Chapter 5 Final Income Taxation
FEATURES OF FINAL INCOME TAXATION (FITT)
1. Final tax
2. Tax withholding at source
3. Territorial imposition
4. Imposed on certain passive income and persons not engaged in business in the
Philippines
Final Withholding System (FWT)
- Imposes upon the person making income payments the responsibility to withhold tax
- Tax will be deducted immediately to the income
- Taxpayer receives the income of net tax
- There would be no need for him to file an income tax to report the same
Final Withholding System
- Inherently territorial
- Applies only to certain passive income earned from sources within the Philippines
Taxation is territorial
- We can’t impose tax obligation against non-resident subjects of foreign sovereignty
- All items of income earned from sources abroad (passive/active) are subject to tax under
Regular Income Tax
Rationale of Final Income Taxation
- FWT is built upon taxpayer and gov’t convenience
- For the gov’t, the FWT system is the most convenient and effective system in collecting
taxes on income where there is high risk of non-compliance or tax evasion
Passive Income
- Items that are earned with very minimal involvement from the taxpayer and are
generally irregular in timing and amount
- Not usually specifically monitored by taxpayers
- FW at source is the most favored scheme in taxing items of passive income
Non-resident persons not engaged in business in the Philippines
- NRP-NETBs, NRA-NETBs, NFRCs have high risk of non-compliance
- These taxpayers do not have offices or fixed places of business in the Philippines
making compliance very unlikely due to their absence and distance in the Philippines
- The law subjects them to final income tax wherein Philippine residents paying them
income (passive/active) are obligated to withhold the following final tax:
Non-resident person not engaged in trade or business General final tax
rate
NRA-NETBs 25%
NRFC 30%
PASSIVE INCOME SUBJECT TO FINAL TAX
1. Interest or yield from bank deposits or deposit substitutes
2. Domestic dividends, in general
3. Dividend income from a Real Estate Investment Trust
4. Share in the net income of a business partnership, taxable associations, joint ventures,
joint accounts, or co-ownership
5. Royalties, in general
6. Prizes exceeding P10,000
7. Winnings
8. Informer’s tax reward
9. Interest income on tax-free corporate covenant bonds
Interest Income or Yield
- Interest income or yield from local currency bank deposits or deposit substitutes are
subject to final tax as follows:
Recipient
Source of interest income Individuals Corporations
Short term deposits 20% 20%
Long-term deposits/ investment certificates Exempt* 20%
*Exemption does not include NRA-NETB
Short term deposits – those made for a period of less than five years
Long-term deposits – not less than five years
Tax on pre-termination of long-term deposits of individuals
- If the deposits or investment placement of individual taxpayers is pre-terminated before
5 years, any previously untaxed or exempted interest income will be subjected to the ff.
final taxes upon pre-termination:
Holding period Final tax
Less than 3 years 20%
3 years to less than 4 years 12%
4 years to less than 5 years 5%
5 years or more 0%
Savings or time deposits with cooperatives are not subject to final tax
- Final tax is limited to banks and shall not be applied with time and savings account
deposits maintained by members with cooperatives and by primary cooperatives with
their federations
Other applications of the final tax on interest
1. Deposits substitutes
2. Government securities
3. Money market placements
4. Trust funds
5. Other investments evidenced by certificates prescribed by the Bangko Sentral ng
Pilipinas
Foreign currency deposit with foreign currency depositary banks
- Interest income from foreign currency deposits under foreign currency deposit system or
expanded foreign currency deposit system by residents is subject to a final tax of 15%
- The old law imposed a rate of 7.5% until 2017
Taxpayer Individuals Corporations
Residents 15% 15%
Non-residents Exempt Exempt
*NRA-NETBs and NRFCs are also exempt
* There is no long-term or short-term classification of foreign currency deposits
Joint accounts on forex deposits
- If the bank account is jointly in the name of non-resident and a resident taxpayer, 50% of
the interest shall be exempt while the other 50% shall be subject to the 15% final tax
- 50% of the deposited savings are exempt, while the remaining amount of 50% is subject
to 15% final tax
INTEREST INCOME SUBJECT TO REGULAR TAX
1. Lending activities, whether or not in the course of business
2. Investment in bonds
3. Promissory notes
4. Foreign sources, whether bank or non-bank
5. Penalty for legal delay or default
Dividends
- Any distribution made by a corporation to its shareholders out of its earnings or profits
and payable to its shareholders, whether in money or property
Types of dividends:
1. Cash dividends – paid in cash
2. Property dividends – paid in non-cash properties
3. Scrip dividends – paid in notes
4. Stock dividends – paid in stocks
5. Liquidating dividends – distribution of corporate net asset
Stock dividend vs. Stock split
Stock dividend Stock split
- Capitalization of earnings - Results in reduction in par value of
stock and an increase in the number
of shares of shareholders
- May be taxable under certain - Will never be subject to income tax
conditions
Dividend Tax Rules
Recipient of dividends
Source of dividends Individuals Corporations
Domestic corporation 10% final tax Exempt
Foreign corporation Regular tax Regular tax
Historical dividend tax rates
- Imposable final tax rates vary depending on the source of the dividends declared:
Source Final tax
Earnings before January 1, 1998 Exempt
Earnings from 1998 6%
Earnings from 1999 8%
Earnings from 2000 and thereafter 10%
Exempt Dividends
1. Inter-corporate dividends
2. Dividends from cooperatives
Inter-corporate dividends
- Received by a domestics corporation and resident foreign corporation from a domestic
corporation from a domestic corporation are exempted under NIRC to minimize double
taxation
- When the dividend finally falls to an individual shareholder, the 10% final tax applies
- Exemption extends to dividends received by business partnerships from domestics
corporation
o Exemption doesn’t extend to dividends received by GPP, exempt joint ventures
and exempt joint co-ownership
- Inter-corporate dividend doesn’t apply to the share of a corporation from the net income
of a business partnership due to absence of express legal exemption. Exemption is
restricted to dividend declaration only
Dividend from cooperatives
- Under RA 9520, distribution of dividends by an exempt cooperative shall not be subject
to tax
ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL TAX
1. Real Estate Investment Trusts
2. Business partnerships
3. Taxable associations
4. Taxable joint ventures, joint accounts or consortia
5. Taxable co-ownerships
Royalties
- Passive royalty income received from sources within the Philippines is subject to the ff.
