Income subject to final withholding

Tax/creditable withholding
Revenue Regulation 2-98
Revenue Regulation 6-2001
Revenue Regulation 12-2001
WITHHOLDING OF TAX AT SOURCE
1. Final Withholding Tax
2. Creditable Withholding Tax
 Final Withholding Tax
• Amount of income tax withheld by the
withholding agent is constituted as a full and final
payment of the income tax due from the payee
on the said income.
• The liability for payment of the tax rests primarily
on the payor as a withholding agent.
• Failure to withhold the tax or in case of under
withholding the deficiency tax shall be collected
from the payor/withholding agent.
• The payee is not required to file an income tax
return for the particular income.
 Creditable Withholding Tax
• Taxes withheld on certain income payments are
intended to equal or at law approximate the tax
due of the payee on said income.
• Income recipient is still required to file an income
tax return, to report the income and/or pay the
difference between the tax withheld and the tax
due on the income.
• Taxes withheld on income payments covered by
the expanded withholding tax and compensation
income are creditable in nature.
 Feature of final income taxation
1. Final Tax
2. Tax withholding at source
3. Territorial imposition
 Income Payments Subject to Final
Withholding Tax
(A) Income payments to a citizen or to a resident alien individual;
(B) Income Payment to Non-resident Aliens Engaged in Trade or Business in the
Philippines.
(C) Income Derived from All Sources Within the Philippines by a Non-resident Alien
Individual Not Engaged in Trade or Business Within the Philippines.
(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters
and Regional Operating Headquarters of Multinational Companies.
(E) Income Derived by Alien Individuals Employed by Offshore Banking Units.
(F) Income of Aliens Employed by Foreign Petroleum Service Contractors and
Subcontractors.
(G) Income Payment to a Domestic Corporation.
(H) Income Payment to a Resident Foreign Corporation
(I) Income Derived From all Sources Within the Philippines by Non-Resident Foreign
Corporation
(J) Fringe Benefits Granted to the Employee (Except Rank and File Employee)
(K) Informer's Reward to Persons Instrumental in the Discovery of Violations of the
National Internal Revenue Code and the Discovery and Seizure of Smuggled
Goods
 Taxpayer subject to final withholding
tax
Non resident person not engage in Final tax
trade or business rate
Non resident alien not engage in 25%
trade or business (NRA-NETB)
Non resident foreign corporation 30%
 Non resident person not engage in
trade or business
Non resident person not engage in trade General
or business final tax
rate
Non-resident alien not engage in trade or 25%
business
Non resident foreign corporation 30%
 Passive income: Definition
Income earned with very minimal involvement
from the taxpayer and are generally irregular in
timing and amount.
 Passive income
• Interest
• Royalties
• Prizes
• Winnings
• Dividends
• Informer’s tax reward
 Interest
Interest on short term deposit
• Any currency bank deposit and yield
• Any other monetary benefit from deposit substitute
• Trust fund and similar arrangement
Final Tax of 20%

Interest on long term deposit or investment:

5 years and above Exempt
4 to less than 5 years = 5%
3 to less than 4 years = 12%
Less than 3 years = 20%

Interest income received from a depositary bank under the expanded

foreign currency deposit system = 15 %
Non residents = exempt
 Interest income or yield
Source of interest income Individuals Corporations
Short term deposits 20%* 20%**
Long term Exempt 20%
deposits/investment ***
certificate

* NRA-NETB - 25%
** NRF – 30%
***Does not include NRA-NETB
Tax free corporate covenant Bonds
Interest income of non-resident aliens, citizen or
resident of the Philippines on bonds, mortgages,
deeds of trust or other similar obligations of
domestic or resident foreign corporation with
tax free-reduction provision where the obligor
shoulders in whole or in part any tax on the
interest shall be subject to a final withholding
tax of 30%.
 Tax free corporate covenant Bonds

Bond investor
Individuals Corporations
Tax on interest income on 30% final Regular
tax-free corporate covenant tax income tax
bonds
Note:
1. The final tax applies to all individuals, regardless of classification.
2. There is no similar final tax provision for corporate recipient of tax free interest;
hence, the regular income tax shall apply.
 Savings or time deposits with
cooperatives
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.
(Dumaguete Cathedral Credit Cooperative vs
CIR, G.R. 182722)
 Joint account on forex deposits
If the bank account is jointy in the name of the
non resident and a residet taxpayer, 50% of the
interest shall be exempt while the other 50%
shall be subject to the 7.5% (now 15%) final tax
(RR 10-98)
 Deposit substitute
Means an alternative form of obtaining fund
from at least 20 persons at any one time other
than deposits, through the issuance,
endorsement, or acceptance of debt
instruments for the borrowers own account, for
the purpose or purchasing of receivables and
other obligations, or financing their own needs
or the needs of their agent or dealer.
 Royalties
Royalties on: (LBM)
1. Book
2. Other literary work
3. Musical compositions
Final Tax 10%

Other royalties – 20%

Passive royalties earned in the Philippines
Source of Citizen, Individual Non Domestic Non resident
passive resident alien, resident alien corporation, foreign
royalties non resident not engage in Resident corporation
alien engage in trade or foreign (NRFC)
trade or business( NRA- corporation
business (RC, NETB) (DC, NRFC)
NRC, RA, NRA-
ETB)
Book, literary 10% Final Tax 25% Final Tax 20% Final Tax 30% Final Tax
work and
musical
composition
Other passive 20% Final Tax 25% final tax 20% Final tax 30% Final Tax
royalties

Royalties where the taxpayer has active involvement is subject to regular income tax
Royalties active or passive, earned from sources abroad are subject to regular income tax
 Prizes
1. P10,000 or less - subject to regular income tax (0-35%).
2. Over 10,000 – Final tax of 20%

