Acco 20233 Income Tax Chapter 5

POLYTECHNIC UNITVERISTY OF THE PHILIPPINES
MULANAY, QUEZON BRANCH

STA. ROSA, MULANAY, QUEON
MODULES IN INCOME TAXATION
CHAPTER 5: FINAL INCOME TAXATION
I. Overview
This chapter discusses the features of final income taxation, the items of
gross income, and the class of taxpayers subject to final income tax. Final tax is one
of the exemptions 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 in mastering income taxation.
II. Table of Contents
The chapter’s lessons cover the following topics:

 Features of Final Income Taxation
 The Final Withholding System
 Taxpayers Subject to Final Income Tax
 Items of Passive Income Subject to Final Tax
 Final Tax to Individuals and Corporations
 Final Tax on Interests from Banks
 Final Tax on Dividends
 Final Tax on Royalties
 Final Tax on Prizes
 Final Tax on Winnings
 Final Tax on Informer’s Reward
 Final Tax on “tax free” Covenant Bonds
 Exceptions to the Final Taxation of Certain Taxpayers
 The Tax Sparing Rule
 Final Withholding Tax Return
 Entities Exempt from Final Tax
III. Course Outcomes
After completion of the course, the students are expected to:

 Demonstrate comprehensive analysis on the interconnected concepts of
taxation
 Familiarize with the accounting and legal technicalities of taxation
 Connect taxation as a relevant factor in managing strategic business unit
 Utilize taxation as an effective tool in monitoring business implementation
Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 1 of 3


IV. Learning Outcomes
After completion of this session, students should be able to:

 Demonstrate understanding and appreciation of the features and scope of
final tax
 Explain passive income subject to final tax and their corresponding final
tax rates
 Determine the general final tax rates on certain non-residents and their
exceptions
 Develop knowledge of other applications of the final income tax scheme
V. Course Materials:.
Read:
 Chapter 5: Final Income Taxation, Income Taxation (Laws, Principles and
Applications) by Rex B. Banggawan, pp. 135-154
Discussion:
FEATURES OF FINAL INCOME TAXATION

1. Final Tax
2. Tax withholding at source
3. Territorial Imposition
4. 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 in certain passive income earned from source within the Philippines.
 Note that taxation is territorial and we cannot impose tax obligation against non-
resident subjects of foreign sovereignty.
 All items of income earned from source abroad, passive or active, are subject to tax
under the general scope of the regular income tax.

Rationale of Final Income Taxation

 The final withholding tax is built upon taxpayer and government convenience.
 It relieves the taxpayer of the obligation to file an income tax return.
 This is convenient for taxpayers who are limited by distance, time and cost to
comply
 For the government, the final withholding system is the most convenient and
effective system in collecting taxes on income where there is high risk of non-
compliance or tax evasion.
 Under the NIRC, final income tax is imposed on certain passive income and upon
non-resident persons not engaged in business in the Philippines.
Passive Income
 Item in passive income are earned with very minimal involvement from the
taxpayer and are generally irregular in timing and amount
 Unlike items of active income, they are not usually specifically monitored by
taxpayers
 When not recorded by the taxpayer, their existence can be difficult to predict
while their actual amount may be difficult to determine.
 Final withholding at source is the most favored scheme in taxing items of passive
income.
Non-Resident Persons Not Engaged in Business in the Philippines

 The law subjects them to final income tax wherein Philippine residents paying
them income, passive or active, are obligated to withhold the following final tax:
Non-Resident Person Engaged in General Final Tax Rate

Trade or Business
Non-resident alien not engaged in 25%
trade or business
Non-resident foreign corporation 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 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.

