BM1804
Final Withholding Tax on Passive Income
Definition of Final Taxes, Withholding, and Passive Income
Final Withholding Tax (FWT) is a 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 (Bureau of Internal Revenue, Tax
Information, 2018).
The FWT is the full and final payment of income tax due from the recipient of the income. The obligation to
withhold the tax is imposed by law on the payor of the goods or service. Only payments specified in the
Consolidated Withholding Tax Regulations are subject to FWT.
Passive Income is subject to a separate and final tax at fixed rates. This income is not included in the
computation of taxable income from compensation or business/professional income, the tax due on which is
computed in accordance with the graduated income tax schedule for individuals in Section 3 of the Revenue
Regulations No. 8-2018 (Bureau of Internal Revenue, 2018 Revenue Regulations, 2018).
Passive Income Subject to Final Income Tax
The newly approved Tax Reform for Acceleration and Inclusion (TRAIN) law also adjusts the tax rates on certain
passive income, in addition to revised personal income tax rates.
The Revenue Regulations No. 8-2018 issued on February 20, 2018 implements the amended provisions on
Income Tax pursuant to Republic Act No. 10963 (Tax Reform for Acceleration and Inclusion or TRAIN Law),
with the following passive incomes subject to final income tax rates:
Interest Income - an earning derived from depositing or lending of money, goods, or credits. Unless exempted
by law, interest income received by the taxpayer, whether usurious or not, is subject to income tax (Valencia &
Roxas, 2016).
For individuals, except non-resident aliens not engaged in trade or business in the Philippines, interest income
from a long-term deposit or investment shall be exempt from income tax, provided that the following conditions
must be met:
1. The deposit or investment must be evidenced by the certificates conforming to the Banko Sentral ng
Pilipinas (BSP) prescribed form; and
2. The same must have a maturity period of not less than five (5) years and in the denomination of P10,000
or other denominations as may be approved by BSP issued by banks (not by non-bank financial
intermediaries or finance companies) (Valencia & Roxas, 2016).
However, should the holder of the certificate pre-terminate the deposit or investment before the fifth year, a tax
shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof.
Interest income may be classified into three (3) categories: (1) exempt from income tax, (2) subject to final
withholding tax, and (3) subject to normal tax.
Interest earned is exempted from income tax if received from (Valencia & Roxas, 2016):
1. By members from a duly-registered cooperative;
2. BSP prescribed form of investments maturing more than five (5) years;
3. Expanded foreign currency deposit system by nonresident citizens/aliens; and
4. A tenant who paid to a landowner on the price of land under a tenant-purchaser agreement as part of CARP.
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Illustration 1: Mr. Mek invested P1,000,000 in a 12% long-term deposit certificate (BSP prescribed form) with a
five-year maturity. Is the interest income from investment subject to income tax?
Answer: It depends. The interest income from such investment is subject to income tax (final tax) if preterminated before the five-year maturity. However, the interest income therefrom shall be exempted from tax
withdrawn upon maturity (Valencia & Roxas, 2016).
Illustration 2: Mr. Mek put his retirement pay on the following investments:
Investments
BSP deposit substitutes (more than 5 years)
Baguio-Benguet Cooperative
Time deposit – China Bank (not BSP prescribed form)
Total investments
Interest per year
12%
24%
7%
Amounts
P200,000
200,000
100,000
P500,000
The interest income not subject to income tax during the year would be:
Interest income – BSP deposit substitutes (P200,000 x 12%)
Interest income – Baguio-Benguet Cooperative (P200,000 x 24%)
Total interest income not subject to tax
P24,000
48,000
P72,000
Accordingly, the only interest income subject to income tax (final tax of 20%) is the income earned from time
deposit. The net interest-earning of Mr. Mek would be:
Total interest income not subject to tax
Add: Interest income – China Bank (P100,000 x 7%)
Less: Final tax on interest (P7,000 x 20%)
Total net interest earnings
P72,000
P7,000
1,400
5,600
P77,600
Illustration 3: Mr. Mek Remus is an OFW in Dubai. He has an expanded foreign currency joint account deposit
with his wife, Mrs. Mari Remus.
Assuming that the EFCD earned $1,000 as interest income, the final withholding tax on interest would be:
Final withholding tax on interest income – EFCD = $1,000 × 15% × 50% = $𝟕5
Illustration 4: On April 30, 200x, Mr. Mek placed his retirement pay amounting to P1,000,000 in the Philippine
National Bank (PNB) as a time deposit. The interest per annum is 18%.
The determination of Mr. Mek’s 200x interest income would be:
Gross interest income (P1,000,000 x 18% x 8/12)
Less: Withholding tax on interest income (20%)
Interest income, net of final withholding tax
P120,000
24,000
P96,000
Royalty Income - a payment or portion of proceeds paid to the owner of a right, such as an oil right or a patent
for the use of it, or a portion of the proceeds from the work of an author or composer (Valencia & Roxas, 2016).
Royalty income may be classified as follows:
1. In general, royalty income includes those derived from natural resources or products such as coal, gas,
oil, copper, silver, gold, and other similar products. These kinds of royalty income are subject to 20%.
