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Income Taxation (reviewer)

Bachelor of Science in Business Administration (Polytechnic University of the

Philippines)

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Chapter 5: Final Income Taxation o Debts instruments w/ maturity of

not more than 5 days – not a
Features of Final Income Taxation deposit subs.
1. Final Tax – for taxpayer and gov’t o Classification of debt instrument
convenience. No. of borrowers
2. Tax withholding at source – impose upon
person making income payment. Issuer 19 or < 20 or >
3. Territorial imposition – applied only to Corp. Priv. Deposit
certain passive income earned in the PH. borrowin subs.
4. Imposed on certain passive income and g
persons not engaged in business in the Gov’t Deposit Deposit
PH. – (NRA-NETB and NRFC) because of including subs. subs.
high risk of non-compliance. BSP
 NRA-NETB and NRFC gen. final  Interest on public
tax rate is 25%. substitute is subject to
 Passive Income – earned w/ Final tax.
very minimal involvement of  Interest on private
taxpayer. borrowing is subject to
o Irregular in timing and regular income tax.
amount. o Timing of withholding of final tax
1) Zero coupon – upon
Passive Income Subject to Final Tax origination.
1. Interest or yield from bank deposits or 2) Interest-bearing – upon
deposit substitutes. payment of interest.
 Local Currency Deposits o Tax rules on interest on debt
From banks instruments
o Short term (<5 yrs.)– 20% on Dep. Sub. Recipient
both indv and corp.
o Long term (>5 yrs.) – exempt Issued by Indv. Corp.
in indv. And RIT1 for corp. banks
From non-bank institutions Short-term 20% 20%
o Short term – RIT2 on both Long-term Exempt RIT
indv. And corp. Issued by
o Long term - – RIT2 on both non-banks
indv. And corp. Short-term 20% 20%
 Savings or time deposits with Long term 20% RIT
cooperatives are not subject to final  Trust funds or investment
tax. management accounts – subject to
 Deposit Substitutes – alternative form same final tax rules on deposits
of obtaining fund from the public. substitutes.
o Relending or purchasing of 1) In order to claim final tax
receivables. (2nd market) exemption.
o Public – 20 or more corporate 1) held at least 5 yrs.
lenders. 2) must qualify as deposit
o The 19 lender rule – not substitute issued by bank.
considered as public borrowing or 3) Hold at least 5 yrs.
deposit substitute. 2) Pre-termination of long-term
o The 19 lender rule does not apply deposits or investment of
to gov’t securities – considered as individuals – pre terminated
deposit substitute irrespective to before 5 years.
the number of lender.

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 Subjected to ff. final taxes 1) Stock div – transfer of

upon pre-termination. surplus.
Holding period Pre-term. tax 2) Receipt of Liquidating div. –
<3 yrs 20% exchange of properties
3 - <4 yrs 12%  Taxability of Stock Dividends
4 - <5 yrs 5% o Subject to tax at the FV,
5 yrs. or more 0% received under the ff.
o Pre termination, transfer or conditions:
1) Subsequent
negotiation of investment cert. –
cancellation and
must still satisfy 5-year
redemption –
requirement.
taxable to the extent
o Foreign Currency deposit w/
it represents
foreign currency depositary
earnings or profit.
banks
 Equivalent to cash
 By residents – 15% FT.
dividends.
Taxpayer Indv. Corp.
2) Leads to substantial
Residents 15% 15%
alteration in
Non- Exempt Exempt
ownership in the
residents
corp. – stock
 No short term or long term dividends are given
classification on foreign depo. lieu of cash div.
 The reduced FT rates are due  Corp declared
to encouraging foreign optional stock or cash
currencies in our bank for div.
int’l trade.  Dividend Tax Rules
o Joint accounts on forex deposits –
Recipient of dividends
exempt for non-resident and 15%
fore resident. Source of div. Indv. Corp.
 Interest Income subject to RIT 1
Domestic corp. 10% FT Exempt2
1) Lending activities
Foreign corp RIT RIT3
2) Investment in corporate bonds
 NRA-ETB is subject to 20% FT.
3) Promissory notes
 Presumptive source of dividend
4) Foreign sources, whether bank or
distribution – from the most recently
non-bank
accumulated profits or surplus.
5) Penalty for legal delay or default.
 Exempt Dividends
1) Intercorporate dividends from
2. Domestic dividends, in general
domestic corporations – exempt
o Distribution made by corp.
from FT to minimize double
o Types of dividends
taxation.
1.Cash dividends – paid in cash
 Exemption is restricted to div.
2.Property dividends – paid in non cash
declaration only.
properties including stoscks or
 Div. from Cooperatives – not subject
securities of another corporation.
to tax.
3.Scrip dividends – paid in notes or
 Inter-corporate div from foreign corp.
evidence of indebtedness of corp.
– subject to RIT.
4.Stock dividends - paid in stocks.
2) Div. from cooperatives – exempt
 Normally exempt from income
from FT
tax.
3) Qualified foreign-source dividends
 Following div. are not income for
– exempt from RIT.
taxation.

