Final Withholding Tax vs Creditable Withholding Tax: What's the Difference?

Final withholding tax (FWT) and creditable withholding tax (CWT, also called expanded withholding tax or EWT) are the two withholding systems under the National Internal Revenue Code (NIRC), and they work in opposite directions for the payee. FWT is the complete and final payment of the tax due on that income — nothing more to file. CWT is only a partial, advance payment that the payee later credits against their own income tax return. Confusing the two leads to double-counting income or missing a credit the payee is entitled to.

The legal basis #

Section 57(A) of the NIRC governs the final withholding tax system, and Section 57(B) governs the creditable withholding tax system, both implemented through Revenue Regulations (RR) No. 2-98, as amended. RR No. 2-98 lists the specific income items subject to each system and the applicable rates. The regulation has been amended repeatedly since 1998 to add or adjust categories — most recently through RR No. 5-2025, issued February 27, 2025, which implemented several Creditable Withholding Tax rate changes under the CREATE MORE Act (Republic Act No. 12066), including reducing the rate on certain payments by credit card companies and e-marketplace or digital financial service providers to withholding agents from 1% to 0.5%.

Final withholding tax: full and final, nothing more to report #

Under FWT, the amount withheld by the payor is the complete and final tax on that income item — the payee does not include it in gross income and cannot claim any further credit or deduction related to it. Common examples:

Because this tax is final, the payor’s remittance closes the matter for that specific income item — the payee’s own annual income tax return does not need to reflect it as taxable income, and there’s no credit to apply because the tax was already paid in full at source.

Creditable withholding tax: an advance payment, not the final word #

Under CWT, the amount withheld is only an advance or partial payment of the payee’s eventual income tax — the payee still includes the full income in gross income on their annual return and credits the tax already withheld against the tax computed to be due. Common examples:

A self-employed professional who receives ₱100,000 in fees with 10% (₱10,000) withheld doesn’t stop there — the full ₱100,000 still counts as gross income on their BIR Form 1701Q, and the ₱10,000 already withheld is subtracted from the income tax computed to be due for that quarter, not treated as the final tax on the fee.

Which certificate applies #

BIR Form 2306, the Certificate of Final Tax Withheld at Source, documents FWT; BIR Form 2307, the Certificate of Creditable Tax Withheld at Source, documents CWT — and they’re issued on different schedules. BIR Form 2306 is generally issued on or before January 31 of the year following the payment (or simultaneously with payment, on the payee’s request). BIR Form 2307 is issued to the payee within 20 days after the close of the quarter in which the income was paid, so the payee can attach it to that quarter’s return. See Withholding Certificate Deadlines in One Table for the fuller comparison including BIR Form 2316.

A recent example of the line moving: CMEPA and bank deposit interest #

The Capital Markets Efficiency Promotion Act (CMEPA), effective July 1, 2025, is a useful illustration of how these categories can shift — it removed the prior tax exemption on interest from certain long-term bank deposits, so all deposit interest is now uniformly subject to the 20% final withholding tax regardless of holding period. Before CMEPA, deposits held for five years or more under specific certification requirements could qualify for a tax exemption on the interest earned; that carve-out no longer applies. The 20% rate itself as an FWT was not new — what changed was which deposits qualify for it, illustrating why a rate table should be checked against the current regulation rather than assumed static.

What withholding doesn’t change: the payor’s expense deduction #

A common misunderstanding is that failing to withhold automatically disallows the payor from deducting the related expense. The EOPT Act (Republic Act No. 11976), effective January 22, 2024, repealed the older rule that tied deductibility directly to withholding compliance. The obligation to withhold still exists and non-withholding still carries its own penalties, but a payor is no longer automatically barred from deducting an expense solely because tax wasn’t withheld on the related payment — the two issues are now assessed separately rather than one triggering the other.

Frequently asked questions #

What is the main difference between final withholding tax and creditable withholding tax? #

Final withholding tax (FWT) is the complete and final settlement of the tax due on an income item — the payee reports no further tax on it. Creditable withholding tax (CWT), also called expanded withholding tax, is an advance or partial payment that the payee later credits against the income tax due on their annual return.

Which BIR certificate applies to final withholding tax versus creditable withholding tax? #

BIR Form 2306, the Certificate of Final Tax Withheld at Source, applies to final withholding tax. BIR Form 2307, the Certificate of Creditable Tax Withheld at Source, applies to creditable withholding tax.

Do I still need to report income that was subject to final withholding tax in my income tax return? #

Generally no. Income subject to final withholding tax is excluded from the payee’s taxable gross income because the tax withheld already fully discharges the tax liability on that income.

Is interest on a bank deposit subject to final or creditable withholding tax? #

Interest on a bank deposit is subject to a 20% final withholding tax. Since the Capital Markets Efficiency Promotion Act (CMEPA) took effect on July 1, 2025, this 20% final tax applies uniformly regardless of the deposit’s holding period, removing the previous exemption for certain long-term deposits.

Are professional fees subject to final or creditable withholding tax? #

Professional fees paid to an individual practitioner are subject to creditable withholding tax — 5% if the payee’s gross income for the year does not exceed ₱3,000,000, or 10% if it does — evidenced by BIR Form 2307, and credited against the payee’s income tax due.

Summary #

The test that separates the two systems is simple: does the withheld tax end the matter (final), or does it reduce a tax the payee still has to compute (creditable)? FWT covers largely passive income — deposit interest, royalties, most dividends — evidenced by BIR Form 2306. CWT covers most business income payments — professional fees, rent, contractor payments — evidenced by BIR Form 2307 and credited on the payee’s own return. For payees who are themselves foreign, the FWT side gets more complex — see Withholding Tax on Payments to Non-Resident Foreign Corporations for how the final-tax rules apply across borders.