FINAL INCOME TAXATION

ITEM OF GROSS INCOME

 FEATURES OF FINAL INCOME TAXATION

1. FINAL TAX FINAL TAXES – Full taxes are

withheld by the income payor at
2. TAX WITHHOLDING AT
source.
SOURCE
3. TERRITORIAL IMPOSITION
4. IMPOSED ON CERTAIN
PASSIVE INCOME AND
PERSONS NOT ENGAGE
IN BUSINESS IN THE
PHILIPPINES
FINAL WITHHOLDING SYSTEM

 Imposes upon the person making income payments

the responsibility to withhold tax
 The tax which will be deducted at source is final
 The taxpayer receives the income net of tax and;
 There would be no need for the taxpayer to file an ITR
to report the same
FINAL WITHHOLDING SYSTEM

 Inherently territorial
 Applies only to Certain passive income earned from
sources within the Philippines
 Built upon taxpayer ang government convenience
 Taxpayer – no need to file tax return
 Government – efficiency and effective collection
 NON-RESIDENT PERSONS/ENTITY NOT
ENGAGED IN BUSINESS IN THE PHILS
1. Non-resident alien not engaged in trade and business(NRA-NETB)
2. Non-resident Corporations

 High risk of non-compliance

 Do not have principal office or fixed places in the Phils.
 The law subjects them to FINAL TAX
 Philippine Residents shall withhold the final tax from their gross
income, active or passive from all sources within the Phils.
 NON-RESIDENT PERSONS/ENTITY NOT
ENGAGED IN BUSINESS IN THE PHILS
NON-RESIDENT PERSONS/ENTITY NOT GENERAL FINAL TAX RATE
ENGAGED IN BUSINESS IN THE PHILS
Non-resident alien not engaged in trade 25%
and business(NRA-NETB)
Non-resident Corporations 30%
 PASSIVE VS ACTIVE INCOME

PASSIVE ACTIVE
 Earned with very minimal or even  Arises from transaction requiring a
without active involvement of the considerable degree of effort or
taxpayer in the earning process. undertaking from the taxpayer.
Example: Example:
a. Interest income a. Compensation Income
b. Dividend b. Business Income
c. Royalties c. Professional Income
 Interest or yield from Dividend income from a
Domestic dividend, in
bank deposits or deposit Real Estate Investment
general
substitute Trust

Share in net income of a

business partnership,
taxable associations,
PASSIVE
Royalties, in general Prize exceeding P10,000
joint ventures, joint
accounts, or co-
ownership
INCOME
SUBJECT TO Interest income on tax

FINALTAX Winnings Informer tax rewards free corporate covenant

bonds
 INTEREST INCOME OR YIELD

Interest income from local currency bank deposits or

deposit substitute

Recipient
Sources of Interest Individual Corporations
Income
Short Term Deposits 20% 20%
Long – Term EXEMPT 20%
Deposits/Investment
Certificates
INTEREST INCOME OR YIELD

Short Term Deposit – less than five years

Long Term Deposits/Investment Certificates –

investments with a maturity of not less than five years.
Tax on Pre-termination of long-term
deposits of individuals
HOLDING PERIOD FINAL TAX RATE
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%
EXERCISES
Savings or
time deposits
with
cooperatives
are not
subject to
final tax
This Photo by Unknown Author is licensed under CC BY-SA-NC
 Other applications of the final tax on
interest

1 2 3 4 5
Deposit substitute Government Money market Trust funds Other investments
securities placements evidenced by
certificates
prescribed by BSP
Foreign Currency deposit with foreign
currency depositary banks
TAXPAYER INDIVIDUALS CORPORATIONS
RESIDENTS 15% 15%
NON-RESIDENTS Exempt Exempt
Joint accounts on forex deposits

If the bank account is jointly in the name of a non-

resident and a resident taxpayer;

50% - exempt
50% - subject to 15% final tax
Exercise

 Mr. Maepal is non-Resident Citizen, who has bank account under the
foreign currency deposit unit. The bank has $50,000 balance and earns 2%
interest per annum.
a. Compute the final tax if the account was under the name of his wife Mrs.
Maepal, who is Resident Citizen.
b. Compute the final tax if the account was under the name of Mr. Maepal.
c. Compute the final tax if the account was a joint account.
d. Compute the final tax if the account was a joint account and both are Non
Resident Citizen.
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-bqnk
5. Penalty for legal delay or
default
DIVIDENDS

