CHAPTER 5: FINAL INCOME TAXATION
1. Zero coupon instruments or securities – upon
Final Withholding System
- the person making income payment is responsible to
withhold the tax
- taxpayer receives the income net of tax; no need to file
ITR on that income
- territorial – applies only to certain passive income
earned from sources within the Philippines
- NRA-NETBs and NRFCs – have high risk of non-
compliance – General FT rate = 25%
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
1. Interest or yield from bank deposits or deposit
substitutes
- limited to banks and shall not be applied with time and
savings account deposit maintained by members with
cooperatives and by primary cooperatives with their
federations
- Deposit substitutes – alternative form of obtaining
funds from the public other than deposits through
issuance, endorsement, or acceptance of debt
instruments for the borrower’s own account
- Public = 20 or more corporate lenders at any one time
* Timing of withholding of final tax:
origination
2 Interest-bearing instruments of securities – upon
payment of interest
Trust funds or investment management accounts
- subject to same final tax rules
- to claim final tax exemption on long-term investment:
a. must be held/managed by the bank for at least 5 years
b. underlying must qualify as a deposit substitute issued
by a bank
c. must hold on to such underlying for at least 5 years
Pre-termination of long-term deposits or investment of
individuals
- before 5 years, any previously untaxed or exempted
interest income will be subjected to the following final
taxes upon termination:
Pre-termination, transfer, or negotiation of investment
certificates
- individual taxpayers
- remaining maturity of instrument must still satisfy the
5-year requirement
Foreign currency deposit with foreign currency
depository banks
- interest income – Final Tax = 15% [residents]
- Joint account for forex deposits – jointly in the name of
a NR and R, 50% interest = exempt; 50% = subject to 15%
final tax
Interest income subject to regular tax
1. Lending activities, whether or not in the course of
business
2. Investments in corporate bonds
3. Promissory notes
4. Foreign sources, whether bank or non-bank
5. Penalty for legal delay or default
2. Domestic dividends, in general
Types of dividends:
1. Cash dividends
2. Property dividends – including stocks and securities of
another corporation
3. Scrip dividends – paid in notes or evidence of
indebtedness of the corporation
4. Stock dividends – NOTE: stock dividends representing
transfer of surplus to capital account shall not be subject
to tax
5. Liquidating dividends – distribution of corporate net
asset. Under NIRC, it is not viewed as income but as
exchange of properties
Taxability of Stock Dividends:
GEN: Exempt from income tax
EX: 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 – capitalization of earnings
- Stock Split – reduction in the par value of stock; increase
in number of shares of shareholders – never subject to
income tax
Dividend Tax Rules
NRA-ETB = 20% FT
NRA-NETB & NRFC = 25% FT
Presumptive source of dividend distribution
- any distribution made shall be deemed to have been
made from the most recently accumulated profits or
surplus
Exempt Dividends
1. Inter-corporate dividends from domestic corporations
– exempt from FT – exemption is restricted to dividend
declaration only
2. Dividends from cooperatives – exempt from FT
3. Qualified foreign-sourced dividends – exempt from
regular tax
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
Entities taxable as corporations are subject to 10% final
tax
1. Real Estate Investment Trusts (REIT) – publicly listed
corporation established principally for the purpose of
owning income-generating real estate assets
2. Business Partnerships
3. Taxable associations
4. Taxable joint ventures, joint accounts or consortia
5. Taxable co-ownership
NOTE: for 2-5 = 10% Final Tax applies at the point of
determination of the income, not at the point of actual
distribution
5. Royalties, in general
- Books and literary works = 10% preferential only if
PRINTED
- If E-Book / CDs = 20%
- Cinematographic films and similar works = NRA ETBs,
NRA NETBs, or NRFCs = FT of 25%
6. Prizes exceeding P10,000
- 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 national sport organizations
Taxable prizes:
NOTE: Final taxation does not apply to foreign passive
income; hence, prizes from foreign sources are subject to
the regular income tax
7. Winnings
8. Informer’s tax reward
- cash reward – any person instrumental in the discovery
of violations of the NIRC or discovery and seizure of
smuggled goods
- 10% final tax
Amount of cash reward: (whichever is lower)
1. 10% of revenues, surcharges, or fees recovered and or
fine or penalty imposed and collected; or
2. P1M
9. Interest income on tax-free corporate covenant
bonds
- Interest income of non-resident aliens, citizens or
residents of the Philippines on bonds, mortgages, deeds
of trust, or other similar obligations of domestic or
resident foreign corporations with tax-free or tax-
reduction provision where the obligor shoulders in whole
or in part any tax on the interest shall be subject to a FWT
of 30%
EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-
RESIDENT PERSONS NOT ENGAGED IN TRADE OR
BUSINESS IN THE PHILIPPINES (NRA-NETBs)
The Tax Sparing Rule
- NRFCs shall be subject to 15% FT on dividend income
instead of the 25% general FT 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 10% of the dividends
Other Final Income Taxes
1. Fringe benefits of managerial or supervisory
employees
2. Income payments of residents other than depositary
banks under the expanded currency deposit system
(EFCDS) and expanded foreign currency deposit units
(EFCDUs)
3. Income payments to sub-contractors of petroleum
service contractors – 8% of gross income
- contractors - RIT
Final Withholding Tax Return
- BIR Form No. 0619-F
- Monthly Deadline: 10th day of the month following the
month in which withholding was made; OR
- Staggered filing if eFPS
Group A 15 to Group E 11
- BIR Form No. 1601-FQ
- Quarterly Deadline: on or before last day of the month
each quarter