F

Passive Income Taxation

Passive income is income earned with no active

participation from the taxpayer. Based on the National acts
Internal Revenue Code (NIRC), passive income
includes interests from currency bank deposits, trust in
funds, deposit substitutes, and similar arrangements;
royalties from owning intellectual property; dividends
from holding shares from a company; capital gains
realized from the sale/disposition of a financial asset,
igures
sale of shares of stock, and sale of real property; and Congressional Policy and Budget Research Department
House of Representatives
prizes/winnings.
December 2018 (No. 43)

In the Philippines, the current tax system of passive

income is very complex (Tables 1.1-1.2). There are
Table 1.2
variations in the tax base and rates, as rates depend
Current Taxation
on several factors and conditions (i.e. type of product, of Passive Income of Corporation
lending, issuer, currency, maturity, taxpayer, residency, Passive Income of Corporation Domestic Resident
(Sec. 27 D, NIRC, as amended) Corporation Foreign
business status, etc.). Corp.
Interest (currency deposits, trust 20%
Table 1.1 funds, deposit substitutes and similar
Current Taxation arrangements)
Royalties from sources within the 20%
of Passive Income of Individual Philippines
Passive Income of Individual Individual/ Non- Interest Income from a depository 15% *See notes
(Sec. 24 B, C, D and Sec. 25, NIRC, Resident Resident bank under EFCDS below
as amended) Alien Alien Cash/Property Dividends received by 0% N/A
Interest (currency deposits, trust funds 20% a domestic corporation from another
and deposit substitutes) domestic corporation
Royalties (on books, literary and 10% Capital gains from the sale, exchange 6% N/A
musical compositions) or other disposition of lands and/or
Royalties (in general) 20% building
Prizes (P10,000 or less) Graduated Income Tax Rates Net Capital gains from sale of shares 15% N/A
Prizes (over P10,000) 20% of stock not traded in the stock
Winnings (except PCSO/Lotto winning 20% exchange
amounting to P10,000 or less which is
Source for Tables 1.1-1.2: www.bir.gov.ph; NIRC, as amended;
exempt)
RA 10963 Tax Reform for Acceleration and Inclusion (TRAIN)
Interest Income from a depository 15% N/A
bank under Expanded Foreign
Currency Deposit System (EFCDS) *Note: On income derived under the EFCDS for Resident Foreign
Cash/Property Dividends received 10% 20% Corporation:
from domestic corporation/ joint stock a) interest income derived by a depository bank, 7.5%;
company/insurance or mutual fund b) income derived by depository banks from foreign currency transactions
companies/ Regional Operating with non-residents, Offshore Banking Units (OBUs) in the Philippines,
Headquarter of multinational local commercial banks including branches of foreign banks that may be
companies authorized by BSP, exempt;
Share in the distributable net income 10% 20% c) interest income derived from foreign currency loans granted by
after tax of a partnership (except depository banks to residents other than OBUs in the Philippines or other
general professional partnership)/
depository banks under the expanded system, 10%.
association, joint account, joint venture
or consortium taxable as corporation
of which an individual is a member or
co-venture
Interest income from long-term deposit Exempt Currently, there are 52 rates and bases on passive
or investment (in the form of savings, *Upon pre-termination before income (22 on interests, 13 on dividends, and 17 on
common or individual trust funds, the 5th year, final tax shall be
deposit substitutes, investment imposed on the entire income capital gains/stock transaction tax).
management accounts and other from the proceeds of the long-
investments evidenced by certificates term deposit based on the
in such form prescribed by the Bangko remaining maturity thereof:
Sentral ng Pilipinas or BSP) 4 years to less than 5 years:
Numerous exemptions/preferential rates apply to
5% certain passive income in the current tax code, and
3 years to less than 4 years:
12% in 41 special laws (covering government-owned
Less than 3 years: 20%
Capital gains from sale, exchange or 6%
and controlled corporations, government financial
other disposition of real property institutions, retirement and savings, property and
located in the Philippines, classified as
capital asset housing, power and water, agriculture, cooperatives
Net Capital gains from sale of shares 15% 5% (not over
of stock not traded in the stock P100,000) and basic sectors, OFW, non-banking, banking, and
exchange 10% special purpose vehicles), resulting in PhP21.1 billion in
(in excess of
P100,000) foregone revenues (DOF estimates).

