Chapter 5: Final Income

Tax
 FEATURES

2. Tax withholding 4. Imposed on certain

1. Final Tax 3. Territorial
at source passive income and
imposition persons not engage in
business in the
philippines
 Final Withholding Imposes upon the person making income payments
System the responsibility to withhold the tax.

The final withholding tax is built upon taxpayer Rationale of Final

and government conventures relieves the Income Taxation
taxpayer of the obligation to file an income tax
return.

Under the NIRC,

For Government,
Final income tax is imposed on certain passive
The final withholding system is the most convenient
income and non-resident persons not engage in
and effectively system in collecting taxes on income
business in the Philippines.
 Earned with very minimal involvement
Passive income fron the taxpayer and a re generally
irregular in timing and amount

Non-resident Aliens Not Engage in Trade

Non-resident persons
of Business (NRA-NETBs) and Non-
not engage in business
resident Foreign Corporations (NRFCs),
in the Philippines
have high risk of non-compliance

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 business General final tax

Non-resident alien not engaged in trade or business 25%

Non-resident foreign corporation 30%
 1. Interest or
9. Interest income
yield from bank
on tax-free
deposits or
corporate covenant 2. Domestic
deposit
bonds dividends, in
substitutes
general
8. Informer’s
tax reward
PASSIVE 3. Dividend
INCOME income from a
SUBJECT real estate
7. Winnings TO FINAL investment
TAX trust
4. Share in the net
6. Prizes income of a business
exceeding partnership, taxable
P10,000 5. Royalties, associations, joint
in general ventures, joint accounts,
or co-ownership
 Recipient
INTEREST INCOME or YIELD
Source of interest Individu Corporati
Interest income or yield from local currency bank deposit or income als ons
deposit substitutes are subject to final tax as follows:
Short term deposits 20% 20%

Long-term Exempt* 20%

deposits/investment
certificates

• Short Term Deposits – made for a

period os less than 5 years
• Long-term Deposits or
Investment Certificates – refers to
certificate of time deposits or
investment
- not less than 5 years
 Tax on pre-termination of long-
term deposits of individuals
If the deposit or investment placement of individual taxpayer is pre-terminated before 5 years,
any previously untaxed or exempted interest income will be subjected to the following final taxes
upon termination:
Holding Period Final Tax

Less than 3 years 20%

3 years to less than 12%

4 years
4 years to less than 5%
5 years
5 years or more 0%
 Other Applications of the Final Tax on
Interest

Means an alternative form of obtaining funds from at

1. Deposit substitutes least 20 persons at any one time other than deposits
through the insurance , endorsement, or acceptance of
debt instruments for the borrowers own account
2. Government securities
Foreign currency deposit with
foreign currency depositary banks
3.Money market placement
Taxpayer Individuals Corporations
Residents 15% 15%
4.Trust Funds Non-residents Exempt exempt
Note:
5. Other investments • Resident taxpayers include resident citizens, resident aliens,
evidenced by certificates domestic corporations and resident foreign corporations.
prescribed by the Bangko • Non-resident taxpayer include non-resident citizens, non-resident
Sentral ng Pilipinas (BSP) aliens, and non-resident foreign corporations.
 Joint Accounts on Forex
Deposits

If the bank account is jointly in

the name of a non-resident and
a resident taxpayer, 50% of the
interest shall be exempt while
the other 50% shall subject to
the 15% final tax.
DIVIDENDS Any distribution made by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders, wether 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 the corporation
4. Stock Dividends – paid in the stocks of the corporation
5. Liquidating Dividends – distribution of corporate net asset
As a rule, dividends are income subject to tax. However, the following are not income for taxation
purposes:
1. Stock Dividends – representing transfer of surplus to capital account shall not be subject to
tax.
2. Liquidating Dividends – under the NIRC, the receipt of liquidating dividends is not viewed
as income but as exchange of properties.

Normally, stock dividends are exempt from income tax.

Taxability of Exceptionally, stock dividends are subject to tax at the fair value
Stock Dividends of the sstocks received under the following conditions:

a. Subsequent cancellation and b. If it leads to substantial alteration in

redemption ownership in the corporation
 Stock Dividend Stock Split

• Capitalization of • Results in reduction in the par value of

earnings stock and an increase in the number of
• May be taxable VS shares of shareholders.
under certain • Will never be subject to income tax.
conditions Example: assuming a 2-for-1 split, a
shareholder holding one P25 par value of
stocks.

Dividends Tax Rules

Recipient of Dividends

Source of Dividends Individuals Corporations

Domestic Corporation 10% final tax Exempt
Foreign Corporation Regular tax Regular tax
 Exempt Dividends

Inter-corporate Dividends from

Dividends Cooperatives

Inter-corporate dividends received by a domestic Under RA 9520, the distribution of

corporation and resident foreign corporation from a dividends by an exempt cooperative to its
domestic corporation are exempted under the NIRC to members either representing interest on
minimize double taxation. capital or as patronage refunds shall not be
subject to tax.
 ENTITIES TAXABLE AS
CORPORATIONS ARE
SUBJECT TO 10% FINAL
Real Estate TAX Taxable co-
Investment ownerships
Trusts
The 10% final withholding tax also apples to dividends or
share in the net income of entities considered corporations
under the NIRC and special laws, such as:

Taxable Joint
Business Ventures, Joint
Partnerships Accounts or
Consorts
Taxable
Associations
 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 REIT dividends are

exempt from the final tax.