INTEREST INCOME OR YIELD

 Interest income or yield from local currency bank deposits or deposit substitutes are
subject to final tax as follows:
Recipient
Source of Interest Income Individuals Corporations
Short - term deposits 20% 20%
Long - term deposits/ investment certificates Exempt 20%
 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 deposit
or investment in the form of savings, common or individual trust fund, deposit
substitutes, investment management accounts and other investments with a
maturity of not less than five years, the form of which shall be prescribed by the BSP
and issued by banks only to individuals in denomination of P10,000 and other
denominations as may be prescribed by the BSP (RMC 18-2011)
Illustration:
A taxpayer earned the following interest income from the various deposits
6-month time deposit P 8,000

2-year time deposit 12,000
5-year time deposit 40,000
Total Interest Income 60,000
Required: Compute the final tax if the taxpayer is an individual and if a corporation
Solution:
Individual Taxpayer:
6-month time deposit (8,000 x 20%) 1,600.00
2-year time deposit (12,000 x 20%) 2,400.00
5-year time deposit (40,000 x 0%) -
Final Withholding Tax 4,000.00
Corporate Taxpayer (60,000 x 20%) 12,000.00

Illustration 2
A resident taxpayer received a P16,000 interest income from a bank. Determine
the final tax withheld at source:
Gross Interest Income (16,000/80%) P 20,000

Multiply by: final tax rates 20%
Final Tax Withheld 4,000
Illustration 3
Banko Negro incurs the following interest in its savings and time deposit
accounts from the following depositors:
Depositors Amount
Resident individuals 600,000.00
Resident and domestic corporations 800,000.00
Non-resident alien not engaged in business 200,000.00
Non-resident corporations 100,000.00
Total Accrued Interest Expense 1,700,000.00
Required: Compute the total income tax to be withhed by Banko Negro
Solution:
Depositors Amount Rate Final Tax

Resident individuals 600,000.00 20% 120,000.00
Resident and domestic corporations 800,000.00 20% 160,000.00
Non-resident alien not engaged in business 200,000.00 25% 50,000.00
Non-resident corporations 100,000.00 30% 30,000.00
Total Accrued Interest Expense 1,700,000.00 360,000.00
Tax on Pre-Termination of Long-Term Deposits of Individuals

 It the deposit or investment placement of individual taxpayers is pre-terminated
before 5 years, any previously untaxed or exempted interest income will be
subjected to the following final taxes upon pre-termination:
Holding Period Final Tax

Less than 3 years 20%
3 years to less than 4 years 12%
4 years to les than 5 years 5%
5 years or more 0%

Illustration 1
On January 1, 2016, Alice invested P1,000,000 in Baguio Bank’s 5-year time
deposit. The deposit pays 10% interest annually. Alice pre-terminated the deposit
on July 1, 2019.
The final tax on pre-termination will be computed as follows:
2016 interest income (1,000,000 x 10%) 100,000.00

2019 accrued interest income (1,000,000 x10% x 6 moths/12 months 50,000.00
Total interest income 350,000.00
Final tax rate applicable to less 4-year pre-termination 12%
Final tax 42,000.00
The net proceeds of the deposit and accrued interest to be released to the
depositor upon pre-termination shall be:
Principal Balance 1,000,000.00

Accrued Interest Income 2019 50,000.00
Final Tax to be Withheld - 42,000.00
Net Proceeds to be released to the depositor 1,008,000.00
Savings or Time Deposits with Cooperatives are not Subject to Final Tax
 The final tax is 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
Other Applications of the Final Tax on Interest

1. Deposit substitute
2. Government securities
3. Money market placements
4. Trust funds
5. Other investments evidenced by certificates prescribed by the Bangko Sentral ng
Pilipinas (BSP)

Deposit Substitutes
 It means an alternative form of obtaining funds from at least 20 persons at any
one time other than deposits through the issuance, endorsement or acceptance
of debt instruments for the borrowers own account for the purpose of relending or
purchasing of receivables and other obligations or financing their own needs or
the needs of their agent or dealer.
Foreign Currency Deposit with Foreign Currency Depository Banks

 The interest income from foreign currency deposits under the foreign currency
deposit system or expanded foreign currency deposit system by residents is
subject to final tax of 15%.
Taxpayer Individuals Corporations

Residents 15% 15%
Non-residents Exempt Exempt
Note:
1. The resident taxpayers include resident citizens, resident aliens, domestic
corporations and resident foreign corporations
2. Non- residents taxpayers include non-resident citizens, non-resident aliens and
non-resident foreign corporations
3. It should be emphasized that NRA-NETB and NFRCs are also exempt
4. There is no long-term or short-term classification of foreign currency deposits
Joint Accounts on Forex Deposits

 If the bank account is jointly in the name of a non-resident and a resident
taxpayer, 50% of the interest shall be exempt while the other 50% shall be
subject to the 15% final tax.
Illustration:
Mr. Siman is an OFW. He deposits all his savings in a savings account under the
foreign currency deposit unit (FCDU) of a domestic bank. During the month, the
savings deposit account earned $1,000 interest equivalent to P41,500
Scenario1: Mr. Siman deposited his savings through the account of his resident
wife.

