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Chapter 5 covers final income taxation, focusing on the features, scope, and implications of final tax, particularly for passive income and non-resident taxpayers. It explains the final withholding system, which simplifies tax compliance by deducting taxes at the source, and outlines the applicable tax rates for different types of income. The chapter also includes examples and illustrations to clarify the calculation of final taxes on various income sources.
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0% found this document useful (0 votes)
33 views19 pagesChapter 5
Chapter 5 covers final income taxation, focusing on the features, scope, and implications of final tax, particularly for passive income and non-resident taxpayers. It explains the final withholding system, which simplifies tax compliance by deducting taxes at the source, and outlines the applicable tax rates for different types of income. The chapter also includes examples and illustrations to clarify the calculation of final taxes on various income sources.
Uploaded by
Brian Kenneth Del MonteCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
Chapter 5 - Final Income Taxation
{CHAPTER 5
FINAL INCOME TAXATION
chapter Overview and Objectives
This Chapter discusses the features of final income taxation, the items of gross
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:
a. Understanding and appreciation of the features and scope of final tax
b. Mastery of those certain passive income subject to final tax and their
corresponding final tax rates
c. Mastery of the general final tax rates on certain non-residents and their
exceptions
lications of the final income tax scheme
d. Knowledge of the other app!
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
vy
‘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
hhim 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
and government convenieng,
The final withholding tax is built upon taxpayer
come tax return. This jg
relieves the taxpayer of the obligation to file an inc
coinvenient for taxpayers who are limited by distance, time and cost to compiy'e
is the most convenient and effec
the government, the final withholding system
tl
tax evasion on the part of the taxpayer:
system, the government must have to put st
non-remittance of the withheld tax on the part of wit
tax is imposed on certain passive income and y
Under the NIRC, final income F
nsn aged in business in the Philippines.
non-resident persons not engaged in
Passive income
Items of passive income are earned with
taxpayer and are generally irregular in timin
recorded by the taxpayer,
actual amount may be difficult to determine.
{s the most favored scheme in taxing items of passive income,
Non-resident persons not enga|
Non-resident persons not engage
non-resident aliens not engaged intra
4 with very minimal involvement from g,
1g and amount. Unlike items of ac,"
income, they are not usually specifically monitored by taxpayers. When
yr their existence can be difficult to predict while the
“Thus, the final withholding at soye|
ged in business in the Philippines
odin trade or business in the Philippines, such
ide or business (NRA-NETBS) and non-resiie
system in collecting tax "here there is high risk of non-complia
ig taxes cn ‘To safeguard the effectiveness ce
trict safety nets against the rig,"
ithholding agents,
AX ON INDIVIDUALS AND CORPORATIONS
srwise indicated, the final tax rates
to be discussed owing
pply to all taxpayers (individuals and corporations) aaeeat
ssident alien not engaged in trade or business (NRA-NETB), and
nn-resident foreign corporation (NRFC).
"BREST INCOME OR YIELD
n interest income
ti
Interest income or yield from local currency bank deposits, deposit substitutes,
ist funds and similar arrangements are subject to final tax as follows:
Corporations}
20% 20%
Short-term deposits/eertfcates
Exempt 20%
‘foreign corporations (NRECS), have high risk of n
in the Philippines making ty
om non-bank institutions
do not have offices or fixed places of business
compliance very unlikely due to their absence and distance in the Philippine,
Also, the Philippine government cannot impose upon them the obligation to fie
return due to territorial consideration.
Thus, the law subjects them to final income tax wherein Philippine resides
-ompliance. These taxpay
He = Long-term deposits/certficates
‘Short-term deposits/eertificates RIT Rie
Long-term deposits/certificates RIT? RIT?
paying them income, passive or active, are obligated to withhold the following
its are those made
final tax:
General final
Non-resident person not engaged in trade or business | tax rate
25%
[Non-resident alien not engaged in trade or business
25%.
|| Non-resident foreign corporation
*ASSIVE INCOME SUBJECT TO FINAL TAX -
. Interest or yield from bank deposits or deposit substitutes
Domestic dividends, in general
‘The final tax on deposits applies only to those made
iRA-NETBs and NRFCs are subject to the 25% general
with banks.
final tax on their interest income.
for a period of less than five years. Long-term
‘of savings, common or indi
Ms ther investments with a maturity of potless.
