INCOME TAXATION NOTES (Roverson D. Mortega) 1.

INTEREST INCOME OR YIELD

FINAL INCOME TAXATION (FIT) ➢ from local currency bank deposits, deposit
substitutes, trust funds, and similar
FEATURES OF FINAL INCOME TAXATION
arrangements.
1. Final Tax Local Currency Deposits
2. Tax Withholding at Source Individuals Corporations
3. Territorial Imposition From Banks
4. Imposed on certain passive income and persons not Short-Term 20% 20%
engaged in business in the Philippines. Long-Term Exempt RIT
From Non-Bank
Short-Term RIT RIT
Passive Income Long-Term RIT RIT
➢ NRA-NETBs and NRFCs – still 25% FIT
➢ Earned with very minimal involvement. ➢ Short-term – period of less than 5 years
➢ Irregular in timing and amount. ➢ Long-term – maturity of not less than 5 years
➢ Not usually specifically monitored by taxpayers.
Savings or Time Deposits with Cooperatives are not
➢ Existence can be difficult to predict, and actual
subject to FIT.
amount may be difficult to determine.

1.1 DEPOSIT SUBSTITUTES

NON-RESIDENT PERSONS NOT ENGAGED IN BUSINESS
IN THE PHILIPPINES ➢ Alternative form of obtaining funds from the
public other than deposits.
➢ NRA-NETBs and NRFCs
➢ Issuance, endorsement, or acceptance of debt
➢ High risk of non-compliance due to absence and
instruments.
distance.
➢ Public = 20 or more corporate lenders at any
➢ PH govt cannot impose to file return due to
one time
territorial considerations.
➢ They are subject to FIT – PH residents paying The 19-lender rule
them income, passive or active.
General Final Tax Rate ➢ 19 or less lenders = not a public borrowing = not
NRA-NETBs 25% a deposit substitute
NRFCs 25% ➢ Debt Instrument for Interbank Call Loans with 5
days or less maturity to cover deficiency = not a
deposit substitute
PASSIVE INCOME SUBJECT TO FINAL TAX ➢ EXEMPTION: Govt Debt Instruments such as T-
1. Interest/Yield from Bank Deposits or Deposit bonds, T-bills, and T-notes = considered as
Substitutes deposit substitute irrespective of number of
2. Domestic Dividends, In General lenders
3. Dividend income from REITs 19 or less 20 or more
4. Share in the net income of a Business Corporate Private Borrowing Deposit Subs
Partnership, Taxable Associations, Joint Issuer (RIT)
Ventures, Joint Accounts, or Co-Ownership Govt + BSP Deposit Subs Deposit Subs
5. Royalties, In General ➢ Any person holding any interest, legal or
6. Prizes Exceeding P10k beneficial, on a debt instrument, by assignment
7. Winnings or participation, w/ or w/o recourse =
8. Informer’s Tax Reward considered as a lender = counted in applying
9. Interest Income on Tax-Free Corporate 19-lender rule
Covenant Bonds
Timing of Withholding Final Tax 1.2 FOREIGN CURRENCY DEPOSIT WITH FOREIGN
CURRENCY DEPOSITARY BANKS
1. Zero Coupon – Upon Origination
2. Interest-Bearing – Upon Payment of Interest ➢ Interest income by residents is subject to 15%
FIT.
Summary of Tax Rules on Interest on Debt Instruments ➢ Reduced FIT rates and exemption is to
Individuals Corporations encourage the deposit of foreign currencies in
Issued by Banks our banks for international trades financing.
Short-Term 20% 20%
Taxpayer Individuals Corporations
Long-Term Exempt RIT
Residents 15% 15%
Issued by Non-Banks
Non-Residents Exempt Exempt
Short-Term 20% 20%
❖ NRA-NETBs and NRFCs are also exempt.
Long-Term 20% RIT
❖ No long-term or short-term classification.

