CHAPTER 5 FINAL INCOME TAXATION (NRA-NETBs) and non-resident foreign corporations

(NRFCs), have high risk of non-compliance.

FEATURES OF FINAL INCOME TAXATION
 These taxpayers do not have offices or fixed places of
1. Final tax
business in the Philippines making tax compliance
2. Tax withholding at source
very unlikely due to their absence and distance in the
3. Territorial imposition
Philippines.
4. Imposed on certain passive income and persons not
 Also, the Philippine government cannot impose upon
engaged in business in the Philippines
them the obligation to file return due to territorial
consideration.
The Final withholding system
 Thus, the law subjects them to final income tax final
 The final withholding system imposes upon the
wherein Philippine residents paying them income,
person making income payments the responsibility to
passive or active, are obligated to withhold the
withhold the tax.
following final tax:
 The tax which will be deducted at source is final.
Non-resident person not engaged General final tax rate
 The taxpayer receives the income net of tax and in trade or business.
there would be no need for him to file an income tax Non-resident alien not engage in 25%
return to report the same. trade or business
 The final withholding system is inherently territorial. Non-resident foreign corporation 30%
 It applies only to certain passive income earned from
sources within the Philippines.
PASSIVE INCOME SUBJECT TO FINAL TAX
 Note that taxation is territorial and we cannot impose
1. Interest or yield from bank deposits or deposit
tax obligation (filing or withholding) against non-
substitutes
resident subjects of foreign sovereignty. Hence, all
2. Domestic dividends, in general
items of income earned from sources abroad, passive
3. Dividend income from a Real Estate Investment
or active, are subject to tax under the general scope
Trust
of the regular income tax.
4. Share in the net income of a business partnership,
Rationale of Final Income Taxation
taxable association, joint ventures, joint accounts,
 The final withholding tax is built upon taxpayer and
or co-ownership
government convenience relieves the taxpayer of the
5. Royalties, in general
obligation to file an income tax return.
6. Prizes exceeding P10,000
 This very convenient for taxpayers who are limited by
7. Winnings
distance, time and cost to comply.
8. Informer's tax reward
 For the government, the final withholding system is
9. Interest income on tax-free corporate covenant
the most convenient and effective system in
bonds
collecting taxes on income where there is high risk of
FINAL TAX ON INDIVIDUALS AND CORPORATIONS
non-compliance or tax evasion.
 Unless otherwise indicated, the final tax rates to be
 Under the NIRC, final income tax is imposed on
discussed in the following sections apply to all
certain passive income and upon non-resident
taxpayers (individuals and corporations) other than:
persons not engaged in business in the Philippines.
a. Non-resident alien not engaged in trade or
Passive income
business (NRA-NETB), and
 Items of passive income are earned with very minimal
b. Non-resident foreign corporation (NRFC).
involvement from the taxpayer and are generally
INTEREST INCOME OR YIELD
irregular in timing and amount.
 Interest income or yield from local currency bank
 Unlike items of active income, they are not usually
deposits or deposit substitutes are subject to final
specifically monitored by taxpayers.
tax as follows:
 When not recorded by the taxpayer, their existence
Recipient
can be difficult to predict while their actual amount Source of interest income Individuals Corporations
may be difficult to determine. Short term deposits 20% 20%
Long-term deposits/investment Exempt* 20%
 Thus, the final withholding at source is the most certificates
favored scheme in taxing items of passive income.
