Can a Supplier Require You to "Gross Up" Payment to Cover Withholding Tax? BIR Rules on Net-of-Tax Clauses

A “net of tax” or “gross up” clause lets a supplier and a client agree on who bears the economic cost of withholding tax, but it cannot change who is legally required to withhold and remit it — that duty belongs to the payor under the NIRC regardless of what the contract says. Sections 57 and 58 of the Tax Code place the withholding and remittance obligation on the person making the payment, and that statutory duty runs to the government; a private contract between two parties has no power to reassign it.

For the certificate that still gets issued regardless of a gross-up arrangement, see What Is BIR Form 2307?; for a related scenario involving who ultimately withholds, see Your Client Withheld Tax But Never Remitted It — Is Your BIR Form 2307 Credit Still Valid?.

The statutory duty both provisions describe is captured in the heading the Tax Code itself gives to Section 58:

“Returns and Payment of Taxes Withheld at Source.”

That heading, and the obligation it covers, attaches to the withholding agent making the payment — not to whichever party a private contract might prefer to carry the cost.

What a net-of-tax clause actually does — and doesn’t do #

The clause operates entirely on the economics of the payment, not on the tax mechanics. Under NIRC Sections 57 and 58, the obligation to withhold a specified percentage of an income payment, and to remit it to the BIR, falls on the payor:

• Section 57 establishes which income payments are subject to withholding and at what point the withholding obligation attaches.
• Section 58 governs the filing of withholding tax returns and the remittance of amounts withheld to the BIR, with the payor — the withholding agent — personally liable for the tax if the duty to withhold is breached.

A net-of-tax clause doesn’t touch either provision. What it changes is the amount the payor actually pays out of pocket: instead of paying the stated contract price and withholding a percentage of it, the payor pays a larger, grossed-up amount so that after withholding at the normal statutory rate, the supplier still receives the originally intended net amount in hand.

Why the obligation can’t be shifted away entirely #

Withholding tax is a mechanism for the government to collect tax at the source of income, and that collection mechanism depends on the payor — not the payee — acting as the withholding agent. A contract clause that tried to say “the supplier will handle its own withholding and remittance instead of the client” wouldn’t actually relieve the client of liability if the client is the one legally designated as the withholding agent for that type of payment; the BIR looks to the statutory withholding agent, not to whatever private arrangement the parties made between themselves. A net-of-tax clause works within that constraint rather than around it — it reallocates who absorbs the cost, while the actual withholding, remittance, and certificate issuance still happen exactly as the law requires.

How grossing up actually works in practice #

The payor computes the extra amount needed so that the contract price survives withholding intact, then withholds on the full grossed-up figure as normal.

1. Start with the net amount the supplier needs to receive (the “net of tax” target).
2. Gross up that amount by dividing by (1 − withholding tax rate) to find the gross payment that, after withholding, nets to the target.
3. Apply the normal withholding tax rate to the grossed-up gross amount, exactly as would apply to any other payment of that type.
4. Issue BIR Form 2307 (or 2306, if final withholding tax applies) showing the actual gross amount paid and the actual tax withheld — not the originally quoted net figure.
5. Remit the withheld amount to the BIR through the normal monthly or quarterly withholding tax return.

Worked example: a fixed-fee consulting contract with a gross-up clause #

A consultant quotes a fixed fee of ₱90,000 net, with a gross-up clause requiring the client to absorb the standard 10% expanded withholding tax so the consultant actually receives the full ₱90,000.

The client pays ₱100,000 in total, withholds ₱10,000 at the normal 10% rate, and releases ₱90,000 to the consultant — exactly the net amount quoted. The client still issues a BIR Form 2307 showing ₱100,000 as the gross income payment and ₱10,000 as the tax withheld; nothing about the certificate or the withholding rate changed, only the size of the gross payment the client agreed to make.

Frequently asked questions #

Can a contract legally require the payor to shoulder the withholding tax instead of the supplier? #

The parties can privately agree on who bears the economic cost of the withholding tax — this is what a net-of-tax or gross-up clause does. What they cannot do is agree the payor won’t withhold and remit at all, because that duty under NIRC Sections 57 and 58 runs to the government, not to the other contracting party, and private parties can’t contract it away.

If a client agrees to a net-of-tax clause, do they still issue a BIR Form 2307 to the supplier? #

Yes. The withholding and the certificate still happen exactly as they would without the clause — the supplier’s BIR Form 2307 still shows the tax actually withheld. The gross-up clause only affects how much the client pays on top of the contract price to make sure the supplier nets the full amount after that withholding.

Does grossing up a payment change the withholding tax rate that applies? #

No. The applicable withholding tax rate (2%, 5%, 10%, or whichever rate fits the type of income) is unaffected by a gross-up clause. The clause changes the base the client pays on, not the rate — the client simply pays enough extra, on top of the stated contract price, that after withholding at the normal rate, the supplier still receives the full contract price net.

Why would a supplier ask for this instead of just accepting the withholding? #

A supplier sometimes prices a contract as the exact net amount they need to receive — common in cross-border services, financing arrangements, or fixed-fee engagements — and a gross-up clause ensures the withholding tax doesn’t eat into that intended net figure. It shifts the economic cost of withholding to the payor without changing the underlying tax mechanics.

Is a net-of-tax clause the same as the payor failing to withhold? #

No — they’re opposites. A net-of-tax or gross-up clause assumes withholding still happens exactly as required; it just adjusts the gross payment upward to compensate for it. A payor simply failing to withhold at all is a separate compliance failure under NIRC Section 57, unrelated to any contractual gross-up arrangement.

Summary #

A net-of-tax or gross-up clause can shift who economically bears the cost of withholding tax, but it can never shift the payor’s statutory duty under NIRC Sections 57 and 58 to actually withhold and remit — that obligation runs to the government and survives any private agreement between the parties. The payor grosses up the payment, withholds at the normal rate on the larger gross amount, and issues the certificate exactly as it would for any other payment. For how the resulting certificate feeds into the payee’s own filing, see What Is BIR Form 2307?.