‘management accout
irs, the form of whic!
by non-bank financial ints
ns of P10,000 and other
nts, and o
+h shal be prescribed
‘rmediaries or finance companies) to
by the BSP and issued by banks
individuals in
‘denominations as may be prescribed by the BSP. ~\ chapter 5 - Final Income Taxation
stustratton 1
A taxpayer earned the following interest income from various time deposits:
-month time deposit 000
sardine depos * 2000
5-year time deposit 40.000
Total interest income 2—s0.000
Required: Compute the final taxifthe taxpayer is an individual and if corporation,
Solution;
Individual taxpayers
S-month time deposit P 8,000 x20% P 1,600
2-year time deposit 12,000 x 20% 2,400
5-year time deposit 40,000 x0% —————
Final withholding tax 24000
Corporate taxpayers (PBK +P12K) x 20% P4000
‘The exemption of individuals on interest income on long-term deposits is anchored on, the face
that fongtorm depots are usualy channled fo the financing 0 long-term projece a
inrastructures propery development and other construction projects whch sre ga
{ssontial ttheGevelopnent of te county. Note that corporation are not exempt
‘subject to regular tax on interest income on long-term deposit or investment certificates.
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 BE 4.000
Mlustration 3
Banko Negro incurs the following interest in its savings and time deposit accot
from the following depositors: aa on _
Resident individuals P 600,000
Resident and domestic corporations 800,000
Non-resident aliens not engaged in business 200,000
Non-resident corporations ——100.000
Total accrued interest expense P.4,700,000
138
15 - Final Income Taxation
te
cree
gausred: compute th tal Srl income tata withheld by Banko Negro
solution
Gentindviduals —— B600,000 x 20% P 120,000
Retjdent/domestic corporations 00.000 x20% 160,000
ypA-NETB 200,000 x25% 50,000
cs 100.000 «25% __25,000
MRP crud inerestexpense Ezanang ** aes
‘or time deposits with cooperatives are not subject to final tax
Sovitiyal tax is limited to banks and shall not be applied with time and savings
‘The int deposit maintained by members with cooperatives and by primary
spoperatives with their federations. (Dumaguete Cathedral Credit Cooperative vs.
Cie GR 182722)
it substitutes
Denote substitute means an alternative form of obtaining funds from the public
ther than deposits through the issuance, endorsement, or acceptance of debt
Gistruments for the borrowers own account, for the purpose of relending OF
purchasing of receivables and other obligations, or financing their own needs 0
ie needs of their agent or dealer. Public means [Link] more corporate lenders at
any onetime. — Frigate Poaviving = W, von epwratt Weratree OE
19-lender rule *
‘TRE inere flotation ofa debt instrument is not considered to be a public borrowing and
{s not deemed a deposit substitute if there are only 19 or less individual or corporate
lenders at any one time.
4g
‘The 19-lender rule does not apply to government securities z
Government debt instruments and securities including Treasury bonds, Treasury bills,
and Treasury notes shall be considered as deposit substitute inrespe
humber of lender at origination if such debt instruments and. securities are to be
traded or exchanged in the secondary market.
Debt instrument issued for interbank call loans with maturity of not more than S days
to cover deficiency in reserves against deposit liabilities, including those between o1
among banks and quasi-banks, shall not be considered as deposit substitutes.
Classification of debt instruments
a |
Government inchiding BSP | Deposit substitute | Deposit substitute
139 Chapter 5 - Final Income Taxation
Note
1. Origination means issuance.
2 EES on depos subsite (Le public borrowing) is subect tial 8x IEE on py,
ings subject to regular income tax. -
2 0% FIT
ing thereof either by assignment or participation with or without recourse, 206
bbe considered as lender and thus be counted in applying the 19-lender rule,
5 debt
Thus, debt instruments may not be intially considered depostt substitute for fy, final tax exemption on Interest income derived from long-term certificates OF
the 18-ender rule but maysubeequey quay as such when the numberof gt “aqe: Te ial cian on ott came devved from longterm arias
Increase to atleast 20 when any of the original lenders assigned, securiizey'®| Nunes
Participated out the debt instrument. 2
ing i It disposed of
sny wants to take advantage of the decreasing interest rates.
ABC ComPrent in various short-term deposit substitutes: It gained total of P300,000
1 ve posalinclsive of P180,000inerescincome,
fro
wmary terest: strum i 10,000 (ie.
ye P180,000 interest income shall be subject to 20% final tax. The P120,
Ses ae a a a ont 00 = P180,000) trading gain on the debt instruments shall be subject to ocr,
Payne tax. Also, forex gains on trading foreign currency denominated instruments,
My shall likewise be subject to regular tax.
