1 Fi al Income Taxation chapter 5 - Fin CHAPTER 5 FINAL INCOME TAXATION Chapter Overview and Objectives 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 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: a, Understanding and appreciation of the features and scope of final tax b. 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 FEATURES OF FINAL INCOME TAXATION ‘ oa — — 2. 3. 4. The Final Withholding System —— & The final withholding system imposes upon the pers ing income nts Tesponsibi ie tax. The tax which will be deducted at source is tal ie taxpayer rece: come ere would be no need for 'm to file an income tax return to report the same. Uae ee cae SANE The final withholding system is inherently territorial It applies only to. i Passive income earne mM Sources within lippines. Note that taxation is Teitiforial and we cannot impose tax obligation (liling or wil i inst Dain sities of foreign sovereignty. Hence, all items of ii d nin Sources abroad, passive or active, are subject eee eee Of the regular income tax. ~~ , Sao Soke 135cr? tion Chapter 5 - Final Income Taxatio! iv i overnment conven; + Rationale of Final Income Taxatio"_ ayer and are tax return. This i ve re final withholding ass Be gon co leaf NCR Td cost tocomps" t Telieves the raxpayel of the oe limite is the most convenient and efi 6 convenient for taxpay’ | withholding system ! is high risk of non-compliane, va M the government, the final income where there vd the effectiveness gf 2. i ta evasion on the pare of the taxpayer: TO safeeroty nets against the ng f 9. {Sym the governor ust have tout sic met nes Bas wt non-remittance of the withheld tax on the pal fl a ed on certain passive income and y unles Under the NIRC, final income tax is impos' ss in the Philippines. ti non-resident persons not engaged in busine: ' Passive income I r 4 u d amo Nr they are not usually specifically monitored sl hen na = recorded by the taxpayer, their existence can be difficult to predict while th Aim actual amount may be difficult to determine. Thus, the final withholding at sourg! trus is the most favored scheme in taxing items of passive income. oe Loc Non-resident persons not engaged in business in the Philippines Non-resident persons not engaged in trade or business in the Philippines, such On non-resident aliens not engaged in trade or business (NRA-NETBs i Er foreign corporations (NRFCs), have high risk of mpm by ° do not have offices or fixed places of busines$ * bs canno te return due to territorial consideration, l— LL Thus, the law subjects them to final income tax Ne paying them income, Passive or active, are obligat 1. final tax: 2 Non-resident person not engaged in trad General final Non-resident alien not ied in trade or busines pe | Non-resident foreign corporation 25% 25% PASSIVE INCOME SUBJECT To FINAL TAX 1, Interest or yield from bank deposits, 2. Domestic dividends, in general" eDostt substitutes nejs- PO thee ~ 2 ~ chapter 5~ Final Income Taxation ie! eof 3. pividend income from a Real Estate Investment Trust Share in the net income of a business partnership, taxable associations, joint ventures, joint accounts, or co-ownership 5, Royalties, in general & prizes exceeding P10,000 7. Winnings — 8. informer's taxreward — 9, Interest income on tax-free corporate covenant bonds FINAL TAX ON INDIVIDUALS AND CORPORATIONS Unless otherwise indicated, the final tax rates to be discussed in the following ‘tions apply to all taxpayers (individuals and corporations) other than: Non-resident alien not engaged in trade or business (NRA-NETB), and oO. X6) Non-resident foreign corporation (NRFC). fi Fest income or yield from local currency bank deposits, deposit substitutes, trust funds and similar arrangements are subject to final tax as follows: Local carrency deposits ~ Recipient On interest income Individuals "| Corporations _| From banks = Short-term deposits/certificates 20% 2% | = Long-term deposits/certificates Exempt 20% From non-bank institugions he ie Short-term deposits/certificates RIT? - Long-term deposits/certificates RIT? sits applies only to those m; p the 25% general Fal ‘tax on their interest income. } 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 Fin the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments with a maturity of not less the form of which shall be prescribed by the BSP and issued by banks fnly (not by non-bank financial intermediaries or finance companies) to individuals ‘nominations of P10,000 and other denominations as may be prescribed by the BSP. C 14-2012)Cc ; hapter 5 - Final income Taxation Mlustration 1 jous time deposits: A taxpayer eared the following interest income from various 8,000 $month time deposit P 12,000 -year time deposit i S-year time deposit 40.000 Total interest income Pp a0.000 Required: Compute the final tax if the taxpayer is an individual and if a corporation, Solution: Individual taxpayers 6-month time deposit P 8,000 x20% P . 1,600 2-year time deposit 12,000 x 20% 2,400 5-year time deposit 40,000 x 0% ae Final withholding tax Bb 4,000 Corporate taxpayers (P8K + P12K).x 20% B__4,000 ‘The exemption of individuals on interest income on long-term deposits is anchored on the fat that long-term deposits are usually channeled to the financing of long-term projects such as infrastructures, property developments, and other construction projects which are deemel essential to the development of the country. Note that corporations are not exempt but art subject to regular tax on interest income on long-term deposit or investment certificates, Illustration 2 A resident taxpayer received 4 P16,000 igterest income from a bank. Determine the isno final tax withheld at source. 