Exempt prizes
(c) Prizes and Awards. - Prizes and awards made primarily in
recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievement but only if:
1. The recipient was selected without any action on his part to
enter the contest or proceeding; and
2. The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
(d) Prizes and Awards in Sports Competition. - All prizes and
awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines
or abroad and sanctioned by their national sports associations.
(Sec 32, RA 8424)
Passive royalties earned in the Philippines
Amount of Citizen, Individual Non Domestic Non resident
taxable prize resident alien, resident alien corporation, foreign
non resident not engage in Resident corporation
alien engage in trade or foreign (NRFC)
trade or business (NRA- corporation
business (RC, NETB) (DC, NRFC)
NRC, RA, NRA-
ETB)
Prizes 20% Final Tax 25% Final Tax Regular tax 30% Final Tax
exceeding
P10,000
Prizes not Regular Tax 25% final tax Regular tax 30% Final Tax
exceeding
P10,000

Royalties where the taxpayer has active involvement is subject to regular income tax
Royalties active or passive, earned from sources abroad are subject to regular income tax
 Other winnings
• Other winnings– Final tax of 20%

*Exempt winnings
1. Philippine Charity Sweepstakes Office (PCSO)
winnings
2. Lotto winnings

*Under TRAIN – Taxable. Ten thousand pesos (P10,000) or

less from Philippine Charity Sweepstakes and Lotto
(PCSO) which shall be exempt
 Dividend
• Cash or property dividend received by individual from a
– domestic corporation;
– Joint stock company
– Insurance or mutual fund companies
– Regional operating headquarter of multinational companies
– Share of individual in the net income after tax of an
• Association
• Joint account
• Joint venture or consortium taxable as a corporation.

Final Tax
• Six percent (6%) beginning January 1, 1998;
• Eight percent (8%) beginning January 1, 1999
• Ten percent (10%) beginning January 1, 2000.
• Ten percent (10%) beginning January 1, 2018.
 Entities taxable as corporations are
subject to 10% final tax
1. Real estate investment trusts
2. Business partnership
3. Taxable associations
4. Taxable joint venture, joint account or
consortium
5. Taxable co-ownership
 Types of dividend
1. Cash dividends
2. Property dividends
3. Scrip dividends
4. Stock dividends
5. Liquidating dividends
Source of Recipient of dividends
dividends
Citizen and Non resident Non resident Domestic and Non
resident alien alien engage alien not resident resident
(RC, NRC, RA) in trade or engage in foreign foreign
business trade or corporation corporation
(NRA-ETB) business (DC, RFC) (NRFC)
(NRA-NETB)
Domestic 10% Final tax 20% Final tax 25% Final Exempt 15%
corporation Tax subject to
tax sparring
rule
Resident Regular tax for Regular tax, 25% Final Regular Tax Regular tax
foreign RC, regular tax subject to Tax subject for DC, regular subject to
corporation for NRC, RA pre to pre tax for RFC pre
subject to pre dominance dominance subject to pre dominance
dominance rule rule dominance rule
rule rule
Non Regular tax for Not subject Not subject Regular tax Not subject
resident RC, not to tax to tax for DC, not to tax
foreign subject to tax subject to tax
corporation for NRC, RA for RFC
Other applications of Final Income tax
1. Compensation income of Filipinos qualified as
special aliens.
2. Fringe benefit of managerial or supervisory
employees
3. Income payments of residents other than
depositary banks under the expanded foreign
currency deposit system to offshore banking
units and expanded foreign currency deposit
units
4. Income payments to oil exploration service
contractors or sub contractors.
 Tax informer’s reward
SEC. 282. Informer's Reward to Persons Instrumental in the Discovery of Violations of the
National Internal Revenue Code and in the Discovery and Seizure of Smuggled Goods. -
(A) For Violations of the National Internal Revenue Code. - Any person, except an internal
revenue official or employee, or other public official or employee, or his relative within the
sixth degree of consanguinity, who voluntarily gives definite and sworn information, not
yet in the possession of the Bureau of Internal Revenue, leading to the discovery of frauds
upon the internal revenue laws or violations of any of the provisions thereof, thereby
resulting in the recovery of revenues, surcharges and fees and/or the conviction of the
guilty party and/or the imposition of any of the fine or penalty, shall be rewarded in a sum
equivalent to ten percent (10%) of the revenues, surcharges or fees recovered and/or fine
or penalty imposed and collected or One Million Pesos (P1,000,000) per case, whichever is
lower. The same amount of reward shall also be given to an informer where the offender
has offered to compromise the violation of law committed by him and his offer has been
accepted by the Commissioner and collected from the offender: Provided, That should no
revenue, surcharges or fees be actually recovered or collected, such person shall not be
entitled to a reward: Provided, further, That the information mentioned herein shall not
refer to a case already pending or previously investigated or examined by the
Commissioner or any of his deputies, agents or examiners, or the Secretary of Finance or
any of his deputies or agents: Provided, finally, That the reward provided herein shall be
paid under rules and regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner.
 Tax informer’s reward
(B) For Discovery and Seizure of Smuggled Goods. -
To encourage the public to extend full cooperation
in eradicating smuggling, a cash reward equivalent
to ten percent (10%) of the fair market value of the
smuggled and confiscated goods or One Million
Pesos (P1,000,000) per case, whichever is lower,
shall be given to persons instrumental in the
discovery and seizure of such smuggled goods.
The cash rewards of informers shall be subject to
income tax, collected as a final withholding tax, at a
rate of ten percent (10%).
The End