FINAL INCOME

TAXATION
Lesson 5
FEATURES OF FINAL INCOME TAXATION
1. Final tax
2. Tax withholding at source
3. Territorial imposition
4. Imposed on certain passive income and persons not engaged in business in the Philippines

The Final withholding tax system

The final withholding tax system imposes upon the person making income payments the
responsibility to withhold the tax. The tax which will be deducted at source is final. The taxpayer
receives the income net of tax, and there would be no need for him to file an income tax return to
report the same.
The final withholding tax is inherently territorial. It applies only to certain passive income earned
from sources within the Philippines. Hence, all items of income earned abroad, passive or active,
are subjected to tax under the general scope of the regular income tax.
Rationale of Final Income Taxation
The final withholding tax is built upon taxpayer and government convenience. It relieves the
taxpayer of the obligation to file an income tax return. This is very convenient for taxpayers who are
limited by distance, time and cost to comply. For the government, the final withholding tax system
is the most convenient and effective system in collecting taxes on income where there is high risk of
non-compliance or tax evasion.
Under the NIRC, final income tax is imposed on certain passive income and upon non-resident
persons not engaged in business in the Philippines.
Passive income
Items of passive income are earned with very minimal involvement from the taxpayer and are
generally irregular in timing and amount. Unlike items of active income, they are not usually
specifically monitored by taxpayers. When not recorded by the taxpayer, their existence can be
difficult to predict while their actual amount may be difficult to determine. Thus, the final
withholding at source is the most favored scheme in taxing items of passive income.
Non-resident persons not engaged in business in the Philippines
NRNEB in the Philippines, such as non-resident aliens not engaged in trade or business (NRA-NETBs)
and non-resident foreign corporation (NRFCs), have high risk of non-compliance. These taxpayers
usually do not have principal offices or fixed places of business in the Philippines. Their distance
and absence from the Philippines make it very unlikely for tax compliance to be expected.
Thus, the law subjects them to final income tax.
Philippine residents shall withhold the following final tax from their gross income, active or passive,
from all sources within the Philippines:
Non-resident person not engaged in trade or business General final tax rate

Non-resident alien not engaged in trade or business 25%

Non-resident foreign corporation 30%

PASSIVE INCOME SUBJECT TO FINAL TAX
1. Interest or yield from bank deposits or deposit substitutes
2. Domestic dividends, in general
3. Dividend income from a Real Estate Investment Trust
4. Share in the net income of a business partnership, taxable associations, joint ventures, joint
accounts, or co-ownership
5. Royalties, in general
6. Prizes exceeding P10,000
7. Winnings
8. Informer’s tax reward
9. Interest income on tax-free corporate covenant bonds

FINAL TAX ON INDIVIDUALS AND CORPORATIONS

Unless otherwise indicated, the final tax rates to be taxed subsequently apply to all taxpayers
(individuals and corporations) other than:
a. Non-resident alien not engaged in trade or business (NRA-NETB), and
b. Non-resident foreign corporation (NRFC).
INTEREST INCOME OR YIELD
Interest income or yield from local currency bank deposits or deposit substitutes are subject to final
tax as follows:

Recipient
Individuals Corporations
Short term deposits 20% 20%
Long-term deposits/investment certificates Exempt* 20%
* Exemption does not include NRA-NETB
* Exemption does not include NRA-NETB
Short-term deposits ate those made for a period of less than 5 years. Long-term deposits or
investment certificates refer to certificate of time deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management accounts, and
other investments with a maturity of not less than five years, the form of which shall be prescribed
by the BSP and issued by banks only (not by non-bank financial intermediaries or finance
companies) to individuals in denominations of P10,000 and other denominations as may be
prescribed by the BSP.
Tax on pre-termination of long-term deposits of individuals
If the deposit or investment placement of individual taxpayers is pre-terminated before 5 years, any
previously untaxed or exempted interest income will be subjected to the following final taxes 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%
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 account deposit
maintained by members with cooperatives and by primary cooperatives with their federations.
Other applications of the final tax on interest
1. Deposit substitute
2. Government securities
3. Money market placements
4. Trust funds
5. Other investments evidenced by certificates prescribed by the BSP
Deposit substitute
Means an alternative form of obtaining funds 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 of relending or purchasing of receivables and other obligations, or
financing their own needs or the needs of their agent or dealer.
Government debt instruments and securities including T-bills, T-bonds and treasury notes shall be
considered as deposit substitute irrespective of the number of lender at origination if such debt
instruments and securities are to be traded or exchanged in the secondary market.
Foreign currency deposit with foreign currency depository banks
The interest income from foreign currency deposits under the foreign currency deposit system or
expanded foreign currency deposit system by residents is subject to a final tax of 15%. (the old law
is 7.5% until 2017)