The final tax shall be computed as follows:
Interest Income P 41,500

Final Tax Rate 15%
Final Tax 6,225
Scenario 2: Mr. Siman deposited his savings through a joint account with his
resident wife
The final tax shall be computed as follows:
Interest Income P 41,500.00

Portion Taxable 50%
Taxable interest income 20,750.00
Multiply by: final tax rate 15%
Final Tax 3,112.50
Scenario 3: Mr. Siman deposited his savings account through his own account
In this case, the interest income shall be exempt from final income.
Interest Income Subject to Regular Tax

 Interest income from the following sources is subject to regular income tax, not to
final 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-bank
5. Penalty for legal delay or default.
DIVIDENDS
 It means any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money or in other property
Types of Dividends:
1. Cash dividends – paid in cash
2. Property dividends – paid in non-cash properties including stocks or securities of
another corporation
3. Scrip dividends – those paid in notes or evidence of indebtedness of the
corporation
4. Stock dividends – 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:
1. Stock Dividends
o Stock dividends representing transfer of surplus to capital account shall
not be subject to tax.
o Stock dividends in the form of increase in corporate value which should
be properly taxable when realized through disposal or sale of the stocks
investments.
o The distribution of stocks of another corporation as dividends is taxable
property dividend and not a stock dividend.
2. Liquidating Dividend
o Under the NIRC, the receipt of liquidating dividends is not viewed as
income but as exchange of properties
o When the liquidating dividends exceed the cost of the investment, the
excess is a taxable capital gain, subject to regular income tax.
o Any loss is deductible only to the extent of capital 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

o If a corporation cancels or redeems stock issued as a dividend at such
time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, equivalent to the distribution of a taxable
dividend, the amount so distributed shall be taxable to the extent it
represents a distribution of earnings or profit
b. If it leads to Substantial Alteration in Ownership in the Corporation

o Substantial alteration in ownership in a corporation may occur when stock
dividends are given in lieu of cash dividends or when the corporation
declared an optional stock or cash dividend.
Dividend Tax Rules
Recipient
Source of Dividends Individuals Corporations
Domestic Corporation 10% of final tax Exempt
Foreign
Prepared by: CAMO, Corporation
Christian Regular Tax
Larry De Las Alas – Instructor Regular Tax9 of 3
Page
Note:
1. A NRA-ETB is subject to a 20% final tax on dividend not to usual 10% but an
NRA-NETB is subject to a 25% final tax
2. A NRFC is not exempt but is subject to the 30% general final tax rate.
Illustrative 1:
Calbayog Company declared a total of P 2,000,000 dividends. P 800,000 is due
to corporate shareholders while P 1,200,000 is due to individual shareholders.
The final tax to be withheld by Calbayog Company shall be:
Shareholders Amount Rate Final Tax

Individual shareholders 1,200,000.00 10% 120,000.00
Corporate shareholders 800,000.00 0% -
Final Tax 2,000,000.00 120,000.00
Illustrative 2
Aborian Company declared a total of P 1,000,000 dividends in March 2014.
Analysis of the recipient shareholders is as follows:
Shareholders Amount
Resident aliens and citizens 500,000.00
NRAs engaged in trade or business 100,000.00
NRAs not engaged in trade or business 50,000.00
Non-resident corporations 100,000.00
Total Dividends 750,000.00
The total final tax to be withheld by Aborian Company shall be:
Shareholders Amount Rate Final Tax

Resident aliens and citizens 500,000.00 10% 50,000.00
NRAs engaged in trade or business 100,000.00 20% 20,000.00
NRAs not engaged in trade or business 50,000.00 25% 12,500.00
Non-resident corporations 100,000.00 30% 30,000.00
Total 750,000.00 112,500.00
Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 10 of

