Course Code and Title: BACR 5 – INCOME TAXATION

Lesson Number : 5

Topics : Final Income Taxation

LEARNING OBJECTIVES

At the end of this lesson, the student should be able to:

1. Define the characteristics of final income taxation;

2. Differentiate passive and active income;

3. Explain the coverage of final taxes on income of non-residents;

4. Identify the final tax rates for different income types;

5. Properly journalize final taxes in the books of the payor and payee;
and

6. Identify the required forms to be filed and their deadlines.

PRE-ASSESSMENT

Try to answer the following questions.

1. When you open the bank statement of your deposit account, do you see an
item “Tax Withheld” showing up every quarter?
2. Assuming your bank account earns a 4% interest per annum, how much is its
effective interest rate considering the tax consequences?
3. Would you rather want your tax directly deducted from your income or still
get the whole of your income and then pay the corresponding tax later?
4. Assume your rich grandfather died recently and he was your favorite
grandchild. Since he says that you are a great accountant, you should be the
executor of his will, with the free portion directly going to you. Which
would you like the estate to be? One mostly consisting of cash in various
bank deposits or one mostly in the form of tangible assets? Why?
5. Why do you think most game shows of raffle promos limit most of their
regular prizes at P10,000? Why won’t they adjust it to reflect inflation?
6. If you won P250 million from the lotto today, by how much would you be
richer once you redeem your ticket?
7. Supposed you informed BIR on a tax fraud and it awarded you a reward for
that. Will BIR tax that reward back?
LESSON PRESENTATION

DEFINITION

Final Withholding Tax is a kind of withholding tax which is prescribed only for
certain payors and is not creditable against the income tax due of the payee for
the taxable year. Income Tax withheld constitutes the full and final payment of
the Income Tax due from the payee on the said income. Final Income Taxation is
characterized by final taxes where taxes are withheld or deducted at source. The
taxpayer receives the income, net of tax. The payor of income remits the tax to
the government. Final taxation is applicable only on certain passive income. Not
all passive income is subject to final tax.

Passive Income vs. Active Income

Passive incomes are earned with very minimal or even without active involvement of
the taxpayer in the earning process and are generally irregular in timing and amount,
whilst, active income arises from transactions requiring a considerable degree of
effort or undertaking from the taxpayer.

The final withholding tax is built upon the taxpayer and government convenience. It
relieves the taxpayer of the obligation to file an income tax return. This is very
convenient for taxpayers who are limited by distance, time and cost to comply. For the
government, the final withholding tax system is the most convenient and effective system in
collecting taxes on income where there is no risk of non-compliance or tax evasion.

FEATURES
The final tax scheme has the following features:

1. Full and final payment

2. Tax withholding at source
3. Territorial imposition
4. Imposed on certain passive income and persons not engaged in
business in the Philippines
5. No filing of income tax return by the payee

GENERAL COVERAGE
Unless otherwise indicated, the final tax rates shall apply to all taxpayers, except for
non- resident aliens not engaged in trade or business who are taxed at 25% and non-
resident foreign corporations which are taxed at 30%.

Individuals in this discussion would involve: Resident Citizens, Non-Resident Citizens,

Resident Aliens and Non-Resident Aliens engaged in trade or business, whereas,
corporation would include: Domestic Corporations and Resident Foreign Corporations.

INTEREST INCOME ON SHORT-TERM PESO DEPOSITS

There shall be a final tax at the rate of 20% imposed on the interest income or yield from
the following sources:
 Illustration 5.1
Banco del Oro incurs the following interest in its deposit accounts from
depositors:
Non-resident Citizens 600,000
Resident Aliens 100,000
Non-resident Corporation 200,000

The total final tax withheld would

be: Non-resident Citizens Resident 600,000 x 20% =120,000
Aliens 100,000 x 20% = 20,000
Non-resident Corporation 200,000 x 30% = 60,000
TOTAL 200,000
480,000
The depositors would only receive the following
amounts:
Resident Aliens 80,000
Non-resident Corporation 140,000
TOTAL 700,000

INTEREST INCOME ON LONG-TERM PESO DEPOSITS

There shall be a final tax at the rate of 20% imposed on the interest income or yield from
long- term deposits and deposit substitutes earned by corporations. Interest income
earned by individuals on the same financial products are exempt from this final tax.

