CHAPTER 5 FINAL INCOME TAXATION (NRA-NETBs) and non-resident foreign corporations

(NRFCs), have high risk of non-compliance.

FEATURES OF FINAL INCOME TAXATION
 These taxpayers do not have offices or fixed places of
1. Final tax
business in the Philippines making tax compliance
2. Tax withholding at source
very unlikely due to their absence and distance in the
3. Territorial imposition
Philippines.
4. Imposed on certain passive income and persons not
 Also, the Philippine government cannot impose upon
engaged in business in the Philippines
them the obligation to file return due to territorial
consideration.
The Final withholding system
 Thus, the law subjects them to final income tax final
 The final withholding system imposes upon the
wherein Philippine residents paying them income,
person making income payments the responsibility to
passive or active, are obligated to withhold the
withhold the tax.
following final tax:
 The tax which will be deducted at source is final.
Non-resident person not engaged General final tax rate
 The taxpayer receives the income net of tax and in trade or business.
there would be no need for him to file an income tax Non-resident alien not engage in 25%
return to report the same. trade or business
 The final withholding system is inherently territorial. Non-resident foreign corporation 30%
 It applies only to certain passive income earned from
sources within the Philippines.
PASSIVE INCOME SUBJECT TO FINAL TAX
 Note that taxation is territorial and we cannot impose
1. Interest or yield from bank deposits or deposit
tax obligation (filing or withholding) against non-
substitutes
resident subjects of foreign sovereignty. Hence, all
2. Domestic dividends, in general
items of income earned from sources abroad, passive
3. Dividend income from a Real Estate Investment
or active, are subject to tax under the general scope
Trust
of the regular income tax.
4. Share in the net income of a business partnership,
Rationale of Final Income Taxation
taxable association, joint ventures, joint accounts,
 The final withholding tax is built upon taxpayer and
or co-ownership
government convenience relieves the taxpayer of the
5. Royalties, in general
obligation to file an income tax return.
6. Prizes exceeding P10,000
 This very convenient for taxpayers who are limited by
7. Winnings
distance, time and cost to comply.
8. Informer's tax reward
 For the government, the final withholding system is
9. Interest income on tax-free corporate covenant
the most convenient and effective system in
bonds
collecting taxes on income where there is high risk of
FINAL TAX ON INDIVIDUALS AND CORPORATIONS
non-compliance or tax evasion.
 Unless otherwise indicated, the final tax rates to be
 Under the NIRC, final income tax is imposed on
discussed in the following sections apply to all
certain passive income and upon non-resident
taxpayers (individuals and corporations) other than:
persons not engaged in business in the Philippines.
a. Non-resident alien not engaged in trade or
Passive income
business (NRA-NETB), and
 Items of passive income are earned with very minimal
b. Non-resident foreign corporation (NRFC).
involvement from the taxpayer and are generally
INTEREST INCOME OR YIELD
irregular in timing and amount.
 Interest income or yield from local currency bank
 Unlike items of active income, they are not usually
deposits or deposit substitutes are subject to final
specifically monitored by taxpayers.
tax as follows:
 When not recorded by the taxpayer, their existence
Recipient
can be difficult to predict while their actual amount Source of interest income Individuals Corporations
may be difficult to determine. Short term deposits 20% 20%
Long-term deposits/investment Exempt* 20%
 Thus, the final withholding at source is the most certificates
favored scheme in taxing items of passive income.
 Non-resident persons not engaged in business in the Note: *Exemption does not include NRA-NETB
Philippines Non-resident persons not engaged in  Short term deposits are those made for a period of
trade or business in the Philippines, such as non- less than five years.
