MODULE 5

Special Income
Taxation
Prepared by Mrs. Nelia I. Tomas, CPA, LPT

INCOME TAXATION Laws. Principles and Applications 2021 OBE Edition by Rex B. Banggawan
Final Income Taxation
Part 1
Learning Objectives
After completing the lesson, the students will be able to

01 Understand the features of final income taxation

02 Identify the passive income subject to final tax

03 Discuss the final tax on individuals and corporations

04 Determine the different final tax rates

05 Compute for the final tax on certain passive income

06 Fill out the final withholding tax return

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 in the Philippines
 Features of Final Income Taxation
The Final Withholding System
 Withholding tax agent has the responsibility to
withhold the income tax payments.
 Tax deducted at source is final.
 Inherently territorial and applies only to certain
passive income earned in the Philippines
Rationale of Final Income Taxation
 Built upon the taxpayer and government convenience. It
relieves the taxpayer of the obligation to file an income
tax return. For the government, it 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, the 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.
Non-resident Person Not Engaged in Business
or Trade
Non-resident aliens not engaged in trade or business
and non-resident foreign corporations have high risk
of non-compliance.
The law subjects them to final income tax
a. Non-resident alien not engaged in trade or
business – 25%
b. Non-resident foreign corporation – 25%
 Passive Income Subject to Final Tax

Interest or yield from bank Interest income on tax-free

01 09 corporate covenant bonds
deposits or deposit substitutes

Domestic dividends, in general 02 08 Informer’s Reward

Dividend income from a Real 07 Winnings

Estate Investment Trust 03

Share in the net income of a

business partnership, taxable 04 06 Prizes exceeding P10,000
associations, joint ventures,
joint accounts or co-ownership

05 Royalties, in general
 Interest Income or Yield
Interest income or yield from local currency bank deposits or deposit
substitutes are subject to final tax as follows:
a. Short-term deposits - are those made for a period of less than 5 years.
Individuals - 20%
Corporations – 20%

b. Long term deposits/investment certificates - refer to certificate of time

deposit or investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts, and other investments
with a maturity of not less than five years, the form of which shall be prescribed
by the BSP and issued by banks only to individuals in denominations or P10,000
and other denominations as may be prescribed by the BSP. (RMC 18-2011)
Individuals - Exempt
Corporations – Regular Income Tax
 Deposit Substitute
 Alternative form of obtaining funds from the public other than deposits through the issuance,
endorsement or 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.
 Public means 20 or more corporate lenders at any one time.

The 19-lender rule

 The mere flotation of a debt instrument is not considered to be a public borrowing and is not
deemed a deposit substitute if there are only 19 or less individual or corporate lenders at any
time.

The 19-lender rule does not apply government securities

 Government debt instruments and securities including Treasury bonds, Treasury bills, and
Treasury notes shall be considered as deposit substitute irrespective of the number of lender
at origination if such debt instruments and securities and are to be traded or exchanged in
the secondary market
 Debt instrument issued for interbank call loans with maturity of not more than 5 days to cover
deficiency in reserves against deposit liabilities, including those between or among banks
and quasi-banks, shall not be considered as deposit substitutes.
 Any person holding any interest, whether legal or beneficial, on a debt instrument or holding
thereof either by assignment or participation, with or without recourse, shall be considered as
lender and thus be counted in applying the 19-lender rule.

Classification of debt instruments

Number of borrowers at origination
Issuer of debt instrument 19 or less 20 or more
Corporate issuer Private borrowing Deposit substitute
Government including BSP Deposit substitute Deposit substitute
Timing of withholding of final tax
1. Zero coupon instruments or securities – upon origination
2. Interest-bearing instruments or securities – upon payment of interest

Summary of tax rules on interest on debt instruments

Deposit substitutes Recipient
Issued by banks: Individuals Corporations
- Short term 20% 20%
- Long term Exempt RIT
Issued by non-banks
- Short term 20% 20%
- Long term 20%* RIT

*exempt if issued by banks

Trust funds or investment management accounts
 Investments in trust funds of banks ( except qualified exempt employee trust funds), or invest
ment management accounts are subject to the same final tax rules.
 However, in order to claim final tax exemption on long-term investment, it is also mandatory
that:
a. The investment of the individual investor in the common or individual trust fund or in
vestment management account must be held/managed by the bank for at least
5 years.
b. The underlying investments of the individual trust account or investment
management account must qualify as a deposit substitute issued by a bank.
c. The individual trust account or investment management account must hold on to
such underlying investment for at least 5 years.
 Tax on Pre-termination of Long-term deposits of Individuals
If the deposit or investment placement of individual taxpayers is pre-determined before
5 years, any previously untaxed or exempted interest income will be subjected to the
following final taxes upon pre-termination:
Holding period Final tax
Less than 3 years 20%
3 years to less than 4 years 12%
4 years to less than 5 years 5%
5 years or more 0%
The final tax is limited to banks and shall not be applied with time and savings account
deposit maintained by members with cooperatives and by primary cooperatives with their
federations.
Other Application of the Final Tax on Interest
1. Deposit substitute
2. Government securities
3. Money market placements
4. Trust funds
5. Other investments evidenced by certificates prescribed by the BSP
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 (individuals or
corporations) is subject to a final tax of 15%.

