Tax withheld at source that constitutes full and final payment of the tax due. The payee does not include these payments in their gross income for income tax purposes.
Final Withholding Tax is the mechanism used for passive income types where the withholding is the complete and final satisfaction of the tax obligation. Unlike creditable withholding tax — where the withheld amount is a prepayment credited against an annual return — FWT means no further tax is due on that income and it is excluded from the payee's gross taxable income in their ITR.
Common income types subject to FWT in the Philippines include: cash dividends from domestic corporations (10%), interest income from bank deposits (20%), royalties (10% or 20% depending on source), prizes exceeding ₱10,000 (20%), and income payments to non-resident aliens and foreign corporations (various rates under treaties).
In practice: BPI pays ₱20,000 in interest on a time deposit held by Señora Cita's Karinderya. BPI withholds 20% FWT (₱4,000) and credits ₱16,000 net to the account. The ₱20,000 interest is NOT included in the karinderya's income tax return — the ₱4,000 FWT is the full tax obligation. No 2307 is issued (that's for creditable tax); instead, the bank files its own FWT returns.
Why it matters: Understanding which income types are subject to FWT versus CWT prevents you from incorrectly including FWT income in your ITR (double-taxing yourself) or missing the distinction when receiving advice from accountants. For corporate treasurers managing investments, knowing FWT rates helps accurately model after-tax yields on placements.
Foreign individuals and corporations receiving income from the Philippines are almost always subject to FWT — at rates that may be reduced by applicable tax treaties. Always verify treaty rates with a tax professional before applying them.