Final Tax on Passive Income of Corporation

Passive Income DC and RFC NRFC

1. Interest on currency bank’s
20% 30%
deposit

2. Yield from deposit substitutes* 20% 30%

3. Trust funds and similar
20% 30%
arrangements
4. Royalties 20% 30%
5. Interest on FCDU deposits
7.5% (RFC)
Exempt
15% (DC)

*T-Bills, T-Bonds, T-notes

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 ILLUSTRATIVE PROBLEMS

A corporation has the following income for 2018:

1. Interest on BDO, Manila, gross of withholding tax P
100,000
2. Interest, US Dollar deposits, BDO, Manila,
gross of withholding tax
$ 50,000
3. Royalty, Philippines
P 600,000
2 4. Royalty, US
 REQUIRED: Compute the tax payable , if the taxpayer is
a:

a)Domestic corporation

3
 SOLUTION
a) Domestic Corporation:
Interest from BDO P
100,000
Royalty, Philippines
600,000
Total P 700,000
Tax rate
20%
Final withholding tax P
140,000

Interest, Dollar deposit $ 50,000

Tax rate 15%
4

Final withholding tax $ 7,500

 REQUIRED: Compute the tax payable , if the taxpayer is
a:

b. Resident foreign corporation

5
 SOLUTION
b) Resident foreign corporation:
Interest from BDO P
100,000
Royalty, Philippines
600,000
Total P 700,000
Tax rate
20%
Final withholding tax P
140,000

Interest, Dollar deposit $ 50,000

Tax rate 7.5%
6

Final withholding tax $ 3,750

 REQUIRED: Compute the tax payable , if the taxpayer is
a:

c. Non-resident foreign corporation

7
 c) Non-Resident Foreign Corporation:
Interest from BDO P
100,000
Royalty, Philippines
600,000
Total P 700,000
Tax rate
30%
Final withholding tax P
210,000

NOTE: The NRFC is exempted from FCDU deposits, and only taxable on income
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from sources within the Philippines.

 Intercorporate dividend

Payor Recipient Taxability

1. Domestic Corporation
Domestic Corp. Not taxable

2. Domestic Corporation
RFC Not taxable

3. Domestic Corporation
NRFC 15% final WT

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 ILLUSTRATION

a) In 2018, a domestic corporation declared a dividend pertaining to a US

company, a NRFC, for P60,000. US law allows tax credits for taxes
“deemed paid” in the Philippines against the tax due from the NRFC in the
US.

REQUIRED: Compute the taxes on the dividend assuming the rate of US

tax is 35% and the exchange rate is P40 to 1 US $.

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 SOLUTION a)
US
Philippines
Dividend P60,000 (P60,000/P40) $1,500
Rate of Tax x 15% 35%
Final withholding tax P 9,000 $ 525
Less: Tax credits
Tax paid in the Phils
(P9,000/P40) (225)
Tax deemed paid
P60,000/40x(30%-15%) (225)
Tax payable $ 75

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 ILLUSTRATION

Compute the taxes on the dividend assuming the US law

does not allow tax credits for the tax “deemed paid” in the
Philippines.

12
 SOLUTION b)
US
Philippines
Dividend P60,000 (P60,000/P40) $1,500
Rate of Tax x 30% 35%
Final withholding tax P 18,000 $ 525
Less: Tax credits
Tax paid in the Phils
(P18,000/P40) (450)

Tax payable $ 75

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 CAPITAL GAINS TAX OF CORPORATIONS

Transaction Tax Base Seller Tax Rates

I. Sale of a Domestic
Corporation

a) Not trade in local Net Capital Seller is a DC 15%

stock exchange Gain
Seller is a FC:
Gain not over P100k 5%
Gain over P100k 10%

b) Trade in local stock Gross

exchange Selling DC, RFC and NRFC .6 x 1%
Price
 CAPITAL GAINS TAX OF CORPORATIONS
Tax
Transaction Tax Base
Rates
II. Sale of Real Property
Classified as Capital Asset:

Seller is Domestic Highest of the:

Corporation a) Gross Selling price
b) Zonal value 6% (FT)
c) Assessor’s value

Seller is a RFC Gain on sale (returnable) 30%

Seller is a NRFC Gain on sale (subject to Final 30%

tax)
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 ILLUSTRATION
A corporation has the following income, expense, and transactions in 2018-
Gross income, Philippines
P 800,000
Expenses
480,000
Gross income, U.S.
500,000
Expenses 300,000
Sales of assets:
1. Shares traded at stock exchange P800,000 (cost-P900,000)
2. Shares not traded at stock exchange P500,000 (cost 600,000)
3. Vacant lot (not used in business, located in the Phils. For P3M
(cost P1M)
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4. Land located in the US for P5M (cost P2M)
 ILLUSTRATION

REQUIRED:

Compute the:
1) FINAL TAX on sale of assets and
2) INCOME TAX PAYABLE; if taxpayer is a

a) Domestic

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 SOLUTIONS
a) DOMESTIC CORPORATION
1. Final tax on sale of assets
Selling price of traded shares (based on gross) P
800,000
Rate of Tax(.6 of 1%)
.006
Final tax
P 4,800

Selling price of not traded shares P 500,000

Cost 600,000
Net loss - P 100,000
Final tax
None
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 SOLUTIONS
a) DOMESTIC CORPORATION
2. Income Tax Payable
Gross Income, Philippines P 800,000
Gross Income, US 500,000
P1,300,000

Expenses, Philippines P (480,000)

Expenses, US (300,000)
(780,000)

Net income from operations

520,000
Add: Gain on sale of land in the US(5M-2M) 3,000,000
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Total
 NOTES TO REMEMBER BY STUDENTS

1. Sale at a loss of traded shares is still taxable because the tax is based
on the gross selling price.

2. Sale at a loss of shares not traded in an exchange is not taxable because

the tax is based only when there is a gain.

3. Gain on the sale of land located in the US is income without and taxable
to a domestic corporation.

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 ILLUSTRATION

REQUIRED: Compute the final tax on sale of assets and

income tax payable if taxpayer corporation is:

b) Resident Foreign
Corporation

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 SOLUTIONS
b) RESIDENT FOREIGN CORPORATION
1. Final tax on sale of assets
Selling price of traded shares (based on gross) P
800,000
Rate of Tax(.6 of 1%)
006
Final tax
P 4,800

Selling price of not traded shares P 500,000

Cost 600,000
22

Net loss P 100,000

 SOLUTIONS
b) RESIDENT FOREIGN CORPORATION
2. Income Tax Payable
Gross Income, Philippines P 800,000
Gross Income, US
480,000 P 320,000

Add: Gain on sale of land in the US(3M-1M)

2,000,000
Total
P2,320,000
Rate of tax
30%
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Income Tax payable
 NOTES TO REMEMBER BY STUDENTS

1. An RFC are taxable only on income from sources within the

Philippines.

2. Gain on the sale of vacant lot located in the Phils. is not subject to final
tax, thus, it is returnable.

3. Gain on sale of land located in the US is income without and not

taxable to an RFC.

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 ILLUSTRATION

REQUIRED: Compute the final tax on sale of assets and

income tax payable if taxpayer corporation is:

c) Non-resident Foreign
Corp.

25
 SOLUTIONS
c) NON-RESIDENT FOREIGN CORPORATION
1. Final tax on sale of assets
Selling price of traded shares (based on gross) P 800,000
Rate of Tax(.6 of 1%)
.006
Final tax
P 4,800

Selling price of not traded shares P 500,000

Cost 600,000
Net loss P 100,000
Final tax
26
None
 SOLUTIONS

c) NON-RESIDENT FOREIGN CORPORATION

2. Income Tax Payable
Gross Income, Philippines
P 800,000
Add: Gain on sale of land in the US(3M-1M)
2,000,000
Total
P 2,800,000
Rate of tax
30%

27 Final Tax
 NOTES TO REMEMBER BY STUDENTS

1. All income of an NRFC from sources within the Philippines are

subject to FINAL WITHHOLDING TAX.

2. The NRFC does not have to file an income tax return.

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 END OF LESSON

29
 Questions

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