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 be subject to the 15% final
tax.
.
 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.

Types of Dividends

Cash dividends Liquidating dividends

Property dividends Scrip dividends Stock dividends

As a rule, dividends are income subject to tax except for liquidating dividends and stock
dividends.
 Liquidating Dividends
Under the rule, is not viewed as income but as
exchange of properties. When liquidating dividends
exceed the cost of the investments, the excess is a
taxable capital gain, subject to regular income tax.

Stock Dividends
It represents transfer of surplus to capital
account shall not be subject to tax. However,
stock dividends become taxable when:
 If the corporation cancels or redeems stock
issued as a dividend immediately after the
declaration of stock dividends.
Dividends  If the declaration of stock dividends leads to
substantial alteration in ownership in the
corporation or when the corporation declared
an optional stock or cash dividend
 If the stock distributed as dividends is of
another corporation
 Dividends Tax Rules
Recipients of dividends
Source of Dividends Individuals Corporations
Domestic corporation 10% final tax1 Exempt2
Foreign corporation Regular tax Regular tax3
1. NRA-ETB is subject to a 20% final tax, and the NRA-NETB is subject to a 25% final tax.
2. NRFC is not exempt, instead subject to 25% general final tax rate. However, the imposable dividend
tax shall be 15% when tax sparing rule applies.
3. With conditional exemption for reinvestment.

Entities Taxable as Corporations Are Subject to 10% Final Tax

Any distribution made to the shareholders or members of a corporation shall be deemed 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 in which received. (Sec. 73 (C), NIRC)

Exempt Dividends
1. Inter-corporate dividends from domestic corporation
2. Dividends from Cooperatives
3. Qualified foreign-sourced dividends
Entities Taxable as Corporations Are Subject to 10% Final Tax
a. Real Estate Investment Trusts (REIT)
b. Business partnerships
c. Taxable Associations
d. Taxable Joint ventures, joint accounts or consortia
e. Taxable co-ownerships
 Royalties on Passive Income
Passive royalty income received from sources within the Philippines is subject to the followi
ng final tax rates:

Recipient
Source of Passive Royalties Individuals Corporations
Books, literary works and musical compositions 10% final tax 20% final tax
Other sources 20% final tax 20% final tax

1. Royalties on books sold on e-copies or CDs, such as e-books are subject to the 20%
final tax.
2. Royalties on cinematographic films and similar works paid to NRA-ETBs, NRA_NETBs
or NRFC is subject to a final tax of 25%.
3. Royalties from active income is subject to regular income tax.
 Taxable Prizes
Recipient
Amount of Taxable Prize Individuals Corporations
Prizes exceeding P10,000 20% final tax Regular tax
Prizes not exceeding P10,000 Regular tax Regular tax

Exempt Prizes
1. Prizes received by recipient without any effort on
his part to join a contest. Examples prizes from
awards as Nobel Prize, Most Outstanding Citizen,
Most Benevolent Citizen of the year.
2. Prizes from sports competitions that are
sanctioned by their respective national sports
organizations.
Requisites of Exemption
Prizes 1. The recipient was selected without any action on
his part to enter the contest.
2. The recipient is not required to render substantial
future services as a condition to receiving the
price or reward.
 Winnings
Recipient
Types of Winnings Individuals Corporations
PCSO/lotto winnings not exceeding P10,000 Exempt Exempt
PCSO/lotto winnings exceeding P10,000 20% final tax 20% final tax
Other winnings, in general 20% final tax Regular tax
Note: PCSO or Lotto winnings of NRA-NETB and NRFCs, regardless of the amount, are subject to 25%.
The tax rules on PCSO winnings shall be applied on a per ticket basis.

