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Chapter 5 Final Income Taxation

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2K views20 pages

Chapter 5 Final Income Taxation

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DANICKA JANE ENERO
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© All Rights Reserved
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a Chapter 5 - Final Income Taxation CHAPTER 5 FINAL INCOME TAXATION Chapter Overview and Objectives the items of gross This Chapter discusses the features of final income taxation, income, and the class of taxpayers subject to final income tax. Final tax is one of the exceptions to the scope of the regular income tax. An excellent understanding of the items of passive income and those taxpayers subject to final tax including their final tax rates is extremely crucial to your mastery of income taxation. After finishing this Chapter, readers are expected to demonstrate: Understanding and appreciation of the features and scope of final tax Mastery of those certain passive income subject to final tax ani corresponding final tax rates Mastery of the general final tax rates on certain non-residents and their exceptions d. Knowledge of the other applications of the final income tax scheme a. b. id their c FEATURES OF FINAL INCOME TAXATION 4, 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 system The final withholding 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 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 sovereignty. Hence, all items of income earned from sources abroad, passive or active, are subject to tax under the general scope of the regular income tax. 135 Chapter 5 - Final Income Taxation Rationale of Final Income Taxation The final withholding tax is built upon taxpayer and government convenience relieves the taxpayer of the obligation to file an income tax return. This jg t convenient for taxpayers who are limited by distance, time and cost to comply, p, the government, the final withholding system is the most convenient and effa, ‘Ob Sich ct =H ECtiyg | system in collecting taxes on income where there is high risk of non-complianca : i tax evasion. | Under the NIRC, final income tax is imposed on certain passive income ang UDO, non-resident persons not engaged in business in the Philippines. Passive income Items of passive income are earned with very minimal involvement from ‘i 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 sours 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 a non-resident aliens not engaged in trade or business (NRA-NETBs) and non-resident foreign corporations (NRFCs), have high risk of non-compliance. These taxpayers do not have offices or fixed places of business in the Philippines making tx compliance very unlikely due to their absence and distance in the Philippines Also, the Philippine government cannot impose upon them 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: General final Non-resident person not engaged in trade or business 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, joi ventures, joint accounts, or co-ownership 136 ~~ EES ch apter 5 - Final Income Taxation royalties, in general prizes exceeding P10,000 winnings informer’s tax reward Interest income on tax-free corporate covenant bonds SeErzrsyn giNALTAX ON INDIVIDUALS AND CORPORATIONS ise indicated, the final tax i i inless otherwise In e fina Tates to be discussed in the followin sectiOS apply to all taxpayers (individuals and corporations) other than: . Non-resident alien not engaged in trade or business (NRA-NETB), and y, 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 source of interest income Individuals | Corporations Short term deposits 20% 20% Long-term deposits /investment certificates Exempt* 20% Note: *Bxemption does not include NRA-NETB short term deposits are those made for a period of less than five 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 10,000 and other denominations as may be prescribed by the BSP. (RMC 18-2011) Mlustration 1 Ataxpayer earned the following interest income from various time deposits: 6-month time deposit P 8,000 2-year time deposit 12,000 5-year time deposit 40,000 Total interest income P__60,000 Required: Compute the final tax if the taxpayer is an individual and if a corporation. 