Trust Funds of Banks or Investment Management

Accounts Joint Accounts on Forex Deposits
➢ Subject to same FIT rules. ➢ If the bank account is jointly in the name of a
➢ Mandatory that (Claiming Exemption on Long- non-resident and a resident, 50% of the interest
Term Investment): is exempt while the other 50% shall be subject
1. Must be held/managed by the bank for at to 15% FIT.
least 5 years.
2. Underlying investments must qualify as a
deposit substitute issued by a bank. 2. DIVIDENDS
3. Must hold on to such underlying investment
for at least 5 years. ➢ Dividends that are not income for taxation
purposes:
1. Stock Dividends – if distributed stocks are a
Pre-Termination of Long-Term Deposits or Investment stock of another corporation = taxable as
of Individuals property dividend.
2. Liquidating Dividends – not viewed as
➢ Any previously untaxed/exempted interest income but as exchange of properties.
income will be subjected to the following FIT Liqui Div > Investment Cost = Excess is capital
upon pre-termination: gain subject to RIT.
Holding Period Pre-Termination Tax Taxability of Stock Dividends
Less than 3 years 20%
3 years to less than 4 years 12% ➢ Normally exempt from income tax
4 years to less than 5 years 5% ➢ Subject to tax at FMV of the stocks received
5 years or more 0% under:
❖ NRA-NETBs are not subject to the reduced pre- 1. Subsequent Cancellation and Redemption –
termination tax rate on long-term deposits or corporation declared stock dividends and
investment certificates (still 25%). immediately called the stock dividends for
redemption and cancellation = equivalent to
Pre-Termination, Transfer, or Negotiation of declaration of cash dividends
Investment Certificates 2. If it Leads to Substantial Alteration in the
➢ The remaining maturity of the instrument must Ownership in the Corporation – when stock
still satisfy the 5-year requirement. dividends are given in lieu of cash dividends or
when the corporation declared optional stock
or cash dividend.
Stock Dividend vs. Stock Split Entities Taxable as Corporations are Subject to 10% FIT
➢ SD = capitalization of earnings = taxable under ➢ 10% FIT applies to dividends or share in the net
certain circumstances income of entities considered as corporations
➢ SS = reduction of par value and increase in under NIRC and special laws:
quantity = never taxable 1. REITs
2. Business Partnerships
3. Taxable Associations
Dividend Tax Rules 4. Taxable Joint Ventures, Joint Accounts,
or consortia
Source of Div Individuals Corporations 5. Taxable Co-Ownerships
Domestic Corp 10% Exempt
Foreign Corp RIT RIT
❖ NRA-ETBs = 20% FIT // NRA-NETBs = 25%
3. REAL ESTATE INVESTMENT TRUSTS OR REITS
❖ NRFCs = 25% (15% when tax sparing rule
applies) ➢ A publicly listed corporation established
principally for the purpose of owning income-
Presumptive Source of Dividend Distribution
generation real estate assets.
➢ Any distribution made = made from most ➢ 10% FIT
recently accumulated profits/surplus. ➢ Recipient of REIT dividends exempt from FIT:
➢ Shall constitute a part of annual income of the 1. NRAs or NRFCs entitled to claim
distributee for the receipt year. preferential tax rate pursuant to
applicable tax treaty.
Exempt Dividends
2. DCs or RFCs
➢ Inter-Corporate Dividends from Domestic 3. Overseas Filipino Investors – Exempt
Corporations – exempt from FIT. from REIT dividend tax until August 12,
➢ Dividends from cooperatives - exempt from FIT. 2018.
➢ Qualified Foreign-Sourced Dividends - exempt
from FIT.
4. BUSINESS PARTNERSHIPS, TAXABLE ASSOCIATIONS,
JOINT VENTURE, JOINT ACCOUNTS, OR CO-
Inter-Corporate Dividends from Domestic Corporations OWNERSHIPS