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 Liquidating div. – distribution of *Active income – undertaking subject to

corporate net assets. RIT.
3. Dividend income from a Real Estate *not a resident in Ph, or passive income
Investment Trust. from abroad are subject to RIT.
ENTITIES TAXABLE AS CORP SUBJ. TO 10%
FT. 6. Prices exceeding 10,000 (PRIZES)
o applies to dividends or share in the Exempt Prizes
net income. 1) Received w/o any effort to join a
1.Real Estate Investment Trust. contest.
 Publicly listed corp – purpose of 2) From sports competitions that are
income generating real estate. sanctioned by their respective national
 Exempt from FT. sport organization.
1) NRA or NRFC. Requisite of exemption
2) Domestic corp or RFC. 1) Selected w/o any action to his part to
3) Overseas Filipino investors – join a contest.
7 yrs. effectivity. 2) Not required to do substantial future
2.Business Partnership service on the future.
3.Taxable Associations Taxable Prizes
4.Taxable Joint Ventures, joint Recipient
accounts or consortia. Amount of Indv Corp
5.Taxable co-ownership. taxable prizes
Prizes > 10,000 20% FT RT
4. Share in the net income of a business Prizes not RT RT
partnership, taxable associations, joint exceeding
ventures, joint accounts, or co-ownership 10,000
 *10% FT applies at the point of No FT on corporate prizes under NIRC.
determination of income. Hence subject to RIT.
 Share in business partnership net 7. Winnings
income – if expensed are subject  Generally subject to 20% FT. except
to RIT. winnings in PCSO.
 No FT on corporate prizes under
5. Royalties, in general NIRC. Hence subject to RIT.
Tax rate of income received in the PH.  Winning from foreign sources –
Recipient subject to RIT.
Source of Ind’v Corp
passive Tax rules on PCSO winnings are applied on
royalties a per ticket basis.
Books, 10% FT 20% FT Recipient
literary work, Types of Winnings Ind’v Corp
and musical
composition PCSO winnings Exempt Exempt
s <10,000
Other 20% FT 20% FT >10,000 20% FT 20% FT
sources Other winnings, in 20% FT Reg. Tax
*10% FT pertain to printed literature. general
*E-copies or CD’s are subject to 20% FT.
*Cinematographic films of NRA-ETB, NRA-  Effort – not subject to 20% final
NETB and NRFCs are 25% FT. tax.
*Passive income – claim owners subject  Chance – subject to 20% FT.
to 20% FT.  10,000 threshold on corp only
applies on prizes not on winnings.

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8. Informer’s tax reward

 Reward given to person instrumental
in the discovery of violations of the
NIRC or discovery and seizure of
smuggled goods.
 Subject to 10% FT withheld by the
gov’t.
Requisites of Tax Informer’s Reward.
1) Sworn information
2) Lead to discovery of fraud
3) Results in recovery
4) Informer must not be:
a. BIR official or employee
b. Other public official or
employee
c. Relative of officials and
employee (6th degree)
Amount of Cash Reward – whichever is
lower
1) 10% of rev, surcharges or fees
recovered.
2)1,000,000

9. Interest income on tax-free corporate

covenant bonds.

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