BAINCTAX

Income Taxation
1TAY2022

Final Withholding Taxes

Final Income
Taxation
 DEFINITION
Final Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is not creditable against the
income tax due of the payee for the taxable year. Income Tax withheld constitutes the full and final payment of the Income Tax
due from the payee on the said income. Final Income Taxation is characterized by final taxes where taxes are withheld or
deducted at source. The taxpayer receives the income, net of tax. The payor of income remits the tax to the government. Final
taxation is applicable only on certain passive income. Not all passive income is subject to final tax.

Passive Income vs. Active Income

Passive incomes are earned with very minimal or even without active involvement of the taxpayer in the earning process and
are generally irregular in timing and amount, whilst, active income arises from transactions requiring a considerable degree
of effort or undertaking from the taxpayer.

The final withholding tax is built upon the taxpayer and government convenience. It relieves the taxpayer of the obligation to
file an income tax return. This is very convenient for taxpayers who are limited by distance, time and cost to comply. For the
government, the final withholding tax system is the most convenient and effective system in collecting taxes on income where
there is no risk of non-compliance or tax evasion.

Final Withholding Taxes Final Income Taxation page 1

 FEATURES
The final tax scheme has the following features:

1. Full and final payment

2. Tax withholding at source
3. Territorial imposition
4. Imposed on certain passive income and persons not engaged in business in the Philippines
5. No filing of income tax return by the payee

GENERAL COVERAGE
Unless otherwise indicated, the final tax rates shall apply to all taxpayers, except for non-resident aliens not engaged in trade or
business and non-resident foreign corporations which are taxed at 25%.

Individuals in this discussion would involve: Resident Citizens, Non-Resident Citizens, Resident Aliens and Non-Resident
Aliens engaged in trade or business, whereas, corporation would include: Domestic Corporations and Resident Foreign
Corporations.

INTEREST INCOME ON SHORT-TERM PESO DEPOSITS

There shall be a final tax at the rate of 20% imposed on the interest income or yield from the following sources:
Final Withholding Taxes Final Income Taxation page 2
 Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC
Deposits (Substitutes),
20% 25% 20% 25%
Government Securities, Others

Illustration 5.1 INTEREST ON SHORT-TERM DEPOSITS

Banco del Oro incurs the following interest in its deposit accounts from depositors:
Resident Citizens 900,000
Non-resident Citizens 600,000
Resident Aliens 100,000
Non-resident Corporation 200,000
The final tax and net proceeds would be:
Interest Final Tax Net Proceeds
Resident Citizens (20%) 900,000 180,000 720,000
Non-resident Citizens (20%) 600,000 120,000 480,000
Resident Aliens (20%) 100,000 20,000 80,000
Non-resident Corporation (25%) 200,000 50,000 150,000
Total 1,800,000 370,000 1,430,000

Final Withholding Taxes Final Income Taxation page 3

 INTEREST INCOME ON LONG-TERM PESO DEPOSITS
In the context of this final tax, a deposit/deposit substitute is considered long-term if the holding period is at least five years.
Since individual taxpayers are exempt if the deposit is long-term, most would just open a long-term one and then pre-terminate
such to avoid the final tax. As such, if the deposit or investment placement of individual taxpayers is pre-terminated before five
years, any previously untaxed or exempted interest income will be subjected to the following final taxes upon pretermination
depending on the length of the holding period.

Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC

Long-Term Interest/Yield Exempt 25% RIT* 25%
If pre-terminated before fifth year, a final tax shall be imposed on the holding period:
Less than 3 years 20%
Three to less than four years 12% 25% 20% 25%
Four to less than five years 5%

*RR 14-2012, as clarified by RMCs 77-2012, 81-2012 and 7-2015, indicated the regular income tax scheme as the appropriate tax
treatement for said income. Some argues that this lacks basis.