 Non-resident persons not engaged in business in the Note: *Exemption does not include NRA-NETB
Philippines Non-resident persons not engaged in  Short term deposits are those made for a period of
trade or business in the Philippines, such as non- less than five years.
resident aliens not engaged in trade or business  Long-term deposits or investment certificates refer
to certificate of time deposit or investment in the
 form of savings, common or individual trust funds, Solution:
deposit substitutes, investment management Depositors Amount Rate Final Tax
accounts, and other investments with a maturity of Resident individuals P 600,000 x 20% P120,000
not less than five years, the form of which shall be Resident/domestic corporations 800,000 x 20% 160,000
NRA-NETB 200,000 x 25% 50,000
prescribed by the BSP and issued by banks only (not
NRFCs 100 000 x 30% 30,000
by non-bank financial intermediaries or finance
Total accrued interest expense P1 700 000 360,000
companies) to individuals in denominations of
P10,000 and other denominations as may be Tax on pre-termination of long-term deposits of
prescribed by the BSP. (RMC 18-2011) individuals
Illustration 1  If the deposit or investment placement of individual
A taxpayer earned the following interest income from
taxpayers is pre-terminated before 5 years, any
various time deposits: previously untaxed or exempted interest income will
6-month time deposit P 8,000
be subjected to the following final taxes upon pre-
2-year time deposit 12,000 termination:
5-Year time deposit 40.000 Holding period Final tax
Total interest income P 60,000 Less than 3 years 20%
3 years to less than 4 years 12%
Required: Compute the final tax if the taxpayer is an 4 years to less than 5 years 5%
5 years or more 0%
individual and if a corporation.
Solution:
Illustration 1
Individual taxpayers
On January 1, 2016, Alice invested P1,000,000 in Baguio
6-month time deposit P 8,000 x 20% P 1,600
Bank's 5-year time deposit. The deposit pays 10% interest
2-year time deposit 12,000 x 20% 2,400
annually. Alice pre-terminated the deposit on July 1,
5-year time deposit 40,000 x 0% 0
2019.
Final withholding tax P 4,000
The final tax on pre-termination will be computed as
follows:
Corporate taxpayers P 60,000 x 20% P 12.000
2016 interest income (P1,000,000 x 10%) P 100,000
 The exemption of individuals on interest income on
2017 interest income (P1,000,000 x 10%) 100,000
long-term deposits is anchored on the fact that long-
2018 interest income (P1,000,000 x 10%) 100,000
term deposits are usually channeled to the financing
2019 accrued interest income
of long-term projects such as infrastructures,
(P1,000,000 x 10% x 6 months/12 months) 50,000
property developments, and other construction
Total interest income P 350,000
projects which are deemed essential to the
Final tax rate applicable to less than
development of the country.
4-year pre-termination 12%
 Note that exemption is limited only to individuals to
Final tax P 42.000
the exclusion of corporations.
The net proceeds of the deposit and accrued interest to
Illustration 2
be released to the depositor upon pre-termination shall
A resident taxpayer received a P16,000 interest income
be:
from a bank. Determine the final tax withheld at source.
Principal balance P 1,000,000
Solution:
Accrued interest for 2019 50,000
Gross interest income (P16,000/80%) P 20,000 Final tax to be withheld ( 42,000)
Multiply by: final tax rates 20% Net proceeds to be released to the depositor P 1,008,000
Final tax withheld P 4,000 Savings or time deposits with cooperatives are not
subject to final tax
Illustration 3
 The final tax is limited to banks and shall not be
Banko Negro incurs the following interest in its savings
applied with time and savings account deposit
and time deposit accounts from the following depositors:
maintained by members with cooperatives and by
Depositors Amount
primary cooperatives with their federations.
Resident individuals P 600 000
(Dumaguete Cathedral Credit Cooperative vs. CIR,
Resident and domestic corporations 800 000
Non-resident aliens not engaged in business 200 000 G.R. 182722)
Non-resident corporations 100 000 Other applications of the final tax on interest
Total accrued interest expense P 1 700 000 1. Deposit substitute
2. Government securities
Required: Compute the total final income tax to be 3. Money market placements
withheld by Banko Negro. 4. Trust Funds
 5. Other investment evidenced by certificates
prescribed by the Bangko Sentral ng Pilipinas
(BSP)
 Deposit substitute means an alternative form of
obtaining funds from at persons at any one time
other than deposits through the Issuance, endorse '
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.
