Certain types of income, called passive income, are subject to a final tax withheld at source, meaning the tax is deducted by the payor and remitted to the BIR, and the income is no longer included in the recipient's taxable income or reported again in the annual return. Common examples subject to final tax include: interest on bank deposits and deposit substitutes; royalties; dividends received by an individual from a domestic corporation; prizes and winnings above certain thresholds; and capital gains from the sale of shares of stock not traded through the stock exchange, and from the sale of real property classified as a capital asset (the 6% capital gains tax). The rates vary by type of income and by the status of the recipient. The 'final' nature is the key feature: because the tax has been fully paid at source, the recipient does not add the income to their other taxable income; this simplifies compliance and ensures collection. This contrasts with income subject to the regular graduated rates, which is aggregated and reported in the annual income tax return. Knowing whether income is subject to a final tax or the regular tax determines how it is reported and taxed.
What Passive Income Is
Certain income (passive income) is subject to a final tax withheld at source — the payor deducts and remits it, and the income is not reported again in the annual return.
Common Examples
- Interest on bank deposits;
- Royalties and dividends from a domestic corporation (for individuals);
- Prizes and winnings above thresholds; and
- Capital gains on unlisted shares and on the sale of capital-asset real property (6% CGT).
Why 'Final'
Because the tax is fully paid at source, the recipient does not aggregate the income with their other taxable income — unlike income under the regular graduated rates, which is reported in the annual return.
Practical Takeaways
- Passive income (interest, dividends, royalties, prizes, certain capital gains) is taxed by a final tax at source;
- It is not reported again in the annual return;
- Distinguish it from income under the regular graduated rates.
Frequently Asked Questions
What is a final tax? A tax withheld at source by the payor and remitted to the BIR, after which the income is no longer included in the recipient's taxable income or reported again in the annual return.
What income is subject to final tax? Passive income such as interest on bank deposits, royalties, dividends from a domestic corporation for individuals, prizes and winnings above thresholds, and capital gains on unlisted shares and capital-asset real property.
Do I report final-taxed income in my annual return? No. Because the tax has been fully paid at source, the income subject to a final tax is not added to your other taxable income or reported again in the annual return.
How is this different from regular income tax? Income subject to the regular graduated rates is aggregated and reported in the annual income tax return, while final-taxed passive income is taxed at source and excluded from that aggregation.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
If you have questions about your rights or options under Philippine law, our firm is available to assist. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.