Non-resident alien Overseas Filipino

individuals or non- investors-exempt from
resident foreign REIT dividend tax until
corporations entitled to August 12, 2018 ( 7 years
Domestic from from the effectively
claim preferential tax rate corporation or
pursuant to applicable tax of RR13-2011 which took
resident foreign effect on August 12, 2011
treaty. corporations.
 Business Partnership, Taxable Associations, Joint Accounts or Co-ownerships
Under Sec. 73 of the NIRC, the net income of these entities is deemed constructively received
by the partners, members or ventures, 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 provisions for salary,
interest and bonus to a partner. Only the
share in the residual income after such
provisions is subject to final tax.
However, if the provisions for salaries,
interest and bonuses are expensed as such in
the book at the partnership, they are subject
to the receiving partner, not to final tax.
 Corporations which accumulate earnings beyond the
The Improperly
reasonable needs of business will be imposed the 10%
Accumulated Earnings
Improperly Accumulated Earning Tax, a penalty tax.
Tax

ROYALTIES

RECIPIENT
Source of passive Individuals Corporations
Passive royalty income received from
royalties
sources within the Philippines is subject to
the following final tax rates: Banks literary works, 10% final tax 20% final tax
and musical
compositions

Other sources 20% final tax 20% final tax

 Passive Royalties
Such as royalties of claim owners or land
owners of mining properties, royalties of
inventor from companies that
manufactures and sell their invention, and
royalty from licensing agreements that
transfer the use of trademark or
technology are subject to 20% final tax.
Active Royalties
VS When royalties accrues from on
undertaking where the taxpayer
has active involvement, it is an
active income subject to the
regular income tax.
 PRIZES

The taxation of prizes varies. Prizes may be exempt from income tax or subject to
either final tax or regular income tax.

Exempt Prizes Requisite of Exemption Taxable prizes

1. Prizes received by a recipient
without any effort on his part to
join a content.
2. Prizes from sports competitions
that are sanctioned by their
respective national sport
organizations.
1. The recipient was selected
without any actions on his part
to enter the context.
2. The recipient is not required to
render substantial future
services in a condition to
receiving the price or reward.
For individual income taxpayers,
taxable prizes are subject to
either final tax or regular tax
depending on the amount of the
prize.
 WINNINGS

• Winning received from sources

• There is no final tax imposed on
within the Philippines are generally
corporate winnings under the NIRC
subject to 20% final tax, except
• Also, winning from foreign sources are
PCSO or lotto winning amounting
subject to regular income tax
to P10,000 or less

Recepient
Types of winnings Individuals Corporations
PCSO/lotto winnings not exceeding P10,000 Exempt Exempt
PSCO/lotto winnings exceeding P10,000 20% final tax 20% final tax
Other winnings in general 20% final tax Regular tax
 A cash reward may be given to any person instrumental in
TAX INFORMER’S the discovery of violations of the National Internal Revenue
REWARD Code or discovery and seizure of smuggled goods. The tax
informer’s reward is subject to final tax.

Requisites of Tax Informer’s Reward:

1. 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 these officials or employee in a and b
 TAX-FREE CORPORATE COVENANT
BONDS

Interest income of non-resident aliens, citizens or residents of the

Philippines on bonds, mortage, deeds of trust or other similar obligations
of domestic or resident foreign corporations with tax-free or tax-reduction
provision where the obligor shoulders in whole or in part any tax on the
inrest shall be subject to a final withholding tax of 30%.

Bond Investor
Individuals Corporations
Tax on interest income on tax-free 30% final tax Regular income tax
corporate covenant bonds
 EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSONS
NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES

NRA-NETB NRFC
General Final Tax Rate 25% 30%
Exceptions:
1. Capital gain on sale of domestic stocks directly to buyer 15% Capital gain tax 15% Capital gains tax
2. Rentals on cinematographic files and similar works 25% of rentals 25% of rentals
3. Rentals of vessels 25% of rentals 4.5% of rentals
4. Rentals of aircraft, machineries, and other equipments 25% of rentals 7.5% of rentals
5. Interest income under the foreign currency deposit system Exempt Exempt

6. Interest on foreign loans N/A 20%

7. Dividend income 25% 15% if tax sparing rule
is applicable
8. Tax on corporate bonds 30% 30%
 Capital gains tax

As a rule, NRA-NETBs and NRFCs do not

file income tax returns. Exceptionally, NRA-
NETBs and NRFCs are required to file
income tax returns to report their gain from
dealings in domestic stocks directly to
buyers. Onwership of the stocks shall not be
transferred to the assignee without the
required return and tax clearance
(Certificate Authorizing Registration of
CAR)
 NRFCs shall be subject to a 15% final tax on dividend income
instead of the 30% general final tax if the country of domicile
The Tax Sparing Rule of the NRFC credits against the tax due of such NRFC taxes
presumed to have been paid by such NRFC from the
Philippines equivalent to 15% of the dividends.

Fringe Benefits include all remunerations under an employer-

Fringe Benefits Tax employee relationship that do not form part of compensation
income.
 INTEREST AND OTHER INCOME
PAYMENTS TO DEPOSITARY BANKS
UNDER THE EXPANDED FOREIGN
CURRENCY DEPOSIT SYSTEM
Residents other than depositary banks under the
expanded foreign currency deposit system, shall
withhold 10% final tax on income payments
such as interest income on loans from
offshore banking units (OBUs) and expanded
foreign currency deposit units (FCDUs).
INCOME PAYMENTS TO SUB-
CONTRACTORS OF PETROLEUM
SERVICE CONTRACTORS
Under PD 1354, every subcontractor, whether
domestic or foreign, entering into a contract with
a service contractor engaged in petroleum
operations in the Philippines shall be liable to a
final income tax equivalent to 8% of its gross
income derived from such contract,such tax to
be in lieu of any and all taxes, whether national
or local.