CHAPTER 05: Final Income Taxation

FEATURES OF FINAL INCOME TAXATION  General final tax rate: 25%

1. Final tax PASSIVE INCOME SUBJECT TO FINAL TAX
2. Tax withholding at source
1. Interest or yield from bank deposits or
3. Territorial imposition
deposit substitutes
4. Imposed on certain passive income and the
2. Domestic dividends, in general
NRA-NETB
3. Dividend income from a Real Estate
The Final Withholding System Investment Trust
4. Share in the net income of a business
 imposes on the payer the responsibility to
partnership, taxable associations, joint
withhold the tax
ventures, joint accounts, or co-ownership
 territorial, applying only to certain passive
5. Royalties, in general
income from sources within the Philippines
6. Prizes exceeding P10,000
7. Winnings
 The tax deducted at source is final.
8. Informer's tax reward
 Taxation is territorial, and tax obligations
9. Interest income on tax-free corporate
cannot be imposed on non-resident foreign
covenant bonds
subjects.
 Income earned from sources abroad, I. INTEREST INCOME OR YIELD
passive or active, is subject to tax under the
Local Currency Bank Deposits, Deposit
general scope of regular income tax.
Substitutes, Trust Funds and Similar
Rationale of Final Income Taxation Arrangements (for resident individuals and
resident/domestic corporations)
 Final withholding tax is built for taxpayer
and government convenience. On interest Recipient
 The taxpayer receives income net of tax income Individuals Corporations
and does not need to file an income tax From banks
return for it. Short term
 For the government, it is the most deposits/ 20% 20%
convenient and effective system for certificates
collecting taxes on income with a high risk Long term
deposits/ Exempt 20%
of non-compliance or tax evasion.
certificates
Passive Income From non-bank institutions
Short term
 Items of passive income are earned with deposits/ RIT2 RIT2
minimal involvement from the taxpayer and certificates
are generally irregular in timing and amount. Long term
 Final withholding at source is the most deposits/ RIT2 RIT2
favored scheme for taxing items of passive certificates
income. NOTE:

Non-resident persons not engaged in 1. The finals tax on deposits applies only to
business in the Philippines (NRA-NETBs) those made with the banks.
2. NRA-NETBs and NRFS are subject to the
 Non-resident persons not engaged in trade 25% general final tax on their interest
or business in the Philippines, such as income.
NRA-NETBs and NRFCs, have a high risk 3. The exemption of individuals on interest
of non-compliance. income on long-term deposits is because
 The Philippine government cannot impose long-term deposits are usually channeled to
upon them the obligation to file a return due the financing of long-term projects.
to territorial considerations.

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4. Corporations are subject to regular tax on STEP 1: Determine if the borrowing is a
interest income on long-term deposits or deposit substitute.
investment certificates.
The 19-lender Rule does not Apply to
5. Interest income: taxpayer; interest expense:
Government Securities
banks/non-bank institutions
 Short-term deposits are for less than five  Government debt instruments traded in the
years secondary market are DEPOSIT
 Long-term deposits SUBSTITUTES.
 investments with a maturity of at least  The number of lenders at origination is
five years irrelevant.
 issued by banks, not non-bank financial  Interbank call loans (short term loans made
intermediaries or finance companies between the banks) with maturities of 5
 must be in denominations of P10,000 or days or less are NOT deposit substitutes.
as prescribed by the BSP
Number of borrowing at
PROBLEM: A resident taxpayer received origination
interest income. Issuer of
debt 19 or less 20 or more
Gross interest income (Receipt/(100% xx instrument
- final tax rate) Corporate Private Deposit
Multiply by: Final tax rate xx issuer borrowing substitute
Final tax withheld Pxx Government Deposit Deposit
including BSP substitute substitute
Savings or Time Deposits with Cooperatives NOTE:
are Not Subject to Final Tax 1. Origination means issuance.
The final tax is limited to banks and shall 2.
NOT be applied with time and savings account a. Interest on deposit substitute (ie.
deposit maintained by members with public borrowing) is subject to FINAL
cooperatives and by primary cooperatives with TAX.
their federations. b. Interest on private borrowing is
subject to regular INCOME TAX.
Deposit Substitutes – an alternative way to
obtain funds from the PUBLIC other than Timing of Withholding of Final Tax
through deposits 1. Zero coupon instruments or securities -
 It involves the issuance, endorsement, or upon origination
acceptance of debt instruments for the 2. Interest-bearing instruments or securities
borrower's own account. - upon payment of interest
 Funds are used for relending, purchasing
receivables and other obligations, or Summary of Tax Rules on Interest on Debt
financing the needs of the borrower or their Instruments
agent or dealer.
 Public - 20 or more corporate lenders at STEP 2: If the borrowing is a deposit
any one time substitute, follow the table below.