1 ae lend Solution: ¥ The ¥ Gross interest income (P16,000/80%) Pp 20,000 uh Multiply by: final tax rates Final tax withheld are Illustration 3 Banko Negro incurs the following interest in its ‘ from the following depositors: . savings and time deposit Resident individuals pAameunt_ Resident and domestic corporations GOOD Non-resident aliens not engaged in business aac Non-resident corporations 10,000 it expensi Total accrued interest expense py ietooo 138chapter 5 - Final Income Taxation equired: Compute the total final income tax to be withheld by Banko Negro. solution: epositors ____________ __Amount _ Rate —FinalTax_ Resident individuals P 600,000 x20% P 120,000 Resident/domestic corporations 800,000 x20% 160,000 NRANETB 200,000 x 25% 50,000 RFCS ——100,000 x 25% ___25.000 Total accrued interest expense P_ 1,700,000 P_355,000 savings or time deposits with cooperatives are not subject to final tax anks and shall not be’applied with time and savings wh account, for the ose of relend pura Teceivables and other. ions, oF fmancing {heneeas ortheir agent or dealer. Public means-20 or more corporate lenders at any one time. The 19-lender rule ‘The mere flotation of a debt instrument is not considered to be a public borrowing and isnot deemed a deposit substitute if there are only 19 or less individual or corporate lenders at any one time. The 19-lender rule does not apply to government securities Government debt instruments and securities including Treasury bonds, Treasury bills, and Treasury notes shall be considered as deposit substitute i i number of lender at origination if such debt instruments and securities are to be traded or exchanged in the secondary market. Debt instrument issued for interbank call loans with maturity of not more than 5 days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitutes. Classification of debt instruments Lssuer of debe instrument 12orless 20ormore | Comorate issuer Private borrowing | Deposit substitute Government including BSP Deposit substitute | Deposit substitute 139 me ‘ Sh_— Chapter 5 - Final Income Taxation a Note: ; 7 i i _ Interest 00 Priv; 1 Orgnaton means tg ga, a vOmomn® © sates fl 7 borrowing is subject to regular income taX- na debt instrument oy ficial, 0} Any person holding any interest, whether legal oF bane i ona ae eco the holding thereof either py assit ment or pa! pani eh he 19-lender ate. be considered as lender and thus be counted in apP’ itute for ‘Thus, debt instruments may not be initially cansdered JRO A ber or fli the 19-lender rule but may subsequently qualify as sucl oes aaah + i increase to at least 20 when any of the original lenders a ant a participated out the ‘debt instrument. w * * 1B ‘Timing of withholding of final tax ' ea i x in ities — ination ft 1, Zero coupon instruments OF securities - upon te nae aaet 2 2. Interest-bearing instruments or securities -upon Summary of tax rules 01 ~___Long term t Tssued by non-banks A a i ~__ Short term 20% 20% i 7 Long-term re or GR eel RIT | 4 ficates or investments is limited to a sper Section 3 of RR14-2012, exemption on long-term certi issued by banks only Mlustration 1 John earns interest incom instruments: e from the following investment placements in various Instrument. Remarks DI1 BSP treasury notes DIZ SP treasury bills I B DI3 itogon Bank deposit certificates 1—ar4 | Ayal DI4 Ayal a corporate bonds issued to the public DIS DI6 Promissory note negotiated by ABC Bank. jonds participated out to 30 lenders The interest income from the foregoin, g instruments shal ll be taxal ywst 140 ble as follo'|__iffohnisa/an __| Debt instrument classification Individual | Corporation | Long-term deposit substitute (BSP) Exempt 20% FIT. “Short-term deposit substitute (BSP) 20% FIT 20% FIT Long-term bank deposit Exempt 20% FIT, Long-term deposit substitute byanon-bank | 20% FIT RIT ‘Short-term deposit substitute by a non-bank 20% FIT 20% FIT. Private borrowing by a bank RIT RIT Long-term deposit substitute by a bank Exempt 20% FIT. ote: The final tax exemption on interest income derived from long,term certificates or debt Note ments refers only to those issued by banks and applies only to individual taxpayers. Mlustration 2 'ABC Company wants to take advantage of the decreasing interest rates. It disposed of "is investment in various sh ‘m deposit substitutes.-It-gained-total-of P300;000~ from the disposal inclusive of P180,000 interest income: ‘Only the P180,000 interest income shall be subject to 20% final tax. The P120,000 (i. 300,000 - P180,000) trading gain on the debt instruments shalll be subject to regular income tax. Also, forex gains on trading foreign currency denominated instruments, if any, shall likewise be subject to regular tax. ‘rust funds or investment. counts: Investments in trust Finids of banks (except qualified exempt employee trust funds), or investment management accounts are subject to the same final tax rules. However, in order to claim final tax exemption on long-term investment, it is also mandatory that: 1. The investment of the individual investor in the common or individual trust fund or investment management account must be held/managed by the bank for at least 5 years. . The underlying investments of the individual trust account or investment management account must qualify as a deposit substitute issued by a bank. . ‘The individual trust account or investment management account must hold on to such underlying investment for at least 5 years. Mlustration 1 Mr. Acebo appointed the trust department of RCBC Bank to manage his money through a trust agreement. The RCBC Bank trust department invested Mr. Acebo's ™money in 5-year corporate bonds. ven if Mr. Acebo does not withdraw his money from the trust agreement for at least 5 Years, his interest income from the trust agreement will still be subject to 20% final tax since the underling instrument (i.e. corporate bonds) is not issued by a bank. 141Chapter 5 - Final Income Taxation Illustration 2 , \ ‘Assume instead that the RCBC trust department invested Mr. Acebo's money in, year time deposit under its own name without mentioning that it deposit is the bank which is @ corp Id not qualify for exemption to the. the name of specific Fe The investor in this case to the 10-year time taxpayer subject to regular tax. Mr. Acebo would final tax since the investment was not made “in trust for qualified individual”. Mustration 3 . darth ‘Assume instead that RCBC trust department invested the money under the nan} Mr. Acebo’s in a 10-year long-term deposit. © Mr. Acebo’s interest income derived from the trust agreement shall be exempt income tax provided both he will hold such deposit or investment in a continuous uninterrupted period