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Dividends from Cooperatives

o Under R.A. 9520, the distribution of dividends by an exempt cooperative
to its members either representing interest on capital or as a patronage
funds shall not be subject to tax
ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL TAX

 The 10% final withholding tax also applies to dividends or share in the net income of
entities considered corporations under the NIRC and special laws such as:
1. 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

 A REIT is a publicly listed corporations established principally for the purpose of
owning income-generating real estate assets
 The following recipients of REIT dividends are exempt from the final tax:
a. Non-resident alien individuals or non-resident foreign corporations entitled to
claim preferential tax rate pursuant to applicable tax treaty
b. Domestic corporations or resident’s foreign corporation
c. Overseas Filipino investors – exempt from REIT dividend tax until August 12,
2018
Business Partnership, Taxable Associations, Joint Venture, Joint Accounts or Co-

Ownership
 Under Sec. 73 of the NIRC, the net income of these entities is deemed
constructively received by the partners, members or ventures respectively, in the
same year the net income is reported. Hence, the 10% final tax applies at the
point of determination of the income, not at the point of actual distribution.
 Share in Business Partnership Net Income

o The share in net income includes the share in residual profit and
provisions for salary, interest and bonus to a partner.
o If the provision for salaries, interests and bonuses are expected as cash
in the book of the partnership, they are subject to regular tax to the

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receiving partner not to final tax. In this case, only the share in the
residual income after such provisions is subject to final tax.
Illustration
The partnership profit distribution of partners Andy and Mar based on their
agreed profit distribution scheme is as follows:
Andy Mar
Salaries to industrial partner 40,000.00 -
Interest to capital partner 12,000.00
Bonus to industrial partner 25,000.00
Residual profit sharing 8,000.00 24,000.00
Profit 73,000.00 36,000.00
Assuming the salaries, interest and bonus are not expense in the book, the 10%
final tax shall be:
Profit Sharing 73,000.00 36,000.00

Multiply by: Final Tax Rate 10% 10%
Final Tax 7,300.00 3,600.00
Note: A partner member or venture who is an NRA-ETB, NRA-NETB or NFRC

shall be subject respectively to 20%, 25% and 30% final tax rate.
ROYALTIES
 Passive royalty income received from sources within the Philippines is subject to the
following final tax rates:
Recipient
Source of Passive Royalties Individuals Corporations
Books, literary works and musical compositions 10% final tax 20% final tax
Other sources 20% final tax 20% final tax
Note:
1. Under the regulations, the 10% preferential royalty final tax on books and literary
works pertain to printed literature. Royalties on books sold on e-copies or CDs such
as e-books are subject to the 20% final tax
2. Royalties on cinematographic films and similar works paid to NRA-ETB, NRA-NETB
or NRFC is subject to final tax of 25%.

