Chapter 5
Final Income Taxation
Reviewer
Features of Final Income
Taxation
1. Final tax
2. Tax withholding at source
3. Territorial imposition
The Final withholding system
-imposes upon the person making
income payments the responsibility
to withhold the tax
-is inherently territorial
-applies only to certain passive
income earned from sources within
the Philippines
Rationale of Final Income
Taxation
-is built upon taxpayer and
government convenience
-it relieves tha taxpayer of the
obligation to file income tax return
-for the govt, it is the most
convenient and effective system in
collecting taxes on income where
there is high risk of non-compliance
or tax evasion
-under NIRC, it is imposed on certain
passive income and to non-resident
persons not engaged in business in
the Philippines
Passive income
-earned with very minimal
involvement from the taxpayer and
are generally irregular in timing and
amount
-final withholding at source became
the most favored scheme in taxing
items of passive income because
their existence can be difficult to
predict and their actual amount may
be difficult to determine
Non-resident persons not
engaged in business in the
Philippines
-such as NRA-NEBT and NRFC have
high risk of non-compliance thus,
the law subjects them to final
income tax; withhold the ff final tax
from their gross income, passive or
active
NRA-NETB
NRFC
General final
tax rate
25%
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 Real Estate
Investment Trust
4. Share in net income of a business
partnership, taxable associations,
joint ventures, joint accounts or coownership
5. Royalties, in general
6. Prizes exceeding P10,000
7. Winnings
8. Informers tex reward
9. Interest income on tax-free
coporate covenant bonds
Final tax on individuals and
corporations
Interest income or yield
Recipient
Individu
Corporatio
Source of interest
als
ns
income
Short term deposits
20% 20%
Exem 20%
Long-term deposits/
pt
investment
certificates
Short term deposits - less than 5
years
Long-term deposits - not less than 5
years
Tax on pre-termination of longterm deposits of individuals
-if the deposit of individual taxpayer
is pre-terminated before 5 years,
any previously untaxed or exempted
interest income will be subjected to
the ff final taxes upon pretermination:
Holding period
Final tax
Below 3 years
20%
3 years to > 4
12%
years
4 years to > 5
5%
years
5 years or more
0%
Savings or time deposits with
cooperatives are not subject to
final tax
-the fianl tax is limited to banks and
shall not be applied with savings and
account deposits maintained by
members with cooperatives
Other applications of the final
tax on interest
1. Deposit substitute
2. Government securities
3. Money market placements
4. Trusts funds
5. Other investment evidenced by
certificates prescribed by the BSP
Deposit substitute
-alternative form of obtaining funds
from at least 20 persons at any one
time other than deposits though
debt instruments
Foreign currency deposit with
foreign currency depositary
banks
-the interst income from foreign
currency deposits under the foreign
currency deposit system will be
subject to:
Taxpayer
Individuals
Residents
Nonresidents
7.5%
Exempt
Corporatio
ns
7.5%
Exempt
Joint accounts on forex deposits
-if the bank account is jointly in the
name of the non-resident and a
resident taxpayer, 50% of the
interest shall be exempt while the
other 50% shall be subject to 7.5%
final tax
Interest income subject to
regular tax
1. Lending activities, whether or not
in the course of business
2. Investments 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, whether on
money or in othe property
Types of Dividends:
1. Cash dividends - paid in cash
2. Property dividends - non-cash
properties including stocks or
securities of another corp
3. Scrip dividends - paid in notes or
evidence of indebtness of the
corporation
4. Stock dividends - paid in the
stocks of the corporation
5. Liquidating dividends distribution of corporate net asset
Dividends are income subject to tax.
However, the following are not
income for taxation purposes:
1. Stock dividends
2. Liquidating dividends
Taxability of stock dividends
Stock dividends are subject to tax at
the fair value of the stocks received
under the following conditions:
A. Subsequent cancellation and
redemption
B. If it leads to substantial alteration
in ownership in the corporation
Stock dividend vs. Stock split
Stock dividend is a capitalization of
earnings while stock split results in
reduction in the par value of stock.
Stock split will never be subject to
income tax.