Final Withholding Taxes Final Income Taxation page 4

 Illustration 5.2 INTEREST ON LONG-TERM DEPOSITS
On January 1, 2021, AMC invested P2,000,000 in a 5-year bank deposit with an interest of 5% annually. AMC pre-terminated
the deposit on September 30, 2024. Assume interest is paid out every quarter-end.
The final tax and net proceeds are computed as follows:
AMC is a: DC RC
Tax Base
Interest Income (2,000,000 x 5% x 3.75) 375,000
Untaxed Interest Income (2,000,000 x 5% x 3.75) 375,000
Tax Rate 20% 12%
Final Tax 75,000 45,000

Gross Proceeds
Interest Earned (2,000,00 x 5% x 3/12) 25,000
Carrying Amount (2,000,000 + 375,000) 2,375,000
Final Tax 5,000 45,000
Net Proceeds 20,000 2,330,000

Final Withholding Taxes Final Income Taxation page 5

 INTEREST INCOME FROM FOREIGN CURRENCY DEPOSITS AND LOANS
Interest income derived from the following sources shall be imposed with the respective rates of final tax:

Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC

Foreign Currency Deposit 15% Exempt 15% Exempt Exempt 15% Exempt
Loans Payable to EFCDU/OBU 10% Exempt 10% Exempt Exempt 10% Exempt
Loans Payable to NRFC N/A 20%

Offshore Banking Unit" or "OBU" shall refer to a branch, subsidiary or affiliate of a foreign banking corporation which is duly
authorized by the Central Bank of the Philippines to conduct of banking transactions in foreign currencies involving the receipt
of from external sources and utilization of such funds. "Foreign currency deposit unit" or "FCDU" shall refer to that unit of a
local bank or of a local branch of a foreign bank authorized by the Central Bank to engage in foreign currency-denominated
transactions.

AMOUNTS WITHDRAWN FROM DECEDENT'S DEPOSIT ACCOUNT

If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall
allow the withdrawal from the said deposit account, subject to a final withholding tax of six percent (6%) of the amount to be

Final Withholding Taxes Final Income Taxation page 6

 withdrawn, provided that the withdrawal shall only be made within one year from the date of the decedent. Such withheld tax
shall not be creditable to the estate tax in relation to the death of the decedent.

Illustration 5.3 DECEDENT DEPOSIT ACCOUNT

Assume your rich grandfather died recently and he was your favorite grandchild. Since he says that you are a great accountant,
you should be the executor of his will, with the free portion directly going to you. suppose there is a P1,000,000 deposited in
the bank account of your grandfather and the rest of his estate consists of several parcels of land readily divided for the legitime
of the mandatory heirs, including the free portion that you can get. The titles of the lands cannot be transferred if the Estate
Tax of P940,000 cannot be paid with the BIR.
You may withdraw the full amount of the bank deposit but it will be subject to 6% final tax amounting to P60,000. The net
proceeds of P940,000 can be used to pay the estate tax to BIR. Once paid, you can already be issued the electronic Certificate of
Authority to Register and transfer the titles to the heirs and yours.

TAX-FREE COVENANT BONDS

Interest income or other payments of any individual taxpayer, including NRA-NETB, from tax-free covenant bonds, mortgages,
deeds of trust or other obligations of domestic and resident foreign corporations shall be subject to final withholding tax of 30%.

Interest Income RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC

Tax-Free Covenant Bonds 30% RIT

Final Withholding Taxes Final Income Taxation page 7

 Illustration 5.4 TAX-FREE COVENANT BONDS
Juana del Cruz, a resident entered into a tax-free covenant bond agreement with Salakot Corporation, a domestic corporation.
The bonds carried a 10% interest for the principal amount of P7,000,000.
The interest received will be assumed as net of tax.
Principal 7,000,000
Multiply: Rate of interest 10%
Interest Income, net 700,000
Divide by to Gross-up 70%
Interest Income, gross (Tax Base) 1,000,000
Multiply: Final Tax Rate 30%
Final Tax Withheld 300,000

CASH AND PROPERTY DIVIDENDS

Dividends received by the following taxpayers, whether in cash or in kind, shall be subject to the following final tax rates
depending on the payor.

Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC

Domestic Corporation 10% 20% 25% Exempt 25%/15%*

Final Withholding Taxes Final Income Taxation page 8

 Domestic REITs 10% Exempt 10% Exempt 10%
Foreign Corporations RIT RIT** RIT

*The tax sparing rule shall apply to an NRFC which is a resident or is domiciled in a country which: (1) has no effective tax
treaty with the Philippines; (2) has a worldwide system of taxation; and (3) allows a tax credit against the tax due from the NRFC
dividend taxes deemed to have been paid in the Philippines equivalent to 15%.

**These dividends may be exempted provided the following requisites are met:

1. Reinvested in the business operation of the domestic corporation in the next taxable year
2. Only for fund working capital requirements, capital expenditures, dividend payments, investment in domestic securities,
and infrastructure projects
3. Two-year minimum holding period of at least 20% in value of outstanding shares of the foreign corporation

A real estate investment trust (REIT) is a corporation whose primary business is owning, developing, and managing real estate
properties, such as apartment buildings, office buildings, hotels, warehouses, health care facilities, shopping malls or golf
courses.

Final Withholding Taxes Final Income Taxation page 9

 SHARE IN NET INCOME IN A TAXABLE PARTNERSHIP, ASSOCIATION, JOINT
ACCOUNT, JOINT VENTURE OR CONSORTIUM
The share in the net income of the following taxpayers shall be subject to the respective final tax rates as summarized below:

Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC

Taxable Partnerships 10% 20%
25% RIT 25%
Exempt Partnerships RIT

It is to be noted that this is only applicable to taxable partnerships. Notice that the rates are mostly similar to that of the final
taxes with dividends. In essence, shares of partners in the net income of a partnership are dividends available for withdrawal.

Illustration 5.5 SHARE IN NET INCOME OF TAXABLE PARTNERSHIP

Paul, Lee and Kath formed a partnership engaged in a merchandising business in Batangas. The three personally manages the
business. Paul and Kath are Filipinos. Lee’s Chinese citizenship adds effectiveness in managing the business. During the year,
they reported net income of P600,000 which they divide equally among themselves.
The three partners will have a share of P200,000 each. They are, however, subject to 10% final tax, therefore, each will only
receive P180,000.

Final Withholding Taxes Final Income Taxation page 10

 PASSIVE ROYALTIES
Passive royalties received by a taxpayer shall be subject to the following final tax rates:

Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC

Books, Literary Works, Musical
10% 25%
Compositions
Cinematographic Films and 20% 25%
20% 25%
Similar Works
All Others 20% 25%

Illustration 5.6 PASSIVE ROYALTIES

Consider the following scenarios:
• Film-ipino Inc. received a check for P640,000 from FilmWorld Corp. as royalties for its cinematographic films and similar
works.
• Michael Angan is an author of an accounting book. He earned a 10% royalty for every P500 copy of his book sold. During
the month, his book sold 900 copies.
The final tax to be remitted to BIR is:

Final Withholding Taxes Final Income Taxation page 11

 Tax Base Tax Rate Tax Amount
Cinematographic Films 800,000 160,000 640,000
Books 45,000 4,500 40,500
Total 845,000 164,500 680,500

PRIZES AND WINNINGS OF INDIVIDUALS

Prizes and winnings of individuals obtained from local sources shall be taxed at the following final rates:

Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC

Prizes
P10,000 and below RIT
25% RIT 25%
Above P10,000 20%
Winnings
PCSO Winnings > P10,000 20% 20%
PCSO Winnings ≤ P10,000 Exempt 25% Exempt 25%
All others 20% RIT

Final Withholding Taxes Final Income Taxation page 12

 It should be noted that the P10,000 threshold is not an exemption threshold rather it only determines whether the income is
included in final tax or regular income tax. As such, prizes at most P10,000 is still taxable under regular taxation and those above
P10,000 is fully taxable under final taxation.

Exemption
The following are exempt prizes:
1. Prizes received by a recipient without any effort on his part to join a contest. Examples include prizes
Coverage
from awards like Nobel Prize, Most Outstanding Citizen, etc.
2. Prizes from sports competitions that are sanctioned by their respective national sport organizations
Exempt prizes mentioned above should meet the following requisites:
1. The recipient was selected without any action on his part to enter the contest.
Requisite
2. The recipient is not required to render substantial future services as a condition to receiving the price
or award.