resident aliens not engaged in trade or business  Long-term deposits or investment certificates refer
to certificate of time deposit or investment in the
 form of savings, common or individual trust funds, Solution:
deposit substitutes, investment management Depositors Amount Rate Final Tax
accounts, and other investments with a maturity of Resident individuals P 600,000 x 20% P120,000
not less than five years, the form of which shall be Resident/domestic corporations 800,000 x 20% 160,000
NRA-NETB 200,000 x 25% 50,000
prescribed by the BSP and issued by banks only (not
NRFCs 100 000 x 30% 30,000
by non-bank financial intermediaries or finance
Total accrued interest expense P1 700 000 360,000
companies) to individuals in denominations of
P10,000 and other denominations as may be Tax on pre-termination of long-term deposits of
prescribed by the BSP. (RMC 18-2011) individuals
Illustration 1
 If the deposit or investment placement of individual
A taxpayer earned the following interest income from
taxpayers is pre-terminated before 5 years, any
various time deposits:
previously untaxed or exempted interest income will
6-month time deposit P 8,000
be subjected to the following final taxes upon pre-
2-year time deposit 12,000
termination:
5-Year time deposit 40.000 Holding period Final tax
Total interest income P 60,000 Less than 3 years 20%
3 years to less than 4 years 12%
Required: Compute the final tax if the taxpayer is an 4 years to less than 5 years 5%
5 years or more 0%
individual and if a corporation.
Solution:
Illustration 1
Individual taxpayers
On January 1, 2016, Alice invested P1,000,000 in Baguio
6-month time deposit P 8,000 x 20% P 1,600
Bank's 5-year time deposit. The deposit pays 10% interest
2-year time deposit 12,000 x 20% 2,400
annually. Alice pre-terminated the deposit on July 1,
5-year time deposit 40,000 x 0% 0
2019.
Final withholding tax P 4,000
The final tax on pre-termination will be computed as
follows:
Corporate taxpayers P 60,000 x 20% P 12.000
2016 interest income (P1,000,000 x 10%) P 100,000
 The exemption of individuals on interest income on
2017 interest income (P1,000,000 x 10%) 100,000
long-term deposits is anchored on the fact that long-
2018 interest income (P1,000,000 x 10%) 100,000
term deposits are usually channeled to the financing
2019 accrued interest income
of long-term projects such as infrastructures,
(P1,000,000 x 10% x 6 months/12 months) 50,000
property developments, and other construction
Total interest income P 350,000
projects which are deemed essential to the
Final tax rate applicable to less than
development of the country.
4-year pre-termination 12%
 Note that exemption is limited only to individuals to
Final tax P 42.000
the exclusion of corporations.
The net proceeds of the deposit and accrued interest to
Illustration 2
be released to the depositor upon pre-termination shall
A resident taxpayer received a P16,000 interest income
be:
from a bank. Determine the final tax withheld at source.
Principal balance P 1,000,000
Solution:
Accrued interest for 2019 50,000
Gross interest income (P16,000/80%) P 20,000 Final tax to be withheld ( 42,000)
Multiply by: final tax rates 20% Net proceeds to be released to the depositor P 1,008,000
Final tax withheld P 4,000 Savings or time deposits with cooperatives are not
subject to final tax
Illustration 3
 The final tax is limited to banks and shall not be
Banko Negro incurs the following interest in its savings
applied with time and savings account deposit
and time deposit accounts from the following depositors:
maintained by members with cooperatives and by
Depositors Amount
primary cooperatives with their federations.
Resident individuals P 600 000
(Dumaguete Cathedral Credit Cooperative vs. CIR,
Resident and domestic corporations 800 000
Non-resident aliens not engaged in business 200 000 G.R. 182722)
Non-resident corporations 100 000 Other applications of the final tax on interest
Total accrued interest expense P 1 700 000 1. Deposit substitute
2. Government securities
Required: Compute the total final income tax to be 3. Money market placements
withheld by Banko Negro. 4. Trust Funds
 5. Other investment evidenced by certificates Illustration
prescribed by the Bangko Sentral ng Pilipinas Mr. Siman is an Overseas Filipino Worker. He deposits all
(BSP) his savings in a savings account under the foreign
 Deposit substitute means an alternative form of currency deposit unit (FCDU) of a domestic bank. During
obtaining funds from at persons at any one time the month, the savings deposit account earned $1,000
other than deposits through the Issuance, endorse ' interest equivalent to P41,500.
acceptance of debt Instruments for the borrowers Scenario 1: Mr. Siman deposited his savings through the
own account, for the purpose of relending or account of his resident wife.
purchasing of receivables and other obligations, or The final tax shall be computed as follows:
financing their own needs or the needs of their agent Interest income P 41,500.00
or dealer. Final tax rate 15%
 Government debt instruments and securities Final tax P 6,225.00
including Treasury bonds, Treasury bills and treasury Scenario 2: Mr. Siman deposited his savings through a
notes shall be considered as deposit substitute joint account with his resident wife.
