Module 12 tax

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 WITHOLDING SYSTEM

The final withholding sydtem 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 system is inherently territorial. It applies only to certain passive income
earned from sources within the Philippines . note that taxation is territorial and we cannot
impose tax obligation (filing or withholding ) against non resident subjects of foreign
[Link] all items of income earned from abroad passive or active are subject to tax
under the scope of the regular income tax.

RATIONALE OF FINALE 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 the taxpayers
who are limited by distance, time and cost to comply. For the government the final withholding
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 , the final income tax is imposed on certain passive income and upon non
resident persons not engaged in business in the Philippines.

PASSIVE INCOME

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 the taxpayers. When not recorded by the taxpayers, their existence can be
difficult to predict while their actual amount maybe 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

Non resident persons not engaged in trade or business in the Philippines such as non resident
aliens not engaged in trade or business and non resident foreign corporations have high risk of
non compliance . These taxpayers do not have offices or fixed place of business in the
Philippines making tax compliance very unlikely due to their absence and distance in the Phils.
Also the Philippine government cannot impose upon them the the obligation to file return due
to territorial consideration.

Thus the law subjects them to final income tax wherein Philippine residents paying them income
, passive or active are obligated to withhold the following final tax.

NON RESIDENT PERSONS NOT ENGAGED IN TRADE OR BUSINESS GENERAL FINAL TAX RATE

1. Non resident alien not engaged in trade or business 25%

2. 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 10,000
7. Winnings
8. Informers tax reward
9. Interest income on tax free corporate covenant bonds

FINAL TAX ON INDIVIDUALS AND CORPORATIONS

Unless otherwise stated, the final tax rates to be discussed in the following sections
apply to all taxpayers individuals and corporations other than
a. Non resident alien not engaged in trade or business
b. Non resident foreign corporation

INTEREST INCOME OR YIELD

Interest income or yield from local currency bank deposit or deposit substitutes are subject to final tax
as follows:
 RECEPIENT

SOURCE OF INTEREST INCOME

INDIVIDUALS CORPORATIONS

Short term deposits 20% 20%

long term deposits investment certificates exempt 20%

ILLUSTRATION

A taxpayer earned the following interest income from various time deposits:

6 month time deposit 8,000

2 year time deposit 12,000
3 year time deposit 40.000

TOTAL INTEREST INCOME 60,000

REQUIRED:

Compute the final tax of the if the taxpayer is an individual and if a corporation.

SOLUTION:

INDIVIDUAL TAXPAYERS

6 month time deposit 8000x20% 1,600

2 year time deposit 12000x 20% 2,400
5 year time deposit 40000x0% 0

Final withholding tax 4,000

Corporate taxpayers 60000 x 20% 12,000

Tax on pre termination of long term deposits of individuals

If the deposit or investment placement of individual taxpayer is preterminated before 5 yrs, any
previously untaxed or exempted interest income will be subjected to the following final taxes upon
pretermination.

HOLDING PERIOD FINAL TAX

Less than 3 years 20%

3 years to less than 4 yrs 12%
4 years to less than 5 yrs 5%
5 years or more 0%

ILLUSTRATION:

On January 1, 2016 Alice invested 1m to baguio banks 5 year time deposit . the deposit pays 10%
interest annually . Alice preterminated the deposit on july 01, 2019

The final tax on pre termination will be computed as follows:

2016 interest income 1m x 10 % 100,000

2017 interest income 1m x10% 100,000
2018 interest income 1m x 10% 100,000
2019 accrued interest income 1mx10%x6/12 50,000

TOTAL INTEREST INCOME 350,000

Final tax rate applicable to less than 4 year

pre termination 12%

FINAL TAX 42,000

THE net proceed of the deposit and accrued interes to be released to the depositor upon pre
termination shall be:

Principal balances p 1,000,000

Accrued interest for 2019 50,000
final tax to be withheld ( 42,000)

Net proceeds to be released to the depositor 1,008,000

Savings or time deposits with cooperatives are not subject to final tax

Other applications of the final tax on interest

1. Deposit substitutes
2. Government securities
3. Money market placements
4. Trust funds
5. Other investments evidenced by certificates prescribed by the bsp

FOREIGN CURRENCY DEPOSITS EITH FOREIGN CURRENCY DEPOSITORY BANKS

TAXPAYER INDIVIDUALS CORPORATION

RESIDENTS 15% 15%
NON RESIDENTS EXEMPT EXEMPT

INTEREST INCOME SUBJECT TO REGULAR TAX

INTEREST INCOME SUBJECT TO REGULAR TAXINTEREST INCOME FROM THE FOLLOWING SOURCES IS
SUBJECT TOR REGULAR INCOME TAX NOT TO FINAL TAX

1. Lending activities whether or not in the course of business

2. Investment in bonds
3. Promissory notes
4. Foreign sources , whether bank or non bank
5. Penalty for legal delay ordefault

DIVIDENDS

DIVIDENDS – means any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders , whether in money or in other property.

TYPES OF DIVIDENDS

1. Cash dividend
2. Property dividend paid in non cash properties including stocks or securities of another
corporation
3. Scrip dividends – those paid in notes or evidence of indebtedness of nthe corporation
4. Stock dividend paid in the stock of the corporation
5. Liquidating dividend – distribution of corporate net assets

DIVIDEND TAX RATES

RECIPIENT OF DIVIDENDS

SOURCE OF DIVIDENDS INDIVIDUALS CORPORATION

Domestic corporation 10% final tax exempt

Foreign corporation rular tax regular tax