A prize is a reward for a contest or competition. In other words, a prize represents a remuneration for an
Prize
effort reflecting one’s superiority.
A winning is a reward for an event that depends on chance such as winnings from gambling, lottery or
Winning
raffle ticket.

Final Withholding Taxes Final Income Taxation page 13

 Illustration 5.7 PRIZES AND WINNINGS
Lucky Manzañas won in a raffle promo and took home P9,000 cash. Two days after, he played in “Bawal Judgemental”, earning
a prize of P35,000 since he got three wrong answers. Compute the final taxes withheld from him.
The P9,000 cash winnings from the raffle promo was subjected to final tax regardless of the amount. This amount is already
the net receipts. The grossed-up amount of P11,250 is multiplied by 20% to get the final tax of P2,250. As for the prize, the gross
amount of P35,000 is multiplied by 20% since it exceeds P10,000. The final tax on such is P7,000.

INFORMER’S CASH REWARD

A 10% final tax shall be imposed on rewards received from informing on violations of NIRC and discovery and seizure of
smuggled goods which were deemed legitimate and collectible against the violator. It should be noted, however, that the amount
of reward is 10% of the collection from the information or P1,000,000, whichever is lower.

Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC

Violations of National Internal
Revenue Code
10% 25% 10% 25%
Discovery and Seizure of
Smuggled Goods

Final Withholding Taxes Final Income Taxation page 14

 Illustration 5.8 INFORMER’S TAX REWARD
Wiz L. Blue shared two pieces of information with the BIR that allegedly proves two tax evading companies. Company A was
then assessed and was forced to pay P500,000 of deficiency taxes. Company B was also assessed and was liable to deficiency
taxes of P12,000,000.
Wiz will be earning 10% of P500,000 as reward related to Company A’s violation. The P50,000 reward will be subject to 10%
final tax, reducing the cash receipt to P40,000. For the information provided anent to Company B, the 10% of P12,000,000
exceeds the maximum reward of P1,000,000, therefore, the basis of the 10% final tax is P1,000,000.

OTHER ITEMS OF INCOME SUBJECT TO FINAL TAX

The following are other items of passive income specifically subject to final tax.

15% Branch Profit Remittance of Corporations (except PEZA, SBMA, CDA registered enterprise)
4.5% Gross Rentals, lease and charter fees derived by non-resident owner or lessor of foreign vessels
Gross rentals, charters and other fees derived by non-resident lessor of aircraft, machineries and
7.5%
equipment
8% Payments to oil exploration service contractors/sub-contractors
Payments to non-resident individual/foreign corporate cinematographic film owners, lessors or
25%
distributors

Final Withholding Taxes Final Income Taxation page 15

 ACCOUNTING FOR FINAL TAXES
To illustrate the journal entries for the recording of final taxes, let us journalize some of the illustrations given.

Illustration 5.1
Books of Payor Books of Payee
Interest Expense 900,000 Cash in Bank 700,000
Final Tax Withholdings Payables 200,000 Income Tax Expense 200,000
Cash 700,000 Interest Income 900,000
Final Tax Withholdings Payables 200,000
Cash 200,000
Illustration 5.6 (Books)
Books of Payor Books of Payee
Royalty Expense 800,000 Cash 640,000
Final Withholding Taxes Payable 160,000 Income Tax Expense 160,000
Cash 640,000 Royalty Income 800,000
Final Withholding Taxes Payable 160,000
Cash 160,000

Final Withholding Taxes Final Income Taxation page 16

 FILING AND PAYMENT OF FINAL TAXES
Every withholding agent (WA)/payor required to deduct and withhold taxes on income payments subject to Final Withholding
Taxes shall file the following within the specified deadlines:

Deadline
Form Name
Manual Filing eFPS Filing
Monthly Remittance Form of Final Income tenth (10th) day following the 11th-15th day following
0619F Taxes Withheld month in which withholding withholding month depending
was made on the taxpayer’s line of business
Monthly Remittance Form of Tax Withheld on on or before the 10th day following the month when the
0620 the Amount Withdrawn from the Decedent's withholding was made
Deposit Account
Quarterly Remittance Return of Final Taxes last day of the month following Not yet available
1602Q Withheld on Interest Paid on Deposits and the close of the quarter during
Deposit Substitutes/Trusts/Etc. which withholding was made
Quarterly Remittance Return of Final Income last day of the month following the close of the quarter during
1601FQ
Taxes Withheld which withholding was made