137 Chapter 5 - Final Income Taxation Solution: Individual taxpayers 6-month time deposit P 8,000 x20% P aN 2-year time deposit pee xe 0 Finawitholdngtse p 4.000 Corporate taxpayers P 60,000 x20% P12,000 The exemption of individuals on interest income on long-term deposits is anchored on the fact that long-term deposits are usually channeled to the financing of long-term Projects such a5 infrastructures, property developments, and other construction Projects which are deemeg essential to the development of the country. Note that exemption is limited only to individuals to the exclusion of corporations. Mlustration 2 . | , A resident taxpayer received a P16,000 interest income from a bank. Determine the final tax withheld at source. Solution: Gross interest income (P16,000/80%) P= 20,000 Multiply by: final tax rates —__20% Final tax withheld BR 4,000 Illustration 3 Banko Negro incurs the following interest in its savings and time deposit accounts from the following depositors: Depositors Amount Resident individuals P 600,000 Resident and domestic corporations 800,000 Non-resident aliens not engaged in business 200,000 Non-resident corporations Total accrued interest expense 100,000 21,700,000 Required: Compute the total final income tax to be withheld by Banko Negro. Solution: Depositors ___________Amount _ Rate _Final Tax _ Resident individuals P 600,000 x 20% P 120,000 Resident/domestic corporations 800,000 x 20% 160,000 NRA-NETB 200,000 x 25% 50,000 NRFCs ——100.000 x 30% 30,000 ‘Total accrued interest expense — P_1.700,000 P__ 360,000 138 — chapter 5 - Final Income Taxation taxon pre-termination of long-term deposits of individuals ifthe deposit or investment placement of individual taxpayers is pre-terminated pefore 5 years, any previously untaxed or exempted interest income will be d to the following final taxes upon pre-termination: subjecte Hol |__Finaltax _| Tess than 3 years 20% 3 years to less than 4 years 12% qyears to less than 5 years 5% 0% 5 years or more Iilustration 1 . On January 1, 2016, Alice invested P1,000,000 in Baguio Bank’s 5-year time deposit. The deposit pays 10% interest annually. Alice pre-terminated the deposit on July 1, 2019. The final tax on pre-termination will be computed as follows: 2016 interest income (P1,000,000 x 10%) P 100,000 2017 interest income (P1,000,000 x 10%) 100,000 2018 interest income (P1,000,000 x 10%) 100,000 2019 accrued interest income (P1,000,000 x 10% x 6 months/12 months) 01 Total interest income P 350,000 Final tax rate applicable to less than 4-year pre-termination 12% P__42,000 Final tax The net proceeds of the deposit and accrued interest to be released to the depositor upon pre-termination shall be: Principal balance 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 P_1,008,000 ae or time deposits with cooperatives are not subject to final tax te inal tax is limited to banks and shall not be applied with time and savings 100 a deposit maintained by members with cooperatives and by primary omens with their federations. (Dumaguete Cathedral Credit Cooperative vs. GR 182722) Oth fF nags, a applications of the final tax on interest *Posit substitute overnment securities Oney market placements 139 cone Chapter 5 - Final Income Taxation 4. Trust funds i : 5. Other investments evidenced by certificates pre eribed by the Bangko Se, ng Pilipinas (BSP) ini ds from at | ; f obtaining fun ea Deposit substitute means an alternative ee aii the issuance, endorseme,, H persons at any one time other than deposits ¢ wn account, for the purpoy o acceptance of debt instruments for the ee or financing their relending or purchasing of receivables and other 0! My needs or the needs of their agent or dealer. including Treasury bonds, Treasury py, deposit substitute irrespective of . instruments and securities are t, by Government debt instruments and securities i and treasury notes shall be considered as de number of lender at origination if such debt i traded or exchanged in the secondary market. i ks Foreign currency deposit with foreign currency ee rar : The interest income from foreign currency deposits uni el ne ign rey deposit system or expanded foreign currency deposit system an ents, subject to a final tax of 15%. The old law imposed a rate of 7.5% until 2017, Taxpayer [ Individuals | Corporations | | Residents 15% — : | Non-residents Exempt emp Note: 1. Resident taxpayers include resident citizens, resident aliens, domestic corporations anj resident foreign corporations. 