 Government debt instruments and securities
including Treasury bonds, Treasury bills and treasury
notes shall be considered as deposit substitute
irrespective of number of lenders at origination if
such debt instruments and securities are to traded or
exchanged in the secondary market.
Foreign currency deposit with foreign currency
depositary banks
 The interest income from foreign currency
deposits under the foreign currency deposit
system or expanded foreign currency deposit
system by residents subject to a final tax of 15%.
 The old law imposed a rate of 7.5% unti12017.
Taxpayers Individuals Corporations
Residents 15% 15%
Non-residents Exempt Exempt
Note:
1. 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- foreign
resident corporations
3. It should be emphasized that NRA-NETBs and
NRFCs are also exempt
4. There is no long-term or short-term classification of
foreign c exempt current, deposits.
 The reduced final tax rates on interest income on
foreign currency deposit and the exemption of non-
resident depositors are intended to encourage the
deposit of foreign currencies in our banks which will
be used in the financing of our international trades.
 Our Philippine peso is not a globally accepted
currency.
 Our foreign trade will be limited without adequate
foreign currency reserves in our banking sector
Joint accounts on forex deposits
 If the bank account is jointly in the name of a
non-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 Overseas Filipino Worker. 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.
Scenario 1: Mr. Siman deposited his savings through the
account of his resident wife.
The final tax shall be computed as follows:
Interest income P 41,500.00
Final tax rate 15%
Final tax P 6,225.00
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 P 20,750.00
Multiply by: final tax rate 15%
Final tax P 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 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 bonds
3. Promissory notes
4. 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 out of its earnings or
profits and payable to its shareholders, whether in money
or in other property. (Sec. 73, NIRC)
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 corporation
4. Stock dividends - paid in the stocks of the
corporation
5. Liquidating dividends - distribution of corporate
net asset
As a rule, dividends are incomes subject to tax. However,
the following are tax income for taxation purposes:
1. Stock dividends
 Stock dividends representing transfer of surplus
to capital account shall not be subject to tax.
  Stock dividends are in the form of increase in Dividend Tax Rules
corporate value (i.e. capital gain) which should be Recipient of dividends
properly taxable when realized through disposal Source of dividends Individuals Corporation
or sale of the stocks investment. s
 The distribution of stocks of another corporation Domestic corporation 10% final tax Exempt
Foreign corporation Regular tax Regular tax
as dividends is a taxable property dividend and
not a stock dividend.
2. Liquidating dividends Note:
 Under the NIRC, the receipt of liquidating 1. A NRA-ETB is subject to a 20% final tax on dividend, not
dividends is not viewed as income but as to the usual 10%; but an NRA-NETB is subject to a 25%
exchange of properties. final tax.
 When the liquidating dividends exceed the cost 2. A NRFC is not exempt but is subject to the 30% general
of the investments, the excess is a taxable capital final tax rate. However, the imposable dividend tax shall
gain, subject to regular income tax. be 15% when the tax sparing rule applies. This will be
discussed later.
 Any loss is deductible only to the extent of capital
Illustrative 1
gain.
Calbayog Company declared a total of P2,000,000
Taxability of Stock Dividends
dividends. P800,000 is due to corporate shareholders
 Normally, stock dividends are exempt from income
while P1,200,000 is due to individual shareholders.
tax.
