Philippines Tax Updates: Final Tax (TRAIN LAW)

Changes in Final Tax

What is a Final Tax?

Final Withholding Tax is a kind of withholding tax which is prescribed on

certain income payments and is not creditable against the income tax due of
the payee on other income subject to regular rates of tax for the taxable
year.

Final taxes are taxes prescribed on certain income. Once an income is

subjected to Final Tax, it will not be furthered taxed under the normal or
capital gains tax. It is a tax specifically extracted on a specifically defined
income on the Tax Law. They are somewhat treated in a special way since
they have their own tax rate.

What are the Major Changes in Final Taxes?

1. All PCSO and Lotto Winnings are now Taxable

In the Old Tax law (NIRC), lotto winnings and all PCSO prizes are tax
exempt. If you are fond of watching lotto draws everynight, you will always
notice that the host will always say that lotto winnings are tax free.

Moreover, in the Old NIRC, prizes are subject to final tax of 20% except
if the amount of the prize is Php 10,000 or less which shall be
subjected to normal tax. Winnings on the other hand are subject to
20% final tax regardless of amount.

In the new TRAIN Law, winnings (except PCSO and Lotto winnings
amounting to Php 10, 000 or less) are subject to a final tax of 20%.

Comparison of the TWO

Old NIRC TRAIN Law

Prizes - 20% Prizes - 20%
Winnings - 20% Winnings - 20%
PCSO and Lotto Winnings - PCSO and Lotto Winnings -
Exempt 20%***
Prizes are subject to 20% Final tax if amount is above Php 10,000, if not, then subject to normal tax.

Winnings are subject to 20% Final tax regardless of the amount won.

***PCSO winnings and prizes amounting to more than Php 10,000 subject to 20%.

Example

Adam won the following prizes/winnings during the year:

Prizes/Winning Amount Won Final Tax

Dance Contest 15, 000 3, 000
Raffle ticket winnings 35, 000 7, 000
PCSO Swertres 143, 000 28, 600

PCSO Swertres lotto winning before TRAIN Law was tax exempt regardless of amount won.

2. Capital Gains on shares NOT traded in the Stock Exchange

The TRAIN law made the Final Tax on Net Capital Gains on shares not
traded in the Stock Exchange to 15%. It replaced the two tier rate of 5%
for the first Php 100,000 and 10% for the amount in excess of Php 100,000
in the Old NIRC.

Old NIRC TRAIN Law

Net Capital Gains Net Capital Gains
First Php 100,000 - 5% First Php 100,000 - 15%
In excess of Php 100,000 - 10% In excess of Php 100,000 - 15%

Net Capital Gains = Capital Gains minus Capital Loss

Net Capital Gains are now subject to 15%. No more two tier rate.

How about the Tax on Shares Traded in the Stock Exchange?

RA 10963 increases the Stock Transfer Tax (STT) from 0.05% to 0.6% of
the gross selling price or gross value in every of the shares of stock sold,
bartered, exchange or otherwise disposed through the local stock exchange.

3. Fringe Benefit Tax

Lets define what is a Fringe Benefit. According to the law, Fringe Benefit is
defined as any good, service or other benefit furnished or granted in cash or
in kind by an employer to an individual employee (except rank and file
employees as defined herein) in addition to basic salaries.
Source: Section 33 (B) of National Internal Revenue Code

Examples of Fringe Benefits: Housing, Expense Account, Vehicle of any kind,

and etc.

Fringe benefits are benefits granted to managerial and supervisory

employees. It is granted to person who has the power to hire and fire.

Why does employers grants fringe benefits? What are the rationale
behind this?

1. It is granted to encourage employee's productivity and loyalty to the

employer.
2. During financial difficulties, employers can easily decrease or
discontinue giving fringe benefits. Unlike salaries and wages which
cannot be decreased once it is given to the employees.
3. Rather than increase the salary a non rank and file employee,
employers choose to give them fringe benefits becaise it can be
withdrawn anytime but salaries and wages cannot be reduced or
decreased.

Fringe Benefits Tax increase from 32% to 35%

Computed base on the Grossed-up monetary value of the fringe benefit

received by non-rank and file employees shall be divided by 65% to arrive at
100% gross-up monetary value.

Illustration

ABC company granted Adam (a Filipino branch Manager), in addition to his

basic salaries, Php 15,000 cash per quarter for his personal membership fees
at a Country Golf Club.

Computation:

Monetary Value of Fringe Benefit Php 26, 000

Percentage Divisor Applicable 65%
Fringe Benefit Tax Rate 35%
Fringe Benefit Tax Php 14, 000*

*26000/65% = Php 40, 000 (Grossed-up Monetary value) * 35% (FBT rate) = 14, 000
4. Foreign Currency Deposit Unit

What is a FCDU?

"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, pursuant to the
provisions of R.A. 6426, as amended.

Source: Bangko Sentral ng Pilipinas - Regulations

Final Tax on interest income received by an individual taxpayer (except non-

resident individual) from a depository bank under the expanded foreign
currency deposit system is to be subjected to final tax of 15%.

From 7.5% to 15%

Conclusion

The government really do its best to adhere to the true principles of

taxation: fair, simple, efficient. The changes as far as one can notice is
taxation have been simplified and the tax rates are increased as it is the goal
of the government to collect more revenue to finance its infrastructure
projects and programs.

Sources:

1. RA 10963 (TRAIN Law)

2. Revenue Regulation 08-2018