The 19-lender Rule On interest Recipient

income Individuals Corporations
 The mere flotation of a debt From banks
instrument (≤ 19 lenders) is NOT Short term 20% 20%
considered to be a public borrowing and Long term Exempt 20%
is NOT deemed a deposit substitute. From non-bank institutions
 flotation of a debt instrument – the Short term 20% 20%
process of issuing a debt instrument, Long term 20% RIT
such as bonds or notes, to raise funds

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NOTE: The final tax exemption on interest of the instrument must still satisfy the 5-year
income derived from long-term certificates or requirement.
debt instruments refers only to those issued by
NOTE: NRA-NETBS are not subject to the
banks and applies only to individual taxpayers.
reduced pre-termination tax rate on long term
Trust Funds or Investment Management deposits or investment certificates.
Accounts
Foreign Currency Deposit with Foreign
 Investments in bank trust funds or Currency Depositary Banks
investment management accounts follow
final tax rules. Taxpayer Individuals Corporations
Residents 15% 15%
1. To claim final tax exemption,
Non- Exempt Exempt
investments must be held by the
residents
bank for at least 5 years.
2. Underlying investments must qualify as
deposit substitutes issued by a bank. NOTE: There is no long-term or short-term
3. Trust accounts or investment classification of foreign currency deposits.
management accounts must hold
these investments for at least 5 years.  Reduced final tax rates on interest income
on foreign currency deposits encourage
Pre-Termination of Long-Term Deposits or depositing foreign currencies in Philippine
Investment of Individuals banks.
 Exemption of non-resident depositors aims
Pre- to increase foreign currency deposits.
Holding Period termination  Increased foreign currency reserves are
Tax used to finance international trade.
Less than 3 years 20%  The Philippine peso is not a globally
3 years to less than 4 12% accepted currency.
years  Adequate foreign currency reserves are
4 years to less than 5 5% essential for facilitating foreign trade.
years
5 years or more 0% Joint Accounts on Forex Deposits
If the bank account is jointly in the name of a
Interest income earned Pxx non-resident and a resident taxpayer, 50% of
Add: Accrued interest income (in xx the interest shall be exempt while the other
months) 50% shall be subject to the 15% final tax.
Total interest income xx
Multiply by: Final tax rate applicable xx% Interest Income subject to Regular Income
Final tax Pxx Tax
The net proceeds of the deposit and accrued 1. Lending activities, whether or not in the
interest to be released to the depositor upon course of business
pre-termination shall be: 2. Investments in corporate bonds
Principal balance Pxx 3. Promissory notes
Accrued interest income in current year xx 4. Foreign sources, whether bank or non-
Less: Final tax to be withheld (xx) bank
Net proceeds to be released to the Pxx 5. Penalty for legal delay or default
depositor
DIVIDENDS - any distribution made by a
corporation to its shareholders out of its
Pre-Termination, Transfer or Negotiation of earnings or profits and payable to its
Investment Certificates shareholders, whether in money or in other
property
For purposes of applying the pre-termination
rates for individual taxpayers on long-term
investment certificates, the remaining maturity
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Types of Dividends Stock Dividend vs. Stock Split
1. Cash dividends  Stock dividends may be taxable under
2. Property dividends certain conditions.
3. Scrip dividends  Stock splits are never subject to income
4. Stock dividends tax.
5. Liquidating dividends
Dividend Tax Rules
Exceptions to Taxable Income for Dividends
Source of Dividends
Recipient
1. Stock dividends Domestic Foreign
Taxpayer
Corporation Corporation
 Stock dividends representing a transfer of Individuals
surplus to the capital account are not  Citizens
subject to tax. and 10% final tax Regular tax
 Stock dividends increase corporate value residents
and are taxable as capital gains when  NRA-ETBs 20% final tax Regular tax
realized through the sale of stocks.  NRA-
 Distribution of stocks from another 25% final tax 25% final tax
NETBs
corporation as dividends is considered a Corporations
taxable property dividend, not a stock  Domestic
dividend. Exempt Regular tax2
corporation
 RFC Exempt Regular tax
2. Liquidating dividends
 NRFC 25% final
25% final tax
 Receipt of liquidating dividends is tax1
considered an exchange of properties, not
income.
NOTE:
 Excess of liquidating dividends over the cost
of investments is taxable as capital gain. 1. may be subject to tax sparing rule, 15%
 The taxable capital gain is subject to regular 2. subject to conditional exemption
income tax.
 Any loss from liquidating dividends is NOTE: The tax (final or regular) applies at the
deductible only to the extent of capital gain. point of DETERMINATION OF THE INCOME,
not at the point of actual distribution.
Taxability of Stock Dividends
Exempt Dividends
 Stock dividends are normally exempt from
income tax. 1. Inter-corporate dividends from domestic
 Stock dividends are subject to tax at fair corporations - exempt from final tax
value if: 2. Dividends from cooperatives - exempt
o The corporation cancels or redeems from final tax
stock issued as a dividend, making it 3. Qualified foreign-sourced dividends -
equivalent to a taxable dividend. exempt from regular tax
 For example, if stock dividends are
Inter-Corporate Dividends from Domestic
declared and immediately redeemed
Corporations
or canceled, it is treated like a cash
dividend.  Inter-corporate dividends from domestic
o There is a substantial alteration in corporations are exempt from final tax to
ownership, such as when stock avoid double taxation.
dividends replace cash dividends or  Individuals receiving these dividends are
when an optional stock or cash dividend subject to 10% finals tax.
is declared.  Business partnerships benefit from the
exemption, but not general professional
partnerships, exempt joint ventures, or
exempt co-ownership.

