MODULE 4: INCOME TAXATION

FINAL INCOME TAXATION

PENALTIES FOR LATE FILING AND PAYMENT TAX
1. Subcharge – 25% of the basic tax for failure to file or pay deficiency tax on time or
50% for willful neglect to file and pay taxes
2. Interest – 12%. It doubles the legal interest rate for loans or forbearance of money
in the absence of any express stipulations.
3. Compromise penalty

FINAL TAX REQUIRED TO BE WITHHELD BY PHILIPPINE RESIDENTS WHO ARE

PAYING THE FOLLOWING
Non-resident person not engaged in trade or business General Final Tax Rates
Non-resident alien not engaged in trade or business (NRA- 25%
NETB)
Non-resident foreign corporations (NRFC) 25%

PASSIVE INCOME SUBJECT TO FINAL TAX

1. Interest or yield from bank deposits or deposits substitute
Local currency deposits
On interest income Recipient
Individuals Corporations
From Banks
Short-term deposits/certificates 20% 20%
Long-term deposits/certificates Exempt RIT
1

From non-bank institutions

Short-term deposits/certificates RIT
2
RIT
2

Long-term deposits/certificates RIT

2
RIT
2

 Short-term deposits – less than 5 years

 Final tax is limited to banks and savings or time deposits with cooperatives are NOT
subject final tax.
 The 19-lender rule does not apply to government securities

Classification of debt instrument

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
 Interest on deposit substitute (i.e., public borrowing) is subject to final tax.
 Interest on private borrowing is subject to regular income tax.

Timing of withholding of final tax

1. Zero coupon instruments/securities – upon origination (or issuance)
2. Interest-bearing instruments/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
*Exemption on long-term certificates/investments is limited to those issued by banks only

Pre-termination of long-term deposits or investment of individuals

Holding period Pre-termination 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%
 For individual taxpayers on long-term investment certificates, the remaining
maturity of the instrument must still satisfy the 5-year requirement.

Foreign currency deposit with foreign currency depositary banks

Taxpayer Individuals Corporation
Residents 15% 15%
Non-residents Exempt Exempt
 Resident taxpayers include resident citizens, resident aliens, domestic corporations,
and resident foreign corporations
 Non-resident taxpayers include non-resident citizens, non-resident aliens, and non-
resident corporations
 NRA-NETBs and NRFC are also exempt
 There is no short-term or long-term classification of foreign currency deposits

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 be subject to the 15% final tax.

Interest income subject to regular tax

a. Lending activities, whether or not in the course of business
b. Investments in corporate bonds
c. Promissory notes
d. Foreign sources, whether bank or non-bank
e. Penalty for legal delay or default
 2. Domestic dividends in general
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.

As a rule, dividends are income subject to tax. However, the following are NOT income for
taxation purposes:
 Stock dividends – should be properly taxable when realized through disposal or sale
of the stock investment.
 Liquidating dividends – when liquidating dividends exceed the cost of the
investments, the excess is a taxable capital gain, subject to regular income tax. Any
loss is deductible only to the extent of capital gain.

Taxability of stock dividends:

a. Subsequent cancellation and redemption
 The amount to be distributed shall be taxable to the extent it represents a
distribution of earnings or profit.
b. If it leads to substantial alternation in ownership in the corporation
 May occur when dividends are given in lieu of cash dividends or when the
corporation declared an optional stock or cash dividend.

Dividend Tax Rules

Recipient of dividends
Source of dividends Individuals Corporations
Domestic corporation 10 % final tax
1
Exempt
2

Foreign corporation Regular tax Regular rax

3

1) NRA-ETB is subject to a 20% final tax on dividend, not to the usual 10%; but an NRA-NETB
is subject to a 25% final tax.
2) NRFC is not exempt but is subject to the 25% general final tax rate. However, the
imposable dividend tax shall be 15% when the tax sparing rule applies.
3) With conditional exemption for reinvestment

Presumptive source of dividend distribution

Any distribution made shall be 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 in which received.

Exempt dividends include:

 Inter-corporate dividends from domestic corporations – exempt from income
tax
 Inter-corporate dividends received from domestic corporation and resident
foreign corporation from a domestic corporation are EXEMPTED under the
NIRC to minimize double taxation.
 Exemption is restricted to dividend declaration only.
 Dividends from cooperatives – exempt from final tax
  Exempt cooperative to its members either representing interest on capital or
as patronage refunds shall not be subject to tax.

 Qualified foreign-sourced dividends – exempt from regular tax

 Inter-corporate dividends from corporations are subject to regular income
tax. However, domestic corporate recipients of such dividends may be
exempted under certain conditions.

ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL TAX

 Real Estate Investment Trust
 Business partnerships
 Taxable associations
 Taxable joint ventures, joint accounts, or consortia
 Taxable co-ownerships

3. Dividend from Real Estate Investment Trust

REIT is a publicly listed corporation established principally for the purpose of owning
income-generating real estate assets.
The following are recipients of REIT are EXEMPT from the final tax:
a. Non-resident alien individuals or non-resident foreign corporations’ entities 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 Aug. 12, 2018

4. Share in the net income of a business partnership, taxable associations, joint

ventures, joint accounts, or co-ownership
 10% final tax applies at the point of determination of the income, not at the point of
actual distribution.
 “Share in the net income” includes the share in the residual profit and provisions for
salary, interest, and bonus to a partner. However, if the provisions for salaries,
interest, 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.
 A partner, member, or venture who is an NRA-ETB (20%), NRA-NETB (25%), or
NRFC (25%) shall be subject to final tax rate.

5. Royalties
Recipient
Source of passive royalties Individuals Corporations
Books, literary works, and musical compositions 10% final tax 20% final tax
Other sources (e-books or e-copies) 20% final tax 20% final tax*
 Royalties on cinematographic films are similar works paid to NRA-ETBs, NRA-
NETBs or NRFCs is subject to a final tax of 25%.
  Passive royalties – royalties of claim owners or land owners of mining properties,
royalties of investors from companies that manufacture and sell their invention, and
royalty from licensing agreements that transfers the use of trademark/technology
are subject to 20% final tax.
 Active royalties- when royalties accrue from an undertaking where the taxpayer has
active involvement.

6. Prizes
Exempt prizes:
 Prizes received without any effort on his part to join a contest. Example: prizes from
such awards as Novel Prize, Most Outstanding Citizen, Most Benevolent Citizen of
the Year, and similar awards.
 Prizes from sports competitions that are sanctioned by their respective national
sports organizations.

Recipient
Amount of taxable prizes Individuals Corporations
Prizes exceeding P10,000 20% final tax Regular tax
Prizes not exceeding P10,000 Regular tax Regular tax
*Prizes from foreign sources are subject to the regular income tax.

7. Winnings
Recipient
Types of winnings Individuals Corporations
PCSO winnings not exceeding P10,000 Exempt Exempt
PCSO winnings exceeding P10,000 20% final tax 20% final tax
Other winnings, in general 20% final tax Regular tax
*PSCO winnings of NRA-NETBs and NRFCs, regardless of amount, are subject to 25% final tax.

8. Informer’s tax reward

 10% final tax

Requisites of Tax Informer’s Reward:

a. Definite sworn information which is not yet been in the possession of the BIR.
b. Information furnished lead to the discovery of fraud upon interest revenue laws or
provisions thereof.
c. Enforcement results in recovery of revenues, surcharges, and fees, and conviction of
the guilty party or imposition of any fine or penalty.
d. The informer must not be:
o BIR official or employee
o Other public official or employee
o A relative within the 6 th degree of consanguinity of those officials or
employee in the above mentioned.
Amount of cash reward:
 10% of revenues, surcharges, or fees recovered and or fine or penalty imposed and
collected
 P1,000,000
*The amount of cash reward is subject to 10% final withholding tax which shall be withheld
by the government.

9. Interest income on 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
 There is no similar final tax provision for corporate recipients of “tax-free” interest;
hence, the regular income tax shall apply.

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% 25%
Exceptions:
1. Capital gain on sale of domestic stocks 15% capital gains 15% capital gains
directly to buyer tax tax
2. Rentals on cinematographic films and 25% of rentals 25% of rentals
similar works
3. Rentals of vessels 25% of rentals 4.5% of rentals
4. Rentals of aircrafts, machineries, and 25% of rentals 7.5% of rentals
other equipment
5. Interest income under the foreign Exempt Exempt
currency deposit system
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 TAX GAINS

 As a rule, NRA-NETBs and NRFCs do not file income tax returns. Exceptionally, they
are required to file income tax returns to report their gain from dealings in domestic
stocks directly to buyers.

TAX SPARING RULE

 NRFCs shall be subject to a 15% final tax on dividend income instead of the 25%
general final tax if the country of domicile 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 10% of the dividends.

OTHER FINAL INCOME TAXES

1. Fringe benefits of managerial or supervisory employees
2. Income payments of residents other than depositary banks under the expanded
foreign currency deposit system (EFCDs) and expanded foreign expanded foreign
currency deposit units (EFCDUs) – shall withhold 10% final tax
3. Income payments to oil exploration service contractors or sub-contractors
 Every subcontractor entering to a contract with a Sservice contractor engaged
in petroleum operations in the Philippines shall be liable to 8% final income tax
of its gross income derived from such contract.
 Other income from all other sources within or without the Philippines shall be
subject to the regular income tax under NIRC.

NOTE TO SPECIAL ALIENS

 These employees are subject to regular income tax if they are residents; 25% final
tax if they are non-residents.