Taxpayer Individuals Corporations

Residents 15% 15%

Non-residents Exempt Exempt

Note:
1. Resident taxpayers include resident citizens, resident aliens, domestic corporations and resident foreign corporations.
2. Non-resident taxpayers include non-resident citizens, non-resident aliens and non-resident foreign corporations
3. It should be emphasized that NRA-NETBs and NRFCs are also exempt
4. There is no long-term or short-term classification of foreign currency deposits.
Joint accounts on forex deposits
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 15% final tax.

Interest income subject to regular tax

The following income are not subject to final tax, but subject to regular tax:
1. Lending activities, whether or not in the course of business
2. Investments in bonds
3. Promissory notes
4. Foreign sources, whether bank or non-bank
5. Penalty for legal delay or default
DIVIDENDS
Types of dividends:
1. Cash dividends – paid in cash
2. Property dividends – paid in non-cash properties
3. Scrip dividends – those paid in notes or evidenced of indebtedness of the corporation
4. Stock dividends – paid in the stocks of the corporation
5. Liquidating dividends – distribution of corporate net assets

As a rule, dividends are income subject to tax. However, the following are not income for taxation
purposes:
6. Stock dividends – representing transfer of surplus to capital account shall not be subject to tax.
7. Liquidating dividends – taxable only if the liquidating dividends exceeds the cost of the
investment, the excess is a taxable capital gain, subject to regular income tax.
Taxability of Stock dividends
Stock dividends are subject to tax at the fair value of the stocks received under the following
conditions:
a. Subsequent cancellation and redemption

If a corporation cancels or redeems stock issued as a dividend at such time and in such manner
as to make the distribution and cancellation or redemption, in whole or in part, equivalent to
the distribution of a taxable dividend, the amount so distributed shall be taxable to the extent
it represents a distribution of earnings or profit.
b. If it leads to a substantial alteration in ownership in the corporation
Substantial alteration in ownership in a corporation may occur when stock dividends are given
in lieu of cash dividends or when the corporation declared an optional stock or cash dividend
Stock dividend vs. Stock split
Stock dividend is a capitalization of earnings while stock split results in reduction in the par value of
stock and an increase in the number of shares of shareholders. Assuming a 2-for-1 split, a
shareholder holding one P50-par value stock will be given two P25-par value stocks. While stock
dividend may be taxable under certain conditions, stock split will never be subject to income tax.
Dividend Tax Rules
Recipient of dividends
Source of dividends Individuals Corporations
Domestic corporation 10% final tax* Exempt**
Foreign corporation Regular tax Regular tax
Note:
* A NRA-ETB is subject to a 20% final tax on dividend, not the usual 10%; but a NRA-NETB is subject to a 25%
final tax
** A NRFC is not exempt but is subject to the 30% general final tax rate. However, the imposable dividend tax
shall be 15% when the tax sparing rule applies.

Exempt Dividends
1. Inter-corporate dividends
2. Dividends from cooperatives
Inter-corporate dividends
Inter-corporate dividends received by a domestic corporation and resident foreign corporation from
a domestic corporation are exempted under the NIRC to minimize double taxation.

Dividends from cooperatives

Under RA 9520, the distribution of dividends by an exempt cooperative to its members either
representing interest on capital or as patronage refunds shall not be subject to tax

ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL TAX

1. Real Estate Investment Trusts
2. Business partnerships
3. Taxable associations
4. Taxable joint ventures, joint accounts or consortia
5. Taxable co-ownerships
Real Estate Investment Trust or REIT
A REIT is a publicly listed corporation established principally for the purpose of owning income-
generating real estate assets.
The following recipients of REIT dividends are exempt from the final tax:
a. Non-resident alien individuals or non-resident foreign corporations entitled to claim
preferential tax rate pursuant to applicable tax treaty
b. Domestic corporations or resident foreign corporations
c. Overseas Filipino investors – exempt from REIT dividend tax until August 12, 2018 (seven (7)
years from the effectivity of RR13-2011 which took effect on August 12, 2011)

Business partnership, taxable associations, joint venture, joint accounts or co-ownerships

The net income of these entities is deemed constructively received by the partners, members or
venturers, respectively, in the same year the net income is reported. Hence, the 10% final tax
applies at the point of determination of the income, not at the point of actual distribution.

