AC 47 Chapter 5

Final Income
Taxation
FEATURES OF FINAL INCOME TAXATION

▰ Final tax
▰ Tax withholding at source
▰ Territorial imposition
▰ Imposed in certain passive income and persons not engaged in business
in the Philippines

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PASSIVE INCOME SUBJECT TO FINAL TAX
(PIDRO)

▰ Prizes
▰ Interest income
▰ Dividends
▰ Royalties
▰ Other winnings

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NON-RESIDENT PERSONS NOT ENGAGED IN BUSINESS
IN THE PHILIPPINES

Non-resident person not engaged in trade or business General final tax rate

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

Non-resident foreign corporation 30%

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INTEREST INCOME
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 INTEREST INCOME OR YIELD FROM LOCAL CURRENCY
BANK DEPOSITS OR DEPOSIT SUBSTITUTES

Recipient
Source of interest INDIVIDUALS
CORPORATIONS
income RC, RA NRC, NRAETB NRANETB
Short-term deposit 20% 20% 25% 20% - DC/RFC
30% - NRFC
Long-term Exempt Exempt 25% 20% - DC/RFC
deposits/investment 30% - NRFC
certificates
Interest from a 15% Exempt Exempt 15% - DC
depositary bank under 7.5% - RFC
Expanded Foreign Exempt – NRFC
Currency Deposit
System (EFCDS)
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 INTEREST INCOME OR YIELD FROM LOCAL CURRENCY
BANK DEPOSITS OR DEPOSIT SUBSTITUTES

Recipient
Source of interest INDIVIDUALS
CORPORATIONS
income RC, RA NRC, NRAETB NRANETB
Joint accounts of 50% of Exempt Exempt -
FOREX deposits 15%
(jointly in the name of
a non-resident and a
resident taxpayer)

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 INTEREST INCOME OR YIELD FROM LOCAL CURRENCY
BANK DEPOSITS OR DEPOSIT SUBSTITUTES

▰ In case of pre-termination of long-term deposits of individuals

Taxpayer
Holding period
RC, RA NRC, NRAETB NRANETB
5 years or more Exempt Exempt 25%
4 years to less than 5 years 5% 5% 25%

3 years to less than 4 years 12% 12% 25%

Less than 3 years 20% 20% 25%

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 INTEREST INCOME OR YIELD FROM LOCAL CURRENCY
BANK DEPOSITS OR DEPOSIT SUBSTITUTES

Banko Negro incurs the following interest in its savings and time deposit
accounts from the following depositors:
Depositors Amount

Resident individuals P600,000

Resident and domestic corporations 800,000

Non-resident aliens not engaged in 200,000

business
Non-resident corporations 100,000

Total accrued interest expense P1,700,000

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 INTEREST INCOME OR YIELD FROM LOCAL CURRENCY
BANK DEPOSITS OR DEPOSIT SUBSTITUTES

Banko Negro incurs the following interest in its savings and time deposit
accounts from the following depositors:
Depositors Amount Rate Final Tax

Resident individuals P600,000 20% P120,000

Resident and domestic corporations 800,000 20% 160,000

Non-resident aliens not engaged in business 200,000 25% 50,000

Non-resident corporations 100,000 30% 30,000

Total accrued interest expense P1,700,000 P360,000

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 INTEREST INCOME OR YIELD FROM LOCAL CURRENCY
BANK DEPOSITS OR DEPOSIT SUBSTITUTES

On January 1, 2016, Alice invested P1,000,000 in Baguio Bank’s 5-year time

deposit. The deposit pays 10% interest annually. Alice pre-terminated the deposit
on July 1, 2019. The final tax on pre-termination will be computed as follows:
2016 interest income (P1,000,000 x 10%) P100,000

2017 interest income (P1,000,000 x 10%) 100,000

2018 interest income (P1,000,000 x 10%) 100,000

2019 accrued interest income (P1,000,000 x 10% x 6/12 months) 50,000

Total interest income P350,000

Final tax applicable to less than 4-year pre-termination 12%

Final Tax P42,000

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 INTEREST INCOME OR YIELD FROM LOCAL CURRENCY
BANK DEPOSITS OR DEPOSIT SUBSTITUTES

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 3: Mr. Siman deposited his
Scenario 1: Mr. Siman deposited his savings through the account of his
savings through his own account.
resident wife.
In this case, the interest income shall be
Interest income P41,500
exempt from final tax.
Final tax rate 15%
Final tax P6,225.00
Scenario 2: Mr. Siman deposited his savings through a joint account
with his resident wife.
Interest income P41,500.00
Portion taxable 50%
Taxable Interest Income P20,750.00
Multiply by: Final tax rate 15%
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Final tax P3,112.50
 OTHER APPLICATIONS 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 Bangko Sentral ng
Pilipinas

* Savings or time deposits with cooperatives and by primary cooperatives with their
federations are not subject to final tax

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 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. Investment in bonds
3. Promissory notes
4. Foreign sources, whether bank or non-bank
5. Penalty for legal delay or default

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2
DIVIDEND INCOME
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“ 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.

