Final Income

Taxation, as amended by
TRAIN LAW
(PASSIVE INCOME)

Christopher L. de Guzman, CPA, CAT

Final withholding tax –
 A tax collection system wherein payors are required to deduct the full
tax on certain income payments.

 It is intended for the collection of taxes from income with high risk of
performance.

 It applies to passive income (within the Philippines only) specifically

provided by law.

 Passive income are earned with minimal or even without active

involvement of the taxpayer in the earning process.
Taxes on Individuals (Passive)
From sources within the
Philippines ONLY
RC; NRC; RA NRA – Engaged/ Not Engaged

1. Interest under the

expanded foreign currency Final Tax of 15%; NRC exempt Exempt/ Exempt
deposit system (FCDS)
2. Royalty on books, literary
works, and musical Final Tax of 10% Final Tax of 10%/ Final Tax of 25%
composition
3. Interest on any currency
bank deposit, yield or other
monetary benefits from
deposit substitutes , trust
fund, and similar
arrangements, royalties
except above, prizes
exceeding P 10,000,
otherwise, basic tax; and
other winnings except Final Tax of 20%/ Final Tax of 25%
PCSO and Lotto winnings P Final Tax of 20%
10,000 and less which is
exempt.
Taxes on Individuals (Passive)

From Sources within the NRA – Engaged/ Not

Philippines ONLY. RC; NRC; RA Engaged
1. Dividends (actual or
constructive) from
domestic corporation, or
from joint stock company,
insurance or mutual fund
company, and regional
operating headquarters of
multinational company; or
share in the distributive net
income after tax of
partnership except GPP,
association, joint account Final Tax of 20%/ Final Tax of 25%
or joint venture or Final tax of 10%
consortium taxable as corp.
which he is a member.
2. Interest on long term
deposits or investment in Exempt/ Final Tax of 25%
Exempt
bank (with maturity of 5
years or more)…
Exceptions –
• That the interest income from long – term deposit or investment in
the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investment to be EXEMPT, must be evidenced by certificates in
SUCH FORM PRESCRIBED BY BSP.
• In case of pre-termination, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depositary
bank from the proceeds of the long-term deposit based on the
remaining maturity:
• 4 years to less than 5 years – 5%;
• 3 years to less than 4 years – 12%;
• Less than 3 years – 20%
• Applicable to individuals only.
Exception -

 Cooperatives are not required to withhold taxes on

interest from savings and time deposits of their
members. (Dumaguete Cathedral Cooperative vs.
CIR, GR No. 182722, January 22, 2010)
Exception, Prizes -
 Those prices received from sports competition sanctioned
by their respective national sport organizations.

 RA 7549 – exempt all prizes and awards gained from local

and international sports tournament and competitions from
the payment of income and other forms of taxes.

 RA 10699, expanding the coverage of incentives granted to

national athletes and coaches competing for the country
who win in international sports competitions and bring
honor and recognition in the country.
Sec. 25B – NRA not engaged
… as interest, cash and/ or property dividends, rents, salaries,
wages, premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable annual or periodic
or casual gains, profits and income, and capital gains a tax
equal to 25% of such income.

… from the sale of shares of stock in any domestic corporation

and real property shall be subject to subsection C ad D of Sec.
24.
Taxes on Corporation (Passive)
From Sources within the Domestic Corp. Resident/ Non-resident FC
Philippines

1. Interest income under Final tax of 15% Final Tax of 7.5%/ Exempt
expanded foreign
currency deposit system
2. Interest on any currency
bank deposit, yield or
any other monetary
benefit from deposit
substitutes and from Final Tax of 20% Final tax of 20%/ 30%
trust funds and similar
Interest on foreign loans – 20% -
arrangements ; royalties NRFC
3. Dividend from domestic
corp. (Intercompany Exempt
dividend) Exempt / 30%; 15% with
conditions.
Income derived under FCDS -

 Income derived by a DEPOSITARY BANK UNDER expanded FCDS from

FOREIGN CURRENCY TRANSACTIONS with non – residents, offshore banking
units in the Philippines, local commercial banks including branches of
foreign banks that may be authorized by the BSP to transact business with
foreign currency deposit system shall be exempt from all taxes…

 Interest income from foreign currency loans granted by such depositary

banks under said expanded system to RESIDENTS other than offshore
banking units in the Philippines or other depositary banks under the
expanded FCDS shall be subject to final tax of 10%.

 Applies to Domestic and Resident Foreign Corporation.