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 The exemption does not apply to a Exempt Prizes
corporation’s share of net income from a
1. Prizes received without any effort to join a
business partnership.
contest, such as Nobel Prize, Most
Real Estate Investment Trust or REIT – a Outstanding Citizen, and Most Benevolent
publicly listed corporation established Citizen of the Year.
principally for the purpose of owning income- 2. Prizes from sports competitions sanctioned
generating real estate assets by their respective national sport
organizations.
Share in business partnership net income
Requisite of Exemption
 Share in net income - includes residual
profit and provisions for salary, interest, and 1. The recipient was selected without any
bonus to a partner action on his part to enter the contest.
 Provisions for salaries, interest, and 2. The recipient is not required to render
bonuses expensed in the partnership's substantial future services as a condition to
books are subject to regular tax for the receiving the price or reward.
receiving partner, not final tax.
Taxable Prizes
 Only the share in residual income after
these provisions is subject to final tax. Amount of Recipient
 If the salaries, interest, and bonus are not Taxable Prize Individuals Corporations
expensed in the book, the 10% final tax will Prize>P10,000 20% finals
Regular tax
be applied. tax
Prize≤P10,000 Regular tax Regular tax
NOTE: A partner, member or venture who is an
NRA-ETB, NRA-NETB or NRFC shall be
subject respectively to 20%, 25% and 25% final NOTE: Final taxation does not apply to foreign
tax rate. passive income; hence, prizes from foreign
sources are subject to the regular income tax.
ROYALTIES (from sources within in the
Philippines) WINNINGS
Source of Recipient Type of Recipient
Passive Winnings Individuals Corporations
Individuals Corporations
Royalties
Books, literary 10% finals tax PCSO
works, and (printed) winnings Exempt Exempt
20% final tax
musical 20% final tax ≤P10,000
compositions (e-copy) PCSO
Other sources 20% final tax* 20% final tax 20% finals
winnings 20% finals tax
NOTE: Royalties on cinematographic films and tax
>P10,000
similar works paid to NRA-ETBS, NRA-NETBS Other
or NRFCs is subject to a final tax of 25%.* 20% finals
winnings, in Regular tax
tax
general
Passive vs Active Royalties
 passive royalties: 20% final tax
NOTE:
 active royalties: regular income tax
 royalties, whether active or passive, earned  PCSO winnings of NRA-NETBs and
from sources abroad: regular income tax NRFCs, regardless of amount, are subject
to 25% final tax.
 The tax rules on PCSO winnings shall be
applied on a per ticket basis.