irrespective of number of lenders at origination if The final tax shall be computed as follows:
such debt instruments and securities are to traded or Interest income P 41,500.00
exchanged in the secondary market. Portion taxable 50%
Foreign currency deposit with foreign currency Taxable interest income P 20,750.00
depositary banks Multiply by: final tax rate 15%
 The interest income from foreign currency Final tax P 3,112.50
deposits under the foreign currency deposit Scenario 3: Mr. Siman deposited his savings account
system or expanded foreign currency deposit through his own account.
system by residents subject to a final tax of 15%. In this case, the interest income shall be exempt from
 The old law imposed a rate of 7.5% unti12017. final tax.
Taxpayers Individuals Corporations Interest income subject to regular tax
Residents 15% 15% Interest income from the following sources is subject to
Non-residents Exempt Exempt regular income tax, not to final tax:
Note: 1. Lending activities, whether or not in the course of
1. Resident taxpayers include resident citizens, business
resident aliens, domestic corporations and resident 2. Investments in bonds
foreign corporations. 3. Promissory notes
2. Non-residents taxpayers include non-resident 4. Foreign sources, whether bank or non-bank
citizens, non-resident aliens and non- foreign 5. Penalty for legal delay or default
resident corporations
3. It should be emphasized that NRA-NETBs and DIVIDENDS
NRFCs are also exempt "Dividends" means any distribution made by a
4. There is no long-term or short-term classification of corporation -to its shareholders out of its earnings or
foreign c exempt current, deposits. profits and payable to its shareholders, whether in money
 The reduced final tax rates on interest income on or in other property. (Sec. 73, NIRC)
foreign currency deposit and the exemption of non- Types of dividends:
resident depositors are intended to encourage the 1. Cash dividends - paid in cash
deposit of foreign currencies in our banks which will 2. Property dividends - paid in non-cash properties
be used in the financing of our international trades. including stocks or securities of another
 Our Philippine peso is not a globally accepted corporation
currency. 3. Scrip dividends - those paid in notes or evidence of
 Our foreign trade will be limited without adequate indebtedness of corporation
foreign currency reserves in our banking sector 4. Stock dividends - paid in the stocks of the
corporation
Joint accounts on forex deposits 5. Liquidating dividends - distribution of corporate
 If the bank account is jointly in the name of a net asset
non-resident taxpayer, 50% of the interest shall As a rule, dividends are incomes subject to tax. However,
be exempt while the other 50% shall be subject the following are tax income for taxation purposes:
to the 15% final tax. 1. Stock dividends
 Stock dividends representing transfer of surplus
to capital account shall not be subject to tax.
  Stock dividends are in the form of increase in Dividend Tax Rules
corporate value (i.e. capital gain) which should be Recipient of dividends
properly taxable when realized through disposal Source of dividends Individuals Corporations
or sale of the stocks investment. Domestic corporation 10% final tax Exempt
 The distribution of stocks of another corporation Foreign corporation Regular tax Regular tax
as dividends is a taxable property dividend and
not a stock dividend. Note:
2. Liquidating dividends 1. A NRA-ETB is subject to a 20% final tax on dividend, not
 Under the NIRC, the receipt of liquidating to the usual 10%; but an NRA-NETB is subject to a 25%
dividends is not viewed as income but as final tax.
exchange of properties. 2. A NRFC is not exempt but is subject to the 30% general
 When the liquidating dividends exceed the cost final tax rate. However, the imposable dividend tax shall
of the investments, the excess is a taxable capital be 15% when the tax sparing rule applies. This will be
gain, subject to regular income tax. discussed later.
 Any loss is deductible only to the extent of capital Illustrative 1
gain. Calbayog Company declared a total of P2,000,000
Taxability of Stock Dividends dividends. P800,000 is due to corporate shareholders
 Normally, stock dividends are exempt from income while P1,200,000 is due to individual shareholders.
tax.
