Final Income Taxation

Chapter 5
 Features of Final Income Taxation
1) Final tax
2) Tax withholding at source
3) Territorial imposition
4) Imposed on certain passive income &
persons not engaged in business in the
Philippines
 Final withholding tax system
• Persons making income payments have the
responsibility to withhold the tax
• Inherently territorial
 Rationale of final income taxation
• Imposed on certain passive income for the
convenience of both the taxpayer and the
government
 Non-resident persons not engaged in
business in the Philippines

Whether they earn active or passive income

from sources within the Philippines, they shall
be subject to the following final tax rates:
General final
Non-resident person not engaged in trade or business tax rate

NRA -NETB 25%

Non-resident foreign corporation 25%

Passive income subject to final tax
 Peso interest income or yield
-Local currency deposits
Recipient
Source of interest income Individuals* Corporations*

From banks:
• Short term deposits 20% 20%
• Long-term deposits/certificates Exempt RIT
From non-bank institutions:
• Short term deposits/certificates RIT RIT
• Long-term deposits/certificates RIT RIT
*Does not include NRA – NETB & NRFC. They are subject to 25% final tax.
Short term deposits are those made for a period of less than 5 years.
Long term deposits are those with maturity of not less than 5 years with BANKS only in
denominations of P10,000 & other denominations as prescribed by BSP
 Savings or time deposits with cooperatives are
NOT subject to final tax
• The final tax is limited to banks and shall not
be applied with time and savings deposits by
members with cooperatives
 Peso interest income or yield
-Debt instruments including deposit substitutes
Recipient
Source of interest income Individuals Corporations

From banks(including Bangko Sentral):

• Short term 20% 20%
• Long-term Exempt RIT
From non-bank institutions:
• Short term 20% 20%
• Long-term 20%* RIT
*Per Section 3 of RR14-2012, exemption on long-term certificates/investments is
limited to those issued by banks only.
 Timing of final tax withholding
• Zero coupon instruments – upon origination
• Interest-bearing instruments – upon payment
of interest
 Deposit Substitutes
• Alternative form of obtaining funds from the
public for the purpose of relending, etc.
• Public means 20 or more individual or
corporate lenders at any one time
 19-lender rule
• Flotation of debt instrument is not a public borrowing & not a
deposit substitute if sourced from 19 lenders only
• Does not apply to Government debt instruments such as
treasury bonds, treasury bills & treasury notes
• Thus,
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
 Tax on pre-termination of long-term
deposits of individuals
• Any previously untaxed interest income will be subject final tax upon pre-
termination

Holding period Final 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%
 Tax on pre-termination of long-term
deposits of individuals - Illustration
Example: Pedro placed a P1,000,000 long term time deposit at 4% interest with City
Savings Bank on January 1, 2018. However, he had to w/draw it on June 30, 2021
because of an emergency need. The bank had already paid him interest for the
whole year of 2018, 2019 and 2020. How much is final withholding tax assuming no
adjustment on the interest rate was made?
Interest earned – 1/2/2018 – 6/30/2021 (P1M x 4% x 3.5) P140,000
x Withholding tax rate 12%
Final withholding tax P 16,800
Proceeds:
Principal P1,000,000
Add: Accrued interest for half year (1,000,000 x 4% 6/12) 20,000
Total P1,020,000
Less: Final withholding tax 16,800
Net proceeds P1,003,200
 Foreign currency deposit with foreign
currency depositary banks
Taxpayer Individuals Corporations

Residents (RC,
RA, DC, RFC) 15% 15%

Non-residents Exempt Exempt

(NRC, NRA,
NRFC)
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 final tax.

There is no long-term or short term classification of foreign currency deposits

Interest income subject to regular tax
• Lending activities, whether or not in the
course of business
• Investment in bonds
• Promissory notes
• Foreign sources, whether bank or non-bank
• Penalty for legal delay or default
 Dividends
• Means any distribution made by a corporation
to its shareholders out of its earnings or
profits & payable to its shareholders, whether
in money or property
 Types of dividends
• Cash dividends
• Property dividends
• Scrip dividends
• Stock dividends
• Liquidating dividends
 Dividends not considered income for
taxation purposes
• Stock dividends
• Liquidating dividends

When liquidating dividends exceed the cost of

the investments, the excess is taxable capital
gain subject to regular tax
 Taxability of stock dividends
• Subsequent cancellation and redemption
(e.g., a corporation declared stock dividends &
immediately called the stock dividends for
redemption & cancellation. This is equivalent
to cash dividend)
• If it leads to substantial alteration in
ownership in the corporation (e.g., stocks are
given in lieu of cash dividends; declaration of
optional stock or cash dividend)
 Stock dividend vs. stock split
• Stock dividend may be taxable under certain
conditions, stock split will never be subject to
income tax
 Dividend tax rules
Recipient
Source of dividends Individuals Corporations