for at least 5 years. The trust must also hold the und instrument (10-year deposit) for at least 5 years. Pre-termination of long-term deposits or investment of individuals If the deposit or investment placement of individual taxpayers is pre-tel before 5 years, any previously untaxed or exempted interest income will subjected to the following final taxes upon pre-termination: Holding period Pre-termination tax Less than 3 years 20% 3 years to less than 4 years 12% 4 years to less than 5 years 5% 5 years or more 0% Illustration - long-term deposits On January 1, 2020, Patricia invested P1,000,000 in Baguio Bank's 5-year time ¢ The deposit 1 s ic aoe sposit pays 10% interest annually. Alice pre-terminated the deposit on Ji! The final tax on pre-termination will be computed as follows: 2020 interest income (P1,000,000 x 10%) 2021 interest income (P1,000,000 P 100,000 2022 interest income (P1,000,000 : io 100,000 2023 accrued interest income 100,000 (P1,000,000 x 10% x 6 months/12 Total interest income #12, months) Final tax rate applicable to less than 4- P 350,000 Final tax Year pre-termination _____129%4 142ter 5 ~ Final Income Taxation cep! roceeds of the deposit and accrued interest to be released to the depositor The Net Pe mination shall be: upon pres P 1,000,000 balance f prin rerest for 2023 —50,000_.- ‘cetitaxto be withheld (42000) ie proceeds to be released to the depositor —Bat.008,000- tiation of inves certificates -termination rates for individual taxpayers on Tong-term investment certificates, the remaining maturity of the instrument mu: al ‘al je 5-year requirement. ~~~ TT re mustration 1 ‘A debt instrument with a maturity of 10 years was held by Mr. X (a resident citizen) for 6 years then transferred it to Mr. ¥ (another resident citizen) who in turn held it for 4 years until the instrument matured. | The final tax due on the interest income of each holder shall be as follows: Classification TR = aul RC 10 years - long-term 6 years Exempt y 4 years - short-term 4 years 20% FWT Note: Mr. Y's remaining maturity upon acquisition of the instrument is already less than 5 years so he isnow subject to 20% final tax. (See Q&A Nos. 2 and 3 of RMC 81-2012 dated December 10, 2012) illustration 2 A debt instrument with a maturity of 10 years was held’ by Mr. X (a non-resident Gitizen) for 3 years and transferred it to Mr. Y (a resident alien). Mr. Y held it for two ‘years before subsequently transferring it to Mr. Z (a resident citizen) who held it until ‘maturity or 5 years. The final tax due on the interest income of each holder shall be as follows: a ion | Remain - — i Mr.X NRC 10 years ~ long-term 3 years 12% FWT Mr.¥ 20% FWT. | NRA 7 years - long-term 2 years, Mrz RC S years — long-term 5 years Exempt _| Mustration 3 Aninstrument with a maturity of 10 years held by Mr,X (2 NRA-NETB) for 3 years and nsferred it to Mr. Y (a NRA-ETB) Mr. Y held it tor 2 years before subsequently ‘ansferring it to Mr. Z. (a resident alien}, who pre-terminated it after 4 years. 143"A . nat Chapter 5 - Final Income Taxation cl fi der shall be as follows: e ‘The final tax due on the interest income of each hol Py | |_Holder | y , ote Mr.X. 10 years - long fin Mr¥ years = long-term rin? Mr. Z, S years — long-term. at ce Note: NRA-NETBs are not subject to the reduced pre-termination tax ral ema investment certificates. ign currency depositary banks The Foreign currency deposit with foreign cul \ plone ‘i s ‘The interest income from foreign currency deposits under ie foreign cu int ' deposit system or expanded foreign currency deposit system by resideny} 7 : subject to a final tax of 15%. wi ‘Taxpayer Individuals Corporations Fir Residents 15% | 15% se Non-residents Exempt Exempt_ Note: In Note esident taxpayers include resident citizens, resident aliens, domestic corporations andrei 4, foreign corporations. in 2, Nonresidents taxpayers include non-resident citizens, non-resident aliens and fon In foreign corporations. fi 3, It should be emphasized that NRA-NETBs and NRFCs are also exempt. 1 £._ There is no long-term or short-term classification of foreign currency deposits. 2 The reduced final tax rates on interest income on foreign currency deposit a ; exemption of non-resident depositors are intended to encourage the depot foreign currencies in our banks which will be used in the financing of international trades. Our Philippine peso is not a globally accepted currency I foreign trade will be limited without adequate forei: it core leq foreign currency reserves It Joint accounts on forex deposits If the bank account is jointly in the name of a non-resident and a re taxpayer, 50% of the interest - Rae re rare’ interest shall be exempt while the other 50% shall be Mlustration Mr. Seeman is an Overseas Filipi Filipino Work account under the forei reat ae ee te ee the month the savings denon? deposit unit CFODU) of 2 done pk ‘eposit account earned $1,000 interest uae font 2 equivalent to P'?'" Scenario 1: Mr. Seem; ositer iden" Mr, lan di Posited his savings through the account of his reside" 144ter 5 Final Income Taxation chal uF final tax shall be computed as follows: meres income P 41,500.00 rinal x 15% Final tax 26225.00 rio 2: Mr. Seeman deposited hhis savings through a joint account with his resident wife. se inal 2x shall be computed as follows: income Interest inco Portion taxable ‘Taxable interest income P 20,750.00 Multiply by: final tax rate vai as ‘Scenario 3: Mr. Seeman deposited his savings account through his own account. P 41,500.00 Inthis case, the interest income shall be exempt from final tax. 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. Investments in corporate bonds 3. Promissory notes Foreign sources, whether bank or non-bank 5. Penalty for legal delay or default DIVIDENDS “Dividends” means any distribution made by a corporation to its shareholders ut of its earnings or profits and payable to its shareholders, whether in money or In other property. (Sec. 73, NIRC) is - distribution of corporate net asset 145| Te Chapter 5 - Final Income Taxation y e following are n, As a tule, dividends are income subject to tax. However, thi lt 5 income for taxation purposes: p idends “aj account shall y pepe representing transit oe ie ape east ie sate fo jt tax. stock dividends are met, fea f Bye pital gain) which should be properly taxable W lin ve vrrough disposal or sale of the stocks investment. : The distribution of stocks of another corporation as dividends is @ taxab, 2 property dividend and not a stock dividend. 