2. Non-residents taxpayers include non-resident citizens, non-resident aliens and nop 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, The reduced final tax rates on interest income on foreign currency deposit and the exemption of non-resident depositors are intended to encourage the deposit i foreign currencies in our banks which will be used i international trades, Our Phili foreign trade will be limited banking sector. ‘ in the financing of av ppine peso is not a globally accepted currency. Ou without adequate foreign currency reserves in ol! Joint accounts on forex deposits If the bank account is jointly i i i y in the name of a non-resident and a reside! taxpayer, 50% of the interest shall be exe! i jet to the 15% final tax, mpt while the other 50% shall be subie' 140 - rapier 5 - Final Income Taxation c Trae a an Overseas Filipino Worker. He deposits all hi E . jis savit i i wou under the ee currency deposit unit (FCDU) of a comeae ani ‘During - “nonth, the savings deposit account earned $1,000 interest equivalent to PAL 500.” r. Siman deposited his savings through the account of his resident wife. scenart0 1:M he final tax shall be computed as follows: interest income P 41,500.00 ginal tax rate —__15% Final tax 26,225.00 scenario 2: Mr. Siman deposited his savings through a joint account with his resident wife. he final tax shall be computed as follows: Interest income P 41,500.00 Portion taxable eaneeeg 00g Taxable interest income P 20,750.00 Multiply by: final tax rate Final tax B_3.112.50 Scenario 3: Mr. Siman deposited his savings account through his own account. In this case, the interest income shall be exempt from final tax. Interest income subject to regular tax Interest income from the following sources is subject to re final tax: 1, Lending activities, 2. Investments in bonds 3, Promissory notes 4, Foreign sources, whether bank or non-bank 5, Penalty for legal delay or default gular income tax, not to whether or not in the course of business DIVIDENDS ‘Dividends” means any distribution out of its earnings or profits and payab ‘nother property. (Sec. 73, NIRC) ) Tes of dividends: 2 bah dividends - paid in cash i Property dividends - paid in non-cash properties including stocks or securities of another corporation n to its shareholders made by a corporatio whether in money or Je to its shareholders, 141 Chapter 5 - Final Income Taxation 4 5. As a rule, dividends are income subject to tax. Howev Scrip dividends - those paid in notes or evidence of indebtedness of the corporation | Stock dividends - paid in the stocks of the corporation A Liquidating dividends - distribution of corporate net asse' er, the following are tt income for taxation purposes: 1 Stock dividends : Stock dividends representing transfer of surplus to capital account shall ot be subject to tax. Stock dividends are in the form of increase in Corporate value (ie. capital gain) which should be properly taxable when Tealizeq through disposal or sale of the stocks investment. The distribution of stocks of another corporation as dividends is a taxable property dividend and nota stock dividend. Liquidating dividends / Under the NIRC, the receipt of liquidating dividends is not viewed as income but as exchange of properties. When the liquidating dividends exceed the cog of the investments, the excess is a taxable capital gain, subject to regular income tax. Any loss is deductible only to the extent of capital gain. Taxability of Stock Dividends Normally, stock dividends are exempt from income tax. Exceptionally, 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. For instance, a corporation declared stock dividends and immediately called the stock dividends for redemption and cancellation. This act is equivalent declaration of cash dividends. If it leads to substantial alteration in ownership in the corporation Substantial alteration in ownership in a corporation may occur when stot dividends are given in lieu of cash dividends or when the corporation declart an opuonal stock or cash dividend. 