TAX INFORMER'S REWARD

PRIZES Requisites of Tax Informer's Reward

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1. Definite sworn information which is not yet income on
in the possession of the BIR tax-free
2. The information furnished lead to the corporate
discovery of fraud upon internal revenue covenant
laws or provisions thereof. bonds
3. Enforcement results in recovery of
revenues, surcharges, and fees and/or NOTE:
conviction of the guilty party or imposition of
any fine or penalty. 1. The 30% final tax applies to all individuals,
4. The informer must NOT be a: REGARDLESS of classification.
a. BIR official or employee 2. *This is subject to 20% final tax if the bonds
b. Other public official or employee qualifies as deposit substitutes. This should
c. relative within the 6th degree of be differentiated with foreign loans.
consanguinity of those officials or
EXCEPTIONS TO THE GENERAL FINAL TAX
employee in a. and b.
ON NON-RESIDENTS (NRA-NETBs and
Amount of Cash Reward – whichever is the NRFCs)
LOWER of the following per case: NRA- NETB NRFC
General final
1. 10% of revenues, surcharges, or fees tax rate
25% 25%
recovered and or fine or penalty Exceptions:
imposed and collected or 1. Capital gain
2. P1,000,000 limit on sale of
15% Capital 15% Capital
domestic stocks
gains tax gains tax
directly to the
The amount of cash reward is subject to 10% buyer
final withholding tax which shall be withheld by 2. Rentals of
25% of rentals 4.5% of rentals
the government. vessels
3. Rentals of
10% cash reward Pxx aircrafts,
machineries, and 25% of rentals 7.5% of rentals
Cash reward limit Pxx other
requirements
Cash reward (whoever is lower) Pxx 4. Interest
income under
Less: 10% final withholding tax (xx) the foreign Exempt Exempt
Net amount to be released to the tax Pxx currency deposit
system
informer
5. Interest on
N/A 20%*
foreign loans
6. Dividend 15% if the tax
TAX-FREE CORPORATE COVENANT income 25% sparing rule is
BONDS applicable
7. Tax on tax-
 tax-free covenant bonds - financial free corporate 30% 20%*
bonds
instruments where the issuer agrees to pay
the bondholder a specified amount of
interest without the bondholder being The Tax Sparing Rule
responsible for any taxes on that interest
income. Instead, the issuer assumes the The tax sparing rule allows for a reduced tax
responsibility of paying any applicable taxes rate on dividends paid to Non-Resident Foreign
Corporations (NRFCs) under certain conditions.
1. Standard Tax Rate: Normally, NRFCs
are subject to a 25% final tax on
dividend income from the Philippines.
Bond Investor
2. Reduced Tax Rate: This rate can be
Individuals Corporations
reduced to 15% if the NRFC's home
Tax on 30% finals Regular tax*
interest tax country provides a tax credit for the

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 taxes presumed to be paid in the Residents, other than depositary banks under
Philippines. the expanded foreign currency deposit system,
3. Credit Requirement: The foreign shall withhold 10% final tax on income
country's tax credit must be equivalent payments such as interest income on loans
to at least 10% of the dividends. from expanded foreign currency deposit units
4. Supreme Court Ruling: The Philippine (FCDUs).
law (NIRC) does not require the foreign
INCOME PAYMENTS TO SUB-
country to match the exact amount
CONTRACTORS OF PETROLEUM SERVICE
waived by the Philippines. It only
CONTRACTORS
requires the foreign country to provide a
tax credit equivalent to what the  Subcontractors in petroleum operations in
Philippines waived. the Philippines pay an 8% final income tax
5. No Tax Scenario: If the NRFC’s on gross income.
country does not tax foreign dividends at  This 8% prefential tax replaces all other
all, the reduced rate still applies. national or local taxes.
 Domestic subcontractors' other income is
ILLUSTRATION:
subject to regular income tax.
 NRFC receives a dividend of P1,000,000  Gross income - includes all earnings from
from a domestic corporation. contracts with petroleum service contractors
 The tax rate can be reduced to 15% if the  The 8% tax applies to all subcontractors,
NRFC's home country credits at least 10% whether individuals or corporations, resident
of the dividend tax. or non-resident.
 The Philippines waives 10% from the  Petroleum service contractors pay regular
standard 25% final tax rate. income tax.
 If the NRFC's home country does not  Suppliers to petroleum service contractors
reduce its tax on the dividend by at least also pay the 8% final tax on contract
10%, the Philippines imposes the full 25% income.
tax.
FINAL WITHOLDING TAX RETURN
OTHER FINAL INCOME TAXES
 The final withholding tax return (BIR
1. Fringe benefits of managerial or supervisory Form 0619-F) is the Monthly Remittance
employees Return of Final Income Taxes Withheld.
2. Income payments of residents other than  It shall be filed in triplicate by every
depositary banks under the expanded withholding agent or payor who is either an
foreign currency deposit system (EFCDS) individual or corporation.
and expanded foreign currency deposit  Filing of tax return: the first two months of
units (EFCDUs) the quarter.
3. Income payments to oil exploration service
contractors or sub-contractors
FRINGE BENEFITS TAX
 Fringe benefits – all remunerations under
an employer-employee relationship that do Deadline and place for monthly manual
not form part of compensation income filing
 Fringe benefits for managerial and
supervisory employees are subject to a The return shall be filed and the tax shall be
final fringe benefits tax. paid or before the 10th day of the month
following the month in which withholding was
INTEREST AND OTHER INCOME made with:
PAYMENTS TO DEPOSITARY BANKS
UNDER THE EXPANDED FOREIGN a. The authorized agent bank of the
CURRENCY DEPOSIT SYSTEM revenue district office having jurisdiction

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 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
Monthly 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.
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.

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