2. Royalties on books and other literary works and musical compositions are subject to 10% final tax.
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BM1804
Illustration: Mr. Merk Remus received the following royalties:
On sale of Angel’s Hamburger (franchise)
On sale of books authored by Remus (copyright)
Total
P200,000
300,000
P500,000
The total tax due on royalties would be:
Royalty tax on sale of Angel’s Hamburger (P200,000 x 20%)
On sale of books authored by Remus (P300,000 x 10%)
Total
P40,000
30,000
P70,000
Dividend Income - a form of earnings derived from the distribution made by a corporation out of its earnings or
profits and payable to its stockholders, whether in money or in other property (Valencia & Roxas, 2016).
Such earnings may be exempt from income tax, or subject to either final tax or on the normal year-end tax of
individuals or corporations.
Forms and valuations of dividend income:
➢ Cash Dividend - the most common form of dividend. It is valued and taxable to the extent of the amount of
money received by the stockholder (Valencia & Roxas, 2016).
Illustration: Mr. Mek received P60,000 cash dividend from Manna Corporation, a domestic corporation. The
P60,000 received by Mr. Mek is subject to a 10% final tax.
➢
Property Dividend - the dividend payable in property of an issuing corporation. It is usually valued and
taxable to the extent of the fair market value of the property received at the time of declaration. Examples
of property dividends are: (a) merchandise inventory and supplies, (b) shares of stock of another
corporation, or (c) treasury stock of issuing corporation if acquired at cost different from its par value.
Illustration: Mr. Remus invested in the common stock of Anscor Corporation for 1,000 shares amounting to
P50,000. After a year of investment, he received 100 common shares of Cebu Pacific with a unit cost of
P10 per share.
The fair market value of Cebu Pacific at the time of declaration was P8 per share and the fair market value
of Anscor’s share at the time of distribution is P55 per share. How much is the property dividend income
received by Mr. Remus?
The property dividend income of Mr. Gallardo would be:
Fair market value of Cebu Pacific per share
Number of Cebu Pacific shares received
Dividend income of Mr. Remus
➢
P
8
100
P 800
Stock Dividend
As a rule, pure stock dividends are not subject to tax because they simply involve a transfer of the retained
earnings to the paid-in capital account, except when the following circumstances exist (Valencia & Roxas,
2016):
a. There is an option that some stockholders could take cash or property dividends instead of stock
dividends;
b. Some stockholders exercised the option to take cash or property dividends; and
c. The exercise of option resulted in a change of the stockholders’ proportionate share in the outstanding
shares of the corporation.
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BM1804
Illustration:
➢ Taxable Stock Dividend - With change in the proportionate share of the stockholders
Assume that Remus Co. with common stock outstanding declared a 20% stock dividend to its
stockholders with an option to choose property dividend instead of stock.
Stockholder X opted to choose property dividend with a fair market value of P15,000 and other
stockholders choose the common stock dividend. The fair market value of the common stock upon
distribution was P500 per share.
Stockholders
X
Others
Before Dividend
Shares
Percent
200
20%
800
80%
100%
Stock
Dividends
Number of
Shares
200
960
160
After Dividend
Percent
17.24%
82.76%
100.00%
The stock dividends mentioned above shall be subject to tax since it resulted in the change
proportionate share of the stockholders. The determination of the dividend income of stockholder
X and other stockholders would be:
Dividend income of stockholder X is P15,000, the fair market value of the property received.
Dividend income of other stockholders:
Fair market value of common stock per share
Multiply by number of stock dividends (800 x 20%)
Dividend Income
➢
P
500
160
P 80,000
Not Taxable Stock Dividend - No change in the proportionate share of the stockholders.
Based on the preceding illustration, if all of the stockholders opted to receive stock dividends, then it
will not result in a change in the proportionate interest of the shareholders in the net assets of the
corporation.
Stockholders
X
Others
Before Dividend
Shares
Percent
200
20%
800
80%
1,000
100%
Stock
Dividends
40
160
Number of
Shares
240
960
1,200
After Dividend
Percent
20.00%
80.00%
100.00%
The dividend exercise is pure stock, and, therefore, not taxable.
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BM1804
FINAL
TAX
PASSIVE INCOME
Interests from any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements
20%
Interest income received by an individual taxpayer (except a non-resident individual) from a
depository bank under the expanded foreign currency deposit system
15%
Proceeds of pre-terminated long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form as prescribed by the BSP - the final tax shall
be based on the remaining maturity of the investment:
• Four (4) years but less than five (5) years
• Three (3) years but less than four (4) years
• Less than three (3) years
Royalties (except royalties on books and other literary works and musical compositions)
Royalties on books and other literary works and musical compositions
Prizes (except prizes amounting to P10,000 or less)
Winnings (except Philippine Charity Sweepstakes and Lotto winnings amounting to P10,000 or
less)
Cash and Property Dividends
Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange
Capital Gains from Sale of Real Property located in the Philippines
5%
12%
20%
20%
10%
20%
20%
10%
15%
6%
Table 1. Summary of Passive Income Subject to Final Income Tax
Source: BIR Revenue Regulations 8-2018, 2018, pp. 13-14
References
Bureau of Internal Revenue. (2018). 2018 revenue regulations. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations/2018-revenueregulations.html
Bureau of Internal Revenue. (2018). Tax information. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/tax-information.html
Valencia, E. G. & Roxas, G. F. (2016). Income taxation. Baguio City: Valencia Educational Supply.
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