.
Table 2 shows tax collection data from certain passive Treatment of passive income varies across ASEAN
income in 2013-2017. Interest income comprised more countries. Some countries aggregate it with other
than half of the percentage share of the total collection sources of income, while others have particular rates
with 57.2% average share from 2013-2017. This is for passive income. Rates also differ to residents and
followed by dividends with 24.2% average share. non-residents. For non-residents, rates may reduce/
Capital gains, stock transaction tax (STT) and initial vary based on tax treaty. Numerous special regimes
public offering (IPO) tax constituted 18.6% average and deductions also apply to financial investments.
share. Collection from passive income has been mostly Table 4 presents the withholding tax (WHT) rates in
steady throughout the period with increase in 2017 selected countries within ASEAN.
particularly in interest income.
Table 4
Table 2 Withholding Tax Rate (%)
Collection from Passive Income, 2013 - 2017 in Selected ASEAN Countries
Country Resident Resident Non-Resident
In Billion Pesos Individual Corporation Individual/Corp.
Passive Income 2013 2014 2015 2016 2017 On Interests:
Indonesia 15 15 20
Interest Income 55.4 53.5 55.0 54.4 64.8 Malaysia 0/5 0 0/15
Dividends 19.9 21.5 24.2 26.4 27.9 Singapore 0 0 15
Thailand 15 0/1 15
Capital gains, STT On Dividends:
23.3 19.0 16.7 17.8 14.5
and IPO tax Indonesia 10 15 20
Total Collection 98.6 93.9 95.9 98.6 107.2 Malaysia 0 0 0
Singapore 0 0 0
% Share to Total Collection Thailand 10 0/10 10
Interest Income 56.2 57.0 57.4 55.2 60.4 On Royalties:
Indonesia 15 15 20
Dividends 20.2 22.9 25.2 26.8 26.0 Malaysia 0 0 10
Capital gains, STT Singapore 0 0 10
23.6 20.2 17.4 18.1 13.5 Thailand Progressive Rate 15
and IPO tax
Source of basic data: Bureau of Internal Revenue (BIR) and National Tax Source: KPMG Asia Pacific Tax Centre (2016); Worldwide Tax Summaries
Research Center (NTRC) Tax Statistics Branch Corporate Taxes 2016/2017 www.pwc.com/taxsummaries
*Note: 0 – means exempt/no applicable WHT

As shown in Table 3, passive income comprised only Common tax rate within ASEAN is 15%, except
6.8% average share in the total BIR revenues (3.9% Indonesia which imposes 20% WHT for non-residents.
of which came from interest income), and only 0.7% Interest income tax rate for individual resident in
average share to GDP from 2013-2017. Malaysia is 5%, while interest on loans guaranteed by
Malaysian government and interest paid to non-resident
by banks in Malaysia are exempt. In Singapore,
Table 3 interests and royalties can be exempt or subject to a
Percentage Share to the Total BIR Revenues
and to Gross Domestic Product (GDP), 2013-2017 reduction in tax rates, usually under fiscal incentives or
Particulars 2013 2014 2015 2016 2017 double taxation agreements. Thailand imposes a 1%
Total BIR rate on interest paid to all resident corporations other
revenues
1,216.7 1,334.8 1,441.6 1,575.8 1,772.3 than banks/finance companies, except where interest
(in Billion
Pesos)
arises from bonds or debentures.
Passive Income % share to total BIR revenues
Interest
4.6 4.0 3.8 3.5 3.7
Income There is no WHT on dividends in Malaysia and Singapore.
Dividends 1.6 1.6 1.7 1.7 1.6
Capital On royalties, both Malaysia and Singapore apply WHT
gains, STT 1.9 1.4 1.2 1.1 0.8 of 10% to non-residents and no WHT for residents. In
& IPO tax
Total 8.1 7.0 6.6 6.3 6.0 Thailand, progressive rates based on the income tax
GDP (in schedule apply to residents, while 15% for non-residents.
Billion 11,538.4 12,634.2 13,322.0 14,479.9 15,806.4
Pesos)
Passive Income % share to GDP Other countries, such as Singapore, do not tax capital
Interest
0.5 0.4 0.4 0.4 0.4 gains. In Malaysia, gains from capital assets are not
Income
Dividends 0.2 0.2 0.2 0.2 0.2 taxed, except for gains from the disposal of real property
Capital
gains, STT 0.2 0.2 0.1 0.1 0.1 situated in Malaysia which are subject to real property
& IPO tax gains tax. There is no specific legislation governing
Total 0.9 0.7 0.7 0.7 0.7
Source of basic data: BIR for the Revenues and Philippine Statistics
capital gains in Thailand, and capital gains are taxed as
Authority (PSA) for the GDP part of the aggregate ordinary income.