2. Liquidating dividends 4 ; ; 4 Ondir the NIRC, the receipt of liquidating dividends is not viewed as incon put as exchange of properties. ‘When the liquidating dividends exceed the coy ilu of the investments, the excess is a taxable capital gain, subject to regulg| Ma income tax. Any loss is deductible only to the extent of capital gain. she Taxability of Stock Dividends : th Normally, stock dividends are exempt from income tax. Exceptionally, stoq| dividends are subject to tax at the fair’ value ‘of the stocks received: under ty} sh following conditions: ind a. Subsequent cancellation and redemption Co If a corporation cancels or redeems stock issued as a dividend, at such ti Fir and in such manner as to make the distribution and_ cancellation redemption, in whole or in part, equivalent to the distribution of a i dividend, the amount so distributed shall be taxable to the extent itrep ie a distribution of earnings or profit. For instance, a corporation declared stock dividends and immediatély called ror dividends for redemption and, cancellation. This act is equiva” Re declaration of cash dividends. Ni ' i NR b. If it leads to substantial alteration in ownership in the corporation Nc Substantial alteration in ownership in a corporation may occur when Te dividends are given in lieu of cash dividends or when the corporation ded Th an optional stock or cash dividend. Stock dividend vs. Stock split % , sot alvin i a capitalization of earnings while stock split results in reducti ie par ; en stock and an increase in the number of:shares of -sharel! suming for-1 split, a shareholder holding one P50-par value stock two Pi S-par value stocks. While stock dividend may be taxable under s conditions, stock split will never be subject to income tax. ' 146cheoter 5 - Final Income Taxation we en q pividend Tax Rules Jource of dividends Domestic corporation Note: -ETB.1S subj a tax on dividend, not to the usual 10%; but. \- : ql oo to pet = — a 2 Cis not exemy féct to the 25% geheral final tax rate. However, the " mposable dividend tax shall be 15% when ing rule applies. This will be discussed later. 3, With conditional exemption for Feinvestment to be discussed in detail in Chapter 9 Ilustrative 1 Mati Company declared a total of P2,000,000 dividends, P800,000 is due to corporate shareholders while P1,200,000 is due to individual shareholders. ——_ ADH ‘The final tax to Be withheld by Mati Company shall be: Shareholders ____________ __Amount Rate __Amount _ Individual shareholders P 1,200,000 x10% P 120,000 Corporate shareholders 800,000 x 0% va Final tax 2_120,000 Mlustrative 2 Bayog Company declared a total of P1,000,000 dividends in March 2021. An analysis ofthe recipient shareholders is as follows: Shargholders 0 —Amount_ Resident aliens and citizens ¥ Jo}* P_ 500,000 NRAs engaged in trade or business 2%.) ° 100,000. NRAs not engaged in trade/business yu 50,000 Non-resident corporations pat mY A ——100.000 Total dividends , P_750,000 The total final tax to be withheld by Bayog Company shall be: R Dividends Rate. _Final Tax esident aliens and citizens P $00,000 x10% P 50,000 engaged in trade or business 100,000 x20% 20,000 RAS-NETBs 50,000 x 25% 12,500 id 100.000 x 25% ___25:000 i Bzso000 ~—“ B_107500 147Chapter 5 - Final Presumptive sor Any distribution made deemed to have been ma‘ and shall constitute a pa! which received. t Dividends ; ae irter-corporate dividends from domestic co! 2. Dividends from coop 3. Qualified foreign-sou Inter-corporate di Inter-corporate foreign corporation from a dot minimize double taxation. Mlustration B, Inc. owns 100% of A Corp. During the year, B, Inc.B, Inc, in turn, declared the same dividi table illustrates the double taxation: —ACorp.__ —B.lnc__ Dividends declared P 100,000 90,000 Less: 10% dividends tax 10,000 9,000 Net dividends This: is a form of direct duplicate taxation. To eliminate the impact of double taxatial inter-corporate dividends such as those declared by A Corp. to B, Inc’'is exem from final tax. When the dividend finally falls to an individual shareholder, the 1 final tax applies. This exemption domestic corporations since business under the NIRC. However, the exe general professional Partnership, because they are On the other hand, the exemption of inter- the share of a co absence ~of declaration only, Dividends from coo Under RA 9520, the di members eith be subject to ~express legal exemption, ler Tepresenting i tax, EN | Income Taxation lend distribution bers of a corporation shay sc tly accumulated profits or sy distributee for the Yee urce of divid to the shareholder ven m the mos! eat the annual income of the (Sec. 73(0), NIRC) rporations ~ exempt from fing) m final tax - exempt fro! yeratives ot from regular tax red dividends - exem| jividends from domestic corporations by a domestic corporation and reg dividends received Ce nted under the Ni mestic corporation are e ACorp. declared P100,000 dividengs ends to its shareholders. The follow P___90,000 — P__81,000 extends to dividends received by business partnerships fro partnerships are considered corporati s rporati en sees not extend to dividends received joint ventures and ie not considered corporations under the NIRC Seto corporate dividends does not appl)" arom of a business partnership due" emption is restricted. to. divid! rporation from the net in peratives istribution of dividends by an inte = exemy . if rest on capital or as patr Pt cooperative 01 S Patronage refunds shall 14gter 57 Final Income Taxation hap orate dividends from foreign corporations i rations from foreign corporations are generally yegular income tax. However, domestic corporate recipients of such ends may be exempted under certain conditions which will be discussed in pter 9. e 10% final withholding tax also applies to dividends from entities considered rations under the ‘and special laws, such as: ‘One-person