3
PRIZES
 The taxation on prizes varies. Prizes may be exempt from income tax subject to either
final tax or regular income tax
 Exempt prizes include:
1. Prizes received by a recipient without any effort on his part to join a contest.
Examples include prizes such awards as Nobel Prize, Most Outstanding Citizen,
Most Benevolent Citizen of the year and similar awards.
2. Prizes from sports competition that are sanctioned by their respective national sports
organization
 Requisite of exemption should be:
1. The recipient was selected without any action on his part to enter the context
2. The recipient is not required to render substantial future services as a condition to
receiving the prize or reward.
Taxable Prizes
o For individual income taxpayers, taxable prizes are subject to either final tax or
regular tax depending on the amount of the prize
o There may be events or competitions where corporations earn prized.
o 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 Individuals Corporations
Prizes exceeding P10,000.00 20% final tax Regular tax
Prizes not exceeding P10,000.00 Regular tax Regular tax
o 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 within the Philippines
are generally subject to 20% final tax, except Philippine Charity Sweeptakes Office
(PCSO) or lotto winnings amounting to P10,000 less
 Similar to prizes, there is no final tax imposed on corporate winnings under the NIRC.
 Winning that are not subjected to final tax by the payor should be reported as part of the
regular income.
 Winnings from foreign sources are subject to regular income tax.
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Recipient
Types of Winnings Individuals Corporations
PCSO/lotto winnings not exceeding P10,000 Exempt Exempt
PCSO/lotto winnings exceeding P10,000 20% final tax 20% final tax
Other winnings, in general 20% final tax Regular tax
Note: PCSO or lotto winnings of NRA-NETB and NRFCs, regardless of amount,
are respectively subject to 25% and 30% final tax.
Illustration1
Apolinario won P10,000 first place in the singing contest sponsored by Syd
Company during their company anniversary celebration
Since the result of singing contest is based on effort rather than chance, the
P10,000 payment is a prize which is not subject to 20% final tax since it is below
the P10,000 threshold. Apolinario shall report the prize in his regular income tax
return. If the amount exceeded P10,000, Syd Company shall withhold 20% final
tax.
Illustration 2
Roy’s raffle ticket was selected as the second winning ticket in the raffle draw of
ZFT Mall for P10,000 dubbed as 2nd prize
Since raffle draw results is not based on effort but on chance, the P10,000
payment is a winning which is subject to 20% final tax. The same shall be
withheld by ZFT Mall. Note that the P10,000 threshold applies only on prizes, not
winnings.
Illustration 3
Mr. Dante Paya made three bets to the PCSO lotto draws. All tickets won. The
details of the winnings were:
EZ2 – P1,400
6/42 – P10,000 (3-digit winning numbers)
6/45 – P20,000,000 Grand Prize (sole winner)
The 6/42 and EZ2 winnings are exempt since they did not exceed P10,000 in
amount. PCSO shall withhold 20% final tax on the entire P20,000,000 amount of
the winnings.

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TAX INFORMER’S REWARD

 A cash reward may be given to any person instrumental in the discovery of violations of
the National Internal Revenue Code or discovery and seizure of smuggled goods. The
tax informer’s reward is subject to 10% final tax.
Illustration:
Ms. Kristen 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 (12,000,000 x 10%) P 1,200,000

Cash reward limit 1,000,000
Cash reward (whichever is lower) P 1,000,000

Less: 10% final withholding tax 100,000
Net amount to be released to the tax informer 900.000
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 obligator shoulders in
whole or in part any tax on the interest shall be subject to a final withholding tax of 30%.
Bond Investor
Individuals Corporations
Tax on interest income on tax-free corporate Regular income
30% final taxq
covenant bonds tax
Note:
1. The final tax applies to all individuals regardless of classification
2. There is no similar final tax provision for corporate recipients of tax-free
interest, hence, the regular income tax shall apply.

3
EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSONS NOT

ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES
NRA – NETB NRFC

General Final Tax Rate 25% 30%
Exceptions:
1. Capital gain on sale of 15% Capital gains tax 15% Capital gains tax
domestic stocks directly
to buyer
2. Rentals on 25% of rentals 25% of rentals
cinematographic film
and similar works
3. Rentals of vessels 25% of rentals 4.5 of rentals
4. Rentals of aircrafts, 25% of rentals 7.5% of rentals
machineries and other
equipment
5. Interest income under Exempt Exempt
the foreign currency
deposit system
6. Interest on foreign loans N/A 20%
7. Dividend income 25% 15% if tax sparing rule is
applicable
8. Tax on corporate bonds 30% 30%
Capital Gains Tax

o As a rule, NRA-ETB and NFRCs do not file income tax return. Exceptionally,
NRA-NETBs and NFRC are required to file income tax returns to report their gain
from dealings in domestic stocks directly to buyers
o Ownership of the stocks shall not be transferred to the assignee without the
required return and tax clearance.
Illustration:
In 2020, Mr. Tih Wong, an NRA-NETB, was hired by Raha Humabon Company
(RHC) a domestic manufacturer, to install his invention in RHCs factory. RHC
pays him royalty and the installation fees. Mr. Wong also agreed to design RHCs
website which he designed and completed abroad. During Mr. Wong’s visit, he
purchased shares of RHMC and subsequently sold them directly to a buyer:

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Royalties from invention P 300,000

Installation fees 1,000.000
Website development fees 500,000
Gain on sale of domestic stocks directly to a buyer 40,000
RHC shall withhold the following final taxes:
Royalties from invention P 300,000

