if the contract manufacturer supplies some or all of its own materials? #

When a contract manufacturer supplies its own materials in addition to processing labor, the arrangement can shift closer to a sale of goods rather than a pure processing service, which can affect whether the 2% service rate or the 1% TWA goods rate applies. Businesses should review the specific supply terms of each manufacturing agreement rather than assume one treatment applies to every arrangement.

How is withholding computed on a toll manufacturing invoice that separately bills materials handling and processing? #

If the invoice cleanly separates a pass-through materials-handling charge from the manufacturer’s own processing fee, only the manufacturer’s own processing fee is generally the withholdable service income. A bundled invoice that doesn’t separate these components is generally withheld in full at the applicable service rate.

Summary #

A toll manufacturer’s processing fee for converting a brand owner’s own supplied materials into finished goods sits in the flat 2% general business-services bracket (ATC WI120/WC120) under RR No. 2-98, Section 2.57.2(E) — distinct from a straight purchase of already-manufactured goods, which can instead reach the 1% Top Withholding Agent goods rate. See BIR Form 2307 for Purchases of Goods for that comparison, and BIR Form 2307 for Contractors and Subcontractors for the general 2% bracket this rate draws from.