corporations incorporated joint ventures . Real Estate Investment Trusts a] Estate Investment Trust or REIT. REIT is a publicly listed corporation €: ing income-generating real estate assets. lished principally for the purpose of iness partnership, taxable associations, joint venture, joint accounts or -ownerships e share in net income from these unincorporated entities are subject to tax as Tax treatment Individual taxpayers Final tax — - Citizens or residents. —~ 10% . - NRA-ETB + 20% -__NRA-NETB 25% _ —— Corporate taxpayers = DCor RFC 25% final tax Inder Sec. 73 of the NIRC, the net income of these entities is deemed onstructively received by the partners, members or venturers, respectively, in le same year the net income is reported. Hence, the tax (final or regular) applies the point of determination of the income, not at the point of ‘actual distribution. are in business partnership net income “share in net income” includes the share in the residual profit and provisions salary, interest and bonus to an individual partner. However, if the provisions salaries, interests, and bonuses are expensed as such in the book of the ership, they are subject to regular tax to the receiving partner, not to final In this case, only the share in the residual income after such provisions is ject to final tax. 1494 e' , “ a? Chapter 5 = Final income Taxation sa yay Avel roby po 0 if vtpea an hi Illustration 3 rtners Andy and Mar based on theiy ore 3 ‘The partnership profit distribution of pa els? profit distribution scheme is as follows: £5 ey P Pp 40,000 p we, Salaries to industrial partner » . 12,000 we? ; Interest to capitalist partner re royal Bonus to industrial partner > £74,000 ether Residual profit sharing P_36,000 oh oldine Profit sharing Fig he ROSIE tINLY vite fro in the book, the 101 ico Assuming the salaries, interest arid bonus are not expenset in a tax shall be: p 73,000 P 36,000 ed Profit sharing : as Multiply by: Final tax rate ——10% ES Final tax P7300 P2600 ne od ‘Assuming Mar is a corporation, the entire 36,000 profit sharing shall be su either fine regular income tax. Exempt F ROYALTIES a ede 1 Prize Passive royalty income received from sources within the Philippines is subj Exam the following final tax rates: Citize Recipient . Source of passive royalties | Individuals _| i a Books, literary works, and musical compositions [10% final tax_| Other sources 20% final tax" Requisit Note: i The 1. Under the regulations, the 10% preferential royalty final tax on books and literay"™@™ 2. ~The pertain to printed literatures. Royalties on books sold on e-copies or CDs such a toni are subject to the 20% final tax. pes 2. Royalties on cinematographic films and similar works paid to NRA- RANE T, NRFCsis subject to a final tax of 25%." rE ee Ferny Passive vs. Active royalties Hustration Ree E-Soft Inc, develops applic: Lie individually tailored to, eet spouts for establishments. These progra™ 7 Re, ic requirements of the establishments and?®™ Fp, 150 esnopter 5 Final Income Taxation des, occasional troubleshooting, and adjustments for problems. The developer ores 1% of the sales of the establishment as royalty. 7 E-Soft also developed a utility program and assigned it to an e-marketer which sells the utility program through the Internet. E-Soft receives 30% royalty on each copy of the program sold. ‘the royalties from application programs are active income subject to regular income The royalty from the utility programs is passive income subject to final withholding tax, but if the e-marketer is not a resident in the Philippines, the passive income from abroad shall be subject to regular tax. Royalties, active or passive, earned from sources abroad are subject to regular income tax. RIZES . The taxation of prizes varies. Prizes may be exempt from income tax or subjéct to either final tax or regular income tax. Exempt prizes 1. Prizes received by ipi ithout any effort on his joi . Examples include prizes from such awards as Nobel Prize, Most Outstanding Citizen, Most Benevolent Citizen of the Year, and similar awards. . Prizes from _sports competitions that are sanctioned by their respective national sport organizations“ Requisite of exempti Nine TeaipenT Ws selected without any action on his part to enter s 2, ~The recipient uired to render sul ture. services as a condition to receiving the price. : Taxable prizes For individual income taxpayers, taxable prizes are subject to ej ir gular tax dependi There may be events or Competitions where corporations earn prizes. However, there is no final imposition on Corporate prizes under thé NIRC. e, thes: e subject toregular income tax. unt of taxable prize xceeding P10,000 20% final tax _ © Not exceeding P10,000 Regular tax ‘om foreign sources are subject to the regular income tax. 1517 i noe Chapter 5 - Final Income Taxation s I eee ‘WINNINGS jved from sources wit sh ‘ins receive : ith) ar as For individual income xP wna tax, except winnings from Phi A (ation Philippines are generally subject to counting to 10,000 or less. vi ug Charity Sweepstakes Office (PCSO) games am si! it " i imposed on corporate winnings un, wi see vin orien ete ifnal tax by the payor should be hl Reape NIRC. Winnings that a1 tof i viene as part of the regular income. ve, winnings from foreign Sources Are subjgyg 2. ae regular income tax. a 4, nfo Types of winnit Individuals conv Pee6 winnings not exceeding P10,000 Exempt 4, The! CSO winnings exceeding P10,000 20% final tax aa Other winnings, in general 20% finaltax | Regular ta b. | Note: PCSO winnings of NRA-NETBs and NRFCS, regardless of amount, are subject to 25 o-— ax. ! ‘The tax rules on PCSO winnings shall be applied on a per ticket basis. Amount’ Mlustration 1 4 i” Apolinario won P10,000 first place in the singing contest sponsored by S| during their company anniversary celebration. m y Syd Comp 2. PAL Since results of singing contest is be The am payment is a prize which is not sje to 209 fi Hea than chance, the PINGS. withhel threshold. Apolinario shall report the prize in His raed aan it ts'below the PUR! inform amount exceetled P10,000, Syd C¢ ular income tax return. | ee Syd Company shall withhold 20% final tax. Mlustra n Me ia