Module No.

3 – Final Income Tax

Learning Outcome/s:
Understanding of the different kinds of passive income and its final withholding tax rate

Core Values/Biblical Principles:

Unity can nurture the spirit of harmony through mutual respect and understanding. We can see unity at
the workplace where team members work together in order to complete the goal and meet the
deadline. If any team member works alone, there can be chances that the person will not achieve the
goal, but if the people are united, the chances of success increases.

Introduction:
Final income tax is one of the exception rule in the taxation of gross income. If an item of gross income is
subject to, or is exempted from, final income tax, it is no longer subject to regular income tax.

Body:
Features of Final Income Tax
1. Final tax
2. Tax withholding at source
3. Territorial imposition
4. Imposed on certain passive income and persons not engaged in trade or business in the
Philippines

Final Withholding Tax

Under the final withholding tax system, the taxpayer actually shoulders the tax but it is the income
payor who withholds and pays the tax. The amount of tax withheld is final. The taxpayer receives the
income net of tax, hence, the taxpayer has no more responsibility to file an income tax return for the
passive income covered subject to final withholding tax.

Final Withholding Tax vs. Creditable/Expanded Withholding Tax

Final Withholding Tax Creditable Withholding Tax
The income payor withholds a percentage of the income.
Both serve to avoid cash flow problem to taxpayers by collecting at the
moment cash is available.
Income tax withheld Full Only portion
Coverage Certain passive income Certain passive income and regular
income
Who remits the tax Income payor Income payor and the taxpayer
Necessity for a None Required
consolidated return

Non-residents not engaged in trade or business

General final tax rate
Non-resident alien not engaged in trade or business (NRA-NETB) 25%
Non-resident foreign corporation 30%

Passive income subject to final income tax

1. Interest or yield from bank deposits or deposit substitutes
2. Domestic dividends
3. Share in the net income of a business partnership, taxable associations, joint ventures, joint
accounts or co-ownership
4. Royalties, in general
5. Prizes exceeding Php 10,000
6. Winnings
7. Informer’s tax reward
 Passive income RC, NRC, RA NRA-ETB NRA-NETB DC, RFC NRFC
Interest from any currency 20% 20% Generally, 25% 20% Generally,
bank deposit in Php of gross 30% of
Yield or monetary benefit 20% 20% income 20% gross
from deposit substitutes, received from income
trust funds, and similar all sources received
arrangements (Note 1) within the from all
Royalties, generally (Note 5) 20% 20% Philippines as 20% sources
interest, within the
From books, literary works, 10% 10% dividends, 20% Philippines
and musical compositions rents, salaries,
Prizes of more than 20% 20% premiums, RIT
Php10,000 (Note 6) annuities,
RIT RIT compensation, RIT
Php 10,000 or less etc.
Winnings 20% 20% RIT

Philippine Charity Exempt if Php Exempt if RIT

Sweepstakes and Lotto 10,000 or less 10k or
winnings less
(Under
TRAIN –
exempt)
Interest from a depositary RC and RA – Exempt Exempt 15% Exempt
bank under expanded foreign 15%
currency deposit system NRC –
(Note 3) Exempt
Interest income from long Exempt Exempt Generally, 25% 20% Generally,
term deposit or investment of gross 30% of
of 5 years or more (Note 2) income gross
Cash or property dividend 10% 20% received from Exempt income
received from a domestic all sources received
corporation or regional within the from all
operating headquarter of a Philippines sources
multi-national company within the
(Note 7) Philippines
Share of an individual 10% 20% N/A
partner in the after-tax net
income of a business
partnership or organization,
JV, or consortium taxable as
a corporation
Informer’s tax reward (Note 10% 10% 10% 10% 10%
8)

Notes:
1. Deposit substitutes – alternative form of obtaining funds from the public other than deposits.
“Public” means borrowing from 20 or more lenders at any one time. Examples include banker
acceptances, promissory notes, repurchase agreements, government debt instruments and
securities.

If the debt instrument is not a deposit substitute, interest income shall not be subject to a final
withholding tax. Instead, it shall be included in the taxpayer’s income tax return (ITR).

2. Long-term deposit or investment certificate – certificate of time deposit or investment certificates

with a maturity of at least 5 years issued by a bank, and not by a non-bank financial intermediary.
 The exemption only covers interest income. Any gain from trading such certificates is not covered by
the exemption.

 NRA-NETB shall not be exempt.

 The long-term deposit or investment certificate must be issued by a bank.
 It may be in the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts.
 Investment must have a maturity of at least 5 years from the time it is held.
 Investment must be held for at least 5 years for the interest income to be exempt.

Pre-termination of investment
If the deposit or investment is pre-terminated before the 5 th year, the entire income shall be subject
to final tax to be withheld by the depositary bank from the proceeds of the long-term deposit or
investment based on the holding period of the taxpayer.

Less than 3 years 20%

3 years to less than 4 years 12%
4 years to less than 5 years 5%

Illustration
A long-term investment instrument with a maturity of 30 years was bought by Mr. A from a bank.
The instrument was sold successively to other investors. The holding periods of the investors are as
follows:
Holding Period FWT Rate
Mr. A (NRC) 3 years 12%
Mr. B (RA) 2 years 20%
Mr. C (NRA-ETB) 5 years Exempt
Mr. D (NRA-NETB) 5 years 25%

3. Interest on foreign currency bank deposits – taxable except if received by non-resident taxpayers.
In case of bank account that is jointly in the name of a non-resident and a resident taxpayer, only
50% of the interest shall be exempt while the other 50% shall be subject to 15% final tax.