The Improperly Accumulated Earnings Tax

Corporations which accumulate earnings beyond the reasonable needs of business will be imposed
the 10% Improperly Accumulated Earnings Tax, a penalty.
ROYALTIES
Passive royalty income received from sources within the Philippines is subject to the following final
tax rates:
Recipient
Source of passive royalties Individuals Corporations
Books, literary works, and musical compositions 10% final tax 20% final tax
Other sources 20% final tax* 20% final tax*
Note:
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%.
Passive vs. active royalties
Royalties of a passive nature such as royalties of claim owners or land owners of mining properties,
royalties of inventors from companies that manufacture and sell their invention, and royalty from
licensing agreements that transfers the use of trademark or technology are subject to 20% final tax.
When royalties accrues from an undertaking where the taxpayer has active involvement, it is an
active income subject to regular income tax.
PRIZES
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 .
2. Prizes from sports competitions that are sanctioned by their respective national sport
organizations.
Requisite of exemption
3. The recipient was selected without any action on his part to enter the contest.
4. The recipient is not required to render substantial future services as a condition to receiving the
price or reward
Taxable prizes
For individual income taxpayers, taxable prizes are subject to either final tax or regular tax
depending on the amount of the prize. There may be events or competitions where corporations
earn prizes. However, there is no final tax imposition on corporate prizes under the NIRC. Hence,
the same must be subject to regular income tax.

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; hence, prizes from foreign sources are
subject to regular income tax.
WINNINGS
For individual income taxpayers, winnings received from sources within the Philippines are generally
subject to 20% final tax, except Philippine Charity Sweepstakes Office (PCSO) or lotto winnings
amounting to P10,000 or less.
Similar to prizes, there is no final tax imposed on corporate winnings under the NIRC. Winnings that
are not subjected to final tax by the payor should be reported as part of the regular income. Also,
winnings from foreign sources are subject to regular income tax.

Recipient
Types of winnings Individuals Corporations
PCSO or lotto winnings not exceeding P10,000 Exempt Exempt
PCSO or lotto winnings exceeding P10,000 20% final tax 20% final tax

OtherPCSO
Note: winnings, in general
or lotto winnings of NRA-NETBs and 20% final tax
NRFCs, regardlessRegular tax are respectively
of amount,
subject to 25% or 30% final tax.
The tax rules on PCSO or lotto winnings shall be applied on a per ticket basis.
TAX INFORMER’S REWARD
A cash reward may be given to any person instrumental in the discovery of violations of the
National Internal Revenue Code or discovery and seizure of smuggled goods. The tax informer’s
reward is subject to 10% final tax.

Requisites of Tax Informer’s Reward:

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, and fees and/or conviction of the
guilty party or imposition of any fine or penalty
4. The informer must not be:
a. BIR official or employee
b. Other public official or employee
c. Relative within the 6th degree of consanguinity of those officials or employees in (a) or (b)

Amount of cash reward – whichever is lower of the following per case:

5. 10% of revenues, surcharges, or fees recovered and or fine or penalty imposed and collected or
6. P1,000,000
The amount of cash reward is subject to 10% final withholding tax which shall be withheld by the
government.
TAX-FREE CORPORATE COVENANT BONDS
Interest income of non-resident aliens, citizens or residents of the Philippines on bonds, mortgages,
deeds of trust, or other similar obligations of domestic or resident foreign corporations with tax-free
or tax-reduction provisions where the obligor shoulders in whole or in part any tax on the interest
shall be subject to a final withholding tax of 30%.

