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    Chapter 5 PDF

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    nasi 5 - Final Income Taxation HAPTER 5 fINALINCOME TAXATION LE chapter Overview and Objectives Fhis Chapter discusses the features of final income taxatio Mme, and the class of taxpayers subject to final income tax a, the items of gross Final tax is one of the exceptions to the scope of the regular income tax. An excellent understanding. of the items of passive income and those taxpayers subject to final tax including their final tax rates is extremely crucial to your mastery of income taxation. After finishing this Chapter, readers are expected to demonstrate: ‘Understanding and appreciation of the features and scope of final tax Mastery of those certain passive income subject to final tax and their corresponding final tax rates Mastery of the general final tax rates on certain non-residents and their exceptions d._ Knowledge of the other applications of the final income tax scheme a b. c FEATURES OF FINAL INCOME TAXATION 1. Final tax 2. Tax withholding at source 3, Territorial imposition Imposed on certain passive income and persons not engaged in business in ” the Philippines ‘The Final withholding system The final withholding system imposes upon the person making income payments the responsibility to withhold the 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 him to file an income tax return to report the same. The final withholding system is inherently territorial. It applies only to certain passive income earned from sources-within the Philippines. Note that taxation is territorial and we cannot impose tax obligation (filing or withholding) against non-resident subjects of foreign sovereignty. Hence, all items of income earned from sources abroad, passive or active, are subject to tax under the general scope of the regular income tax. 135 Chapter 5 - Final income Taxation 1 withholding tax is built upon taxpayer and government convenience, ves the taxpayer of the obligation to file an income tax return. This is ot convenient for taxpayers who ted by distance, time and cost to comy the government, the final withholding system is the most convenient and, system in collecting taxes on income where there is high risk of non-compliancese tax evasion. Under the NIRC, final income tax is imposed on certain passive income and upop non-resident persons not engaged in business in the Philippines, ‘monitored by taxpayers. When nat ted by the taxpayer, their existence can be difficult to predict while ther actual amount may be difficult to determine. Thus, the final withholding at source 1s the most favored scheme in taxing items of passive income, Non-resident persons not engaged in business in the Philippines Non-resident persons not engaged in trade or business in the Philippines, suchas 'Bs) and non-resident snce very unlikely due to their absence and distar Also, the Philippine government cannot impose upon them the obi return due to territorial consideration. law subjects them to final income tax where! sm income, passive or active, are obligated to wit PASSIVE INCOME SUBJECT TO FINAL TAX 1, Interest or yield from bank deposits or deposit substitutes ic dividends, in general icome from a Real Estate Investment Trust 2 3 4 net income ofa business partnership, taxable associations. ventures, olnt accounts, or co-ownerahlp. { 136 ' 1 chapter 5 - Final Income Taxation in general winnings Informer’s tax reward Iiterest income on tax-free corporate covenant bonds senee FINAL TAX ON INDIVIDUALS AND CORPORATIONS tnless otherwise indicated, the final tax rates to be discussed in the following dations apply to all taxpayers (individuals and corporations) other than: 4. Non-resident alien not engaged in trade or business (NRA-NETB), and Non-resident foreign corporation (NRFC). INTEREST INCOME OR YIELD Jterest income or yield from local currency bank deposits or deposit substitutes are subject to final tax as follows: jent | [Souree of interest income Individuals | Corporations Short term deposits 20% 2006 Tang-term deposits investment certificates | Exempt™ 20% Note: ‘Exemption doesnot clude NRA-NET ‘Short term deposits are those made for a period of less than five years. Long-term ‘deposits or investment certificates refer to certificate of time depositor investmentin the form of savings, common or individual trust funds, deposit substitutes, investment. management accounts, and other investments with a maturity of not less than five vears, the form of which shall be prescribed by the BSP and issued by banks only (not by non- ‘nk financial intermediaries or finance companies) to individuals in denominations of 10,000 and other denominations as may be prescribed by the BSP. (RMC 18-2011) Mlustration 1 ‘Ataxpayer earned the following interest income from various time deposits: P 8000 12,000 40.000 260.000 Required: Compute the final tax fthe taxpayer is an incividual and fa corporation. 