BIR clarifies withholding tax rules for top agents

By Francis Allan L. Angelo

The Bureau of Internal Revenue has clarified when top withholding agents must apply the 0.5% creditable withholding tax to purchases from manufacturers and direct importers, addressing uncertainties involving wholesale transactions, motor vehicles, pharmaceutical products, fuels, and incorrectly withheld taxes.

Revenue Memorandum Circular No. 79-2026, issued on July 20, provides answers to 12 frequently asked questions on the implementation of Revenue Regulations No. 24-2025.

RR No. 24-2025 took effect on Oct. 10, 2025, or 15 days after its publication on the BIR’s official website on Sept. 25, 2025.

The BIR said the 0.5% creditable withholding tax applies when the supplier is either a manufacturer or a direct importer of goods covered by the regulation and the sale is intended for wholesale.

A supplier does not need to be both a manufacturer and a direct importer to qualify for the rate.

A local manufacturer that produces and sells covered goods may qualify even without importing products.

A direct importer that brings covered goods into the Philippines for sale may also qualify, provided the transaction meets the wholesale requirement.

Top withholding agents may establish a supplier’s status through documents including a BIR certificate of registration, Department of Trade and Industry or Securities and Exchange Commission registration papers, a mayor’s or business permit, and Bureau of Customs importer accreditation.

The circular defines “intended for wholesale” according to the nature of the seller’s ordinary business operations.

A wholesale transaction generally involves goods sold for resale, distribution, or further commercial disposition rather than final consumption by an end-user.

A sale is considered wholesale when the manufacturer or direct importer does not ordinarily engage in retail sales of the covered goods and the transaction is consistent with sales to dealers, distributors, resellers, or other commercial buyers.

The supplier’s BIR registration, business permits, and established business practices may be used to determine whether its regular operations are wholesale in character.

When there is no clear evidence that a transaction is retail, the seller’s regular course of business will be the controlling consideration.

The BIR said a transaction is retail when the manufacturer or direct importer ordinarily sells at retail or when the goods are clearly sold to an end-user for final consumption.

In retail transactions, the preferential 0.5% rate does not apply.

Instead, the 1% creditable withholding tax for suppliers of goods under Section 2.57.2(I) of RR No. 2-98, as amended, governs the transaction.

The buyer’s intended use of the goods does not by itself determine the applicable rate.

A top withholding agent must apply the 0.5% rate when buying covered goods from a manufacturer or direct importer whose business is predominantly wholesale, even when the buyer acquires the goods for its own use or consumption rather than for resale.

The controlling factor is the seller’s status and regular course of business, not the purpose for which the buyer purchases the goods.

The circular also clarifies the treatment of motor vehicles in completely built unit, semi-knocked-down, and completely knocked-down forms.

Motor vehicles imported or manufactured as completely knocked-down units are covered by the 0.5% tax because they are considered motor vehicle parts and accessories under RR No. 24-2025.

The BIR adopted the definition under Bureau of Customs Memorandum Order No. 4-2003, which covers completely knocked-down parts, components, subparts, and assemblies intended to be assembled into a complete vehicle.

Purchases of these units from a manufacturer or direct importer are subject to the 0.5% tax when made in the ordinary course of the seller’s trade or business.

Motorcycles are also covered by the term “motor vehicles.”

The circular relied on Section 3(a) of Republic Act No. 4136, or the Land Transportation and Traffic Code, which broadly defines a motor vehicle as one powered by a source other than muscular power and used on public highways.

Purchases of motorcycles from manufacturers or direct importers therefore qualify for the 0.5% rate when the sale occurs in the ordinary course of the seller’s business.

The phrase “manufacturing of motor vehicles in CBU or SKD units” refers to the form of the finished vehicle rather than the components used during production.

The rule applies when the manufacturing process results in a vehicle classified as a completely built unit or semi-knocked-down unit.

It does not refer to whether completely knocked-down or semi-knocked-down parts were used as manufacturing inputs.

For pharmaceutical products, the circular covers medicines, drugs, and other preparations intended for diagnosing, curing, mitigating, treating, or preventing diseases in humans or animals.

The products must be classified and regulated by the Food and Drug Administration under Republic Act No. 3720, as amended by Republic Act No. 9711, or the Food and Drug Administration Act of 2009.

The category includes finished dosage forms and pharmaceutical raw materials intended for pharmaceutical manufacturing when sold by manufacturers or direct importers whose principal registered business is producing or importing such products.

Products that the FDA does not classify or regulate as drugs or pharmaceutical preparations are not covered.

Milk is generally classified as a food or nutritional product under Department of Health Administrative Order No. 2014-0029 and is not automatically treated as a pharmaceutical product.

Milk may qualify when it is specially formulated, labeled, and registered with the FDA as a therapeutic or pharmaceutical preparation.

This treatment may apply to specialized or fortified milk products prescribed or recommended by physicians for specific medical conditions.

Only milk products registered with the FDA as drugs or therapeutic preparations are subject to the 0.5% withholding tax under the pharmaceutical-products category.

The circular also defines solid fuels as petroleum-derived or processed products in solid or semisolid form intended for combustion, energy generation, or industrial use.

Examples include petroleum coke, asphalt in solid or semisolid form, greases, waxes, and petrolatum.

Liquid fuels include bunker fuel oil, diesel fuel oil, kerosene, lubricating oil, naphtha and similar distillation products, regular gasoline, premium gasoline, aviation gasoline, aviation turbojet fuel, processed gas, liquefied petroleum gas, and LPG used for motive power.

Related products include items derived from, blended with, or used in connection with solid or liquid fuels, regardless of whether they are directly consumed as fuel.

These products include process oils, natural or synthetic lubricants, coolants, solvents, thinners, anhydrous ethanol, coconut methyl ester, and other additives or blending components.

The definitions are based on petroleum products covered by Chapter V, particularly Section 148, of the National Internal Revenue Code of 1997, as amended.

They also draw from Republic Act No. 8479, or the Downstream Oil Industry Deregulation Act, its implementing rules, and Department of Energy Department Circular No. 98-03-004.

A top withholding agent that discovers an incorrect tax rate must adjust the amount withheld and apply the correct rate when filing BIR Form No. 1601EQ, the quarterly remittance return of creditable income taxes withheld.

The return must be filed no later than the last day of the month following the close of the quarter.

Adjustments may be made only within the same taxable year under RR No. 11-2018, as amended.

For the fourth quarter of taxable year 2025, the circular cited Jan. 31, 2026, as the filing deadline.

The BIR said the guidance is intended to promote consistent implementation of RR No. 24-2025, give withholding agents and taxpayers clearer compliance standards, and ensure that the correct withholding tax is applied to covered transactions.