➢ Received by a DC and RFC from DC = Exempted ➢ Net Income of these entities = constructively
under NIRC to minimize double taxation received by the partner, members, or venturers,
➢ Extends to dividends received by Business respectively, in the same year the net income is
Partnerships from DC = because they are reported.
considered corporations under NIRC ➢ 10% FIT applies at the point of determination
➢ General Professional Partnership, Exempt Joint of income, not at the point of actual
Ventures, and Exempt Co-Ownership are not distribution.
included because they are not corporations
Share in Business Partnership Net Income
under NIRC.
➢ Includes share in the residual profit and
Inter-Corporate Dividends from Foreign Corporations
provisions for salary, interest, and bonus to
➢ Received by Corporations from Foreign partner.
Corporations = RIT ➢ If these (excluding residual profit) are expensed
➢ DC recipients of such dividends may be in the books of the partnership = RIT of the
exempted under certain conditions. receiving partner, not FIT = the share in residual
income after such provisions is subject to FIT.
➢ NRA-ETB = 20% // NRA-NETB & NRFC = 25%
5. ROYALTIES Taxable Prizes
➢ Passive Royalty Income received from sources ➢ For Individuals, taxable prizes are subject to
within PH is subject to the ff FIT rates: either FIT or RIT depending on the amount of
Sources Individuals Corporations the prize.
Books, Literary Works, 10% 20% ➢ For Corporate Prizes, no FIT imposition, only
and Musical RIT.
Compositions
Other Sources 20% 20% Amount Individuals Corporations
➢ 10% preferential royalty FIT on books & literary Exceeding P10k 20% RIT
works = for hardcopy/printed only Not Exceeding P10k RIT RIT
➢ E-Copies/CDs = 20% FIT ➢ Foreign Passive Income = Exempt from FIT
➢ Royalties on Cinematographic Films and similar ➢ Prizes from Foreign Sources = RIT
works paid to NRA-ETBs, NRA-NETBs, or NRFCs
= 25% FIT
7. WINNINGS
Passive vs. Active Royalties
➢ For Individuals, received from sources within
➢ Passive nature such as royalties of claim owners PH = 20% FIT, except winnings from PCSO
or landowners of mining properties, royalties of games amounting to P10k or less.
inventors, royalties from licensing agreements ➢ No FIT on Corporate Winnings. Not subject to
that transfers the use of trademark/technology FIT = part of RIT
= 20% FIT ➢ Winnings from Foreign Sources = RIT
➢ Taxpayer has active involvement = active
income subject to RIT Types Individuals Corporations
➢ Royalties, active or passive that are earned PCSO not Exempt Exempt
from abroad = RIT exceeding P10k
PCSO exceeding 20% 20%
P10k
Other winnings, 20% RIT
6. PRIZES
in general
➢ May be exempt from Income Tax or subject to ➢ PCSO winnings of NRA-NETBs and NRFCs,
either FIT or RIT. regardless of amount = 25% FIT
➢ Tax Rules on PCSO winnings = applied on a per
Exempt Prizes ticket basis
➢ Prizes received without any effort on recipient’s
part to join a contest. Ex. Nobel Prize, Most
Outstanding Citizen, Most Benevolent Citizen of 8. TAX INFORMER’S REWARD
the Year, and similar awards. ➢ A cash reward may be given to any person
➢ Prizes from sport competitions that are instrumental in the discovery of violations of
sanctioned by their respective national sport the NIRC or discovery and seizure of smuggled
organizations. goods.
Requisite of Exemption ➢ Subject to 10% FIT.

➢ The recipient was selected without any action Requisites of Tax Informer’s Reward
on his part to enter the contest. ➢ Definite sworn information which is not yet in
➢ The recipient is not required to render the possession of BIR.
substantial future services as a condition to ➢ The information furnished led to the discovery
receiving the prize or reward. of fraud upon NIRC or provisions thereof.
 ➢ Enforcement results in recovery of revenues, CAPITAL GAINS TAX
surcharges, and fees and/or conviction of the
➢ As a rule, NRA-NETBs and NRFCs do not file ITR.
guilty party or imposition of any fine or penalty.
Required to file to report their gain from
➢ Informer must not be:
dealings in domestic stocks directly to buyers.
1. BIR Official/Employee
➢ Ownership of the stocks shall not be transferred
2. Other Public Official/Employee
to the assignee without the required ITR and
3. Relative within the 6th degree of
tax clearance from BIR that the tax on the
consanguinity of A and B.
transfer has been paid.
Amount of Cash Reward

➢ Whichever is lower:
THE TAX SPARING RULE
1. 10% of revenues, surcharges, or fees
recovered or fine or penalty imposed ➢ NRFCs shall be subject to a 15% FIT on dividend
and collected. income instead of the 25% general FIT if the
2. P1M (max/limit) country of domicile of the NRFC credits against
➢ Amount of cash reward = 10% FIT (withheld by the tax due of such NRFC taxes presumed to
government) have been paid by such NRFC from the PH
equivalent to 10% of the dividends.