Ray/ raf ticket was selected asthe second winning t Peeore 1 for P10,000 dubbed as “2nd Prize’. ning ticket in the raffle draw «Since raffle draw results is 10% ca ; not basad-oneff C ¢ winning which ts subject t. effort but on chance, ash re that th ject to 20 final eax fi the B10,000 paymet 1 P10,000 threshold applies only OF yr same shall be/withheld By ZFT Nall Cash re Mlustration 3 es, not on winnings. ee 1 Mr. Dante Paya let ay the winninge wera” nee Bets to the PCSO lotto dra i " . ma ~P4,000 WS. All tickets won. The d TAXp - 6/42-P10,000 cs 000 (3-4 ; Ih 6/45 -P20000900 Sannin numbers) were The 6/42 and Bz Prize (sole winner) resi PCSO shal 72 winnings are exempt since thi obj e they di ig id not exceed P10,000 in final Ml withhold 209% final tax on the entire P20M amount of the winnings. fi of thecanter 5 - Final Income Taxation qaxINFORMER'S REWARD 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. pequisites of Tax Informer’s Reward: i Definite sworn information which is not yet in 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 of the guilty party or imposition of any fine or penalty. 4, The informer must not be a: a. BIR official or employee b, Other public official or employee c. relative within the 6th degree of consanguinity of thosé officials or employee in a. and b. 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. Note that the final tax applies to any recipient informant including NRA-NETB or NRFCs. Mlustration Ms, Kirsten, a non-resident alien, provided information to the BIR leading to the Tecovery of P12,000,000 unpaid taxes. The cash reward shall be computed as follows: 10% cash reward (P12,000,000 x10%) 21,200,000 Cash reward limit 21,000,000 a Teward (whichever is lower) P 1,000,000 ja 10% final withholding tax —100,000 ‘amount to be released to the tax informer 2.900.000 TAX-FREE CORPORATE COVENANT BONDS Interest income of non-resident aliens, citizens or residents of the Philippines on ends, mortgages, deeds of trust, or other similar obligations of domestic or oot foreign corporations with tax-free or tax-reduction provision where the £r shoulders in whole or in part any tax on the interest shall be subject to 2 al Withholding tax of 30%. 153e Taxation Chapter 5 - Final Incom' ‘Bond investor aitduals | OO on ation : i 30% final tax egular income poy 1a Tax on interest income em tax-free panne tax* spite ae corporate covenant bonds Wee 0 gal al Note: . individ als, regardless of classification. : antec firearms = cota ” gifferentiated ‘with foreign loans: wes { EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSON ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES NRANETB | NRFC | General Final Tax Rate 25% 25% Exceptions: a7 Ex? pital gain on sale of domestic —T 15% Capital 15% Capital _| stocks directly to buyer jains tax. gains tax 7,_ Rentals of vessels 25% of rentals 4.5% of rentals 3 Rentals of aircrafts, machineries, and other equipments 25% of rentals_|_7.5% ofrentals Interest income under the foreign currency deposit system. Exempt Exempt. Interest on foreign loans N/A ae nail 15% if tax 6. Dividend income 25% soda tt is 7, Tax on tax-free corporate bor applicable mds 30% Be Capieat gains tax a rule, NRA-ETBs and NRFCs d NETBs and NRECS are RFCs do not file income tax returns, Exceptional de ete Tequired to file ii . Exceptionally: em dealings in d i f income tax return gaint be rah aruneeeCres sons directly to buyers. Oumership of th = se the BIR that the ta: ssignee without the required retui e stocks SY J Thus, x on the transfer has been paid. mn and tax clearané whic Illustration: NRA-NETBs (BIR Mus In 2023, Mr. Wat ache Lu, an NRA: domestic manufacture -NETB, was hi Siniitey , was hired rrer, to install his invention by Raha Humabon Company factory. RHC pays hit and the installati also res 0 7 ion fees. Mr. Lu als to design ; agreed to design RHC’s websi and subsequently sold them dit ectly toa buyer. hie ad Dur , he purchast : he followin, ‘going transat g amounts i transactic were compiled from the foregoi i uv ons: 154jter 5 Final Income Taxation nal ities from invention P_ 300,000 fees , opment fees 200 000 domestic stocks directly to a buyer ae ic shall withhold the following final taxes: yalties from invention F688 tallation fees pral gross income =.ann titiply by: Final tax on NRA-NETB otal final withholding tax ‘The final tax applies on gross income, whether active or passive. The same rule and final tax rate apply with NRFC taxpayers, The website development fee is not subject to final tax since the same is earned abroad. Note that the service is rendered abroad, not in the Philippines. Mr. Lu shall file a capital gains tax return for the gain on the sale of domestic stocks, fhe Tax Sparing Rule IRFCs shall be st neral final tax i aring Tule; ¢ ign law OF the non-resident corporation must give a deemed cttax credit for dividend equivalent to_the percentage-points waived by the lippines potnting that the NIRC merely require the country of the NRFC to a emed paid tax equivalent to that waived by the Philippines. (CIR vs. Procter & amble Philippines Manufacturing Corporation and the CTA (G.R. 66836)) us, the requirement of the tax sparing rule is deemed satisfied if the country to hich the NRFC is domiciled imposes no tax on dividends from foreign sources. BIR Ruling Nos, 104-2012, March 22, 2012) lustration: The Tax Sparing Rule with NRFCs NREC is due to receive a dividend of P1,000,000 from a domestic corporation. The al tax to be imposed by the Philippines which shall be withheld by the domestic Drporation shall be 15%, not 25%, if the country of domicile of the NRFC also reduces I income tax upon the P1,000,000 dividend by at least 10%, the dividend tx "eentage waived by the Philippines from the 25% general final tax rae fe BUNK of the NRFC does not reduce its tax on the dividend by at least 10%, ippines shall impose the 25% final tax. 155ne} Chapter 5 - Final Income Taxation a A os itere OTHER FINAL INCOME TAXES 1 3 yc > i mployees 3 gu 1, Fringe benefits of managerial or supervisory emf Or citary banks unde Bo F 2. Income payments of residents pier EFCDS) and expanded 7 Vv expanded foreign currency ens system ( ana : i Us) furrency