According to RR 2-98, Section 2.57 Withholding of Tax at Source (a) Final Withholding Tax – Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income.
The finality of the withholding tax is limited only to the payee’s income tax liability on the particular income. It does not extend to the payee’s other tax liability on said income, such as when the said income is further subject to a percentage tax. For example, if a bank receives income subject to final withholding tax, the same shall be subject to a percentage tax.
Interest income coming from savings deposit are subjected to Final Tax, wherein the withholding agents (banks) are required to remit the Final Tax deducted from the passive income earned by the depositor.
How will interest income subjected to Final Tax be reported in Financial Reports?
As we all know, Final Tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income ( rr 2-98 sec 2.57(a) ), and therefore it should not be included in the computation of the income tax payable of the company. Thus, it should be a deduction from taxable income as a reconciling item.
Illustration:
Sales and Services P 100
Less: Cost of Sales 50
Gross Income 50
Operating Expenses ( 10 )
Other Income
Interest Income (net of FT) 5
Other Interest Income 5 10
Income before Income Tax 30
Add(Deduct) reconciling items:
Interest income subject to FT ( 5 )
Taxable Income P 25