Domestic corporation 10% final tax* Exempt**

Foreign corporation Regular tax Regular tax

*NRA-ETB is subject to 20% final tax on dividend, not to the usual 10%; but an NRA-
NETB is subject to a 25% final tax
**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
 Exempt dividends
• Inter-corporate dividends
• Dividends from cooperatives
• Qualified foreign sourced dividends
*The reason for the exemption of intercorporate dividends is
to minimize double taxation
*Exemption extends to business partnerships
*Exemption does not cover dividends received by GPP, exempt
joint ventures & exempt co-ownerships
* Does not apply to share of a corporation from net income of
business partnership
 Entities taxable as corporations are
subject to 10% final tax
• Real estate investment trusts (REIT)
• Business partnerships
• Taxable associations
• Taxable joint ventures, joint accounts or
consortia
• Taxable co-ownerships
 REIT
• Publicly listed corporation established
principally for the purpose of owning income-
generating real estate assets
 Recipients of REIT dividends exempt
from final tax
• NRAs or NRFCs entitled to claim preferential
tax rate pursuant to applicable tax treaty
• DCs or RFCs
• Overseas Filipino investors (exempt until
August 12, 2018)
 Business partnerships, taxable associations, joint venture,
joint accounts or co-ownerships

• The 10% final tax applies at the point of

determination of the income, NOT at the
point of actual distribution
 Share in business partnership income
• Includes the share in the residual profit and
provisions for salary, interest and bonus to a
partner
• If salaries, interest and bonus are expensed in
the books of the partnership, they shall be
subject to regular tax, not final tax. Only the
residual income after these provisions shall be
subject to final tax
 Illustration
Andy & Mar have the following profit distribution schemes in their partnership:
Andy Mar
Salaries to industrial partner P 40,000 P -
Interest to capitalist partner - 12,000
Bonus to industrial partner 25,000 -
Residual profit sharing 8,000 24,000
Total sharing P 73,000 P 36,000

If salaries, interest and bonus are NOT expensed in the books, 10% final tax shall be:

Andy Mar
Total sharing P73,000 P36,000
X Final tax rate 10% 10%
Final tax P 7,300 P 3,600
 Royalties
Recipient
Source of passive royalties Individuals Corporations

Books, literary works and musical 10% final tax 20% final tax
compositions
Other sources 20% final tax 20% final tax
1. Under the regulations, the 10% preferential royalty final tax on books and literary
works pertain to printed literatures. Royalties on books sold on e-copies or CDs
such as e-books are subject to the 20% final tax
2. Royalties on cinematographic films and similar works paid to NRA-ETBs, NRA-
NETBs or NRFCs is subject to a final tax of 25%
3. Only passive royalties are subject to final tax. Active royalties are subject to regular
tax
4. If earned from sources abroad whether active or passive, it is subject to regular tax
 Prizes
• May be exempt from income tax or subject to
either final tax or regular income tax
 Exempt prizes
1) Prizes received by a recipient without any
effort on his part to join a contest (e.g., Nobel
prize, most outstanding citizen, similar
awards)
2) Prizes from sports competitions that are
sanctioned by their respective national sport
organizations
 Requisite of exemption
1) The recipient was selected without any
action on his part to enter the contest
2) The recipient is not required to render
substantial future services as a condition to
receiving the price or reward
 Taxable prizes
Recipient
Amount of taxable prize Individuals Corporations

Prizes exceeding P10,000 20% final tax Regular tax

Prizes not exceeding P10,000 Regular tax Regular tax

Final taxation does not apply to foreign passive income. Prizes from foreign sources are
subject to regular income tax.
 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

• PCSO winnings of NRA-NETBs & NRFCs are subject to 25% final tax regardless of
amount
• The tax rules on PCSO winnings shall be applied on a per ticket basis
 Tax Informer’s Reward
• Subject to 10% final tax
Requisites:
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
officials or employee in a or 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
2) P1M
Tax-free corporate covenant bonds

Bond investor
Individuals Corporations

Tax on interest income on tax-free 30% final tax Regular tax

corporate covenant bonds

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 gains on stock directly sold to buyer 15% 15%

2) Rentals on cinematographic films 25% 25%

3) Rentals of vessels 25% 4.5%

4) Rentals of aircrafts 25% 7.5%

5) Tax on corporate covenant bonds 30% 30%

6) Interest income under FCDS Exempt Exempt

7) Interest on foreign loans n/a 20%

8) Dividends Income 25% 15% if tax sparing rule is

applicable
 Capital gains tax
• As a rule, NRA-NETBs and NRFCs do not file
income tax returns
• Exceptionally, they are required to file income
tax return to report their gain from dealings in
domestic stocks directly to buyers
 Tax sparing rule
• NRFCs shall be subject to 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 applications of final income tax
 Fringe benefit tax
• Tax on fringe benefits of managerial and
supervisory employees
• 35% of grossed up monetary value of benefits
 Interest & other income payments to
depositary banks under FCDS

• Tax is 10% of income payments such as

interest on loans from OBUs & FCDUs
 Income payments to sub-contractors
of petroleum service contractors
• Tax is at 8% on income derived from the service contractor in
lieu of any and all taxes
• All other income of the subcontractor shall be subject to
regular income tax
• Applies to subcontractors whether individuals or
corporations, resident or non-resident
• Petroleum service contractors are subject to regular tax
 Final withholding tax return
• BIR FORM 0619F – for monthly filing & payment of
final taxes withheld, manual filing deadline is 10 days
from month-end, deadline for EFPS filers is based on
grouping (11 to 15 days after month-end)
• BIR FORM 1601FQ – for final taxes withheld other than
those filed under 1602Q & 1603Q
• BIR FORM 1602Q – for final tax on interest of deposits
• BIR FORM 1603Q – for FBT

Deadline of those with Q is on the last day of the month

after the end of the quarter
 Entities exempt from final income tax
• Foreign governments & foreign GOCCs
• International missions or organizations with
tax immunity
• General professional partnership
• Qualified employee trust fund