TYPES
PROPERTY
DIVIDEND – paid
LIQUIDATING
in non-cash SCRIP DIVIDEND – STOCK DIVIDEND –
DIVIDEND –
CASH DIVIDEND – properties paid in notes or paid in the stocks
distribution of
paid in cash including stocks or evidence of of the
corporate net
securities of indebtedness Corporation
assets
another
corporation
DIVIDENDS

Dividends – are generally income subject to tax

The following are not income subject to tax:

A.Stock dividend – transfer of surplus to capital
account
B.Liquidating dividend – not income but
exchanged of properties
TAXABILITY OF STOCK DIVIDENDS

STOCK Dividends – not subject to tax

EXCEPT:

A. SUBSEQUENT CANCELLATION AND REDEMPTION

B. IF IT LEADS TO SUBSTANTIAL ALTERATION IN OWNERSHIP IN THE
CORPORATION
 DIVIDEND TAX RULES

RECIPIENT OF DIVIDENDS
SOURCE OF DIVIDEND INDIVIDUALS CORPORATION
DOMESTIC CORPORATION 10% EXEMPT
FOREIGN CORPORATION REGULAR TAX REGULAR TAX

NRA – ETB is subject to 20% final tax on dividend

NRA – NETB is subject to 25% final tax on dividend
NRFC- not exempt but subject 30% final tax
HISTORICAL DIVIDEND TAX RATES

Source RECIPIENT OF DIVIDENDS

Earnings before Jan 1, Exempt
1998
Earnings from 1998 6%

Earnings from 1999 8%

Earnings from 2000 and 10%
thereafter
Exercises

 GINEBRA Company (Domestic Corp) declared 10M cash dividends distributed

as follows:
5M – Japeth Aguilar – Resident Citizen
5M – San Miguel Corp. – Domestic Corp.

a. Compute the final tax.

b. Compute the final tax assuming GINEBRA Company is a Non-Resident Foreign
Corp
c. Compute the final tax assuming Japeth Aguilar is NRA-ETB and San Miguel
Corporation is NRFC
d. Compute the final tax assuming Japeth Aguilar is NRA-NETB
e. . Compute the final tax assuming GINEBRA Company is a Non-Resident Foreign
Corp and Japeth Aguilar is NRA-ETB and San Miguel Corporation is NRFC and
income is from outside of the Philippines.
EXEMPT DIVIDENDS

1. INTERCORPORATE
2. DIVIDEND FROM COOP
ENTITIES TAXABLE AS CORPORATIONS
ARE SUBJECT TO 10% FINAL TAX
1. REAL ESTATE INVESTMENT TRUSTS
2. BUSINESS PARTNERSHIP
3. TAXABLE ASSOCIATION
4. TAXABLE JOINT VENTURE, JOINT ACCOUNTS OR CONSORTIA
5. TAXABLE CO-OWNERSHIP
 REAL ESTATE INVESTMENT TRUST
 Publicly listed corporations
established principally for the
purpose of owning income-
generating real estate assets.
The following recipients of REIT
dividends are exempt from final tax:
a. NRA or NRFC entitled to claim
preferential tax rate.
b. Domestic Corporations or
Resident Foreign Corporations
c. Overseas Filipino investors -
exempt from REIT dividend tax
until Aug 12, 2018
IMPROPERLY ACCUMULATED EARNINGS
TAX
Corporations which accumulate earnings beyond the reasonable needs of
the business will be imposed 10% final tax (IAET)
 ROYALTIES

PASSIVE ROYALTY INCOME – received from sources within the Phils is subject to
following final tax rates:

SOURCE OF PASSIVE RECIPIENT

INCOME
INDIVIDUALS CORPORATIONS
BOOKS, LITERARY 10% 20%
WORKS AND MUSICAL
COMPOSITION
Other sources 20% 20%
ROYALTIES

 10% Royalty tax – pertains to final tax on printed books and literature
 E-books – 20% final tax
 Royalties on Cinematographic films and similar works paid to
NRA – ETB
NRA-NETB 25% final tax
NRFC
 ACTIVE ROYALTIES – Active income subject to regular income tax
 Royalties active or passive earned from sources outside of the Philippines
are subject to regular income tax if received by Resident Citizen and
Domestic Corporation..
Exercises