The final tax to be withheld by Calbayog Company shall be:
 Exceptionally, stock dividends are subject to tax at
Shareholders Amount Rate Amount
the fair value of the stocks received under the
Individual shareholders P 1,200,000 x 10% P 120,000
following conditions: Corporate shareholders 800,000 x 0% 0
a. Subsequent cancellation and redemption Final tax P 120,000
If a corporation cancels or redeems stock issued Illustrative 2
as a dividend at such time and in such manner as Aborian Company declared a total of P1,000,000
to make the distribution and cancellation or dividends in March 2014. An analysis of the recipient
redemption, in whole or in part, equivalent to the shareholders is as follows:
distribution of a taxable dividend, the amount so Shareholders Amount
distributed shall be taxable to the extent it Resident aliens and citizens P 500,000
represents a distribution of earnings or profit. For NRAs engaged in trade or business 100,000
instance, a corporation declared stock dividends NRAs not engaged in trade/business 50,000
and immediately called the stock dividends for Non-resident corporations 100,000
redemption and cancellation. This act is Total dividends P 750,000
equivalent to declaration of cash dividends.
b. If it leads to substantial alteration in ownership The total final tax withheld by Aborian Company shall be:
in the corporation Shareholders Dividends Rate Final Tax
Substantial alteration in ownership in a Resident aliens and citizens P500 000 x 10% P50 000
corporation may occur when stock dividends are NRAs engaged in trade or business 100 000 x 20% 20 000
given in lieu of cash dividends or when the NRAs – NETBs 50 000 x 25% 12 500
corporation declared an optional stock or cash NRFCs 100 000 x 30% 30 000
Total P750 000 P112 500
dividend.
Stock dividend vs. Stock split Historical dividend tax rates
 Stock dividend is as capitalization of earnings The imposable final tax rates vary depending on the
source of the declared:
 Stock split results in reduction in the par value of
Source Final tax
stock and increase in the number of shares of
Earnings before January 1, 1998 Exempt
shareholders.
Earnings from 19911 6%
 Assuming a 2-for-1 split, a shareholder holding one
Earnings from 1999 8%
P50-par value stock will be given two P25-par value
Earnings from 2000 and thereafter 10%
stocks.
 While stock dividend may be taxable under certain
Any distribution made to the shareholders or members of
conditions, stock split will never be subject to
a corporation shall deemed to have been made from the
income tax.
most recently accumulated profits or surplus. and shall
constitute a part of the annual income of the distribute
for the year which received. (Sec, 73(0, NIRC)
Exempt Dividends Real Estate Investment Trust or REIT
1. Inter-corporate dividends  A REIT is a publicly listed corporation established
2. Dividends from cooperatives principally for the purpose of owning income-
Inter-corporate dividends generating real estate assets.
 Inter-corporate dividends received by a domestic The following recipients of REIT dividends are exempt
corporation and resident foreign corporation from a from the final tax:
domestic corporation are exempted under the NIRC a. Non-resident alien individuals or non-resident foreign
to minimize double taxation. corporations entitled to claim preferential tax rate
Illustration pursuant to applicable tax treaty.
B, Inc. owns 100% of A Corp. During the year. A Corp. b. Domestic corporations or resident foreign corporations
declared P100 000 dividend to B, Inc.B, in turn declared c. Overseas Filipino investors - exempt from REIT dividend
the same dividends to its shareholders. The following tax until August 12, 2018 (7 years from the effectivity of
table illustrates the double taxation: RR13-2011 which took effect on August 12, 2011)
A Corp. B. Inc
Dividends declared P 100 000 90 000 Business partnership, taxable associations, joint
Less: 10% dividends tax 10 000 9 000 venture, joint accounts or co-ownerships
Net dividends P 90 000 81 000  Under Sec. 73 of the NIRC, the net income of these
 This is form of direct duplicate taxation. To eliminate entities is deem constructively received by the
the impact of double taxation, inter-corporate partners, members or venturers, respectively, in the
dividends such as those declared by A Corp. to B, same year the net income is reported.
Inc. is exempted from final tax.  Hence, the 10% final tax applies at the point of
 When the dividend finally falls to an individual determination of the income, not at the point of
shareholder, the 10% final tax applies. actual distribution.
 This exemption extends to dividends received by Share in business partnership net income
business partnerships from domestic corporations  The "share in net income" includes the share in the
since business partnerships are considered residual profit and provisiors for salary, interest and
corporations under the NIRC. bonus to a partner.