4. Interest income from savings and time deposits of members with their credit cooperative – exempt
from the 20% FWT

Interest income from the following sources is subject to regular income tax:
a. Lending activities, whether or not in the course of business
b. Investment in bonds
c. Promissory notes
d. Foreign sources, whether bank or non-bank
e. Penalty for legal delay or default

5. Active royalties – accrue from an undertaking where the taxpayer has active involvement; income
subject to regular income tax.
 Royalties, whether active or passive, earned from sources abroad are subject to regular income
tax.

6. Exempt prizes:
a. Prizes received by a recipient without any effort on his part to join a contest. Examples include
prizes from Nobel Prize, Most Outstanding Citizen, etc.
b. Prizes from sports competitions that are sanctioned by their respective national sports
organizations.
 Requisites for exemption:
a. The recipient was selected without any action on his part to enter the contest.
b. The recipient is not required to render substantial future services as a condition to receiving the
price or reward.

7. Stock dividends and liquidating dividends are not income for taxation purposes.
 Stock dividends are in the form of increase in corporate value (i.e., capital gain) which should be
properly taxable when realized through disposal or sale of the stocks investment.
 Distribution of stocks of another corporation as dividends is a taxable property dividend.
 When the liquidating dividends exceed the cost of the investment, the excess is a taxable capital
gain, subject to regular income tax.
 Dividends received by taxpayers, whether individual or corporate, from foreign corporation is
subject to regular income tax.

8. Requisites of tax informer’s reward:

a. Definite sworn information which is not yet in the possession of the BIR.
b. The information furnished lead to the discovery of fraud upon internal revenue laws or
provisions thereof.
c. Enforcement results in recovery of revenues, surcharges, and fees and/or conviction of the
guilty party or imposition of any fine or penalty.
d. The informer must not be a: BIR official or employee, other public official or employee, or
relative within the 6th degree of consanguinity of those officials or employees.

Amount of cash reward – lower of: (1) 10% of revenues, surcharges, or fees recovered and or fine or
penalty imposed and collected; or (2) Php 1,000,000

9. BIR forms filed by the payor of the income

Monthly remittance (BIR Form No. 0619F)
Quarterly remittance (BIR Form No. 1601FQ)
Filed not later than the 10 th day of the month
following the month when withholding was
made. Filed for the first 2 months of each
calendar quarter.
Filed not later than the last day of the month
following the close of the quarter during which
withholding was made.

Attachment: Quarterly Alphabetical List of

Payees (QAP) reflecting the name of the
payees, their TIN, amount of income paid to
each, and final tax withheld from each.

Quarterly remittance of final taxes withheld on Filed not later than the last day of the month
interest paid on deposits/deposit following the close of the quarter.
substitutes/trusts/etc. (BIR Form No. 1602Q)
Annual information return of FWTs (BIR Form Filed on or before January 31 of the year
No. 1604CF) following the calendar year in which the
income payments subject to FWTs were paid or
accrued.

Annual alphalist of payees, income payments,

and FWTs shall be reflected in the Schedules of
Form 1604CF.

10. Entities exempt from final income tax:

a. Foreign governments and foreign government-owned and controlled corporations
b. International missions or organizations with tax immunity
c. General professional partnership
 d. Qualified employee trust fund

The abovementioned entities are exempt not only to final tax, but also to capital gains tax and
regular income tax.

Illustration
A resident taxpayer received a Php16,000 interest income from a bank.

The final tax withheld at source is computed as follows:

Gross interest income = 16,000/80% = Php 20,000
Final tax withheld = 20,000 x 20% = Php4,000

Illustration
On January 1, 2021, Mr. X invested Php 1,000,000 in ABC Bank’s 5-year time deposit. The deposit pays
10% interest annually. Mr. X pre-terminated the deposit on July 1, 2024.

The final tax on pre-termination will be computed as follows:

2021 interest income (1,000,000 x 10%) Php 100,000
2022 interest income (1,000,000 x 10%) 100,000
2023 interest income (1,000,000 x 10%) 100,000
2024 accrued interest income (1,000,000 x 10% x 6/12) 50,000
Total interest income Php 350,000
Final tax rate applicable 12%
Final tax Php 42,000

The net proceeds of the deposit and accrued interest to be release to Mr. X upon pre-termination shall
be:
Principal balance Php 1,000,000
2024 accrued interest income 50,000
Less: Final tax to be withheld 42,000
Net proceeds to be released Php 1,008,000

Illustration
ABC Company declared a total of Php 1,000,000 dividends on July 2020. An analysis of the recipient
shareholders is as follows:
Resident aliens and citizens Php 500,000
NRA-ETBs 100,000
NRA-NETBs 50,000
Domestic corporations 250,000
NRFCs 100,000
Total dividends Php 1,000,000

The total final tax to be withheld by ABC Company shall be:

Dividends Rate Final Tax
Resident aliens and citizens Php 500,000 10% Php 50,000
NRA-ETBs 100,000 20% 20,000
NRA-NETBs 50,000 25% 12,500
Domestic corporations 250,000 0% -
NRFCs 100,000 30% 30,000
Total Php 1,000,000 Php 112,500

Summary:
Final income tax is an income tax which is withheld at source. It is imposed only on certain passive
incomes and to persons not engaged in trade or business in the Philippines.

References:
Income Taxation, Rex Banggawan 2019 Edition