Dividend Tax Rules
Source of
dividends
Receipient of dividends
Individuals Corporatio
ns
10% final
Exempt
tax
Domestic
corporatio
ns
Foreign
Regular
Regular
corporatio
tax
tax
n
*NRA-ETB is subject to a 20% final
tax on dividend
Historical dividend tax rates
Earnings before Jan. 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 copperatives
Inter-corporate dividends
-received by a domestic corporation
and resident foreign corporation
from a domestic corporation are
exempted to minimize double
taxation
Dividends from cooperatives
-the distribution of dividends by an
exempt cooperative to its members
shall not be subject to tax
Entities taxable as corporations are
subject to 10% final tax
1. Real Estate Investment Trusts
2. Business partnership
3. Taxable associations
4. Taxable joint ventures, joint
accounts or consortium
5. Taxable co-ownership
Real Estate Ivestment Trusts
(REIT)
-publicly listed corporation
established principally for the
purpose of owning incomegenerating real estate assets
The following receipient of REIT
dividends are exempt to final tax:
1. NRA or NRFC entitled to claim
preferential tax rate
2. Domestic corporation or resident
foreign corporation
3. Overseas Filipino investors
Business partnership, taxable
associations, joint venture, joint
accounts or co-ownership
-the 10% final tax applies at the
point of determination of the income
- not at the point of actual
distribution
*A partner, member or venture who
is an NRA-ETB, NRA-NETB or NFRC
shall be subject to 20%, 25%, 30%
final tax rate, respectively
The Improperly Accumulated
Earnings Tax
-corporations which accumulate
earnings beyond the reasonable
needs of business will be imposed
10% Improperly Accumulated
Earnings Tax - a penalty tax
Royalties
-passive royalty income received
from sources within the Philippines is
subject to the following final tax
rates:
Receipient
Source of passive
royalties
Individuals
Corporatio
ns
Books, literary
works and musical
compositions
Other sources
10% final
tax
20% final
tax
20% final
tax
20% final
tax
Passive vs. Active royalties
Royalties of a passive nature are
subject to 20% final tax while
royalties that accrues from an
undertaking where the taxpayer has
active involvement are subject to
regular tax.
Prizes
-the taxation of prizes varies, it may
be exempt from income tax or
subject to either final tax or regular
income tax
Exempt prizes
1. Prizes received by a receipient
without effort on his part to join a
contest (e.g Most Outstanding
Citizen)
2. Prizes from sports competitions
that are sanctioned by their
respective national sport
organization
Requisite of exemption
1. The receipient was selected
without any action on his part to
enter the contest
2. The receipient is not required to
render substantial future services as
a condition to receiving the price or
reward
Taxable prizes
Receipient
Amount of taxable
prize
Individuals
Corporatio
ns
Prizes exceeding
P10,000
Prizes not
exceeding P10,000
20% final
tax
Regular
tax
Regular
tax
Regular
tax
*Final taxation do not apply on
foreign passive income; hence,
prizes from foreign sources are
subject to regular income tax
Winnings
-for individual income taxpayers,
winnings received from sources
within the Philippines are generally
subject to 20% final tax except:
1. PCSO
2. Lotto winnings
Receipient
Types of winnings
Individuals
Corporatio
ns
PCSO or lotto
winnings
Other winnings, in
general
Exempt
Exempt
20% final
tax
Regular
tax
Tax Informers Reward
-cash reward may be given to any
person instrumental in the discovery
of violations of the NIRC or discovery
and seizures of smuggled goods; it is
subject to 10% final tax
Amount of Cash Reward whichever is lower of the following
per case:
1. 10% of revenues, surcharges, fees
recovered and or fine or penalty
imposed and collected or
2. P1,000,000
*The amount of cash reward is
subject to 10% final tax which shall
be withheld by the government
Tax-free corporate covenant bonds
Receipient
Tax on interest
income on tax-free
corporate covenant
bonds
Individuals
Corporatio
ns
30% final
tax
Regular
income
tax
The Tax Sparing Rule
NRFCs shall be subject to a 15%
final tax on dividend income if the
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.
Other applications of final
income tax
1. Compensation income of Filipinos
qualified as special aliens
2. Fringe benefits of managerial or
supervisory employees
3. Income payments of residents
other than depository banks
4. Income payments to oil
exploration service contractors or
sub-contractors
Filipino employees qualified as
special aliens
Filipino employees occupying the
same position as those held by
special aliens subject to a 15% final
tax may opt to be taxed at the same
15% final tax.
Capital gains tax
NRA-NETBs and NRFC are required to
file income tax return to report their
gains from dealings in domestic
stocksd directly to the buyer
Fringe Benefits Tax
-include all remunerations under an
employer-employee relationship that
do not form part of compensation
income.
Special Aliens
NRA-NETBs employed by regional or
area headquarters and regional
operating headquarters of
multinantional companies, offshore
banking units, etc. Special aliens are
subject to a final tax of 15% on
gross income from their employees.
Interest and other income
payments to depositary banks
under the expanded foreign
currency deposit systems
Residents, other than the depositary
banks under the expanded foreign
currency deposit systems, shall
withhold 10% final tax on income
payments such as interest income
on loans.
Income payments to sub-contractors
of petroleum service contractors
-subject to 8% of its gross income
derived from such contract
*Petroleum service contractors are
subject to regular income tax
*Other persons or entities inherently
necessary to the petroleum service
contract are entitled to the
preferential 8% final tax on their
gross income derived from suchh
contracts
Final withholding tax return
-shall be filed in trplicate by every
withholding agent or payor who is
either an individual or corporation
on or before the 10th day of the
month following the month in which
withholding was made
Entities exempt from final
income tax
1. Foreign governments and foreign
government-owned and controlled
corporations
2. International missions or
organization with tax immunity
3. Qualified employee trsut fund