 Exceptionally, stock dividends are subject to tax at
The final tax to be withheld by Calbayog Company shall be:
the fair value of the stocks received under the Shareholders Amount Rate Amount
following conditions: Individual shareholders P 1,200,000 x 10% P 120,000
a. Subsequent cancellation and redemption Corporate shareholders 800,000 x 0% 0
If a corporation cancels or redeems stock issued Final tax P 120,000
as a dividend at such time and in such manner as Illustrative 2
to make the distribution and cancellation or Aborian Company declared a total of P1,000,000
redemption, in whole or in part, equivalent to the dividends in March 2014. An analysis of the recipient
distribution of a taxable dividend, the amount so shareholders is as follows:
distributed shall be taxable to the extent it Shareholders Amount
represents a distribution of earnings or profit. For Resident aliens and citizens P 500,000
instance, a corporation declared stock dividends NRAs engaged in trade or business 100,000
and immediately called the stock dividends for NRAs not engaged in trade/business 50,000
redemption and cancellation. This act is Non-resident corporations 100,000
equivalent to declaration of cash dividends. Total dividends P 750,000
b. If it leads to substantial alteration in ownership
in the corporation The total final tax withheld by Aborian Company shall be:
Substantial alteration in ownership in a Shareholders Dividends Rate Final Tax
corporation may occur when stock dividends are Resident aliens and citizens P500 000 x 10% P50 000
given in lieu of cash dividends or when the NRAs engaged in trade or business 100 000 x 20% 20 000
corporation declared an optional stock or cash NRAs – NETBs 50 000 x 25% 12 500
NRFCs 100 000 x 30% 30 000
dividend.
Total P750 000 P112 500
Stock dividend vs. Stock split
Historical dividend tax rates
 Stock dividend is as capitalization of earnings
The imposable final tax rates vary depending on the
 Stock split results in reduction in the par value of
source of the declared:
stock and increase in the number of shares of
Source Final tax
shareholders.
Earnings before January 1, 1998 Exempt
 Assuming a 2-for-1 split, a shareholder holding one
Earnings from 19911 6%
P50-par value stock will be given two P25-par value
Earnings from 1999 8%
stocks.
Earnings from 2000 and thereafter 10%
 While stock dividend may be taxable under certain
conditions, stock split will never be subject to
Any distribution made to the shareholders or members of
income tax.
a corporation shall deemed to have been made from the
most recently accumulated profits or surplus. and shall
constitute a part of the annual income of the distribute
for the year which received. (Sec, 73(0, NIRC)

Exempt Dividends
1. Inter-corporate dividends
2. Dividends from cooperatives
Inter-corporate dividends
 Inter-corporate dividends received by a domestic
corporation and resident foreign corporation from a
domestic corporation are exempted under the NIRC
to minimize double taxation.
Illustration
B, Inc. owns 100% of A Corp. During the year. A Corp.
declared P100 000 dividend to B, Inc.B, in turn declared
the same dividends to its shareholders. The following
table illustrates the double taxation:
A Corp. B. Inc
Dividends declared P 100 000 90 000
Less: 10% dividends tax 10 000 9 000
Net dividends P 90 000 81 000
 This is form of direct duplicate taxation. To eliminate
the impact of double taxation, inter-corporate
dividends such as those declared by A Corp. to B,
Inc. is exempted from final tax.
 When the dividend finally falls to an individual
shareholder, the 10% final tax applies.
 This exemption extends to dividends received by
business partnerships from domestic corporations
since business partnerships are considered
corporations under the NIRC.
 However, the exemption does not extend to
dividends received by general professional
partnership, exempt joint ventures and exempt co-
ownership because they are not considered
corporations under the NIRC.
 On the other hand, the exemption of inter-corporate
dividend does not apply to the share of a
corporation from the net income of a business
partnership due to absence of express legal
exemption.
 Exemption is restricted to dividend declaration only.
Dividends from cooperatives
 Under RA 9520, the distribution of dividends by an
exempt cooperative to its members either
representing interest on capital or as patronage
refunds 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. 5. Taxable co-ownerships
Real Estate Investment Trust or REIT
 A REIT is a publicly listed corporation 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 foreign corporations
c. Overseas Filipino investors - exempt from REIT dividend
tax until August 12, 2018 (7 years from the effectivity of
RR13-2011 which took effect on August 12, 2011)
Business partnership, taxable associations, joint
venture, joint accounts or co-ownerships
 Under Sec. 73 of the NIRC, the net income of these
entities is deem constructively received by the
partners, members or venturers, 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
 The "share in net income" includes the share in the
residual profit and provisiors for salary, interest and
bonus to a partner.