9. TAX-FREE CORPORATE COVENANT BONDS

OTHER FINAL INCOME TAXES
➢ Interest Income of NRAs, NRCs, or Residents of
PH on bonds, mortgages, deeds of trust, or 1. Fringe Benefits Tax
other similar obligations of DCs or RFCs with 2. Income payments of residents other than
tax-free or tax-reduction provision where the depositary banks under the expanded foreign
obligor shoulders in whole or in part any tax on currency deposit system (EFCDS) and expanded
the interest = 30% FIT foreign currency deposit units (EFCDUs)
Individuals Corporations 3. Income payments to oil exploration service
Tax on Interest 30% RIT contractors or subcontractors.
Income on TFCCB
➢ Applies to all individuals, regardless of Fringe Benefits Tax
classification. ➢ All renumerations under an employer-
➢ Corporate Recipients = RIT employee relationship that do not form part of
compensation income.
EXCEPTIONS TO THE GENERAL FINAL TAX ON NON- ➢ Fringe benefits of managerial and supervisory
RESIDENT PERSONS NOT ENGAGED IN TRADE OR employees are subject to final fringe benefits
BUSINESS IN THE PHILIPPINES tax.

Interest And Other Income Payments to Depositary

Banks Under the Expanded Foreign Currency Deposit
System

➢ Residents, other than depositary banks under

EFCDS, shall withhold 10% FIT on income
payments such as interest income on loans
from EFCDUs.
Income Payments to Sub-Contractors of Petroleum Deadline and Place for Monthly Manual Filing
Service Contractors
➢ Return shall be filed and paid on or before the
➢ Under PD 1354, domestic or foreign 10th day of the month following the month in
subcontractors entering a contract with a which withholding was made with:
service contractor engaged in petroleum 1. The authorized agent bank of the
operations in the PH shall be liable to an 8% FIT revenue district office has jurisdiction
of its gross income derived from such contract, over the withholding agent’s place of
such tax to be in lieu of any and all taxes, business.
national or local. 2. No agent banks = Revenue Collection
➢ For Domestic Subcontractors = Income from Officer
other sources, within or without PH = RIT 3. Authorized city/municipality treasurer
➢ For Foreign Subcontractors = Income from other within the revenue district where the
sources, within PH = RIT withholding agent’s place of business is
➢ 8% FIT applies only to subcontractors, whether located.
individuals or corporations, resident, or non-
Monthly Deadline for eFPS Filing
resident.
➢ Petroleum Service Contractors = RIT ➢ In accordance with the schedule set forth in RR
➢ Persons or entities contracted by a petroleum No. 26-2002.
service contractor to locally supply ➢ Groups
goods/materials that are required/inherently A. 15 days following the end of the month.
necessary/incidental to its exploration and B. 14 days following the end of the month.
development of petroleum mineral resources = C. 13 days following the end of the month.
8% FIT on gross income from such contracts D. 12 days following the end of the month.
E. 11 days following the end of the month.

Quarterly Filing
NOTES ON SPECIAL ALIENS
➢ BIR Form 1601-FQ
➢ Under the old law, employees of offshore
➢ Quarterly Remittance Return of FIT Withheld =
banking units, regional operating or regional
on or before the last day of the month after
administrative headquarters of multinational
each quarter.
companies, referred to as special aliens, are
previously subject to 15% FIT on gross Penalties for Late Filing/Remittance of FIT Withheld
compensation income.
➢ Special alien classification = abolished by virtue ➢ Same with penalties for late payment of income
of a presidential veto to the TRAIN LAW. taxes as discussed in Chapter 4.
➢ These employees are now subject to RIT if ➢ Applies for Non-Withholding or Non-
residents and 25% FIT if non-residents. Remittance of Final Taxes

FINAL WITHHOLDING TAX RETURN Entities Exempt from Final Income Tax

➢ BIR Form 0619-F 1. Foreign Governments, Foreign Government-

➢ Monthly Remittance Return of FIT Withheld = Owned and Controlled Corporations –
filed in triplicate by every withholding International Comity
agent/payor who is an individual/corporation 2. International Mission or Organizations with Tax
for the first 2 months of the quarter. Immunity – International Comity
3. General Professional Partnership – exempt from
any income tax.
4. Qualified Employee Trust Fund – exempt from
any income tax.
Reference/s: Income Taxation Laws, Principles, and
Applications 2021 by Rex B. Banggawan, CPA, MBA