depositunits (EFCDUS) ontractors or sub-contractoy fp 1 inal 3, Income payments to oll exploration Se a, ee ef al | ‘AX ed ie ee iacode all _remunerations _under an ammreriean of relationship that do not form part of compensation incor a a ee s yea aii reimgerial and supervisory employees are subject £2 2 Ta ie Fe This will be discussed in detail in Chapter 11. month y Th INTEREST AND OTHER INCOME PAYMENTS TO DEPOSITARY BANKS am ‘THE EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM if Residents, other than depositary banks under the expanded foreign cure b 5 deposit system, shall withhold 10% final tax on income payments such as inter tt income on loans from expanded foreign currency deposit units (FCDUs). The c taxation of FCDUs and EFCDUs will be discussed in Chapter 15-A, w INCOME PAYMENTS TO SUB-CONTRACTORS OF PETROLEUM SEI Mont CONTRACTORS In ace Under PD 1354, every subcontractor, whether domestic or foreign, enteringiag filing a contract with a service contractor engaged in petroleum Operations ine Gray, opie be re ie a anal income tax equivalent to eight percent (8%) Grou lerived from such contract , such tax in li taxes, whether national or local. to be in lieu of any aM Groy Grou Provided, however, that any income received fi a Grou without the Philippines in the case of dot c sti ora hotter sources baie i ™ Philippines in the case of foreign subc i ¢.subcantractors and. within TE Wet jocomte tainidderith eNIRG: ‘ontractors shall be subject to the re Qua The term "gross income" me: i al A contract entered into by the aboot come earned or received as a result o re petroleum operations in the Philipoi ractor with a service contractor engage et ie gl tae ippines under Presidential Decree No. 87. ate e inal tax i : corporations, resident or rae subcontractors, whether individuas"§ Pe | the regular income tax. * Fetroleum service contractors are subj Th ap Persons or entities contra cte ‘ Boods and materials that Ret een sere are required by and in, 156 contractor to locally SY or that are inherently nece![chapter 5 - Final Income Taxation incidental to, its exploration and development of petroleum mineral resources ind are entitled to the preferential 8% final tax on their gross income derived rom such contracts. (BIR Ruling No. 024-2001, June 13, 2001) NAL WITHOLDING TAX RETURN final withholding tax return (BIR Form 0619-F), Monthly Remittance Return Final Income Taxes Withheld, shall be filed in triplicate by every withholding ent or payor who is either an individual or corporation for the first two months fthe quarter. eadline and place for monthly manual filing e return shall be filed and the tax shall be paid or before the 10% day of the jonth following the month in which withholding was made wit The authorized agent bank of the revenue district office having jurisdiction over the withholding agent's place of business . 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 lonthly deadline for eFPS filing in accordance with the schedule set forth in RR No. 26-2002, the deadline for e- iling of returns is as follows: roup A - Fifteen (15) days following the end of the month roup B - Fourteen (14) days following the end of the month roup C- Thirteen (13) days following the end of the month roup D - Twelve (12) days following the end of the month roup E - Eleven (11) days following the end of the month lote: Please check the groupings of taxpayers under eFPS in Chapter 4. juarterly filing withholding agent shall file (BIR Form 1601-FQ), Quarterly Remittance ‘eturn of Final Income Taxes Withheld, on or before the last day of the month fter each quarter. enalties for Late Filing or Remittance of Final Income Taxes Withheld le same penalties for late payment of income taxes as discussed in Chapter 4 pply for non-withholding or non-remittance of final taxes. 157—_ Chapter 5 - Final Income Taxation cate EXEMPT FROM FINAL INCOME TAX . Foreign governments and foreign government-owne corporations d and controlled 2. International missions or organizations with tax immunity 5 3. General professional partnership 3, 4, Qualified employee trust fund : 5. Personal Equity Retirement Aaccount fund 4. The first two categories are exempt on grounds of international comity. Generd professional partnerships and qualified employee trust funds are expressly exempt from any income tax imposed under the NIRC. 5. 6. These entities are exempt not only to final tax but also to capital gains tax and T regular income tax. Acomprehensive summary of final tax rates is presented in Appendix 1.er - Final Income Taxation chart SELF-TEST EXERCISES Harter fon Questions piseuss? ‘are the features of final income taxation? 1 Mplain withholding at source, 2 Trumerate the passive income subject to final tax and their corresponding tax es. Tihat are the two types of taxpayers who are subject to final tax rates on all 4 income from within the Philippines? What are the general tax rates applicable to ch? , fmumerate the requisites of the tax informer’s reward. é. Discuss the procedures and deadline in remitting the final withholding taxes. qrue or False 1 , Individuals and corporations are tax-exempt on interest income on long-term deposits. Generally, interest income from non-bank sources is subject to regular income tax. , Foreign income is subjected to final tax if the taxpayer is taxable on global income. Items of passive income from abroad are subject to final tax. o Interest income on government securities are subject to final tax, Allitems of passive income are generally subject to final tax. 1. Final tax is collected at source; hence, there is no need to file an income tax return. Corporations are tax-exempt on inter-corporate dividends from any corporation. 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. 12. Corporations are subject to final tax on prizes, 13, The share in the net income of a business partnership is subject to a creditable withholding tax, not to final tax. 14. General professional partnerships are subject to final tax but not to regular tax. 1S. Allnon-residents are exempt from final tax on foreign currency deposits., 16. Royalties, active or passive, are subject to regular income tax. 1. The tax sparing rule is applicable to resident and non-resident foreign corporations, CEI aneep Tne or False 2 * The final withholding’tax return shall be filed by the withholding agént on or 2. lelore the 15% day of the month the final taxes were withheld, 3 Te emment employee may claim the tax informer’s reward. 