 However, the exemption does not extend to  However, if the provisions for salaries, interests and
dividends received by general professional bonuses are expensed as such in the book of the
partnership, exempt joint ventures and exempt co- partnership, they are subject to regular tax to the
ownership because they are not considered receiving partner, not to final tax.
corporations under the NIRC.  In this case, only the share in the residual income
 On the other hand, the exemption of inter-corporate after such provisions is subject to final tax.
dividend does not apply to the share of a Illustration
corporation from the net income of a business The partnership profit distribution of partners And and
partnership due to absence of express legal Mar based on their agreed profit distribution scheme is as
exemption. follows:
 Exemption is restricted to dividend declaration only. Andy Mar
Dividends from cooperatives Salaries to industrial partner P 40 000 P 0
 Under RA 9520, the distribution of dividends by an Interest to capitalist partner - 12 000
exempt cooperative to its members either Bonus to industrial partner 25 000 -
representing interest on capital or as patronage Residual profit sharing 8 000 24 000
refunds shall not be subject to tax. Profit sharing P 73 000 P 36 000
ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT
Assuming the salaries, interest and bonus are not
TO 10% FINAL TAX
expense in the book the 10% final tax shall be:
 The 10% final withholding tax also applies to
Profit sharing P 73 000 P36 000
dividends or share in the net income of entities
Multiply by: Final tax rate 10% 10%
considered corporations under the NIRC and special
Final tax P 7 300 P 3 600
laws, such as:
1. Real Estate Investment Trusts
Note: A partner, member or venture who is an NRA-ETB,
2. Business partnerships
NRA-NETB or NRFC shall be subject respectively to 20%,
3. Taxable associations
25% and 30% final tax rate.
4. Taxable joint ventures, joint accounts or
consortia
5. 5. Taxable co-ownerships
The Improperly Accumulated Earnings Tax PRIZES
 Domestic corporations cannot avoid the dividends tax  The taxation of prizes varies.
by simply not declaring dividends.  Prizes may be exempt from income tax or subject
 Corporations which accumulate earnings beyond the to either final tax or regular income tax.
reasonable needs of business will be imposed the Exempt prizes
10% Improperly Accumulated Earnings Tax, penalty 1. Prizes received by a recipient without any effort on
tax. his part to join a context. Examples include prizes
ROYALTIES from such awards as Nobel Prize, Most Outstanding
 Passive royalty income received from sources within Citizen, Most Benevolent Citizen of the Year, and
the Philippine if; subject to the following final tax similar awards.
rates: 2. Prizes from sports competitions that are sanctioned
Recipient by their respective national sport organizations
Source of passive royalties Individuals Corporations Requisite of exemption
Books, literary works, & 10% final tax 20% final tax'
musical compositions
1. The recipient was selected without any action on
Other sources 20% final tax 20% final tax" his part to enter the contest.
2. The recipient is not required to render substantial
Note: future services a; condition to receiving the price or
1. Under the regulations, the 10% preferential royalty reward.
final tax on books and literary works pertain to printed Taxable prizes
literatures. Royalties on books sold on e-copies or CDs  For individual income taxpayers, taxable prizes are
such as e-books are subject to the 20% final tax. subject to either final tax or regular tax depending
2. Royalties on cinematographic films and similar works on the amount of the prize.
paid to NRA-ETBs, NRA-NETBs, or NRFCs is subject to a  There may be events or competitions where
final tax of 25%. corporations earn prizes.
Passive vs. Active royalties  However, there is no final tax imposition on
 Royalties of a passive nature such as royalties of claim corporate prizes under the NIRC. Hence, the same
owners or land owners of mining properties, royalties must be subject to regular income tax.
of inventors from companies that manufacture and Recipient
sell their invention, and royalty from licensing Amount of taxable prize Individuals Corporations
Prizes exceeding P10,000 20% final tax Regular tax
agreements that transfers the use of trademark or
Prizes not exceeding Regular tax Regular tax
technology are subject to 20% final tax. P10,000
 When royalties accrues from an undertaking where
the taxpayer has active involvement, it is an active  Recall also that final taxation does not apply to
income subject to the regular income tax. foreign passive income; hence, prizes from foreign
Illustration sources are subject to the regular income tax.
