Chapter 5

FINAL INCOME
TAXATION
(FIT)
FEATURES OF FINAL INCOME
TAXATION
1) Final Tax
2) Tax withhold at source
3) Territorial imposition
4) Impose on certain passive income and persons not
engaged in business in the Philippines.
FINAL WITHHOLDING SYSTEM

 The person making income payments (payor) is responsible

to withhold, file and remit the tax to BIR.
 The tax deducted at source is final.
 The taxpayer (payee) receives the income net of tax and no
need to file.
 Applies to certain passive income earned from sources
within the Philippines
PASSIVE INCOME
 Earned with very minimal involvement from the taxpayer and
are generally irregular in timing and amount.
 If not recorded by the taxpayer, their existence can be
difficult to predict while their amount may be difficult to
determine.
NR NOT ENGAGED IN BUSINESS IN THE PH
 they have high risk of non-compliance as their distance and
absence from the Philippines make it very unlikely for tax
compliance.
 FINAL TAX ON INDIVIDUALS AND
CORPORATION
final taxes to be discussed in the following sections apply to
all taxpayers (individuals and corporations) except ;

1) Non-resident aliens not engaged in trade or business (NRA-NETB)

2) Non-resident foreign corporations (NRFC)
PASSIVE INCOME SUBJECT TO FINAL
TAX1) Interest or yield from bank deposits or deposits substitutes
2) Domestic dividends, in general
3) Dividend income from a real estate investment trust (REIT)
4) Share in the net income of a business partnership, taxable
association (SNI)
5) Royalties, in general
6) Prizes exceeding 10,000
7) Winnings
8) Informer tax rewards
9) Interest income on tax free corporate covenant bonds
 Therefore, interest income on short-term

INTEREST INCOME bank deposits – 20%

Individual - long-term bank
deposits - Exempt
Local Currency Deposits
 interest income or yield from local currency bank deposits or deposit
substitutes are subject to final tax as follows ;

Before
CREATE 20%

* Exemption does not include NRA-NETB (25%)

INTEREST INCOME

Old NIRC & Train

(8,000 + 12,000) x 20% P 4,000 CREATE
INTEREST INCOME
Net of final tax

Grossed-up
INTEREST INCOME

100,000 x 25% 25,000 30% if OLD NIRC and Train Law

355,000
TAX ON PRE-TERMINATION OF LONG TERM
DEPOSITS OF INDIVIDUALS
 if a long-term deposit or investment placement of individual taxpayer is
pre-terminated before 5 years, any previously untaxed or exempted
interest income will be subjected to the following final taxes ;
TAX ON PRE-TERMINATION OF
LONG TERM DEPOSITS OF INDIVIDUALS
INTEREST INCOME
Pretermination, transfer or negotiation of investment certificates

 For purposes of applying the pre-termination rates for individual

taxpayers on long-term investment certificates, the remaining
maturity of the instrument must still satisfy the 5-year requirement.
TAX ON PRE-TERMINATION OF
LONG TERM DEPOSITS OF INDIVIDUALS
TAX ON PRE-TERMINATION OF
LONG TERM DEPOSITS OF INDIVIDUALS
TAX ON PRE-TERMINATION OF
LONG TERM DEPOSITS OF INDIVIDUALS
INTEREST INCOME
Other applications subjects to the final tax on interest
 Deposit substitute
 Government Securities
 Money Market Placements
 Trust Funds
 Other evidence by certificates prescribed by the BSP
INTEREST INCOME
Foreign Currency Depository Bank
 the interest income from foreign currency deposits under the foreign
currency depository system or expanded foreign currency deposit system
by residents is subject to a final tax of 15%.

OLD NIRC - 7.5%

TRAIN / CREATE - 15%
INTEREST INCOME
INTEREST INCOME
Interest income subject to regular income tax (RIT)
 Lending
 Investment in Bonds
 Promissory Notes
 Foreign Sources, whether bank or non-bank
 Penalty for Legal Delay
DIVIDENDS
 distribution made by a corporation to its shareholders out of its
earnings or profits and payable to shareholders, whether in
money or property.
Kinds of Dividend:
 Cash Dividends - paid in cash.
 Property Dividends - paid in non-cash properties.
 Scrip dividends - paid in notes or evidence of indebtedness.
 Stock dividends - paid in the stocks of the corporation.
 Liquidating dividends - distribution of corporate net asset.
DIVIDENDS
General Rule :
Dividends are income subject to tax (cash, property and script) ,
except for the following (not income) :
 Stock Dividends
- representing transfer of surplus to capital account.
a. From the same corporation – exempt
b. From different corporation – taxable (property dividend)
 Liquidating Dividends
- is not viewed as income but exchange of properties.
DIVIDENDS
Taxability of Stock Dividends
- normally, stock dividends are exempt from income tax.
- exceptionally, stock dividends are subject to tax (at fair value of stocks
received) under the following conditions ;
 Subsequent cancellation and redemption
- a corporation which declared stock dividends and immediately called the
stock dividends for redemption and cancellation as this act is equivalent to
cash dividends. (stock to cash)
 If it leads to substantial alteration in ownership in the corporation
- may occur when the stock dividends are given in lieu of cash dividends or
when the corporation declared an optional stock or cash dividend. (cash
to stock)
DIVIDENDS
DIVIDEND TAX RULE