Timing of withholding of final tax i
1 Zero coupon instruments or securities upon origination
2. interest-bearing instruments or securities ~ upon payment of interes
Issued by banks:
= Short term 20% 20%
=~ Long term ‘Exempt 20%
Issued by non-banks
funds or Investment management accounts
rvestments in trust funds of banks (except qualified exempt employee trust funds), or
westment management accounts are subject to the same final tax rules. However, in
—Lenurterm 2096" ar Jt cai final tax exemption on longterm investment ts also mandatory that
ve i trust
*Per Section exemption on long-term ‘or im ants is limited to, ‘The investment of the individual investor in the common or in<
coed yank ly 20" emmtrom on angen cates = or investment management acconnt must be held /managed by the hank for at least
5 years.
= Short term 20% 20%
Mlustration 1
‘The underlying investments of the individual trust account or investment
John earns interest income from the following investment placements in various det management account must qualify as a deposit substitute issued by a bank.
oer ments The individual trust account or investment management account must hold on to
i mem] — — such underlying investment for atleast 5 years.
[bia psP reasury notes S years ation 1
Pi2 [BSP treasury bils_ year : Acebo appointed the trust department of RCBC Bank to manage his money
3__| Itogon Bank deposit cenificates “S years ugh a trust agreement. The RCBC Bank trust department invested Mr. Acebo's
[ Ayala corporate bonds issued to the public 10 years ney in 5-year corporate bonds.
‘Securitized SB corporate bonds (100 lender “3 years
Promissory note negotiated by ABC Bank years n if Mr. Acebo does not withdraw his money from the trust agreement for at least 5|
KT Bank bonds participated out to 30 lenders Byears rs, his interest income from the trust agreement will still be subject to 20% final ta
ce the underling instrument (ie. corporate bonds) is not issued by a bank.
interest income from the foregoing instruments shall be taxable as follows: . rumen : ” 4
ae 141 Chapter 5 - Final Income Taxation
Mlustration 2
Assume instead that the
year time deposit under i
CBC trust department invested Mr Ace's money
smn nae without menonng tnt asus fr
The investor in tis ;
in this case tothe 10:year time depose isthe bank which (sa
Fier Sbect to regular tax. Mr. Acebo would not qual for eR@MPtOn to the
2x since the investment was not made “In trast for the ROME Of spin
Pee a
qualified individual”,
Mlustratton 3
Assume instead that RCBC trust department invested the money under the Name
Mr. Acebo's in a 10-year long-term deposit.
‘Mr, Acebo's interest income derived from the trust agreement shall be exempe
sit or investment in @ continuous 4
{income tax provided both he will hold such depé
uninterrupted period for at least § years. The trust must also hold the underigd
instrument (10-year deposit) for at least Syears. «
Pre-termination of long-term deposits or investment of individuals
If the deposit or investment placement of individual taxpayers is pre-terminay
before § years, any previously untaxed or exempted interest income wi
subjected to the following final taxes upon pre-terminatior
Pre-termination tax
20%
[Holding period
("Less than 3 years
[Bivears to ess than Zyears
[Fé yearsto less than S years
[Bears ormore
Now Kesiden” Ate
pu trees
tet ongey)
Te satisfy the Year requirement
for
for
the final tax due on the interest income of each holder shall be as follows:
Mr. X
MY,
z Mr. Y's remaining maturity upon acquisition ofthe instrument i already less than 5 years so he
> _—_—— rl ll
Final Income Taxation
be released to the depositor
ation, transfer oF negotiation of investment certificates
se 1 oP ‘ 8 the pre-termination rates for individual taxpayers ON
erm investment certificates, the remaining maturity of the instrument must
yustration 1
jebt instrument with a maturity of 10 years was held by Mr. X (a resident citizen)
yrs then transferred it to Mr. ¥ (another re: turn held it
Sse a eta oatee na
a
| Final tas _|
Exempt
20% FWT
| Holding period |
years
‘years
[ Classification |
RC.
RC.
40 years - long-term
‘4 years - short-term
Note:
{prow subject to 20% final tx (See Qa Nos 2 and 3 of RMC 81-2012 dated Decenber 10,2012)
mustration 2
‘A debt instrument with a maturity of 10 years was held by Mr. X (a non-resident
citizen) for 3 years and transferred it to Mr. Y (a resident alien). Mr, ¥ held it for two
years before subsequently transferring it to Mr. Z (a resident citizen) who held it until
‘maturity or 5 years.