E-Soft Inc. develops application programs for WINNINGS
establishments. These programs were individually  For individual income taxpayers, winnings received
tailored to meet specific requirements of the from sources within the Philippines are generally
establishments and required upgrades, occasional subject to 20% final tax, except Philippine Charity
troubleshooting, and adjustments for problems. The Sweepstakes Office (PCSO) or lotto winnings
developer receives 1% of the sales of the establishment amounting to P10,000 or less.
as royalty.  Similar to prizes, there is no final tax imposed on
corporate winnings under the NIRC.
E-Soft also developed a utility program and assigned it to  Winnings that are not subjected to final tax by the
an e-marketer which sells the utility program through the payor should be reported as part of the regular
Internet. E-Soft receives 30% royalty on each copy of the income.
program sold.  Also, winnings from foreign sources are subject to
The royalties from application programs are active regular income tax.
Recipient
income subject to regular income tax. The royalty from
Types of winnings Individuals Corporations
the utility programs is passive income subject to final PCSO/lotto winnings not Exempt Exempt
withholding tax, but if the e-marketer is not a resident in exceeding P10 000
the Philippines, the passive income from abroad shall be PCSO/lotto winnings exceeding 20% final tax 20% final tax
P10 000
subject to regular tax.
Other winnings, in general 20% final tax Regular tax
Royalties, active or passive, earned from sources abroad
are subject to regular income tax.
 Note: PCSO or lotto winnings of NRA-NETBs and c. relative within the 6th degree of consanguinity
NRFCs, regardless of array are respectively subject to of those officials or employee in a. and b.
25% or 30% final tax. Amount of Cash Reward - whichever is the lower of
 The tax rules on PCSO or lotto winnings shall be the following per case:
applied on a per ticket basis. 1. 10% of revenues, surcharge, or fees recovered and
Illustration 1 or fine or penalty imposed and collected or
Apolinario won P10,000 first place in the singing contest 2. P1,000,000
sponsored by Syd Company during their company
anniversary celebration. The amount of cash reward is subject to 10% final
withholding tax which shall be withheld by the
Since results of singing contest is based on effort rather government.
than chance, the P10,000 payment is a prize which is not
Illustration
subject to 20% final tax since it is below the P10,000
Ms. Kirsten provided information to the MR leading to
threshold. Apolinario shall report the prize in his regular
the recovery of P12,000,000 unpaid taxes. The cash
income tax return. If the amount exceeded P10,000, Syd
reward shall be computed as follow:
Company shall withhold 20% final tax.
10% cash reward (P12,000,000 x10%)
Illustration 2 Cash reward limit

Roy's raffle ticket was selected as the second winning Cash reward (whichever is lower)
ticket in the raffle draw of ZFT Mall for P10,000 dubbed Less: 10% final withholding tax
as "2nd Prize". Net amount to be released to the tax informer

Since raffle draw results is not based on effort but on TAX-FREE CORPORATE COVENANT BONDS
chance, the P10,000 payment is a winning which is  Interest income of non-resident aliens, citizens or
subject to 20% final tax. The same shall be withheld by residents of the Philippines on bonds, mortgages,
ZFT Mall. Note that the P10,000 threshold applies only on deeds of trust, or other similar obligations of
prizes, not on winnings. domestic or resident foreign corporations with tax-
free or tax-reduction provision where the obligor
Illustration 3 shoulders in whole or in part any tax on the interest
Mr. Dante Paya made three bets to the PCSO lotto draws. shall be subject to a final withholding tax of 30%.
All tickets won. The details of the winnings were: Bond investor
- EZ2 - P 4,000 Individuals Corporations
- 6/42 - P10,000 (3-digit winning numbers) Tax on interest income 30% final tax Regular income
- 6/45 - P20,000,000 Grand prize (sole winner) on tax-free corporate tax
covenant bonds
The 6/42 and EZ2 winnings are exempt since they did not
Note:
exceed P10,000 in amount. PCSO shall withhold 20% final
1. The final tax applies to all individuals,
tax on the entire P2OM amount of the winnings.
regardless of classification.
TAX INFORMER'S REWARD 2. There is no similar final tax provision for
 A cash reward may be given to any person corporate recipients of "tax-free" interest;
instrumental in the discovery of violations of the hence, the regular income tax shall apply.