Final Withholding Taxes Final Income Taxation page 17

 Quarterly Remittance Return of Tax Withheld not later than the last day of the month following the close of the
1621 on the Amount Withdrawn from Decedent's quarter during which withholding was made
Deposit Account
Certificate of Final Income Tax Withheld on or before January 31 of the year following the year in which
2306
income payment was made
Annual Information Return on Final Income on or before January 31 of the year following the calendar year in
1604F Taxes Withheld which the income payments subject to final withholding taxes were
(with Annual Alphabetical List of Payees) paid or accrued

References:
Banggawan, R. (2019). Income Taxation. Pasay City: Real Excellence Publishing.
Valencia, G. & Roxas, E. (2016). Income Taxation. Baguio City: Valencia Educational Supply.
Reyes, V. (2019). Income Tax Law and Accounting under the TRAIN Law. Manila: GIC Enterprises & Co., Inc.
Ampongan O. (2018). Income Taxation. Mandaluyong City: Millennium Books, Inc.

Final Withholding Taxes Final Income Taxation page 18

 Self-Check!
Basing on your readings, answer the following questions.
1. How is final income taxation different from the other income tax schemes?
2. What is the difference between passive and active income?
3. What is the general final tax rate for NRA-NETBs? For NRFCs?
4. What are the types of passive income subject to final tax? What is the tax rate applicable to each?
5. What is the proforma entry for recording transactions subject to final tax?
6. What are relevant BIR forms for final taxes? What are the deadlines?

Exercise 5.1 TRUE OR FALSE

Determine whether the following statements are true or false.
1. Prizes and winnings received by corporate taxpayers are subject to regular income tax.
2. The interest income received by corporate taxpayers from tax-free covenant bonds are deemed net-of-tax.
3. Final tax is generally applicable to passive income since these are more susceptible to non-reporting.
4. Income subjected to final tax are not reported in the income tax return.
5. Active royalties are mostly subject to 20% final tax.

Final Withholding Taxes Final Income Taxation page 19

 6. The maximum net cash receipts from rewards on informing BIR on tax violations is P900,000. The payee of an income
subject to final tax is also called the withholding agent.
7. The first P10,000 of an prize is exempt from final taxes.
8. There is a separate quarterly remittance return for final taxes collected on income payments of banks.
9. Dividends received by resident aliens from non-resident foreign corporations are subject to 10% final tax.
10. The final tax withheld constitutes full payment.

Exercise 5.2 MULTIPLE CHOICE

Choose the best answer from the choices provided.
1. Who is subject to final tax on royalties earned, whether active of passive?
a. Resident citizen
b. Resident Alien
c. Non-resident citizen
d. Non-resident alien not engaged in trade or business
2. Which is the following recipients is exempt from final tax on dividends?
a. Resident Alien
b. Resident Citizen

Final Withholding Taxes Final Income Taxation page 20

 c. Resident Corporation
d. Resident Foreigner
3. Which of the following is not subject to final tax?
a. Prizes exceeding P10,000
b. Prizes not exceeding P10,000
c. Winnings exceeding P10,000
d. Winnings not exceeding P10,000
4. Which is not subject to 10% final tax?
a. Royalties from a business trademark
b. Royalties from literary works
c. Dividends from a domestic corporation
d. Share in the net income of a business partnership

Exercise 5.4 FINAL TAX RATES

Write the final tax rate applicable for each income. If it is exempt, write EX. If it is subject to other income tax schemes, write NA.
1. Jill, a non-resident alien engaged in trade, received a share in the net income of an exempt partnership
2. June, received a reward on whistleblowing on a tax violation