Anne Curtis, Resident Citizen composed a song dedicated to her husband. Star
Records, Domestic Corp. purchase the song composition and promised to give the
composer Anne Curtis 1% royalty for each revenue it generates

a. Compute final tax if the revenue is 20M

b. Compute final tax if the revenue is 20M and Anne Curtis is Non Resident Alien
NETB.
c. Compute final tax if the revenue is 20M and assuming Star Records is Foreign
Corp. and the royalty is earned outside of the Phils.
d. Compute final tax if the revenue is 20M and assuming Star Records is Foreign
Corp; Anne Curtis is Non Resident Alien NETB. Royalty Income received from
outside of the Philippines
e. Compute final tax if the revenue is an active 20M royalty income.
Prizes
 Taxation of prizes varies
 Maybe exempt from income tax or subject to either final or regular income
tax
Exempt Prizes
1. Prizes received by a recipient without any effort on his part to join the
contest.
Ex. Nobel Prize, Most outstanding Citizen, Bayani award
2. From Sports Competitions sanctioned by their respective national sports
organization.

Requisite of Exemption
1. The recipient was selected without any action on his part to enter the
contest.
2. The recipient is not required to render substantial future services as a
condition to receiving the prices or reward.
 Prizes

Recipient
Amount of taxable Individuals Corporations
prize
Exceeding 10,000 20% final tax Regular tax
Not exceeding 10,000 Regular tax Regular tax

Final taxation does not apply to foreign passive income – subject to regular tax
Exercises
Mang Juan, Resident Citizen, was given a prize for participating in the Tawag ng
Tanghalan in Showtime (Domestic Corporation).

a. Compute the final tax assuming the prize is 10,000

b. Compute the final tax assuming the prize is 10,999
c. Compute the final tax assuming the prize is 10,000 and the recipient is a
Domestic Corporation
d. Compute the final tax assuming the prize is 10,999 and the recipient is a NRF-
Corporation
e. Compute the final tax assuming the prize is 8,000 and the recipient is a NRA –
ETB; and NRA-NETB
f. Compute the final tax assuming the prize is 10,000 and Showtime is Non Resident
Foreign Corporation and the income is earned outside of the Philippines.
g. Compute the final tax assuming the prize is 10,000 and Showtime is Non Resident
Foreign Corporation and the income is earned outside of the Philippines. Mang
Juan is Non- Resident Alien.
h. Compute the final tax assuming the Prize is 10,100, and was given for
recognition for being a model Citizen, and no participation was made on the
part of the recipient and no future substantial performance is required.
WINNINGS

 GENERALLY SUBJECT TO 20% FINAL TAX

EXCEPT:
PCSO UP TO 10,000 OR 10,000 AND BELOW
LOTTO
 No final tax imposed on Corporate winnings
 Winnings not reported under final tax – should be reported in the regular tax
 Winnings from foreign sources – subject to regular income tax
 WINNINGS
Recipient
Types of winnings Individuals Corporations
PCSO or Lotto Exempt up to 10,000; Exempt up to 10,000
10,001 or more – 20% 10,001 or more –
final tax Regular tax
Other winnings 20% Final Tax Regular tax
TAX INFORMERS REWARD

 10% FINAL TAX

REQUISITE
1. Definite sworn Information not yet in the BIR’s possession
2. Information will lead to discovery of Fraud
3. Recovery of revenues, surcharges, and Fines/Penalties
4. The informer must not be a:
a. BIR official/ employee
b. Other public official or employee or its relative within 4th degree of
consanguinity.
TAX INFORMERS REWARD

 Amount of Cash reward – whichever is lower between:

1. 10% of revenue, surcharges, or fees recovered
2. 1,000,000 pesos
TAX FREE CORPORATE GOVERNMENT
BONDS
BOND INVESTOR
INDIVIDUALS CORPORATIONS
TAX ON INTEREST 30% Final tax Regular income tax
INCOME
EXCEPTIONS TO THE GENERAL FINAL TAX ON
NON-RESIDENT PERSONS NOT ENGAGED IN
TRADE OR BUSINESS IN THE PHILIPPINES