What constitutes long-term?

In the context of this final tax, a deposit/deposit substitute is considered long-term if the
holding period is at least five years.

Since individual taxpayers are exempt if the deposit is long-term, most would just open a
long- term one and then pre-terminate such to avoid the final tax. As such, if the deposit
or investment placement of individual taxpayers is pre-terminated before five years, any
previously untaxed or exempted interest income will be subjected to the following final
taxes upon pre-termination depending on the length of the holding period.
 Illustration 5.2
On January 1, 2018, AMC invested P2,000,000 in a 5-year bank deposit with an interest of 5%
annually. AMC preterminated the deposit on July 1. 2021.
 If AMC is a corporation.
Interest Income (2,000,000 x 5% x 3.5) Multiply: Final Tax 350,000
Rate 20%
Final Tax 70,000

If AMC is a resident citizen.
Untaxed Interest Income (2,000,000 x 5% x 3.5) Multiply: 350,000
Final Tax Rate 12%
Final Tax on Pre-termination 42,000

INTEREST INCOME FROM FOREIGN CURRENCY DEPOSITS AND

LOANS
Interest income derived from the following sources shall be imposed with the respective rates of
final tax:

Offshore Banking Unit" or "OBU" shall refer to a branch, subsidiary or affiliate of a foreign
banking corporation which is duly authorized by the Central Bank of the Philippines to
conduct of banking transactions in foreign currencies involving the receipt of from external
sources and utilization of such funds.
 "Foreign currency deposit unit" or "FCDU" shall refer to that unit of a local bank or of a
local branch of a foreign bank authorized by the Central Bank to engage in foreign
currency- denominated transactions.

AMOUNTS WITHDRAWN FROM DECEDENT'S DEPOSIT ACCOUNT

If a bank has knowledge of the death of a person, who maintained a bank deposit account
alone, or jointly with another, it shall allow the withdrawal from the said deposit account,
subject to a final withholding tax of six percent (6%) of the amount to be withdrawn, provided
that the withdrawal shall only be made within one year from the date of the decedent. Such
withheld tax shall not be creditable to the estate tax in relation to the death of the decedent.

Illustration 5.3
Going back to question number 4 in the pre-activity, suppose there is a P1,000,000 deposited
in the bank account of your grandfather and the rest of his estate consists of several parcels of
land readily divided for the legitime of the mandatory heirs, including the free portion that
you can get. The titles of the lands cannot be transferred if the Estate Tax of P940,000 cannot
be paid with the BIR.

You may withdraw the full amount of the bank deposit but it will be subject to 6% final tax amounting
to P60,000. The net proceeds of P940,000 can be used to pay the estate tax to BIR. Once paid, you can
already be issued the electronic Certificate of Authority to Register and transfer the titles to the heirs
and yours.

TAX-FREE COVENANT BONDS

Interest income or other payments of any individual taxpayer, including NRA-NETB,
from tax- free covenant bonds, mortgages, deeds of trust or other obligations of domestic
and resident foreign corporations shall be subject to final withholding tax of 30%.
Illustration 5.4
Juana del Cruz, a resident entered into a tax-free covenant bond agreement with Salakot
Corporation, a domestic corporation. The bonds carried a 10% interest for the principal amount
of P7,000,000.

The interest received will be assumed as net of

tax. Principal 7,000,000
Multiply: Rate of interest 10%
Interest Income, net 700,000
Divide by to Gross-up 70%
Interest Income, gross (Tax Base) 1,000,000
Multiply: Final Tax Rate 30%
Final Tax Withheld 300,000

CASH AND PROPERTY DIVIDENDS

Dividends received by the following taxpayers, whether in cash or in kind, shall be
subject to the following final tax rates depending on the payor.

The tax sparing rule shall apply to an NRFC which is a resident or is domiciled in a
country which: (1) has no effective tax treaty with the Philippines; (2) has a
worldwide system of taxation; and (3) allows a tax credit against the tax due from the
NRFC dividend taxes deemed to have been paid in the Philippines equivalent to 15%.
 A real estate investment trust (REIT) is a corporation whose primary business is owning,
developing, and managing real estate properties, such as apartment buildings, office
buildings, hotels, warehouses, health care facilities, shopping malls or golf courses.