 However, if the provisions for salaries, interests and
bonuses are expensed as such in the book of the
partnership, they are subject to regular tax to the
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 And and
Mar based on their agreed profit distribution scheme is as
follows:
Andy Mar
Salaries to industrial partner P 40 000 P 0
Interest to capitalist partner - 12 000
Bonus to industrial partner 25 000 -
Residual profit sharing 8 000 24 000
Profit sharing P 73 000 P 36 000
Assuming the salaries, interest and bonus are not
expense in the book the 10% final tax shall be:
Profit sharing P 73 000 P36 000
Multiply by: Final tax rate 10% 10%
Final tax P 7 300 P 3 600
Note: A partner, member or venture who is an NRA-ETB,
NRA-NETB or NRFC shall be subject respectively to 20%,
25% and 30% final tax rate.
 Royalties, active or passive, earned from sources abroad
The Improperly Accumulated Earnings Tax are subject to regular income tax.
 Domestic corporations cannot avoid the dividends tax PRIZES
by simply not declaring dividends.  The taxation of prizes varies.
 Corporations which accumulate earnings beyond the  Prizes may be exempt from income tax or subject
reasonable needs of business will be imposed the to either final tax or regular income tax.
10% Improperly Accumulated Earnings Tax, penalty Exempt prizes
tax. 1. Prizes received by a recipient without any effort on
ROYALTIES his part to join a context. Examples include prizes
 Passive royalty income received from sources within from such awards as Nobel Prize, Most Outstanding
the Philippine if; subject to the following final tax Citizen, Most Benevolent Citizen of the Year, and
rates: similar awards.
Recipient 2. Prizes from sports competitions that are sanctioned
Source of passive royalties Individuals Corporations by their respective national sport organizations
Books, literary works, & 10% final tax 20% final tax'
musical compositions
Requisite of exemption
Other sources 20% final tax 20% final tax" 1. The recipient was selected without any action on
his part to enter the contest.
Note: 2. The recipient is not required to render substantial
1. Under the regulations, the 10% preferential royalty future services a; condition to receiving the price or
final tax on books and literary works pertain to printed reward.
literatures. Royalties on books sold on e-copies or CDs Taxable prizes
such as e-books are subject to the 20% final tax.  For individual income taxpayers, taxable prizes are
2. Royalties on cinematographic films and similar works subject to either final tax or regular tax depending
paid to NRA-ETBs, NRA-NETBs, or NRFCs is subject to a on the amount of the prize.
final tax of 25%.  There may be events or competitions where
Passive vs. Active royalties corporations earn prizes.
 Royalties of a passive nature such as royalties of claim  However, there is no final tax imposition on
owners or land owners of mining properties, royalties corporate prizes under the NIRC. Hence, the same
of inventors from companies that manufacture and must be subject to regular income tax.
sell their invention, and royalty from licensing Recipient
agreements that transfers the use of trademark or Amount of taxable prize Individuals Corporations
Prizes exceeding P10,000 20% final tax Regular tax
technology are subject to 20% final tax.
Prizes not exceeding Regular tax Regular tax
 When royalties accrues from an undertaking where P10,000
the taxpayer has active involvement, it is an active
income subject to the regular income tax.  Recall also that final taxation does not apply to
Illustration foreign passive income; hence, prizes from foreign
E-Soft Inc. develops application programs for sources are subject to the regular income tax.
establishments. These programs were individually WINNINGS
tailored to meet specific requirements of the  For individual income taxpayers, winnings received
establishments and required upgrades, occasional from sources within the Philippines are generally
troubleshooting, and adjustments for problems. The subject to 20% final tax, except Philippine Charity
developer receives 1% of the sales of the establishment Sweepstakes Office (PCSO) or lotto winnings
as royalty. amounting to P10,000 or less.