142 _— 5 - Final Income Taxation chapter! jdend vs- Stock split sock ividend is a capitalization of earnings while stock split results in reduction in ar alue of stock and an increase in the number of shares of shareholders. the P' ing 2 2-for-1 split, a shareholder holding one PS0-par value stock will be given assumit? ar value stocks. While stock dividend may be taxable under certain ivi myitions stock split will never be subject to income tax. 00 pividend Tax Rules Recipient of dividends (jouree of dividends Individuals Corporations Domestic con oration 10% final tax: Exempt? Foreign CO oration Regular tax Regular tax te: C ANRA-ETB is subject to a 20% final tax on dividend, not to the usual 10%; but an NRA- NETBis subject to a 25% final tax. 2, ANRFC 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. This will be discussed later. Mustrative 1 Calbayog Company decl: corporate shareholders w1 lared a total of P2,000,000 dividends. P800,000 is due to hile P1,200,000 is due to individual shareholders. ‘The final tax to be withheld by Calbayog Company shall be: Shareholders Amount _Rate_ _Amount Individual shareholders P 1,200,000 x10% P 120,000 Corporate shareholders 800,000 x 0% 0 Final tax P__120,000 Illustrative 2 et Company declared a total of P1,000,000 dividends in March 2014. An analysis ofthe recipient shareholders is as follows: Resident ax —Amount _ ent aliens and citizens P 500,000 «engaged in trade or business 100,000 Nonna engaged in trade/business 50,000 Tia] fn corporations 100,000 ends P_750,000 143 Chapter 5 - Final Income Taxation The total final tax to be withheld by Aborian Company shall be: ; ee 50,000 Resident aliens and citizens P 500,000 x10% P 0.000 NRAs engaged in trade or business 100,000 x20% — NRAs-NETBs 50,000 x25% - NRFCs 100,000 x 30% Total B_750,000 | Historical dividend tax rates : a | The imposable final tax rates vary depending on the source of the divideng, declared: Source Final tax Earnings before January 1, 1998 ae Earnings from 1998 4 Earnings from 1999 aon Earnings from 2000 and thereafter Any distribution made to the shareholders or members of a corporation shall by deemed to have been made from the most recently accumulated profits or surphs and shall constitute a part of the annual income of the distributee for the year y which received. (Sec. 73(C), NIRC) 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 NIRCt minimize double taxation. Illustration B, Inc. owns 100% of A Corp. During the year, A Corp. declared P100,000 dividendst! B, Inc. B, Inc, in turn, declared the same dividends to its shareholders. The followi table illustrates the double taxation: —ACorp. _ : Dividends declared P 100,000 = aa Less: 10% dividends tax 10,000 | i Net dividends P 90,000 Eau This is a form of direct duplicate taxation. To eliminate the impact of double taxatio! inter-corporate dividends such as those declared by A Corp. to B, Inc. is exem?! 144 chapter 5 - Final Income Taxation final taX. When the dividend finally falls to an individual shareholder, the 10% om A final 8X applies. this exemption extends to dividends received by business partnerships from domestic corporations since business partnerships are considered corporations under the NIRC. However, the exemption does not extend to dividends received by eneral professional partnership, exempt joint ventures and’exempt co-ownership ecause they are not considered corporations under the NIRC. On the other hand, the exemption of inter-corporate dividend does not apply to the share of a corporation from the net income of a business partnership due to absence of express legal exemption. Exemption is restricted to dividend declaration only. 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 The 10% final withholding tax also applies to dividends or share in the net income ofentities considered corporations under the NIRC and special laws, such as: 1, Real Estate Investment Trusts , Business partnerships 2 3, Taxable associations 4, Taxable joint ventures, joint accounts or consortia 5 . Taxable co-ownerships Real Estate Investment Trust or REIT AREIT 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: 4 Non-resident alien individuals or non-resident foreign corporations entitled to claim preferential tax rate pursuant to applicable tax treaty. 