Ways of eliminating double taxation –

1. Exempt method (Sec. 32, B, 5)

2. Deduction method (Sec. 34, C, 2)
3. Credit method (Sec. 34, C, 3, and 4)
4. Tax Sparing method (Sec. 28, B, 5, b)
Interest Income or Yield –
Interest Income Individuals Corporations

Short – term deposits 20% 20%

Long – term deposits Exempt* 20%
* Subject to NRA-NETB – 25% NRFC – 30%
exemptions

Note: Savings or time deposit with cooperatives is exempt.

FCDS –

Taxpayer Individuals Domestic Foreign

Residents 15% 15% 7.5%
Non – Exempt - Exempt
residents

Joint account between resident and non –

resident on forex deposit – 50/ 50 rule
Dividends –

• All kinds of dividends are taxable except for stock

dividends unless:
• Subsequently cancelled and redeem (equivalent to cash
dividends).
• Stocks dividends are given in lieu of cash dividends
(equal to cash dividends).

• Liquidating dividends are also not taxable.

Dividends –

Source of Dividends Individuals DC and RF Corporation

(Recipients)
Domestic Corporation 10% final tax/ 20% FT* Exempt**

Foreign Corporation Regular tax Regular tax

* Non – resident alien engaged in business or trade.

** NRFC is not exempt but subject to 30% or to tax sparing rule (15%).
 Dividends received from cooperatives are exempt.
Tax Sparing Rule

o 15% final tax on dividend received by non-resident foreign

corporation is subject to condition that the country in which
the non-resident foreign corporation is domiciled, shall allow
a credit against the tax due from the non-resident foreign
corporation taxes deemed to have been paid in the
Philippines equivalent to 15%, the difference between the
regular income tax of 30% and the 15% tax on dividends.

o 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 (BIR Ruling).
Royalties –

Sources Individuals Corporations

Books, literary works, 10% final tax 20% final tax

and musical
compositions

Other sources 20% final tax 20% final tax

NRA-NETB 25%;
NRFC – 30%
Prizes –

Taxable Prize Individuals Corporations

Exceeding P 10,000 20% final tax Regular tax
Not exceeding P 10,000 Regular tax Regular tax

Exempt Prizes: (1) received without any effort; (2) received from sports
competition sanctioned by their respective national sport organizations.

Requisites of exemption: (1) selected without any action on contestant; (2)

no substantial future services.
Winnings –

Type of Winnings Individuals Corporation

PCSO or sweepstakes Exempt Regular tax

not exceeding P 10,000

PCSO or sweepstakes 20% FT Regular tax

exceeding P 10,000

Other Winnings 20% FT Regular Tax

Tax Informers Rewards –

 10% final tax;

 Given to anyone except (1) BIR official employee; (2) other
public official or employee; (3) relative within the 6th degree
of consanguinity of those officials or employee in (1) and (2).
 Amount of cash reward is P 1,000,000 or 10% of the revenues,
surcharges, or fees recovered and or fine or penalty imposed
and collected, whichever is lower.
Final Withholding Tax Return

 Monthly filing BIR Form 0619 – F (in triplicate);

 Date of Payment: on or before the 10th day of the month following the
month in which the withholding was made;
 Place of Payment:
 Authorized agent bank
 Revenue collection officer;
 City or municipal treasurer.
 Quarterly filing – 1601FQ, on or before the last day of the month of
each quarter.
Deadline for EFPS Filing –

 Group A – 15 days following the end of each month

 Group B – 14 days following the end of each month
 Group C – 13 days following the end of each month
 Group D – 12 days following the end of each month
 Group E – 11 days following the end of each month
Exempt from Final Income Tax –

 Foreign governments and foreign GOCC.

 International missions or organizations with tax
immunity.
 General professional partnership.
 Qualified employee trust fund.
Other Rulings –
 Real Estate Investment Trust or REIT dividends, the following recipients are
exempt.
 Non – resident alien individuals or non – resident foreign corporations under the
tax treaty.
 Domestic and resident foreign corp.
 Overseas Filipino investors until August 12, 2018.
 Income Payment to subcontractors of petroleum service contractors.
 8% of the gross income for subcontractor of petroleum services; for other sources
subject to regular income tax.
 Petroleum contractors are subject to regular income tax.
 For the supplier locally of goods or materials – 8% final tax on gross income.
Tax Free Covenant Bonds –

 Tax on interest income on tax – free covenant

bonds

 Bond investor is individual …… 30% final tax

 Bond investor is a corporation… regular
income tax
Reference:

 NIRC as amended by TRAIN LAW;

 Income Taxation, Banggawan, 2019 Edition.