Final Withholding Taxes Final Income Taxation page 21

 3. A non-resident lessor of aircrafts earns rentals from domestic companies
4. A company engaged in arts primarily obtains income from royalties on its literary works
5. An NRFC received dividends from a domestic corporation which was subject to tax sparing rule
6. Jackie received P10,000 from a raffle promo
7. Jonny, a resident Italian, received P60,000 dividends from an REIT
8. Jimmy, preterminated a seven-year peso deposit four years before its maturity
9. Jessy, received the interest from her investment on Philippine t-bills
10. Justme, an NRFC, earned interest from a loan extended

Problem 5.1 PASSIVE ROYALTIES

Dina Amon, a resident citizen, earned the following royalties from her intellectual works:
Cook Books 45,000
Musical Compositions 80,000
Other Passive Royalties 120,000
How much is the withheld final tax of Dina?

Problem 5.2 PASSIVE ROYALTIES

Jack Amon, a resident alien, received the following royalties during the taxable year:

Final Withholding Taxes Final Income Taxation page 22

 Hairy Cutter Novel Books 450,000
Patents 120,000
Other Passive Royalties 224,000
How much is the final tax of Jack?

Problem 5.3 INTEREST INCOME

Hannah Caiat, a non-resident citizen, was credited with the following interest income from her bank deposits:
Banco de Oro(net of tax) 1,600
Bank of the Philippine Islands (gross of tax) 5,000
Metro Bank (net of tax) 8,000
Citi Bank (gross of tax) 9,6001

How much is the final tax on interest income on bank deposits of Hannah?

Problem 5.4 DIVIDENDS

Mary Ribook, received the following dividends in Philippine pesos, gross of tax.
San Miguel Corporation 25,000
Apple Corporation 50,000
Ayala Land Corporation 30,000
Google Corporation 10,000
How much is the final tax from the said dividends?

Final Withholding Taxes Final Income Taxation page 23

 Problem 5.5 PRIZES AND WINNINGS
Nash E. Mulan wants to experience placing a bet in the PCSO Ultra Lotto and tries to bet on the combination 06-19-23-39-41-
50. Knowing the minimal chance of winning, he did not watch the telecast of the draw. Getting the newspapers on the next
day, it revealed the following winning numbers 41-23-19-51-06-39. The prizes are as follows: 6 digits – P55,000,000, 5 digits –
P300,000, 4 digits – P4,000 and 3 digits – P20.
How much is the final tax of Nash?

Problem 5.6 PRIZES AND WINNINGS

Nash, from the previous problem, was not satisfied of winning once and places again the same combination on the next draw
of 6/58. Winning numbers were 06-56-47-41-50-23.
How much is the final tax of Nash?

Problem 5.7 PRIZES AND WINNINGS

Nash, again from the previous problem, having been obsessed with lottery adapts the same combination as being his lucky
numbers and places a bet on the Mexican Lottery. He won the jackpot prize of P960,000,000 during the draw.
How much is the final tax of Nash?

Problem 5.7 PRIZES AND WINNINGS

Venti Lador, obtained the following winnings (gross of tax) during the taxable year.

Final Withholding Taxes Final Income Taxation page 24

 January 21 60,000
March 16 14,000
September 18 86,000
How much is the total final tax from the winnings?

Problem 5.8 TAX INFORMER’S REWARD

Lala Pit, reported to the BIR, Tim Maray, as having evaded from the payment of tax worth P9,000,000. Due to the information
she provided, BIR was able to collect said amount.
How much is the final tax?

Problem 5.9 TAX INFORMER’S REWARD

Assuming from the previous problem, the tax reported was P20,000,000.
How much is the final tax?

Case Study 5.1 WINNING A PRIZE

Mina Lascia is a loyal customer of Johnnyson Supermarket. The grocery store gives a raffle ticket for every P1,000 purchase of
every customer. Mina earned 50 entries during the promo period. Five raffle tickets are drawn on the draw and the winners
are called to the store within the next two weeks. To determine the prize of the winners, they are given four minutes to gather

Final Withholding Taxes Final Income Taxation page 25

 anything they want from the store and take home everything they can. Because Mina has an asthma, she only got P8,500 worth
of grocery items as her prize.
Is the P8,500 subject to final tax?

Final Withholding Taxes Final Income Taxation page 26