Professional fees 1,000,000
Total gross income 1,300,000
Multiply by: final tax on NRA-NETB 25%
Total final withholding tax 325,000
Note:
1. The final tax applies on gross income, whether active or passive. The same
rule applies with NFRC except that the final tax rate is 30%
2. The website development fee is not subject to final tax since the same is
earned abroad
3. Mr. Wong shall file a capital gains tax return for the gain on the sale of
domestic stocks.
The Tax Sparing Rule

o NRFCs 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
of such NRFC taxes presumed to have been paid by such NRFC from the
Philippines equivalent to 15% of the dividends.
o 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
paid tax for dividend equivalent to the percentage points waived by the
Philippines pointing that the NIRC merely require the country of the NRFC to a
deemed paid tax equivalent to that waived by the Philippines.
Illustration:
AN NRFC is due to receive a dividend of P1,000,000 from a domestic
corporation. The final tax to be imposed by the Philippines which shall be
withheld by the domestic corporation shall be 15% not 30%, if the country of

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domicile of NRFC also reduces its income tax upon the P1,000,000 dividend by
at least 15%, the dividend tax percentage waived by the Philippines from the
30% general final tax rate. If the country of NRFC does not reduce its tax on the
dividend by at least 15%, the Philippines shall impose the 30% final tax.
FINAL WITHHOLDING TAX RETURN

 The final withholding tax return (BIR Form 0619-F), Monthly Remittance Return of Final
Income Taxes Withheld, shall be filed in triplicate by every withholding agent or payor
who is either an individual or corporation for the first two months of the quarter.
ENTITIES EXEMPT FROM FINAL 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.

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POLYTECHNIC UNITVERISTY OF THE PHILIPPINES

MULANAY, QUEZON BRANCH

MODULES IN INCOME TAXATION

CHAPTER 5: FINAL INCOME TAXATION

II. Table of Contents

The chapter’s lessons cover the following topics:

III. Course Outcomes

After completion of the course, the students are expected to:

Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 1 of 3

MODULES IN INCOME TAXATION

After completion of this session, students should be able to:

FEATURES OF FINAL INCOME TAXATION

The Final Withholding System

Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 2 of 3

MODULES IN INCOME TAXATION

Rationale of Final Income Taxation

Non-Resident Persons Not Engaged in Business in the Philippines

Non-Resident Person Engaged in General Final Tax Rate

PASSIVE INCOME SUBJECT TO FINAL TAX

Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 3 of 3

MODULES IN INCOME TAXATION

INTEREST INCOME OR YIELD

6-month time deposit P 8,000

Corporate Taxpayer (60,000 x 20%) 12,000.00

Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 4 of 3

MODULES IN INCOME TAXATION

Gross Interest Income (16,000/80%) P 20,000

Depositors Amount Rate Final Tax

Tax on Pre-Termination of Long-Term Deposits of Individuals

Holding Period Final Tax

Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 5 of 3

MODULES IN INCOME TAXATION

The final tax on pre-termination will be computed as follows:

2016 interest income (1,000,000 x 10%) 100,000.00

Principal Balance 1,000,000.00

Other Applications of the Final Tax on Interest

Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 6 of 3

MODULES IN INCOME TAXATION

Foreign Currency Deposit with Foreign Currency Depository Banks

Taxpayer Individuals Corporations

Joint Accounts on Forex Deposits

Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 7 of 3

MODULES IN INCOME TAXATION

The final tax shall be computed as follows:

Interest Income P 41,500

The final tax shall be computed as follows:

Interest Income P 41,500.00

Interest Income Subject to Regular Tax

Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 8 of 3

MODULES IN INCOME TAXATION

Taxability of Stock Dividends

a. Subsequent Cancellation and Redemption

b. If it leads to Substantial Alteration in Ownership in the Corporation

Dividend Tax Rules

MODULES IN INCOME TAXATION

The final tax to be withheld by Calbayog Company shall be:

Shareholders Amount Rate Final Tax

The total final tax to be withheld by Aborian Company shall be:

Shareholders Amount Rate Final Tax

Prepared by: CAMO, Christian Larry De Las Alas – Instructor Page 10 of

MODULES IN INCOME TAXATION

Dividends from Cooperatives

ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL TAX

1. Real Estate Investment Trusts