CHAPTER 5

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.

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 tax payer 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 to certain passive income earned
from sources within the Philippines. Note that taxation is territorial and we cannot impose tax obligation
(filling or withholding) against non-resident subjects of foreign sovereignty. Hence, all items of income
earned from sources 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 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 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
Items of 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. Thus, the 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.

Non –resident persons not engaged in trade or business in the Philippines, such as non-resident aliens
not engaged in trade or business (NRA-NETBs) and non-resident foreign corporations (NFRCs), have igh
risk of non-compliance. These taxpayers do not have offices or fixed places of business ion the
[Philippines making tax compliance very unlikely due to their absence and distance in the Philippines.
Also, the Philippine government cannot impose upon them the obligation to file return due to territorial
consideration.
Thus, 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 not engaged in trade or General Final Tax Rate
business
Non-resident alien not engaged in trade or 25%
business
Non-resident foreign corporation 30%