Bond investor

Individuals Corporations

Tax on interest income on tax-free corporate 30% final tax Regular income tax
covenant bonds
Note:
1. The final tax applies to all individuals, regardless of classification
2. 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% 30%
Exceptions:
1. Capital gain on sale of domestic stocks directly to buyers 15% capital gains tax 15% capital gains tax
2. Rentals on cinematographic films and similar works 25% of rentals 25% of rentals
3. Rentals of vessels 25% of rentals 4.5% of rentals
4. Rentals of aircrafts, machineries, and other similar equipment 25% of rentals 7.5% of rentals
5. Interest income under the foreign currency deposit system Exempt Exempt

6. Interest on foreign loans N/A 20%

7. Dividend income 25% 15% if tax sparing rule is
applicable
8. Tax on corporate bonds 30% 30%
Capital gains tax
As a rule, NRA-NETBs and NRFCs do not file income tax returns. Exceptionally, NRA-NETBs and
NRFCs are required to file income tax returns to report their gain from dealings in domestic stocks
directly to buyers. Ownership of stocks shall not be transferred to the assignee without the
required return and tax clearance (Certificate Authorizing Registration or CAR) from the BIR that the
tax on the transfer has been paid.

The Tax Sparing Rule

NRFCs shall be subject to a 15% final tax on dividend income instead of the 30% 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 15% of the dividends.
The requirement of the tax sparing rule is deemed satisfied if the country to which the NRFC is
domiciled imposes no tax on dividends from foreign sources.
OTHER FINAL INCOME TAXES
1. Fringe benefits of managerial or supervisory employees
2. Income payments of residents other than depository banks under the expanded foreign
currency deposit system (EFCDs) to offshore banking units (OBUs) and expanded foreign
currency deposit units (EFCDUs)
3. Income payments to oil exploration service contractors or sub-contractors.

FRINGE BENEFITS TAX

Fringe benefits shall include all remunerations under the employee-employer relationship that do
not form part of compensation income. The fringe benefits of managerial and supervisory
employees are subject to a final fringe benefits tax.
INTEREST AND OTHER INCOME PAYMENTS TO DEPOSITORY BANKS UNDER THE EXPANDED FOREIGN
CURRENCY DEPOSIT SYSTEM
Residents, other than depository banks under the expanded foreign currency deposit system, shall
withhold 10% final tax on income payments such as interest income on loans from offshore banking
units (OBUs) and expanded foreign currency deposit units (FCDUs).

INCOME PAYMENTS TO SUB-CONTRACTORS OF PETROLEUM SERVICE CONTRACTORS

Under PD 1354, every sub-contractor, whether domestic or foreign, entering into a contract with a
service contractor engaged in petroleum operations in the Philippines shall be liable to a final income
tax equivalent to 8% of its gross income derived from such contract, such tax to be in lieu of any and all
taxes, whether national or local.

Note on Special Aliens

Under the old law, employees of offshore banking units, regional operating or regional administrative
headquarters of multinational companies , referred to as special aliens, are previously subject to 15%
final tax on gross compensation income. The special alien classification is now abolished by virtue of a
presidential veto to the TRAIN law. As such, these employees are now subject to regular income tax if
they residents and 25% final tax if they are non-residents.
FINAL WITHHOLDING TAX
The final withholding tax return (BIR Form 0619-F), Monthly Remittance Return of Final Income
Taxes Withheld, shall be filed in triplicate by every withholding agent or payor who is either an
individual or corporation for the first two months of the quarter.

Deadline and place for monthly manual filing

The return shall be filed and the tax shall be paid on 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
c. The authorized city or municipality treasurer within the revenue district where the withholding
agent’s place of business is located
Deadline for eFPS filing
Group A – Fifteen (15) days following the end of the month
Group B – Fourteen (14) days following the end of the month
Group C – Thirteen (13) days following the end of the month
Group D – Twelve (12) days following the end of the month
Group E – Eleven (11) days following the end of the month

Quarterly filing
The withholding agent shall file (BIR Form 1601-FQ), Quarterly Remittance Return of Final Income
Taxes Withheld, on or before the last day of the month after each quarter.

Penalties for Late Filing or Remittance of Final Income Taxes Withheld

The same penalties for late payment of income taxes, apply for non-withholding or non-remittance
of final taxes.
ENTITIES EXEMPT FROM FINAL INCOME TAX
1. Foreign governments and foreign government-owned and controlled
corporations
2. International missions or organizations with tax immunity
3. General professional partnership
4. Qualified employee trust fund

The first two categories are exempt on grounds of international comity. General
professional partnerships and qualified employee trust funds are expressly exempt
from any income tax imposed under the NIRC.

These entities are exempt not only to final tax but also to capital gains tax and
regular income tax.