SHARE IN NET INCOME IN A TAXABLE

PARTNERSHIP, ASSOCIATION, JOINT ACCOUNT,
JOINT VENTURE OR CONSORTIUM
The share in the net income of the following taxpayers shall be subject to the respective final tax
rates as summarized below:

It is to be noted that this is only applicable to taxable partnerships. Notice that the rates are
similar to that of the final taxes with dividends. In essence, shares of partners in the net income
of a partnership are dividends available for withdrawal. Also notice that there are no rates for
corporations since partnerships can only be formed by natural persons.

Illustration 5.5
Paul, Lee and Kath formed a partnership engaged in a merchandising business in Batangas.
The three personally manages the business. Paul and Kath are Filipinos. Lee’s Chinese
citizenship adds effectiveness in managing the business. During the year, they reported net
income of P600,000 which they divide equally among themselves.

The three partners will have a share of P200,000 each. They are, however, subject to 10% final tax,
therefore, each will only receive P180,000.

PASSIVE ROYALTIES
Passive royalties received by a taxpayer shall be subject to the following final tax rates:
Illustration 5.6
Michael Angan is an author of an accounting book. He earned a 10% royalty for every P500 copy of
his book sold. During the month, his book sold 900 copies.

Michael will receive the following amount:

Copies Sold 900
Multiply: Sales Price 500
Sales 450,000
Rate 10%
Royalties earned 45,000
Less: Final Tax (45,000 x 10%) 4,500
Amount Received 40,500

Illustration 4.6
Film-ipino Inc. received a check for P640,000 from FilmWorld Corp. as royalties for its
cinematographic works.

The final tax to be remitted to BIR is:

Net Amount 640,000
Divide by to Gross-up 80%
Royalties 800,000
Rate 20%
Final Tax 160,000
PRIZES AND WINNINGS OF INDIVIDUALS
Prizes and winnings of individuals obtained from local sources shall be taxed at the
following final rates:

It should be noted that the P10,000 threshold is not an exemption threshold rather it
only determines whether the income is included in final tax or regular income tax. As
such, prizes at most P10,000 is still taxable under regular taxation and those above
P10,000 is fully taxable under final taxation. Prizes and winnings of corporate taxpayers
are subject to regular income tax. Prizes and winnings not subjected to final tax are
reportable under regular income taxation.

E xempt Prizes
The following are exempt prizes:

1. Prizes received by a recipient without any effort on his part to join a contest.
Examples include prizes from awards like Nobel Prize, Most Outstanding
Citizen, etc.
2. Prizes from sports competitions that are sanctioned by their respective
national sport organizations

R equisite for Exemption

Exempt prizes mentioned above should meet the following requisites:

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 price or award.

Prize vs. Winning

A prize is a reward for a contest or competition. In other words, a prize represents a
remuneration for an effort reflecting one’s superiority. A winning, in contrary, is a
reward for an event that depends on chance such as winnings from gambling, lottery
or raffle ticket.
Illustration 5.7
Lucky Manzañas won in a raffle promo and took home P9,000 cash. Two days after, he
played in “Bawal Judgemental”, earning a prize of P35,000 since he got three wrong answers.
Compute the final taxes withheld from him.

The P9,000 cash winnings from the raffle promo was subjected to final tax regardless of the amount.
This amount is already the net receipts. The grossed-up amount of P11,250 is multiplied by 20% to get
the final tax of P2,250. As for the prize, the gross amount of P35,000 is multiplied by 20% since it
exceeds P10,000. The final tax on such is P7,000.

INFORMER’S CASH REWARD

A 10% final tax shall be imposed on rewards received from informing on violations of
NIRC and discovery and seizure of smuggled goods which were deemed legitimate
and collectible against the violator. It should be noted, however, that the amount of
reward is 10% of the collection from the information or P1,000,000, whichever is lower.

Illustration 5.8
Wiz L. Blue shared two pieces of information with the BIR that allegedly proves two tax
evading companies. Company A was then assessed and was forced to pay P500,000 of
deficiency taxes. Company B was also assessed and was liable to deficiency taxes of
P12,000,000.