 Similar to prizes, there is no final tax imposed on
E-Soft also developed a utility program and assigned it to corporate winnings under the NIRC.
an e-marketer which sells the utility program through the  Winnings that are not subjected to final tax by the
Internet. E-Soft receives 30% royalty on each copy of the payor should be reported as part of the regular
program sold. income.
The royalties from application programs are active  Also, winnings from foreign sources are subject to
income subject to regular income tax. The royalty from regular income tax.
Recipient
the utility programs is passive income subject to final
Types of winnings Individuals Corporations
withholding tax, but if the e-marketer is not a resident in PCSO/lotto winnings not Exempt Exempt
the Philippines, the passive income from abroad shall be exceeding P10 000
subject to regular tax. PCSO/lotto winnings exceeding 20% final tax 20% final tax
P10 000
Other winnings, in general 20% final tax Regular tax
 Note: PCSO or lotto winnings of NRA-NETBs and
NRFCs, regardless of array are respectively subject to
25% or 30% final tax.
 The tax rules on PCSO or lotto winnings shall be
applied on a per ticket basis.
Illustration 1
Apolinario won P10,000 first place in the singing contest
sponsored by Syd Company during their company
anniversary celebration.
Since results 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".
a. BIR official or employee
b. Other public official or employee
c. relative within the 6th degree of consanguinity
of those officials or employee in a. and b.
Amount of Cash Reward - whichever is the lower of
the following per case:
1. 10% of revenues, surcharge, or fees recovered and
or fine or penalty imposed and collected or
2. P1,000,000
The amount of cash reward is subject to 10% final
withholding tax which shall be withheld by the
government.
Illustration
Ms. Kirsten provided information to the MR leading to
the recovery of P12,000,000 unpaid taxes. The cash
reward shall be computed as follow:
10% cash reward (P12,000,000 x10%)
Cash reward limit
Cash reward (whichever is lower)
Less: 10% final withholding tax
Net amount to be released to the tax informer

Since raffle draw results is not based on effort but on TAX-FREE CORPORATE COVENANT BONDS
chance, the P10,000 payment is a winning which is  Interest income of non-resident aliens, citizens or
subject to 20% final tax. The same shall be withheld by residents of the Philippines on bonds, mortgages,
ZFT Mall. Note that the P10,000 threshold applies only on deeds of trust, or other similar obligations of
prizes, not on winnings. domestic or resident foreign corporations with tax-
free or tax-reduction provision where the obligor
Illustration 3
shoulders in whole or in part any tax on the interest
Mr. Dante Paya made three bets to the PCSO lotto draws.
shall be subject to a final withholding tax of 30%.
All tickets won. The details of the winnings were:
Bond investor
- EZ2 - P 4,000 Individuals Corporations
- 6/42 - P10,000 (3-digit winning numbers) Tax on interest income 30% final tax Regular income
- 6/45 - P20,000,000 Grand prize (sole winner) on tax-free corporate tax
covenant bonds
The 6/42 and EZ2 winnings are exempt since they did not
Note:
exceed P10,000 in amount. PCSO shall withhold 20% final
1. The final tax applies to all individuals,
tax on the entire P2OM amount of the winnings.
regardless of classification.
TAX INFORMER'S REWARD 2. There is no similar final tax provision for
 A cash reward may be given to any person corporate recipients of "tax-free" interest;
instrumental in the discovery of violations of the hence, the regular income tax shall apply.
