The segment introduces Final Withholding Tax, particularly in light of recent discussions about taxing interest income from long-term deposits. It defines passive income as earnings requiring no active effort, contrasting it with active income like compensation or business profits. Passive income subject to FWT must be sourced within the Philippines and is not subject to regular income tax to avoid double taxation.

The video outlines five main categories of passive income subject to FWT: interest income, royalty income, prizes, winnings, and dividends. Income not falling into these specific categories as enumerated in the NIRC (National Internal Revenue Code) is generally subject to regular income tax using the graduated tax rate table or an optional 8% flat rate for qualified individual taxpayers.

Interest income from any currency bank deposit, deposit substitutes, or trust funds with a maturity of less than 3 years is generally subject to a 20% FWT for resident citizens, non-resident citizens, resident aliens, and non-resident aliens engaged in trade or business. For non-resident aliens not engaged in trade or business, the rate is 25%. It's clarified that this tax applies to the interest earned, not the principal, and has been a long-standing regulation.

Interest income from Foreign Currency Deposit System (FCDS) accounts for resident citizens and resident aliens is subject to a 15% FWT. Non-resident citizens and non-resident aliens (whether engaged in trade or business or not) are exempt from FWT on FCDS income. Long-term deposits or investments with a maturity of 5 years or more were previously exempt for various resident categories before July 1, 2025. However, this exemption is removed for deposits made from July 1, 2025, onwards due to the Capital Market Efficiency Promotion Act (CMEPA), making them subject to 20% FWT. The video expresses disappointment over this change, noting its impact on middle-income earners.

If long-term deposits are pre-terminated, the FWT rates vary: 5% for termination between 4 to less than 5 years, 12% for 3 to less than 4 years, and 20% for less than 3 years. Royalty income in general is subject to 20% FWT for resident taxpayers and 25% for non-resident aliens not engaged in trade or business. However, royalties from books, literary works, and musical compositions receive a lower 10% FWT for resident taxpayers, incentivizing intellectual and artistic creation.

Prizes exceeding Php 10,000 are subject to 20% FWT for residents and 25% for non-resident aliens not engaged in business. Prizes Php 10,000 or less are exempt from FWT but subject to regular income tax. Winnings in general, regardless of amount, are subject to 20% FWT (25% for non-resident aliens not engaged in business), except for PCSO/Lotto winnings. PCSO/Lotto winnings of Php 10,000 or less are FWT-exempt but subject to regular income tax, while those over Php 10,000 are subject to 20% FWT (25% for non-resident aliens not engaged in business).

Dividends from domestic corporations are subject to 10% FWT for resident citizens, non-resident citizens, and resident aliens, 20% for non-resident aliens engaged in trade or business, and 25% for non-resident aliens not engaged in trade or business. Dividends from resident foreign corporations are exempt from FWT but subject to regular income tax. Informer's rewards (for discovering tax code violations or smuggled goods) are subject to a 10% FWT, capped at 10% of the revenue collected or recovered property, whichever is lower.

Individuals receiving income subject to FWT are not required to file a separate BIR return for it. The withholding tax agent (e.g., banks) is responsible for reporting and remitting the FWT to the BIR. The income received is net of FWT and should not be included in the gross income for computing regular income tax, as FWT is a final tax.