Intercorporate dividends
Corporation to Corporation - Exempt

NRA-ETB – 20% FIT

NRA-NETB – 25% FIT
NRFC – 25% FIT
DIVIDENDS
DIVIDEND TAX
DIVIDENDS
DIVIDEND TAX

30% OLD NIRC and CREATE

DIVIDENDS
Exempt Dividends
1) Inter-corporate dividends from domestic corporations –
exempt from final tax
2) Dividends from cooperatives – exempt from final tax
3) Qualified foreign-sourced dividends – exempt from regular tax
 DC (receives)
DIVIDENDS DC (pays)

Exempt Dividends RFC (receives)

 Inter-corporate dividends
- received by a domestic corporation and resident foreign corporation
from a domestic corporation are exempt under the NIRC to minimize
double taxation.
1) Dividends to Business Partnership (corporation) – exempt
2) Dividends to Pass through entities (such as… General Professional
Partnership, Exempt Joint Ventures, Exempt Co-ownership) – taxable
(taxable to the partner, venturer and co-owner)
DIVIDENDS
Exempt Dividends
 Inter-corporate dividends
DIVIDENDS
Exempt Dividends
 Dividends from cooperatives
- distribution of dividends by any exempt cooperative to its members either
representing interest on capital or as patronage refunds shall not be
subject to tax.
DIVIDENDS
Entities taxable as corporations are subject to 10% FINAL
TAX

a. Real estate investment trust (REIT)

b. Business partnerships
c. Taxable associations
d. Taxable joint ventures, joint accounts
e. Taxable co-ownership
DIVIDENDS
Real Estate Investment Trust (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 final tax.
a. NRA and NRFC to claim preferential tax rate pursuant to applicable
tax treaty.
b. DC or RFC.
c. Overseas Filipino Investors - exempt from REIT dividend tax until
Aug.12,2018.
DIVIDENDS
Business partnership, taxable associations, joint venture, joint
accounts or co-ownerships
- net income of these entities is deemed constructively received by the
partners, members or venturers in the same year net income is reported.
- hence, 10% final tax applies at the point of determination of income not
on the point of actual distribution. (taxable when declared)
DIVIDENDS
Share in Business Partnership Net Income
- includes the share in the residual profit and provisions of salary,
interest, bonus to a partner.
1) if provisions are expensed in the book of the partnership, they are
subject to regular tax to receiving partner, not final tax.
2) if provisions are not expensed in the book of the partnership
– 10% final tax.
DIVIDENDS
Share in Business Partnership Net Income

25% final tax rate

ROYALTIES
 passive royalty income received from sources within the
Philippines is subject to the following final tax rates ;

Printed Literatures – 10%

E-copies – 20%
Cinematographic films - 25% for non-residents
ROYALTIES (Summary)
PRIZES
 taxation of prizes varies, may be exempt from income tax or
subject to FIT or RIT.
 Exempt Prizes
a. Prizes received without any effort on recipient's part to
join a contest.
- awards from Nobel Prize, Most Outstanding Citizen, Most Benevolent Citizen and
similar awards.

b. Prizes from sport competitions that are sanction by their

respective national sport organizations.
PRIZES
 Requisites 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 in receiving the price or reward.
(unconditional)
PRIZES
Taxable Prizes
WINNINGS
PRIZES / WINNINGS
 Difference between prize and winnings
Prizes
– based on effort not chance (active participation)
– 10,000 threshold
Winnings
– based on chance not effort (no active participation)
– no threshold (except for PCSO)
PRIZES / WINNINGS
TAX INFORMER'S REWARD
 a cash reward may be given to any person instrumental in the
discovery of violations of the NIRC or discovery of smuggled
goods.
 tax informer's reward is subject to 10% final tax.
Requisites of Tax Informer's Reward
TAX INFORMER'S REWARD
Amount of Cash Reward :
- whichever is lower of the following per case ;
a. 10% of revenues, surcharges or fees recovered and or fine or
penalty imposed and collected
b. 1,000,000 per case
TAX INFORMER'S REWARD
 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 foreign corporations with tax-free or tax-
reduction provision where the obligor shoulders in whole or in part any
tax on the interest shall be subject to FIT of 30%.
OTHER APPLICATION OF FINAL INCOME
TAX (FIT)
1) Fringe benefit of managerial or supervisory employees. (Chapter 11)
2) Income payments of residents other than depositary banks under the
expanded foreign currency depository system (EFCDS) to offshore
banking units (OBUs) and expanded foreign currency deposit units
(EFCDUs) – 10% FIT
3) Income payments to oil exploration service contractors or sub-
contractors. – 8% FIT
ENTITIES EXEMPT FROM FINAL INCOME
TAX
1) Foreign governments and foreign GOCC
2) International missions or organization with tax immunity
3) General professional partnership
4) Qualified employee trust fund
• 1 and 2 are exempt on the grounds of international comity.
• 3 and 4 are expressly exempt from any income tax imposed under NIRC.
BIR FORMS
0619F – Monthly Final Withholding Taxes
Due date: 10th day after month-end

1601FQ – Quarterly Final Withholding Taxes

Due date: 30th/31st day after quarter

1604F – Annual Final Withholding Taxes

Due date: 30 days after year-end