5. Domestic corporations or resident foreign corporations © Overseas Filipino investors - exempt from REIT dividend tax until August 12, (7 years from the effectivity of RR13-2011 which took effect on August 2011) 145 Chapter 5 - Final Income Taxation Business partnership, taxable associations, joint venture, joint accounts o, co-ownerships Under Sec. 73 of the NIRC, the net in constructively received by the partners, me reported. Hence, the 1 come of these entities is deemeg venturers, respectively, in 0% final tax applies at the the same year the net income is a ee point of determination of the income, not at the point of actual distribution. Share i net income n business partnership sidual profit and provision Judes the share in the re: fit rtner. However, if the provisions for salaries uch in the book of the partnership, they ot to final tax. In this case, only is subject to final tax. The “share in net income” inc for salary, interest and bonus to a pa interests and bonuses are expensed as S' are subject to regular tax to the receiving partner, not t the share in the residual income after such provisions ! Illustration . tion of partners Andy and Mar based on their agreed The partnership profit distribu profit distribution scheme is as follows: __Andy — ——Mar_— Salaries to industrial partner Pp 40,000 P 0 Interest to capitalist partner : 12,000 Bonus to industrial partner 25,000 - 24,000 Residual profit sharing 8,000 p__73,000 P__36,000 Profit sharing ‘Assuming the salaries, interest and bonus are not expense in the book, the 10% final tax shall be Profit sharing Pp 73,000 P 36,000 Multiply by: Final tax rate _____ 10% Y Final tax P7300 P___3,600 ETB, NRA-NETB or NRFC shall be subject Note: A partner, member or venture who is an NRA‘! 25% and 30% final tax rate. respectively to 20%, The Improperly Accumulated Earnings Tax Domestic corporations cannot avoid the dividends tax by simply not declaring dividends Corporations which accumulate earnings beyond the reasonable needs of business will be imposed the 10% Improperly Accumulated Earnings Tax, # penalty tax. This topic will be discussed in detail in Chapter 15-B. 146 ~ 15° Final Income Taxation cnaptel sats i ived fi ithi RO’ oyalty income received from sources within the Philippines is subject to ps wing final tax rates: e a - Recipient fpassive royalties Individuals | Corporations erary works, and musical compositions | _10% final tax | 20% final tax 20% final tax" _| 20% final tax’ the regulations, the 10% preferential royalty final tax on books and literary works te der " . 4, Un in to printed literatures. Royalties on books sold on e-copies or CDs such as e-books pereubjectto the 20% final tax Royalties O” cinematographic films and similar works paid to NRA-ETBs, NRA-NETBs, or RFCs 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 sel 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 the regular income tax. [lustration E ESoft Inc. develops application programs for establishments. These programs were individually tailored to meet specific requirements of the establishments and required upgrades, occasional troubleshooting, and adjustments for problems. The developer receives 1% of the sales of the establishment as royalty. E-Soft also developed a utility program and assigned it to an e-marketer which sells the utility program through the Internet. E-Soft receives 30% royalty on each copy of the program sold. The royalties from application programs are active income subject to regular income ta. The royalty from the utility programs is passive income subject to final withholding tax, but if the e-marketer is not a resident in the Philippines, the passive income from abroad shall be subject to regular tax. Royalties, active or passive, earned from sources abroad are subject to regular Income tax, PRIZES : ‘axation of prizes varies. Prizes may be exempt from income tax or subject to er final tax or regular income tax. 147 Chapter 5 - Final Income Taxation Exempt prizes : i joi 1. Prizes received by a recipient without any effort te et Our Examples include prizes from such awards as No ilar awards. "el, Citizen, Most Benevolent Citizen of the Year, and = ed by their res 2. Prizes from sports competitions that are sanction Peet, national sport organizations n on his part to enter the conteg Requisite of exemption substantial future services a, 1. The recipient was selected without any ie 2. The recipient is not required to ren' 7 condition to receiving the price or reward. Taxabl izes : : ‘ For ie income taxpayers, taxable prizes are eee to a tary regular tax depending on the amount of the a ite m ip i Hi 3 iti i izes. However, ty competitions where corporations earn prize: | iraposition on corporate prizes under the NIRC. Hence, the same must be subjay 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 Recall also that final taxation does not apply to foreign passive income; hene, prizes from foreign sources are subject to the regular income tax. WINNINGS For individual income taxpayers, winnings received from sources within th Philippines are