Examples:
1. Mr. A won P10,000 in a singing contest – Singing contest is based on effort, thus, the P10,000 is a
prize that is not subject to 20 final tax because it is within the threshold. Instead, Mr. A shall report the
prize in his regular income tax return.
2. Mr. A won P10,000 in a raffle draw organized by Z Mall – Raffle draw winnings is based on chance
thus, the P10,000 is a winnings that is subject to 20% final tax. Z Mall shall withhold the 20% final tax.
Mr. A shall receive the prize net of final tax.
3. Mr. A made 2 bets in PCSO lotto draws. Both won. The 1st winning is P5,000 and the 2nd winning is
P15,000. The 1st winning is exempt from tax while the 2nd winning is subject to 20% final tax.
 Tax Informer’s Rewards
01 Definition
A cash reward may be given to any person
instrumental in the discovery of violations
on the National Internal Revenue Code or
discovery and seizure of smuggled goods.
The reward is subject to 10% final tax.
03 Amount of Cash Reward
whichever is lower of the following per case:
1. 10% of revenues, surcharges or fees recovered
and or fine or penalty imposed and collected.
2. P1,000,000

02 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 those officials or employee in a and b.
 Tax-Free Corporate Covenant Bonds
Bond Investor
Individuals Corporations
Tax on interest income on tax-free corporate 30% final tax Regular income
covenant bonds tax
The final tax applies to all individuals, regardless of classification.
 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:
 Capital gain on sale of domestic stock 15% Capital gains tax 15% Capital gains tax
directly to buyer
 Rentals on cinematographic films and
similar works 25% of rentals 25% of rentals
 Rentals of vessels 25% of rentals 4.5% of rentals
 Rentals of aircrafts, machineries, and other
equipment 25% of rentals 7.5% of rentals
 Interest income under the foreign currency
deposit system Exempt Exempt
 Interest on foreign loans N/A 20%
 Dividend income 25% 15% if tax sparing rule
is applicable
 Tax on corporate bonds 30% 30%
 Tax Sparing Rule
NRFCs shall be subject to a 15% tax on dividend income instead
of the 30% general final tax if the country of domicile of the NRFC
credit 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. The requirement of tax sparing rule is deemed
satisfied if the country to which the NRFC is domiciled imposes no
tax on dividends from foreign sources.

Exceptions to the Capital Gains Tax

General Final Tax on As a rule, NRA-NETBs and NRFCs do
Non-Resident Persons not file income tax returns. Exceptionally,
they are required to file income tax
Not Engaged in Trade returns to report their gain from dealings
in domestic stocks directly to buyers.
or Business in the
Philippines
Final Withholding Tax Returns
The final withholding tax returns (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 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 in located.
Final Withholding Tax Returns
 Monthly Deadline for eFPS Filing
In accordance with the schedule set forth in RR No. 26-
2002, the deadline for e-filing of returns is as follows:
Group A – 15 days following the end of the month
Group B – 14 days following the end of the month
Group C – 13 days following the end of the month
Group D – 12 days following the end of the month
Group E – 11 days following the end of the month

 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.
 Questions to Ponder:
1. What are the features of final income taxation?
2. Explain withholding tax at source.
3. Enumerate the passive income subject to final tax and their corresponding tax rates.
4. What are the two types of taxpayers who are subject to final tax rates on all income fr
om within the Philippines? What are the general tax rates applicable to each?
5. Enumerate the requisites of the tax informer’s reward.
6. Discuss the procedures and deadline in remitting the final withholding taxes.
 Required Readings
1. Chapters 5, pp.136 – 159:

Banggawan, Rex B. 2021. INCOME TAXATION LAWS, PRINCIPLES, AND

APPLICATIONS. Real Excellence Publishing., Pasay Default Barangay,
Pasay City, Philippines.

2. https://www.bir.gov.ph/index.php/tax-information/capital-gains-tax.html
 Learning Activities
Chapters 5, pp.160 – 171; pp.204 – 220:

Banggawan, Rex B. 2021. INCOME TAXATION LAWS, PRINCIPLES, AND

APPLICATIONS. Real Excellence Publishing., Pasay Default Barangay, Pasay
City, Philippines.
 References
Banggawan, Rex B. 2021. INCOME TAXATION LAWS, PRINCIPLES AND APPLICATIONS. Real Exc
ellence Publishing., Pasay Default Barangay, Pasay City, Philippines.

BIR Form 0619-F (Monthly Remittance Return of Final Income Taxes Withheld. Retrieved from https://
www.bir.gov.ph/images/bir_files/taxpayers_service_programs_and_monitoring_1/0619-F%20Jan%202
018%20rev%20final.pdf

BIR Form 1601-FQ (Quarterly Remittance Return of Final Income Taxes Withheld. Retrieved from http
s://www.bir.gov.ph/images/bir_files/taxpayers_service_programs_and_monitoring_1/1601-FQ%20final
%20Jan%202018%20rev%20DPA.pdf
 Appendix: Course Materials Evaluation
Adopted: BEST PRACTICES AND SAMPLE QUESTIONS FOR COURSE EVALUATION SURVEYS. Retrieved from
https://assessment.provost.wisc.edu/best-practices-and-sample-questions-for-courseevaluation-surveys//.