final tax rates:
Recipient
Source of passive royalties Individuals Corporations
Books, literary works, and musical compositions 10% final tax 20% final tax
(printed or hard copies)
Other sources (e-copies) 20% final tax 20% final tax
Passive vs. Active royalties
Passive royalties Active royalties
Royalties of a passive nature are subject to Royalties accrues from an undertaking where
20% final tax the taxpayer has active involvement, it is an
active income subject to RIT
Prizes
- Prizes may be exempt from income tax or subject to either final tax or regular income tax
Exempt prizes
1. Prizes received by a recipient without any effort on his part to join a contest
2. Prizes from sports competitions that are sanctioned by their respective Nat’l sport org.
Requisite of exemption
1. Recipient was selected without any action on his part to enter the contest
2. Recipient is not required to render substantial future services as a condition to receiving
he price or reward
Taxable prizes
- For individual taxpayers, taxable prizes are subject to either final tax or regular tax
depending on the amount of the prize
- There is no final tax imposition on corporate prizes under the NIRC, the same must be
subject to RIT
Recipient
Amount of taxable price Individuals Corporations
Prizes exceeding P10,000 20% final tax Regular tax
Prizes not exceeding P10,000 Regular tax Regular tax
*Final taxation does not apply to foreign passive income; hence prizes from foreign sources are
subject to RIT
Winnings
- Winnings received from sources within the Philippines are subject to 20% final tax,
except PCSO or lotto winnings amounting to P10,000 or less
- Winnings that are not subjected to final tax by the payor should be reported as part of
the RIT
- Winnings from foreign sources are also subject to RIT
Recipient
Types of winnings Individuals Corporations
PCSO/lotto winnings not exceeding P10,000 Exempt Exempt
PCSO/lotto winnings exceeding P10,000 20% final tax 20% final tax
Other winnings, in general 20% final tax Regular tax
*PCSO/lotto winnings of NRA-NETB and NRFC, in any amount, are respectively subject to 25%
and 30% final tax
*Tax rules on PCSO or lotto winnings shall be applied on a per ticket basis
Tax Informer’s Reward
- Cash reward given to any person instrumental in the discovery of violations of the NURC
or discovery of smuggled goods.
- It is subjected to 10% final tax
Requisites of Tax Informer’s Reward:
1. Definite sworn information which is not yet in the possession of the BIR
2. The information furnished lead to the discovery of fraud upon internal revenue laws or
provisions thereof
3. Enforcement results in recovery of revenues, surcharges, and fees and/or conviction of
the guilty party or imposition of any fine or penalty
4. The informer must not be a :
a. BIR official or employee
b. Other public official or employee
c. Relative within the 6th degree of consanguity of those officials or employee in a.
and b.
Amount of Cash Reward
- Whichever is the lower of the ff. per case:
1. 10% of revenues, surcharges, or fees recovered and or fine or penalty imposed and
collected or
2. P1,000,000 – cash reward limit
- Amount of cash reward is subject to 10% fina withholding tax which shall be withheld by
the gov’t.
Example: Kunwari yung equivalent ng 10% sa na-recovered mo is mas mataas kesa sa 1M (i.e.
1.2M yung equivalent ng 10% sa na-recovered mo) ang makukuha mong reward is 1M kasi yun
yung mababa.
Kung ang equivalent naman ng 10% na na-recovered mo is mas mababa sa 1M (i.e. 900K yung
equivalent ng 10% sa na-recovered mo) ang makukuha mong reward is yung 900K kasi yun
yung mababa
Tax-free Corporate Covenant Bonds
- Interest income of individual taxpayer of the Phil on obligations of domestic or RFC with
tax-free or tax reduction where the obligor shoulders in whole or in part any tax on the
interest shall be subject to a 30% final withholding tax of 30%
Bond Investor
Individuals Corporations
Tax on interest income on tax-free corporate 30% final tax Regular Income Tax
covenant bonds
EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSONS NOT
ENGAGED IN TRADE OR BUSINESS (NRA-NETB) IN THE PHILIPPINES
NRA-NETB NRFC
General Final Tax Rate 25% 30%
Exceptions:
1. Capital gain on sale of domestic stocks directly to 15% Capital 15% Capital
buyer gains tax gains tax
2. Rentals on cinematographic films and similar works 25% of rentals 25% of rentals
3. Rental of vessels 25% of rentals 4.5% of rentals
4. Rentals of aircrafts, machineries, and other 25% of rentals 7.5% of rentals
equipment
5. Interest income under the foreign currency deposit Exempt Exempt
system
6. Interest on foreign loans N/A 20%
7. Dividend income 25% 15% if tax sparing
rule is applicable
8. Tax on corporate bonds 30% 30%
Capital gains tax
- NRA-ETBs and NRFCs do not file income tax returns
- Exceptionally, they are required to file income tax returns to report their gain from
dealing in domestic stocks directly to buyers
The Tax Sparing Rule
- NRFCs shall be subject to 15% final tax on dividend income instead of 30% if the
country of domicile of the NRFC credits against the tax due of such NRFC taxes
presumed to have been paid by such NRFC from the Philippines equivalent to 15% of
the dividends