137 Y 1 6 Final Income Taxation (Chapter § - Final Income Taxation crate saxon pre-cermination oflngterm epost ofindvduals Solution: - ivestment placement of individe vaeposit or inves hividual taxpayers is pre-terminated Individual taxpayers ithe dears, any previously untaxed or exempted Interest income wil Be el jowing final taxes upon pre-termi P8000 x20% P1600 subjected 12,000 x 20% 2400 Final tax 40,000 0% 2 == aT) nd yeare 12 ran 5 years 56 setae rm deposits are usually channeled to the financing of long-term projects sucha scion pieces Ruger gteetsopns onl eld sa ese pa bomen otal ar P 100,000 100,000 100,000 9 acerut 1,000,000 x 10¥%6x 6 months/12 months) so.000 P 350.000 ible to less than 4-year pre-termination __12%4 Eom ‘The not proceeds of the deposit and accrued interest to be released to the depositor ‘pon pre-termination shall be: Amount P 600,000 800,000 200,000 Non-resident corporations 109.000 Total accrued interest expense ExLzo0.009 Required: Compute the total final income tax to be withheld by Banke Negro. Solution: Amount Rate. _ final Tax_ 600, ,00 x 20% F 120,000 ‘corporations 800,010 20% 160,000 200,000 x25% 50,000 00.000 x30% __30.000 Total accrued interest expense 1700000 360000 138 Chapter 5 - Final Income Taxation 4. Trust funds 5. Other investments evidenced by certificates prescribed by the Bangko ng Pilipinas (BSP) ee tema Deposit substitute means an alternative form of obtaining funds from at least 25 persons at any one time other than deposits through the issuance, endorsement, ‘acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing ot rece nd ather obligations, or financing their ows needs or the needs of dealer. Government debt instruments and securities including Treasury bonds, Treasury bil, and treasury notes shall be considered as deposit substitute irrespective of the ‘number of lender at origination if such debt instruments and securities are to be traded or exchanged in the secondary market. Foreign currency deposit with foreign currency depositary banks rest income froma foreign currency deposits under the foreign currency yystem or expanded foreign currency deposit system by residents ig a final tax of 15%. The old law imposed arate of 75% until 2017, [Taxpayer Tadividuals_| Corporations [Residents 15% _ 15% (Non-residents Eaempi | ~Bempe Note: 1. Resident taxpayers include resident ctzens, resident allens, domestic corporations and ‘The reduced final tax rates on int rest income on foreign currency deposit and the exemption of non-resident depositors are intended to encourage the deposit of Il be used in the financing of our accepted currency. Our foreign trade will be limited without adequate foreign currency reserves in our banking sector. non-resident and a resident her 50% shall be subject to the 15% final tax. 140 5 Final Income Taxation raster ion suszrman is an VETS ino Wor Hr. Siman is an Overseas Filipino Worker. He deposits al his savings cinder the foreign currency deposi asi Bn a savings or the savings deposit account eg AcpU of domestic bank During Semonth red $1,000 intrest equivalentta Pe S06 senaro 1: Mr, San deposited is savings through the account sree wit 1x shall be computed as follows: yeome P 4150000 —— 15% s22509 scenario 2; Mr. Siman deposited his savings through aot account with is resident wife ‘the final tax shall be computed as follows: P 41,500.00 50%, P 2075000 15% Pansy hii savings account through his own account. ‘Taxable interest income ax rate Scenario 3: Mr.Siman depos Inthis case, the interest income shall be exempt from final tax. Interest income subject to regular tax icome from the following sources is subject to regular income tax, otto , whether or notin the course of business -s, whether bank or non-bank: bution made by a corporation to its shareholders and payable to its shareholders, whether in money or ‘Types of dividends: 1. Cash dividends - paid in cash 2. Property dividends - paid in non-cash properties including stocks or securities of another corporation at im notes or evidence of indebtedness of the /idends - paid in the stocks of the corporation 5, Liquidating dividends - distribution of corporate net asset ‘As a rule, dividends are income subject to tax. However, the following are not income for taxation purposes: gain) which should be properly through disposal or sale ofthe stocks investment. ‘The distribution of stocks of another corporation as dividends 1s a taxable property dividend and not a stock dividend, 2. Liquidating dividends ‘Under the NIRC, the receipt of liquidating ‘but as exchange of properties. When of the investments, the exces: 1 tax, Any loss is deductible only to the extent of idends ts not viewed as income nds exceed the cost subject to regular al gain. ‘Taxability of Stock Dividends Normally, stock dividends are exempt from income tax. Exceptionally, stock dividends are subject to tax at the fair value of the stocks received under the following conditions: ‘a. Subsequent cancellation and redemption Ifa corporation cancels or redeems stock issued as @ dividend at such time and in such manner as to make the jon and cancellation of redemption, in whole 0! ind, the amount so tion of earnings or profit. For instance, a corporation declared stock dividends and immediately ‘Stock dividenas for redemption and cancellation, This act is equi declaration of cash aividends. 1b. [fit leads to substantial olteration in ownership in the corporation alteration in ownership in a corporation may occur when stock dividends are piven in lieu of cash dividends or when the corporation declared an optional stock or cash dividend a2 apler §- Final Income Taxation ation of earings while ol ‘nd an increase in he unbee shae aheee tere . eee re creme na cj 0 wei rn er A Ni rc iend tax shal be 1596 when Ge ta suring ele apes. Tas wl be ‘Reese ter lustrative 1 Calbayog Company declared a total of P2,000,000 dividends. P800,000 Is due to Corporate shareholders while 2,200,000 Is due to individual shareholders. “The Final tax to be withheld by Calbayog Company shall be: Shareholders _____ _Amount_ fate. _Amount_ Individual shareholders: P 1.200.000 10% P 120.000 Corporate shareholders ‘00.000 0% 2 Final tax Tae Mlustrative 2 “Aborian Company declared total of P2,000,000 dividends in March 2014, An analysis ofthe recipient shareholders is as follows Sharsholders ——_________ Amount Resident al a P 500,000 RAs engags 100.000 [NRAS not eng ‘50,000 Non-resident corporations 00.000 Total dividends Ezsn.000 143 ‘Chapter § - Final Income Taxation ‘The cotal final tax to be withheld by Aborian Company shall be: Shareholders___ Dividends Rate. — final Tax— Resident aliens andeitizens P 500,000 x10% P 50,000 [NRAs engaged in rade or business 100.000 x20% 20,000 NRAs.NETBS 50.000 x25% 12,500 NRCS 109.000 «30% __30.000 Total 2750009 P_ide.500 Historical dividend tax rates ‘The imposable final tax rates vary depending on the source of the dividends declared: i Einaliax Earnings before January 1, 1998 Exempt Earnings from 1998 6% Earnings from 1999 8% Earnings from 2000 and thereafter 10% ution made to the shareholders or members of a corporation shall be and shall constitute a part of the annual income of the distributee for the year which received. (Sec. 73(C), NIRC) Exempt Dividends 1, Inter-corporate dividends 2. Dividends from cooperatives Inter-corporate dividends idends received by a domestic corporation and resident ign corporation from a domestic corporation are exempted under the NIRC to ‘minimize double taxation. lared P100,000 dividends to shareholders. The following Dividends declared P Less: 10% dividends tax fe the impact of double taxation, ‘A.Corp. to B, Inc. is exempted ccnapter 5 Final Income Taxation from final tax, When the dividend final ls to an individual shareholder, the re shareholder, the 10% is exemption extends to dividends received by business partnerships from Te ee oa cr bes patie Bom under the NIRC. However, the exemption doesnot extend to dividends received by several professional partnership, exempt joint ventures and exempt co-ownershs Eicause they are not considered corporations under the NIRC ‘on the other hand, the exemption of inter-corporate dividend does not apply to i ce rrr dnd dr nt ey absence of express legal exemption. Exemption is restricted to dividend declaration only. pividends from cooperatives Under RA 9520, the distribution of dividends by an exempt cooperative to its members either representing interest on capital or as patronage refunds shall not be subject to tax. ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL TAX ‘The 1096 final withholding tax also applies to dividends or share in the net income ofentities considered corporations under the NIRC and special laws, such as: Real Estate Investment Trusts 2. Business partnerships 3. Taxable associations 4. Taxable joint ventures, joint accounts or consortia 5, Taxable co-ownerships Real Estate Investment Trust or REIT AREIT is a publicly listed corporation established principally for the purpose of ‘owning income-generating real estate assets. idends are exempt from the final tax luals or non-resident foreign corporations entitled al tax rate pursuant tv applicable tax treaty. \$ oF resident foreign corporat 10 investors - exempt from REIT dividend tax until August 12, 2018 (7 years trom the effecuvity of RR13-2011 which took effect on August 12, 2011} 145, ‘Chapter 5 - Final Income Taxation Business partnershi Eaeinessparterahip,cxabe ssolaons, oat venture, font acount or Under Ste 72 of the MIRC, the net income of test ents 5 demas structively received by the partners, members or ventures, respective the same year the net income i reported Hence, he 10% fn! tax cans ari Point of determination of the income, notet the point of actual aibution ‘Share in business partnership net income ‘The “share in net income” includes the share in the residual profit and provisions for salary, interest and bonus to a partner. However. if the provisions for salaries, interests and bonuses are expensed as such in the book 7 are subject to regular tax to the receiving partner, the share in the residual income after such provisions is subject to final tax. Mlustration ‘The partnership profit distribution of partners Andy and Mar based on their agreed profit distribution scheme is as follows: Salaries to industrial partner P 25,000 Residual profit sharing foo __ 24.000 ‘Assuming the salaries, interest and bonus are not expense in the book, the 10% final P 73,000 P 36,000 10% __10% ly by: Final tax rate Final tax Note: A parmer, member or venture who isan NRA-ETB, NRA-NETE or NRFC shall be subj respectively to 20%, 2595 and 3096 final tax rate ‘The Improperly Accumulated Earnings Tax ns cannot avoid the dividends tax by simply not declaring fons which accumulate earnings beyond the reasonable needs Sf business will be imposed the 10% Improperly Accumulated Earnings Ta # penalty tax. This topic will be discussed iu detail in Chapter 15-B. 146 near 5 Final Income Taxation povALTIES alty income received from sources within the Philippines is subject to Recipient (Soares ofpassive royalties Tadividuals | Corporations ee jierary works, and musical compositions |_10%6 final tax_| 20% fin "2096 final tax" [2085 final tax the 509% preferential royaly final tax on books and Nterary works es Ryan onboat son expe or euch as kt a Raplies on fms and simiar works paid to AMRA-ETBS, NRA.NETBS, oF cs subject anal ta of 25%" passive vs. Active royalties Rapalties ofa passive nature such a royalties of claim owners or land owners of ing properties, royalties of inventors from companies that manufacture and heir invention, and royalty from licensing agreements that transfers the use ademark or technology are subject to 20% final tax. When royalties accrues wan undertaking where the taxpayer has active involvement, itis an active me subject tothe regular income tax. iustration é “develops application programs for establishments. These programs were red specific requirements ofthe establishments and required ional troubleshooting, and adjustments for problems. The developer pgrad receives 1% of the sales of the establishment as royalty developed a utility program and assigned it to an e-marketer which sells ity program through the Internet. E-Soft receives 30% royalty on each copy of, the program sol. ‘The royalty from the utility programs isp: 3g tax, but not a resident in the income from abroad shall be subject to regular “3x. Royalties, active or passive, earned from sources abroad are subject to regular income tax jon of prizes varies. Prizes may be exempt from income tax or subject to either final tax or regular iacome tax. 147 Chapter 5 - Final income Taxation Exempt prizes 1. Prizes received by a recipient without any effort on his part to jolna contest, Examples include prizes from such awards as Nobel Prize. Most Outstanding Citizen, Most Benevolent Citizen ofthe Year, and similar awards. 