National Internal Revenue Code or discovery and EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-
seizure of smuggled goods. RESIDENT PERSONS NOT ENGAGED IN TRADE OR
 The tax informer's reward is subject to 10% final tax. BUSINESS IN THE PHILIPPINES
Requisites of Tax Informer's Reward: NRA-NERTB NRFC
1. Definite sworn information which is not yet in the General Final Tax Rate 25% 30%
possession of the BIR Exceptions:
1. Capital gain on sale 15% Capital gains 15% Capital
2. The information furnished lead to the discovery of of domestic stocks tax gains tax
fraud upon internal revenue laws or provisions directly to buyer
thereof. 2. Rentals on 25% of rentals 25% of
3. Enforcement results in recovery of revenues, cinematographic rentals
films and similar
surcharges, and fees and/or conviction of the guilty works
party or imposition of any fine or penalty. 3. Rentals of vessels 25% of rentals 4.5% of
4. The informer must not be a: rentals
4. Rentals of aircrafts, 25% of rentals 25% of
 machineries, and rentals
other equipments
In applying the tax sparing rule, the Supreme Court ruled
5. Interest income Exempt Exempt
under the foreign that NIRC does not require that the foreign law of non-
currency deposit resident corporation must give deemed paid tax credit for
system dividend equivalent to the percentage points waived by
6. Interest on foreign N/A the Philippines pointing that the NIRC merely require the
loans
7. Dividend income 25% 15% if tax country of the NFRC to a deemed paid tax equivalent to
sparing rule that waived by the Philippines. (CIR vs. Procter & Gamble
is applicable Philippines Manufacturing Corporation and the CTA (G.R.
8. Tax on corporate 30% 30% 66836)
bonds
Illustration: The Tax Sparing Rule with NRRCs
Capital gains tax
An NFRC is due to receive a dividend of P1,000,000 from
 As a rule, NRA-ETBs and NRFCs do not file income tax
a domestic corporation. The final tax to be imposed by
returns.
the Philippines which shall be withheld by the domestic
 Exceptionally, NRA-NETBs and NRFCs are required to
corporation shall be 15%, not 30%, if the country of
file income tax returns to report their gain from
domicile of the NRFC also reduces its income tax upon
dealings in domestic stocks directly to buyers.
the P1,000,000 dividend by at least 15%, the dividend tax
 Ownership of the stocks shall not be transferred to
percentage waived by the Philippines from the 30%
the assignee without the required return and tax
general final tax rate. If the country of the NFRC does not
clearance (Certificate Authorizing Registration or
reduce its tax on the dividend by at least 15%, the
CAR) from the BIR that the tax on the transfer has
Philippines shall Impose the 30% final tax.
been paid.
OTHER FINAL INCOME TAXES
Illustration: NRA-NETBs
1. Fringe benefits of managerial or supervisory
In 2020, Mr. Tih Wong, an NRA-NETB, was hired by Raha
employees
Humabon Company (RHC), a domestic manufacturer, to
2. 2. Income payments of residents other than
install his invention in RHC's factory. RHC pays him royalty
depositary banks under the expanded foreign
and the installation fees. Mr. Wong also agreed to design
currency deposit system (EFCDS) to offshore
RHC's website which he designed and completed abroad.
banking units (OBUs) and expanded foreign
During Mr. Wong's visit, he purchased shares of RHMC
currency deposit units (EFCDUs)
and subsequently sold them directly to a buyer.
3. Income payments to oil exploration service
Royalties from invention P 300,000 contractors or sub-contractors
Installation fees 1,000,000 FRINGE BENEFITS TAX
Website development fees 500,000
 Fringe benefits include all remunerations under a
Gain on sale of domestic stocks directly to a buyer 40,000
employee-employee relationship that do not form
RHC shall withhold the following final taxes: part of o compensation income. The fringe benefits
Royalties from invention P 300,000 of managerial and supervisory employees are
Professional fees 1,000,000 subject to a final fringe benefits tax.