National Internal Revenue Code or discovery and EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-
seizure of smuggled goods. RESIDENT PERSONS NOT ENGAGED IN TRADE OR
 The tax informer's reward is subject to 10% final tax. BUSINESS IN THE PHILIPPINES
Requisites of Tax Informer's Reward: NRA-NERTB NRFC
1. Definite sworn information which is not yet in the General Final Tax Rate 25% 30%
Exceptions:
possession of the BIR
1. Capital gain on sale 15% Capital gains 15% Capital
2. The information furnished lead to the discovery of of domestic stocks tax gains tax
fraud upon internal revenue laws or provisions directly to buyer
thereof. 2. Rentals on 25% of rentals 25% of
cinematographic rentals
3. Enforcement results in recovery of revenues,
films and similar
surcharges, and fees and/or conviction of the guilty works
party or imposition of any fine or penalty. 3. Rentals of vessels 25% of rentals 4.5% of
4. The informer must not be a: rentals
4. Rentals of aircrafts, 25% of rentals 25% of
a. BIR official or employee
machineries, and rentals
b. Other public official or employee other equipments
 5. Interest income Exempt Exempt In applying the tax sparing rule, the Supreme Court ruled
under the foreign that NIRC does not require that the foreign law of non-
currency deposit
system
resident corporation must give deemed paid tax credit for
6. Interest on foreign N/A dividend equivalent to the percentage points waived by
loans the Philippines pointing that the NIRC merely require the
7. Dividend income 25% 15% if tax country of the NFRC to a deemed paid tax equivalent to
sparing rule
is applicable
that waived by the Philippines. (CIR vs. Procter & Gamble
8. Tax on corporate 30% 30% Philippines Manufacturing Corporation and the CTA (G.R.
bonds 66836)

Capital gains tax Illustration: The Tax Sparing Rule with NRRCs
 As a rule, NRA-ETBs and NRFCs do not file income tax An NFRC is due to receive a dividend of P1,000,000 from
returns. a domestic corporation. The final tax to be imposed by
 Exceptionally, NRA-NETBs and NRFCs are required to the Philippines which shall be withheld by the domestic
file income tax returns to report their gain from corporation shall be 15%, not 30%, if the country of
dealings in domestic stocks directly to buyers. domicile of the NRFC also reduces its income tax upon
 Ownership of the stocks shall not be transferred to the P1,000,000 dividend by at least 15%, the dividend tax
the assignee without the required return and tax percentage waived by the Philippines from the 30%
clearance (Certificate Authorizing Registration or general final tax rate. If the country of the NFRC does not
CAR) from the BIR that the tax on the transfer has reduce its tax on the dividend by at least 15%, the
been paid. Philippines shall Impose the 30% final tax.
Illustration: NRA-NETBs OTHER FINAL INCOME TAXES
In 2020, Mr. Tih Wong, an NRA-NETB, was hired by Raha 1. Fringe benefits of managerial or supervisory
Humabon Company (RHC), a domestic manufacturer, to employees
install his invention in RHC's factory. RHC pays him royalty 2. 2. Income payments of residents other than
and the installation fees. Mr. Wong also agreed to design depositary banks under the expanded foreign
RHC's website which he designed and completed abroad. currency deposit system (EFCDS) to offshore
During Mr. Wong's visit, he purchased shares of RHMC banking units (OBUs) and expanded foreign
and subsequently sold them directly to a buyer. currency deposit units (EFCDUs)
Royalties from invention P 300,000 3. Income payments to oil exploration service
Installation fees 1,000,000 contractors or sub-contractors
Website development fees 500,000 FRINGE BENEFITS TAX
Gain on sale of domestic stocks directly to a buyer 40,000  Fringe benefits include all remunerations under a
employee-employee relationship that do not form
RHC shall withhold the following final taxes:
part of o compensation income. The fringe benefits
Royalties from invention P 300,000
of managerial and supervisory employees are
Professional fees 1,000,000
subject to a final fringe benefits tax.
Total gross income P 1,300,000
INTEREST AND OTHER INCOME PAYMENTS TO
Multiply by: final tax on NRA-NETB 25%
Total final withholding tax P 325 000
DEPOSITARY UNDER THE EXPANDED FOREIGN
Note: CURRENCY DEPOSIT SYSTEM
1. The final tax applies on gross income, whether  Residents, other than depositary banks under the
active or passive. The same rule applies with NRFC expanded foreign currency deposit system, shall
except that the final tax rate is 30%. withhold 10% final tax on income payments such as
2. The website development fee is not subject to final interest income on loans from offshore banking
tax since the same is earned abroad. Note that the units (OBUs) and expanded foreign currency deposit
service is rendered abroad, not in the Philippines. units (FCDUs).