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TYPES OF DIVIDENDS

▰ Cash dividends
▰ Property dividends
▰ Scrip dividends
▰ Stock dividends
▰ Liquidating dividends

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 DIVIDEND INCOME

Recipient
INDIVIDUALS
Source of dividend
RC, RA, CORPORATIONS
income NRAETB NRANETB
NRC
Domestic corporation 10% 20% 25% Exempt
*NRFC is not exempt but
subject to 30% general
final tax rate or 15% when
tax sparing rule applies

Share in the 10% 20% 25% Exempt

distributable NI after *NRFC is not exempt but
subject to 30% general
tax of a partnership final tax rate or 15% when
that is not a GPP tax sparing rule applies

Foreign corporation Regular Regular tax Regular tax Regular tax

tax
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 DIVIDEND INCOME

Calbayog Company declared a total of P2,000,000 dividends. P800,000 is due to

corporate shareholders while P1,200,000 is due to individual shareholders.

Shareholders Amount Rate Amount

Individual P1,200,000 10% P120,000

Corporate 800,000 0% 0
Final tax P120,000

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 DIVIDEND INCOME

Aborian Company declared a total of P1,000,000 dividends in March 2014.

An analysis of the recipient shareholder is as follows:
Shareholders Amount

Resident aliens and citizens P500,000

NRAs engaged in trade or business 100,000

NRAs not engaged in trade or business 50,000

Non-resident corporations 100,000

Total dividends P750,000

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 INTEREST INCOME OR YIELD FROM LOCAL CURRENCY
BANK DEPOSITS OR DEPOSIT SUBSTITUTES

Aborian Company declared a total of P1,000,000 dividends in March 2014.

An analysis of the recipient shareholder is as follows:
Shareholders Amount Rate Final Tax

Resident aliens and citizens P500,000 10% P50,000

NRAs engaged in trade or business 100,000 20% 20,000

NRAs not engaged in trade or business 50,000 25% 12,500

Non-resident corporations 100,000 30% 30,000

Total dividends P750,000 P112,500

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ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT
TO 10% FINAL TAX ON DIVIDENDS OR SHARE IN THE NET
INCOME

▰ Real Estate Investment Trusts (REITs)

▰ Business partnerships
▰ Taxable associations
▰ Taxable joint ventures, joint accounts or
consortia
▰ Taxable co-ownerships

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ROYALTIES
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 ROYALTIES

Recipient
Source of passive INDIVIDUALS
CORPORATIONS
royalties RC, RA, NRC, NRAETB NRANETB
Literary works 10% 10% 25% 20% - DC/RFC
Books 30% - NRFC
Musical Compositions
OTHER PASSIVE 20% 20% 25% 20% - DC/RFC
ROYALTIES (natural 30% - NRFC
resources, franchise,
e-copies/e-books)

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4
PRIZES
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 PRIZES

Recipient
INDIVIDUALS
AMOUNT CORPORATIONS
RC, RA, NRC NRAETB NRANETB
More than P10,000 20% 20% 25% Regular tax
Less than or equal to Basic tax Basic tax 25% Regular tax
P10,000

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EXEMPT PRIZES

▰ Prizes received by a recipient without any

effort on his part to join a contest. Examples:
Prizes from awards such as Nobel Prize, Most
Outstanding Citizen, Most Benevolent Citizen
of the Year, and the likes
▰ Prizes from sports competitions that are
sanctioned by their respective national sports
organizations
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REQUISITES OF EXEMPTION

▰ The recipient was selected without any action

on his part to enter the contest.
▰ The recipient is not required to render
substantial future services as a condition to
receiving the price or reward

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5
WINNINGS
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 WINNINGS

Recipient
SOURCE AND INDIVIDUALS
CORPORATIONS
AMOUNT RC, RA, NRC NRAETB NRANETB
PCSO/Lotto winnings Exempt Exempt 25% Exempt
less than or equal to
P10,000
PCSO/Lotto winnings 20% Exempt 25% 20% final tax
more than P10,000
OTHER WINNINGS, in 20% 20% 25% Regular tax
general

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Illustration 1

Apolinario won P10,000 first place in the singing contest

sponsored by Syd Company during their company
anniversary celebration.
Since the 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.

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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”.

Since raffle draw results is not based on effort but on

chance, the P10,000 payment is a winning which is subject
to 20% final tax. The same shall be withheld by ZFT Mall.
Note that the P10,000 threshold applies only on prizes, not
on winnings.

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TAX INFORMER’S REWARD

A cash reward may be given to any person instrumental in

the discovery of violations of the NIRC or discovery and
seizure of smuggled goods. The tax informer’s reward is
subject to 10% final tax.

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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, 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
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officials in a and b
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 or
2. P1,000,000

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ILLUSTRATION

Ms. Kirsten provided information to the BIR leading to the

recovery of P12,000,000 unpaid taxes. The cash reward
shall be computed as follows:
10% cash reward (12,000,000 x P1,200,000
10%)
Cash reward limit 1,000,000

Cash reward (whichever is lower) P1,000,000

Less: 10% final withholding tax 100,000

Net amount to be released to the 900,000

tax informer 36
 EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT
PERSONS 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 gains tax 15% Capital gains
tax

2. Rentals on cinematographic films and similar works 25% of rentals 25% of rentals
3. Rentals of vessels 25% of rentals 4.5% of rentals
4. Rentals of aircrafts, machineries, and other equipments 25% of rentals 7.5% of rentals
5. Interest income under the FCDS 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%
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FINAL WITHHOLDING TAX RETURN

1. Monthly Remittance Return of Final Income Taxes

Withheld (BIR FORM NO. 0619-F) shall be filed in
triplicate by every withholding agent for the first two
months of the quarter. The return shall be filed and the
tax be paid on or before the 10th day of the month
following the month in which the withholding was
made.
2. Quarterly Remittance Return of Final Income Taxes
Withheld (BIR FORM NO 1601-FQ) shall be filed on or
before the last day of the month after each quarter.
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