2. Prizes from sports competitions that are sanctioned by their respective national sport organizations 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 te receiving the price or reward. ‘Taxable prizes iuidual income taxpayers, taxable prizes are subject to either final tax or tax depending on the amount of the prize. There may be events or Competitions where corporations earn prizes. However, there Is no final tax Imposition on corporate prizes under the NIRC. Hence, the same must be subject to regular income tax. Recipient [Amount of taxable prize Tndividuals | Corporations [Prizes exceeding P10,000 2096 final ar Regular tak | Prizes noc exceeding P0500 | Regular tax Regular tax Recall also that final taxation does not apply to foreign passive income; hence, prizes from foreign sources are subject to the regular income tax. WINNINGS For individual income taxpayers, winnings received from sources withi Philippines are general ct to 20% final tax, except Philippine ‘Sweepstakes Office (PCSO) or lotto winnings amounting to P10, 10 prizes, there is no final tax imposed on corporate winnings under the ed to final tax by the payor should be reported igs from foreign sources are subject to Recipient | Corporations | Exempt ings exceeding P10,000 [other winnings, in general it Note; PCSO or lotto winnings of NRA-NETBs and NRFCS, regardless of amount, are respecte” ‘chapter 5 - Final income Taxation ‘The tax rules on PCSO or lotto winnings shall be applied on a per ticket basis. tion ri won P1000 frst place inthe singin company anniversary celebration Sn Posmres SY Company a during ‘since results of singing contest is based on effort rather effort rather than chance, the P10,000 Dpayment isa prize which isnot subject to 20% final tax since if below Svea Apelnro shall eer the prise m ho regular hemes eae ‘amount exceeded P10,000, Syd Company shall withhold 20% final ta =e tration 2 s raffle ticket was selected as the second winning ticket in all for PL0,000 dubbed as “2nd Prize” ee Oaea erste Since raffle draw results is not based on effort but on chance, the P10,000 pay Saaning which subject to 20% fil tax The sete sal be wed by ZF Muri pr.ooo creel pple nlyon pace novos ange Mustration 3 Mr. Dante Paya made three bets to the PCSO lotto draws. All tickets won, The details of the winnings were: ‘winning numbers) 1d prize (sole wi er) exempt since they did not exceed F10,000 in amount on the entire P20M amount of the winnings. The 6/42 and £22 winnings CSO shall withhold 20% fir ‘TAX INFORMER'S REWARD A cash reward may be given to any person instrur the discovery of violations of the ternal Revenue Code or discovery and seizure of smuggled goods, The tax informer’s reward is subject to 10% final tax Requisites of Tax Informer’s Rewai 1. Definite sworn information which is not yetn 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 ofthe guilty party or imposition of any fine or penalty. 4. The informer must not bea: 2. BIR official or emplayee b. other public oficial or employee relative within the 6th degree of consanguinity of those officials or employee ina.and b. us Chapter 5 - Final income Taxation Amount of Cash Reward - whichever is the lower of the following per case: 1. 10% of revenues, surcharges, or fees recovered and or fine or penalty Imposed and collected or 2. 1,000,000 ‘The amount of cash reward is subject to 10% final withholding tax which shall be withheld by the government. Mlustration Ms. Kirsten provided information to the BIR leading to the recovery of P12,000,000 unpaid taxes, The cash reward shall be computed as follows: 10% cash reward (P12,000,000 x10%) P1.200,000 Cash rewar P2,000.000 1,000,000 190.000, e_soa.000 Cash reward (whichever is lower) Less: 10% olding tax Net amount tobe released tothe tax informer ‘TAX-FREE CORPORATE COVENANT BONDS lens, citizens or residents of the Philippines on ‘oF other similar obligations of domestic or __ ‘Corporations ‘Tax on interest income on tax-free | 30% final tax | Regular income | corporate covenant bonds | tax Note: 1 The final tax applies tall ndividuals, regardless of casiication. ‘ovislon for corporate recipients of tax-free” interest hence, EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSONS NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES NmA.Nevs ~T——NnFe——] 25% TT ere "TER Capital [586 Capt aainstor | “gainstax __| | 25% rentals | 25% ofrentals_| 150 ‘cnepter 5 - Final Income Taxation ofveasae Wietrenas | adap 259% ofrentae | 759% ofrentais depositsystem Exempt xem foreign loans N/A re _ 75 ftax 7. Dividend income 25% | sorte rets _ spplicable &Faxan corporate bonds is 30% income tax returns. Exception: me tax returns to report their gain from dealings in domestic stocks directly to buyers. Ownership of the stocks shall not be transferred to the assignee without the required return and tax clearance (Certificate Authorizing Registration or CAR) from the BIR that the tax on the transfer has been paid. Mlustration: NRA-NETBS in 2020, Mr. Tih Wong, an NRA-NETB, was hired by Raha Humabon Company (RHC),a er, to install his invention in RHC’s factory. RHC pays him royalty mn Fees. Mr. Wong also agreed to design RHC’s website which he designed and completed abroad. During Mr. Wong's visit, he purchased shares of REMC and subsequently sold them directly to a buyer. Royalties from invention 300,000 Installation fees 1,000,000, development fees ‘500,000 Gain on sale of domestic stocks directly toa buyer 40,000 RHC shall withtold the following final taxes: invention P 300,000 Professional fees 1.000.000 ‘Total gross income P1,300,000 Multiply by: final tax on NRA-NETB. 25% Total final withholding tax Ree im ‘The final tax applies on gross income, whether active or passive, The same rule apples wth [NREC excepr tt the fina tax rate Is 3096 2 The website development fee is aot subject © wt Chapter 5 - Final Income Taxation ‘The Tax Sparing Rule NRECs shall be subject to a 15% final tax on dividend income instead of the 30% ‘general final tax if the country of domicile of the NRFC credits against the tax due ch NRFC taxes presumed to have been paid by such NRFC from the Philippines equivalent to 15% ofthe dividends. In applying the tax sparing rule, the Supreme Court ruled that the NIRC does not require that the foreign law of the non-resident corporation must give a deemed idend equivalent to the percentage points waived by the NIRC merely require the country of the NRFC to a deemed paid tax ea} co that waived by the es. (CIR vs. Procter & Gamble Philippines Manufacturing Corporation and the CTA (GR. 66836)) ‘Thus, the requirement of the tax sparing rule is deemed satisfied if the country to which the NRFC is domiciled imposes no tax on dividends from foreign sources, (BIR Ruling Nos. 104-2012, March 22, 2012) Mlustration: The Tax Sparing Rule with NRFCS [An NRFC is due to receive 2 dividend of P1,000,000 from a domestic corporation. The final tax to be imposed by the Phi corporation shall be 15%, not 30%, {ts Income tax upon the P1,000,000 dividend by at least 15% the dividend tax percentage waived by the Philippines from Ue 30% general final tax rate Ifthe Country of the NRFC does not reduce its tax on the dividend by at least 25%, the Philippines shall zmpose the 30% final tax. OTHER FINAL INCOME TAXES 1, Fringe benefits of managerial or supervisory employees 2. Income payments of residents other than depositary banks under the ‘expanded foreign currency deposit system (EFCDS) to offshore banking units (OBUs) and expanded foreign currency deposit units (EFCDUs) 3. Income payments to oil exploration service contractors or sub-contractors FRINGE BENEFITS TAX rations under an_employer-employee smpensation income. The fringe benefits of to a final fringe benefits tax. INTEREST AND OTHER INCOME PAYMENTS TO DEPOSITARY BANKS UNDER THE EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM in depositary banks under the expanded foreign currency withhold 10% final tax on income payments such as interest ing units (OBUs) and expanded foreign 152 ‘chapter 5 Final Income Taxation ancy deposit units (PCDUs). The final taxation of FCDI s an cape discussed in Chapter 15-A. Ms EEGDUS and oBs INCOME PAYMENTS TO SUB-CONTRACTORS OF PETROLEUM SERVICE CONTRACTORS Under PD 1354, every subcontractor, whether domestic or foreign, entering into rack wih a service contractor engaged in petroleum operations 1 the ome tax equivalent to ei nt ome derived rom such contrac such txt ele of anya ll ‘whether national or local its gros axes, other sources within and tractors and within the subject to the regular at any income received from in the case of domestic sut foreign subcontractors shall ‘The term "gross income” means all income earned or received as a result of the Ny the subcontractor with a service contractor engaged