Total gross income P 1,300,000 INTEREST AND OTHER INCOME PAYMENTS TO
Multiply by: final tax on NRA-NETB 25% DEPOSITARY UNDER THE EXPANDED FOREIGN
Total final withholding tax P 325 000 CURRENCY DEPOSIT SYSTEM
Note:  Residents, other than depositary banks under the
1. The final tax applies on gross income, whether expanded foreign currency deposit system, shall
active or passive. The same rule applies with NRFC withhold 10% final tax on income payments such as
except that the final tax rate is 30%. interest income on loans from offshore banking
2. The website development fee is not subject to final units (OBUs) and expanded foreign currency deposit
tax since the same is earned abroad. Note that the units (FCDUs).
service is rendered abroad, not in the Philippines. INCOME PAYMENTS TO SUB-CONTRACTORS OF
3. Mr. Wong shall file a capital gains tax return for the
PETROLEUM SERVICE CONTRACTORS
gain on the sale of domestic stocks.
 Under PD 1354, every subcontractor, whether
The Tax Sparing Mile domestic or foreign, entering into a contract with a
NFRCs shall be subject to a 15% final tax dividend income service contractor engaged in petroleum
instead of the 30% general final tax if the country of operations in the Philippines shall be liable to a
domicile of the NFRC credits against the tax due of such final income tax equivalent to eight percent (8%) of
NFRC taxes presumed to have been paid by such NFRC its gross income derived from such contract, such
from the Philippines equivalent 15% of the dividends.
 tax to be in lieu of any and all taxes, whether
national or local.
 Provided, however, that any income received from
all other sources within and without the Philippines
in the case of domestic subcontractors and within
the Philippines in the case of foreign
subcontractors shall be subject to the regular
income tax under the NIRC.
 The term "gross income" means all income earned
or received as a result of the contract entered into
by the subcontractor with a service contractor
engaged in petroleum operations in the Philippines
under Presidential Decree No. 87.
 Note that the 8% final tax applies only to
subcontractors, whether individuals or
corporations, resident or non-resident.
 Petroleum service contractors are subject to the
regular income tax.
 Persons or entities contracted by a petroleum
service contractor to locally supply goods and
materials that are required by and in, or that are
inherently necessary or incidental to, its
exploration and development of petroleum mineral
resources and are entitled to the preferential 8%
final tax on their gross income derived from such
contracts. (BIR Ruling No. 024-2001, June 13, 2001)
Note on Special Aliens
 Under the old law, employees of offshore banking
units, regional operating or regional administrative
headquarters of multinational companies, referred
to as special aliens, are previously subject to 15%
final tax on gross compensation income. The special
alien classification is now abolished by virtue of a
presidential veto to the TRAIN law.
 As such, these employees are now subject to regular
income tax if they are residents and 25% final tax if
they are non-residents.
FINAL WITHOLDING 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.
Deadline and place for monthly manual filing
 The return shall be filed and the tax shall be paid or
before the 10th day of the month following the
month in which withholding was made with:
a. The authorized agent bank of the revenue
district office having jurisdiction over the
withholding agent's place of business
b. In places where there are no authorized agent
banks, to the revenue collection officer
c. The authorized city or municipality treasurer
within the revenue district where the
withholding agent's place of business is located
Monthly deadline for eFPS filing
 In accordance with the schedule set forth in RR No.
26-2002, the deadline for filing of returns is as
follows:
Group A - Fifteen (15) days following the end of
the month
Group B - Fourteen (14) days following the end of
the month
Group C - Thirteen (13) days following the end of
the month
Group D - Twelve (12) days following the end of
the month
Group E- Eleven (11) days following the end of
the month
Note: Please check the groupings of taxpayers under eFPS
in Chapter 4
Quarterly filing
 The withholding agent shall file (BIR Form 1601-FQ),
Quarterly Remittance Return of Final Income Taxes
Withheld, on or before the last day of the month
after each quarter.
Penalties for Late Filing or Remittance of Final
Income Taxes Withheld
 The same penalties for late payment of income taxes
as discussed in Chapter4 apply for non-withholding
or non-remittance of final taxes.
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
 The first two categories are exempt on grounds of
international comity. General professional
partnerships and qualified employee trust funds are
expressly exempt from any income tax imposed
under the NIRC.
 These entities are exempt not only to final tax but
also to capital gains tax and regular income tax.