What is Final Withholding Tax in the Philippines?

May 17, 2025

Withholding tax is a key part of the Philippine tax system, designed to simplify collection and ensure compliance. It requires payers, or withholding agents, to deduct a portion of income at the source and remit it directly to the government.

Final withholding tax (FWT) is a type of withholding tax deducted at the source on certain types of income. Unlike Creditable withholding tax (includes EWT and withholding tax on compensation), which is credited against annual tax dues, FWT is final. Once remitted to the BIR, the income is excluded from the recipient’s annual return and does not need to be filed or declared again.

The primary purpose of FWT is to streamline tax collection, particularly for passive income and income earned by non-residents. By collecting the tax at the source, the BIR ensures compliance and reduces the administrative burden on both taxpayers and the government.

Types of Income Subject to Final Withholding Tax

FWT applies to specific categories of income, primarily passive income and payments to non-residents. The most common types of income subject to FWT in the Philippines include:

Dividends: Cash or property dividends paid by domestic corporations to individuals or non-resident foreign corporations are subject to FWT, typically at a rate of 10-20%, depending on the recipient’s status.
Interest Income: Interest earned from bank deposits, government securities (like income from bonds), or private loans is taxed at rates ranging from 20% for residents to 25% for non-residents.
Royalties: Payments for the use of intellectual property, such as copyrights or patents, are subject to FWT, often at 20%.
Capital Gains: Gains from the sale of shares of stock not traded in the stock exchange or real property (like residential houses + lot) are taxed at 6-15%, depending on the asset.
Prizes and Winnings: Certain prizes and winnings, such as those from lotteries or contests, are subject to a 20% FWT.

The rates vary based on the taxpayer’s residency status and applicable tax treaties between the Philippines and other countries, which may reduce the FWT rate for non-residents.

FWT covers various income types with different rates and exemptions.

How to Compute for the Final Withholding Tax?

To calculate the FWT, multiply the taxable income by the applicable rate, which varies based on the income type and the recipient’s status. Here’s a quick example.

An individual earns $10,000 in taxable interest income from their bank savings account. The FWT rate for this income type is 20%.

₱ 10,000 × 0.20 = ₱ 2,000 FWT

Who is Affected by Final Withholding Tax?

FWT applies to both resident and non-resident individuals and entities, but the rates and rules differ:

Resident Citizens and Corporations: Filipino citizens and domestic corporations earning passive income, such as dividends or interest, are subject to FWT. For example, a Filipino receiving dividends from a local company might face a 10% FWT.
Non-Residents: Non-resident aliens or foreign corporations earning income from Philippine sources, such as royalties or dividends, are also subject to FWT. The rates are often higher (e.g., 25% for non-resident aliens engaged in trade or business in the Philippines).
Withholding Agents: Businesses, banks, or individuals paying the income are responsible for withholding the tax and remitting it to the BIR using forms like BIR Form 1604-F. Failure to withhold or remit correctly can result in penalties.

How Do You Pay Final Withholding Tax?

The process of FWT is straightforward. It is often done by the withholding agent (aka payer) who is responsible for computing and remitting the tax:

Income Payment: When a payer (e.g., a bank or corporation) disburses income subject to FWT, they calculate the applicable tax based on BIR regulations.
Tax Withholding: The payer deducts the FWT from the gross income before releasing the net amount to the recipient.
Remittance to BIR: The withheld tax is remitted to the BIR by the withholding agent, typically within 10 days after the end of the month in which the income was paid.
No Further Reporting: The recipient does not need to declare this income in their annual tax return.

For example, if a resident individual earns ₱10,000 in interest from a bank deposit, the bank withholds 20% (₱2,000) as FWT. The individual receives ₱8,000, and the bank remits ₱2,000 to the BIR. The individual has no further tax obligations for this income.

Why is Understanding Final Withholding Tax Important?

Understanding Final Withholding Tax (FWT) is essential for both payers and recipients. Payers, such as banks and businesses, must grasp FWT rules to comply with tax laws and avoid penalties.

For recipients, knowing FWT prevents surprises from reduced income and assures you that the tax has been fully paid. No need to declare FWT in annual tax returns.

Summary

Final Withholding Tax (FWT) simplifies tax collection on passive income and non-resident earnings by deducting taxes at the source, ensuring BIR compliance and efficient revenue collection. Understanding FWT is crucial for payers and recipients to stay compliant with tax laws.

For corporations paying dividends, real estate firms, insurance companies, and other businesses regularly handling FWT, we recommend enlisting a tax consultation service to ensure compliance with BIR regulations.

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