in isin the Philippines under Presidential Decree No. 87. Note that the 8% final tax applies only to subcontractors, whether individuals or corporations, resident or non-resident. Petroleum service contractors are subject to the regular income tax. Persons or entities contracted by a petroleum service contractor to locally supply goods and materials that are required by and in, or that are inherently necessary (or incidental to, its exploration and development of petroleum mineral resources and are entitled to the preferential 8% final tax on their gross income derived from such contracts. (BIR Ruling No. 024-2001, june 13, 2001) Aliens Under the old law, employees of offshore banking units, regional operating or | administrative headquarters of multinational companies, referred to as aliens, are previously subject to 15: tax on gross compensation jen classification is now abolished by virtue of a presidential veto to the TI As such, these employees are now subject to regular {income tax ifthey are residents and 25% final tax ifthey are non-residents )LDING TAX RETURN holding tax return (BIR Form 0619-F}, fonthly Remittance Return of Final Income Taxes Withkeld, shall be filed in triplicate by every withholding ent or payor who i ether a individual or eorperaton fr the first vo months ve quarter. 183 ‘Chapter 5 - Final Income Taxation Deadline and place for monthly manual filing a re 1¢ paid or before the 10% day of the ‘month following the month in which withholding was made wi a, The authorized agent bank of the revenue district of ‘over the withholding agent's place of business ving jurisdiction b.Inplaces where there are no authorized agent banks, to the revenue collection officer ‘The authorized city or municipality treasurer within the revenue district © where the withholding agent's place of business is located Monthly deadline for eFPS filing filing of returns is as follows: Group A Fifteen (15) days following the end of the month wing the end of the month ing the end of the month Group D- Twelve (12) days following the end of the month Group E ~ Eleven (11) days following the end of the month ‘Note: Pease check the groupings of taxpayers under eFPS in Chapter 4, ‘Return of Final Income Taxes Withheld, on or before the last day of the month after each quarter, Penalties for Late Fiting or Remittance of Final Income Taxes Withheld The same penalties for late payment of income taxes as discussed in Chapter 4 apply for non-withholding or non-remietance of final taxes. ENTITIES EXEMPT FROM FINAI INCOME TAX 1. Foreign governments and foreign government-owned and controlled corporations 2. International missions or organizations with tax immunity 3. General professional partnership 4. Qualified employee trust fund ‘The first two categories are exempt on j.rounds of international comity. General professional partnerships and qualified employee trust funds are express! exempt from any income tax imposed under the NIRC. ‘These entities are exempt not only to final tax but also to capital gains tax and regular income tax. ‘A comprehensive summary of final tax rates is presented in Appendix 1. 154 in accordance with the schedule set forth in RR No. 26-2002, the deadline for e | le (BIR Form 1601-FQ), Quarterly Remittance chapler 8 - Final Income Taxation ‘HAPTER 5: SELF-TEST EXERCISES a 2 6 3, Enumerate the passive income subject to final tax and their corresponding tax rates What are the two types of taxpayers who are subject to final tax rates on all Income from within the Philippines? What are the general tax rates applicable to each? ‘5. Enumerate the requisites of the tax informs Discuss the procedures and deadline in rex rd final withholding taxes. ‘True or False 1 interest income from non-bank sources is subject to regular income tax. Foreign income is subjected to final tax ifthe taxpayer is taxable on global income. ve income from abroad are subject to final tax. ‘ine on government securities are subject to final tax. fe income are generally subject toh fed at source; hence, there is no need to file an income tax return, tax-exempt on inter corporate dividends from any corporation, and corporations are tax-exempt on interest income on long-term 9, Dividends from resident corporations are subject to regular tax. 10, Dividends from Real Estate Investment Trusts are exempt from final tax. 11, Stock dividends are always exempt from final tax partnerships are subject to final tax but not