4 in final tax on winnings applies to corporations. 5, lviduals, except corporations, are subject to final tax on winnings abroad. Winnings which are not more than P10,000 in amount are subject to the regular ‘nome tax. 159ef ; pt Chapter 5 - Final Income Taxation cr ert é ' he Nigel me tax. cine 6. PCSO winnings are exempt from all types Pees tear on thet compen, 3, Corp? 7. Special aliens do not file a regular income 4 . jonds appli chin a. The taal tax on interest on tax-free eorporate covenant bonds applies oy, whi id Trident individual or corporate t@XPAVETS ve income fom sy a mere 9. NRANNETB and NRFC ae ‘subject to final tax only 5 ine 10, inthe IETB and NRFCs are not required to file the regules neope ae | incere soars shall withhold 10% final tax upon interest on foreign Currency lay in of ~ pen banks under the expanded foreign currency deposit sy which of 12, A qualified employee trust fund is not subject to final tax, seo curren! & 15 Tho income of FCDU banks from fellow depositary banks under the e Now ” foreign currency deposit system is subject to 10% finall tax. me Nom 14. Petroleum service subcontractors are subject to 8% final tax on their income Non-T petroleum service contractors. a Resid 15, Foreign governments and foreign government-owned and controlled corpo 1 are exempt from final tax. 9, The follor | Philippine Multiple Choices - Theory 1 \ a. Non-t 1. The final tax rates on pre-termination of long-term deposits are not relevantto b. Non-r a. any corporations. c. resident aliens. c. Non-t b. resident citizens. d.non-resident citizens. j) None 2. “Which is correct with regard to the final income taxation? i TH Taxpayers need not ean income tax return. Mt a obi It covers all items of passive income from whatever sources, b subje © It applies to all items of gross income of any non-resident earned —— sources within the Philippines. 1. What i 4. Itapplies to passive income earned abroad. than 290 3. wh statement is correct regarding final income tax? 20% . "ms of income subj “ ha a ® Final tax applies pa {0 nal tax can still be subjected to regular tat % Philippines. 'y on certain passive inéome earned within 9B '* Which of © Items of income exempt u , & Resi d. Final income tax ay tl Sat final tax are subject to regular tax: Ly ; plies to all passive income from Philippines sources. [1,0 Interest incom i . A div: a Lending 1m Which of the following sources is subject to final income ‘Wider b Mortgeee loans Investment in corporate bonds t 6% loney market placements ay, 5. The e final tax does not apply to interest on (select a. Longe th b Tree deposit“ s.Deposit substitute St answer) ateng Promissory notes 4 me je 160apter 5 - Final Income Taxation ‘The exemption on final tax on interest from long-term deposit is not applicabl , Citizens individuals ¢, Resident corporation or individualy PP @ Corporations 4. All of these Which interest income is not subject to any income tax? a, Interestincome from discount notes , Interest income from bonds issued by a bank Imputed interest d,_ Interest income from deposit substitute Which of the following is subject to 15% final tax on interest from foreign currency deposits made with Philippine banks? a. Non-resident corporation b, Non-resident citizen c. Non-resident alien not engaged in trade or business 4. Resident alien The following are subject to final tax on all income from sources within the Philippines. Which is the exception? a. Non-resident foreign corporation b. Non-resident alien not engaged in trade or business & Non-resident alien engaged in trade or business @ None of these. 0. The interest income from long-term peso deposits made with foreign banks is a. subject to 20% final tax.’ subject to regular tax. b. exempt from any tax. “d. None of these. /1, What is the final tax on interest income on 6-year deposit pre-terminated less than 2 years before maturity? 5% d.0% 2. Which of the following-recipients is exempt from final tax on dividends? a Resident citizen “Ce Resident corporation b. Non-resident alien d. Resident alien 3. A dividend declaration in 701g s subject to a final tax of a 6%. 10%. b. 9%, d. 20%. 4. Dividends declared by a resident corporation is @ exempt from any tax. (¢)subject to regular income tax. b. subject to 10% final tax. d. subject to 20% final tax. 161chopte™ 5 - Final Income Taxation e following are subject to final tax, except one. Which is the exception? 1 Th woe Jueteng winnings CSO winnings not exceeding P10! g Lotto winnings exceeding P10K “¢. All of these a which of the following is exempt from final tax? Interest income earned by a bank from deposits in anoth 5 Royalties from books — 9 -/, P aa ¢,_ Interest income earned by a bank from lending activities 4. Allofthese 9, The share in the net income of a business partnership is subject to which tax if received by a domestic corporation? a 10% final tax ¢. regular income tax @ 20% final tax d. 15% capital gains tax 10, Prizes arising from sources within the Philippines may be subject to final tax. subject to regular tax. exempt from tax. exempt or subject to final tax or regular tax. Sar ge i. = y royalties earned abroad by a non-resident corporation is not subject to Philippine income tax. always subject to final tax. subject to either final tax or regular tax. always subject to regular tax. 2 12. The winnings of a resident alien from abroad is subject to regular tax. - subject to final tax. subject to either final or regular tax. Not subject to Philippine income tax. ar seg arse 13, Royalty income of a domestic corporation from abroad is 4. subject to regular tax. b. subject to final tax. © subject to either final tax or regular tax. * Not subject to Philippine income tax. rT TT) [es 14, Winn: a Winnings from PCSO are generally b xempt from any tax. “Subject to regular tax. Subject to 20% final tax * Subject to both final and regular tax. 163