3. Mr. Wong shall file a capital gains tax return for the INCOME PAYMENTS TO SUB-CONTRACTORS OF
gain on the sale of domestic stocks. PETROLEUM SERVICE CONTRACTORS
The Tax Sparing Mile  Under PD 1354, every subcontractor, whether
NFRCs shall be subject to a 15% final tax dividend income domestic or foreign, entering into a contract with a
instead of the 30% general final tax if the country of service contractor engaged in petroleum
domicile of the NFRC credits against the tax due of such operations in the Philippines shall be liable to a
NFRC taxes presumed to have been paid by such NFRC final income tax equivalent to eight percent (8%) of
from the Philippines equivalent 15% of the dividends. its gross income derived from such contract, such
 tax to be in lieu of any and all taxes, whether c. The authorized city or municipality treasurer
national or local. within the revenue district where the
 Provided, however, that any income received from withholding agent's place of business is located
all other sources within and without the Philippines Monthly deadline for eFPS filing
in the case of domestic subcontractors and within  In accordance with the schedule set forth in RR No.
the Philippines in the case of foreign 26-2002, the deadline for filing of returns is as
subcontractors shall be subject to the regular follows:
income tax under the NIRC. Group A - Fifteen (15) days following the end of
 The term "gross income" means all income earned the month
or received as a result of the contract entered into Group B - Fourteen (14) days following the end of
by the subcontractor with a service contractor the month
engaged in petroleum operations in the Philippines Group C - Thirteen (13) days following the end of
under Presidential Decree No. 87. the month
 Note that the 8% final tax applies only to Group D - Twelve (12) days following the end of
subcontractors, whether individuals or the month
corporations, resident or non-resident. Group E- Eleven (11) days following the end of
 Petroleum service contractors are subject to the the month
regular income tax. Note: Please check the groupings of taxpayers under eFPS
 Persons or entities contracted by a petroleum in Chapter 4
service contractor to locally supply goods and Quarterly filing
materials that are required by and in, or that are  The withholding agent shall file (BIR Form 1601-FQ),
inherently necessary or incidental to, its Quarterly Remittance Return of Final Income Taxes
exploration and development of petroleum mineral Withheld, on or before the last day of the month
resources and are entitled to the preferential 8% after each quarter.
final tax on their gross income derived from such Penalties for Late Filing or Remittance of Final
contracts. (BIR Ruling No. 024-2001, June 13, 2001) Income Taxes Withheld
Note on Special Aliens  The same penalties for late payment of income taxes
 Under the old law, employees of offshore banking as discussed in Chapter4 apply for non-withholding
units, regional operating or regional administrative or non-remittance of final taxes.
headquarters of multinational companies, referred ENTITIES EXEMPT FROM FINAL INCOME TAX
to as special aliens, are previously subject to 15% 1. Foreign governments and foreign government-
final tax on gross compensation income. The special owned and controlled corporations
alien classification is now abolished by virtue of a 2. International missions or organizations with tax
presidential veto to the TRAIN law. immunity
 As such, these employees are now subject to regular 3. General professional partnership
income tax if they are residents and 25% final tax if 4. Qualified employee trust fund
they are non-residents.  The first two categories are exempt on grounds of
FINAL WITHOLDING TAX RETURN international comity. General professional
 The final withholding tax return (BIR Form 0619-F), partnerships and qualified employee trust funds are
Monthly Remittance Return of Final Income Taxes expressly exempt from any income tax imposed
Withheld, shall be filed in triplicate by every under the NIRC.
withholding agent or payor who is either an  These entities are exempt not only to final tax but
individual or corporation for the first two months of also to capital gains tax and regular income tax.
the quarter.
Deadline and place for monthly manual filing
 The return shall be filed and the tax shall be paid or
before the 10th day of the month following the
month in which withholding was made with:
a. The authorized agent bank of the revenue
district office having jurisdiction over the
withholding agent's place of business
b. In places where there are no authorized agent
banks, to the revenue collection officer