to regular tax. wre exempt from final tax on foreign currency deposits 16, Royalties, active or passive. are subject to regular income tax. 17. The tax sparing rule 1s applicable to rasident and non-resident foreign corporations. srparations, are subject to final tax on winnings abroad. ich are not more than P10,000 in amount are subject to the regular income tax. to winnings are exempt from all types of income tax. 1s do not file a regular income tx return on thelr compensation 155 Chapter 5 - Fi 1come Taxation 7. The final tax on interest on tax-free corporate covenant bonds applies only ty tax return, ‘on foreigh currency loans of rency deposit system, tax ‘hanks under the expanded foreign currency deposit: 13, Petroleum service subcontractors are subject to 8% final tax on their income fom petroleum service contractors. 14, The ithhol before the 15° day 15. Foreign governments and foreign government-owned and controlled corporations are exempt from final tax. Multiple Choices - Theary 1 1, Which is correct with regard to the final income taxation? yeed not file an income tax return, ‘of passive income from wtatever sources. items of gross income of any non-resident earned from 2, Which statement is correct regarding final Income tax? ‘a. Items of income subjected to final tax can stil be subjected to regular tax. ‘ax applies only on certain passive income earned within the are subject to \eame from Ph tax 3. Interest income from which ofthe following sources is subject to inal income tax? a Lending © Bond investment , Mortgage loans 4. Money market placements ‘The final tax does not apply to interest on {select the best answer) a. Long-term deposit ¢ Depos Bb. Trust tunds Promis-ary notes 156 chapter 5 - Final Income Taxation any corporations. bi resident citizens. poration engaged in trade or business not engaged in trade or business exempt from any tax, d. None: 111, What is the final tax on interest income on 6-year deposit pre-terminated less than 2 years before maturity? a 20% 65% b. 12% 4.0% 12, Which ofthe following recipients is exempt from final tax on dividends? 2 Resident citizen - Resident corporanon b, Non-residentalien 4. Rest 13. A dividend dectaration in 2019 is subject toa final tax of © 10%. 4.20%, Mm clared by a resident corporation is fromany tax. _c.subject to regular income tax. b. subject to 10%6 final tax. subject to 20% final tax. 357 Chapter 5 - Final income Taxation yn and the date of record, BCD, Inc. sold ay domestic corporation. Which tax if the buyer of the sale is ay I withhold 10% dividend tax if the buyer of the sale is a corporation. ‘¢ ABC, Ine. shall withhold 10% dividend tax if the seller of the sale is an inéwidual : 4. ABC, Inc. shall withhold 1036 dividend tax if the seller of the sale is a corporation. Multiple Choices - Theory 2 1s covered by fi 4. Shareinthe net income, 2, Which is not subject to 20% final tax? eerest income from trust funds rom musical compositions P1100 worth of prizes d. Winnings rks. corporation come of a business partnership yusiness trademark 4. Which ofthe following is taxable? sanctioned by the national sports organization jon abroad © Nobel prize 4. Any prize received without effort 5. Which winning is taxable toa final tax? a. Winnings exceeding P10,000 b ings not exceeding PL0,000 © Winnings from PCSO oF lotto 4 Allorthese es from sources abroad is subject to final tax. Ifthe amount of prizes exceeds P10,000. 158 chapter 5 - Final Income Taxation he amount of prizes does not exceed P10,000. the taxpayer without effort. umstance, : 30 winnings not exceeding PLOK b. Lotto winnings exceeding P1OK 4. All ofthese: Interest income earned by a bank from lending activities a. Allof hese 9, Dividend income from domestic corporations is subject to final tax effective 2000 1998 b. 1999 4.1997 10, Prizes arising from sources within the Philippines may be a 6 final tax. © subject to either final tax or regular tax. 4. always subject to regular tax 12, The winnings of # resident alien from abroad is ibject to regular tax. to final tax. © subject to either final or regular tax. 4. not subject to Philippine income tax. 13. mncome of a domestic corporation from abroad is to regular tax. ther nal tax oF regular tax, Philippine income tax. 14, Winnings from PCSO are generally exempt rom any tax subject to regular tax © subject to 2086 final tax 159 Chapter 5 - Final income Taxation

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