Wiz will be earning 10% of P500,000 as reward related to Company A’s violation. The P50,000
reward will be subject to 10% final tax, reducing the cash receipt to P40,000.
For the information provided anent to Company B, the 10% of P12,000,000 exceeds the maximum
reward of P1,000,000, therefore, the basis of the 10% final tax is P1,000,000.
OTHER ITEMS OF INCOME SUBJECT TO FINAL TAX

The following are other items of passive income specifically subject to final tax.

ACCOUNTING FOR FINAL TAXES

To illustrate the journal entries for the recording of final taxes, let us journalize some of
the illustrations given.

Illustration 5.1
Books of Payor Books of Payee
Interest Expense 900,000 Cash in Bank 700,000
Final Tax Withholdings 200,000 Income Tax Expense 200,000
Payables Interest Income 900,000
Cash 700,000

Final Tax Withholdings 200,000

Payables
Cash 200,000
 Illustration 5.6
Books of Payor Books of Payee
Royalty Expense 800,000 Cash 640,000
Final Withholding Taxes 160,000 Income Tax Expense 160,000
Payable Royalty Income 800,000
Cash 640,000

Final Withholding Taxes 160,000

Payable
Cash 160,000

FILING AND PAYMENT OF FINAL TAXES

Every withholding agent (WA)/payor required to deduct and withhold taxes on
income payments subject to Final Withholding Taxes shall file the following
within the specified deadlines: [You may click the form codes to access the link
to the pdf file of said form.]

Deadline
Form Name Manual Filing eFPS Filing

Monthly Remittance Form of tenth (10th) day 11th-15th day

Final Income Taxes Withheld following the month following
in which withholding month
0619F
withholding was depending on the
made taxpayer’s line of
business
Quarterly Remittance Return last day of the Not yet available
of Final Taxes Withheld on month following the
Interest Paid on Deposits and close of the quarter
1602Q
Deposit during which
Substitutes/Trusts/Etc. withholding was
made
Quarterly Remittance Return of last day of the month following the close of
1601FQ Final Income Taxes Withheld the quarter during which withholding was
made
Certificate of Final Income Tax on or before January 31 of the year
2306 Withheld following the year in which income
payment was made
 Annual Information Return on
Final Income Taxes Withheld
1604F
(with Annual Alphabetical List
of Payees)
on or before January 31 of the year
following the calendar year in which the
income payments subject to final
withholding taxes were paid or accrued

ACTIVITY/EVALUATION

TRUE OR FALSE
Determine whether the following statements are true or false.
1. The maximum net cash receipts from rewards on informing BIR on tax
violations is P900,000. The payee of an income subject to final tax is also
called the withholding agent.
2. The first P10,000 of an prize is exempt from final taxes.
3. There is a separate quarterly remittance return for final taxes collected
on income payments of banks.
4. Dividends received by resident aliens from non-resident foreign
corporations are subject to 10% final tax.
5. The final tax withheld constitutes full payment.
6. Prizes and winnings received by corporate taxpayers are subject to
regular income tax.
7. The interest income received by corporate taxpayers from tax-free
covenant bonds are deemed net-of-tax.
8. Final tax is generally applicable to passive income since these are
more susceptible to non-reporting.
9. Income subjected to final tax are not reported in the income tax return.
10. Active royalties are mostly subject to 20% final tax.

MULTIPLE CHOICE
Choose the best answer from the choices provided.
1. Who is subject to final tax on royalties earned, whether active of passive?
a. Resident citizen
b. Resident Alien
c. Non-resident citizen
d. Non-resident alien not engaged in trade or business
 2. Which is the following recipients is exempt from final tax on dividends?
a. Resident Alien
b. Resident Citizen
c. Resident Corporation
d. Resident Foreigner

3. Which of the following is not subject to final tax?

a. Prizes exceeding P10,000
b. Prizes not exceeding P10,000
c. Winnings exceeding P10,000
d. Winnings not exceeding P10,000

4. Which is not subject to 10% final tax?

a. Royalties from a business trademark
b. Royalties from literary works
c. Dividends from a domestic corporation
d. Share in the net income of a business partnership