generally subject to 20% final tax, except Philippine Chari 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 th NIRC. Winnings that are not subjected to final tax by the payor should be report as part of the regular income. Also, winnings from foreign sources are subject! regular income tax. pag cn debe gananeaan en aeeaanEepes anaes Recipient Types of winnings Individuals Corporations PCSO/lotto winnings not exceeding P10,000 Exempt Exempt PCSO /lotto winnings exceeding P10,000 20% final tax 20% final tax Other winnings, in general 20% final tax Regular tax Note: PCSO or lotto winnings of NRA-NETB: i Sener ee s and NRFCs, regardless of amount, are respett” 148 15° Final Income Taxation cnapte pet rules on PCSO or lotto winnings shall be applied on a per ticket basis. justration 1 00 fi 5 nme" linario won P10,000 first place in the singing contest sponsored by Syd Company apolinar 3 : ap” sg their company anniversary celebration. since results of singing contest is based on effort rather than chance, the P10,000 payment is a prize which is not subject to 20% final tax since it is below the P10,000 threshold. Apolinario shall report the prize in his regular income tax return. If the amount exceeded 10,000, Syd Company shall withhold 20% final tax. iilustration 2 poy's raffle ticket was selected as the second winning ticket in the raffle draw of ZFT Mall for P10,000 dubbed as “2nd Prize”. since raffle draw results is not based on effort but on chance, the P10,000 payment is a winning which is subject to 20% final tax. The same shall be withheld by ZFT Mall. Note that the P10,000 threshold applies only on prizes, not on winnings. Illustration 3 Mr. Dante Paya made three bets to the PCSO lotto draws. All tickets won. The details of the winnings were: E22 - P 4,000 6/42 - P10,000 (3-digit winning numbers) 6/45 - P20,000,000 Grand prize (sole winner) The 6/42 and EZ2 winnings are exempt since they did not exceed P10,000 in amount. CSO shall withhold 20% final tax on the entire P20M amount of the winnings. 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. Enforcement results in recovery of revenues, surcharges, and fees and/or Conviction of the guilty party or imposition of any fine or penalty. The informer must not be a: 4 BIR official or employee Other public official or employee relative within the 6th degree of consanguinity of those officials or employee in a. and b. 3 149 Chapter 5 - Final Income Taxation Amount of Cash Reward - whichever is the lower of the following per case; 1. 10% of revenues, surcharges, or fees recovered and or fine or Penaly imposed and collected or 2. P1,000,000 The amount of cash reward is subject to 10% final withholding tax which shaj) be withheld by the government. Mustration d Ms. Kirsten provided information to the BIR leading to the recovery of P12,00009) unpaid taxes. The cash reward shall be computed as follows: 10% cash reward (P12,000,000 x10%) 1,200,000 Cash reward limit nhaaT Cash reward (whichever is lower) P ae Less: 10% final withholding tax 100,000 Net amount to be released to the tax informer P_900,000 TAX-FREE CORPORATE COVENANT BONDS Interest income of non-resident aliens, citizens or residents of the Philippines o, bonds, mortgages, deeds of trust, or other similar obligations of domestic resident foreign corporations with tax-free or tax-reduction provision where thy obligor shoulders in whole or in part any tax on the interest shall be subject to, final withholding tax of 30%. Bond investor Individuals Corporations Tax on interest income on tax-free | 30% final tax Regular income corporate covenant bonds tax Note: 1. ‘The final tax applies to all individuals, regardless of classification. There is no similar final tax provision for corporate recipients of “tax-free” interest; hene, the regular income tax shall apply. 2, 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 15% Capital 15% Capital stocks directly to buyer gains tax gains tax 2. Rentals on cinematographic films |___and similar works 25% of rentals 25% of rentals 150 — | _ Final Income Taxation jer 8 chap als of vessels. 25% ofrentals_| 4.5% of rentals | 3. Re vals of aircrafts, machineries, 1 oo other € uipments 25% of rentals 7.5% of rentals eine under the foreign fs, Int curren deposit system Exempt Exempt terest ON. foreign loans N/A 20% (ol 15% if tax | gend income 25% sparing rule is |? ne applicable

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