FINAL TAX RATES

Write the final tax rate applicable for each income. If it is exempt, write EX. If it is subject to other
income tax schemes, write NA.
1. Jackie received P10,000 from a raffle promo
2. Jonny, a resident Italian, received P60,000 dividends from an REIT
3. Jimmy, preterminated a seven-year peso deposit four years before its maturity
4. Jessy, received the interest from her investment on Philippine t-bills
5. Justme, an NRFC, earned interest from a loan extended
6. Jill, a non-resident alien engaged in trade, received a share in the net income of an
exempt partnership
7. June, received a reward on whistleblowing on a tax violation
8. A non-resident lessor of aircrafts earns rentals from domestic companies
9. A company engaged in arts primarily obtains income from royalties on its literary
works
10. An NRFC received dividends from a domestic corporation which was subject to
tax sparing rule
REINFORCEMENT/ASSIGNMENT

Problem 5.1 PASSIVE ROYALTIES

Dina Amon, a resident citizen, earned the following royalties from her intellectual
works: Cook Books 45,000
Musical Compositions 80,000
Other Passive Royalties 120,000
How much is the withheld final tax of Dina?

Problem 5.2 PASSIVE ROYALTIES

Jack Amon, a resident alien, received the following royalties during the taxable
year: Hairy Cutter Novel Books 450,000
Patents 120,000
Other Passive Royalties 224,000
How much is the final tax of Jack?

Problem 5.3 INTEREST INCOME

Hannah Caiat, a non-resident citizen, was credited with the following interest income from
her bank deposits:
Banco de Oro (net of tax) 1,600
Bank of the Philippine Islands (gross of tax) 5,000
Metro Bank (net of tax) 8,000
Citi Bank (gross of tax) 9,600
How much is the final tax on interest income on bank deposits of
Hannah?

Problem 5.4 DIVIDENDS

Mary Ribook, received the following dividends in Philippine pesos, gross of
tax. San Miguel Corporation

25,000
Apple Corporation 50,000
Ayala Land Corporation 30,000
Google Corporation 10,000
How much is the final tax from the said dividends?

Problem 5.5 PRIZES AND WINNINGS

Nash E. Mulan wants to experience placing a bet in the PCSO Ultra Lotto and tries to bet on
the combination 06-19-23-39-41-50. Knowing the minimal chance of winning, he did not
watch the telecast of the draw. Getting the newspapers on the next day, it revealed the
following winning numbers 41-23-19-51-06-39. The prizes are as follows: 6 digits –
P55,000,000, 5 digits – P300,000, 4 digits – P4,000 and 3 digits – P20.
How much is the final tax of Nash?
Problem 5.6 PRIZES AND WINNINGS
Nash, from the previous problem, was not satisfied of winning once and places again the
same combination on the next draw of 6/58. Winning numbers were 06-56-47-41-50-23.
How much is the final tax of Nash?

Problem 5.7 PRIZES AND WINNINGS

Nash, again from the previous problem, having been obsessed with lottery adapts the same
combination as being his lucky numbers and places a bet on the Mexican Lottery. He won
the jackpot prize of P960,000,000 during the draw.
How much is the final tax of Nash?

Problem 5.7 PRIZES AND WINNINGS

Venti Lador, obtained the following winnings (gross of tax) during the taxable year.
January 21 60,000
March 16 14,000
September 18 86,000
How much is the total final tax from the winnings?

Problem 5.8 TAX INFORMER’S REWARD

Lala Pit, reported to the BIR, Tim Maray, as having evaded from the payment of tax worth
P9,000,000. Due to the information she provided, BIR was able to collect said amount.
How much is the final tax?

Problem 5.8 TAX INFORMER’S REWARD

Assuming from the previous problem, the tax reported was P20,000,000.
How much is the final tax?
REFERENCES:

 Income Taxation with Special Topics and Properly Filled BIR Forms, 2020 Edition -
Enrico D. Tabag, CPA, MBA & Earl Jimson R. Garcia, CPA, MBA

 Reviewer in Taxation Updated TRAIN-Book 1 2018 Edition- Asser S. Tamayo, CPA,

MBA

 Income Taxation-Laws, Principles and Applications- Rex B. Banggawan, CPA, MBA

 National Internal Revenue Code of 1997

 Bureau of Internal Revenue Regulations

 Bureau of Internal Revenue Memorandum Circulars

 Supreme Court Jurisprudence on Tax Cases