‘The final tax due on the interest income of each holder shall be as follows:
Mlustration - long-term deposits
On january 1, 2020, Patricia invested P1,000,000 in Bagulo Bank's 5-year time depost
The depost pays 10% interest annually. Alice pre-terminated the depost on jy,
The final tax on pre-termination will be computed as follows: oe NRC a0yearseongeerm [3 Ta
2020 interest income (P1,000,000 x 10%) P 100,000 Mr.Y NRA years long-term | 2years 20% FWT
2021 interest income (P1,000,000 x 10%) 100,000 Mr. Z RG. S years long-term Siyears Exempt
2022 interest income (P1,000,000 x 10%) 100,000
2023 accrued interest income Mlustration 3
(P1,000,000 x 10% x 6 months/12 months) 50,000 An instrument with a maturity of 10 years held by Mr. X (@ NRA-NETB) for 3 years and
P 350,000 transferred it to Mr. Y (a NRA-ETB). Mr. Y held it for 2 years before subsequently
transferring it to Mr. Z (a resident allen), who pre-terminated it after 4 years.
(Total interest income
‘inal tax rate applicable to less than 4-year pre-termination 12%
242,000
final tax
142
4143 Chapter 5 - Final income Taxation
‘The final tax due on th interestincome ofeach holder shall be as fllows:
Pitter | Holdinwaciad |
Mr.X “|” NRA-NETS [10 yearslongterm | 3 years 25% Fwr
t Mr.¥ |" NRA-ETB —| 7 years —long-term ‘Zyears 20% Fwr
Mr.Z RA ‘S years - long-term 4 years 5%
Note: NRA-NETBs are not subject to the reduced pre-trmi
ination tax rate On Inger dep
{investment certificates
it wit itary banks
Foreign currency deposit with foreign currency depositary
The interest income from foreign currency deposits under the
Final Income Taxation
ll be computed as follows.
P 41,500.00
—_15%
B6225.00
‘Mr. Seeman deposited his ‘Savings through a joint account with his
C
foreign cuneyg P 41,500.00
deposit system or expanded foreign currency deposit system by resideny ? ee
Subject to a final tax of 15%.
Taxpayer, Individuals [Corporations : aoe
Nene = a 13: Mr. Seeman deposited his savings account through his own account.
Non-residents Exempt Exempt
Note:
1L. Resident taxpayers include resident citizens, resident aliens,
foreign corporations.
2
Foreign corporations :
Sle enpased hat NRANEDs and NRF ae alo ex
Thre tle rm or Shrtar lsifeaton offen currency deposits.
3.
‘
deposit ang
‘The reduced final tax rates on interest income on foreign currency
exemption of non-resident depositors are intended to encourage the deposi
foreign currencies in our banks which will be used in the financing of gy
international trades. Our Philippine peso is not a globally accepted currency. Our
foreign trade will be limited without adequate foreign currency reserves in oy,
banking sector.
Joint accounts on forex deposits
If the bank account is jointly in the name of a non-resident and a resider
‘axpayer, 50% ofthe interest shall be exempt while the other 50% shall be subjea
to the 15% final tax.
Mlustration
Mr. Seeman is an Overseas Filipino Worker. He deposits all his savings in a saving
account under the foreign currency deposit unit (FCDU) of a domestic bank. Dury
the month, the savings deposit account earned $1,000 interest equivalent to P41,500
‘Scenario 1: Mr. Seeman deposited his savings through the account of his resident wie
144
domestic corporations and rsa,
Non-residents taxpayers Inciude non-resident citizens, non-resident alles and none
se, the interest income shall be exempt from final tax.
subject to regular tax
Ome from the following sources is subject to regular income tax, not to
activities, whether or not in the course of business
ents in corporate bonds
ssory notes
ssources, whether bank or non-bank
for legal delay or default
dends - paid in the stocks of the corporation
ing dividends - distribution of corporate net asset
145 Final Income Taxation
Chapter 5 - Final income Texation
ne ne fps are income subject to tax However, the FOWNg ae ny
ion purposes: [Recipient of dividends
1. Stock dividends wx twxable ‘Corporations.
Stock dividenids representing transfer of surplus to capital account shall, eS
be subject to tax. Stock dividends are in the form of increase In corpo
should be properly taxable when realize
value (ie. capital gain) wi
through disposal or sale of the stocks investment.
ot oft Dut bjt to he 25% general nl tax rate. However, the
dividend tax shal be 153 whet eta spring le aples. TH wl Pe
The distribution of stocks of another corporation as dividends Is a taxa.
Property dividend and not a stock dividend. 3d later.
tional exemption for reinvestment to be discussed in detail in Chapter 9
2:-Liquidating dividends
Under the NIRG, the receipt of liquidating dividends fs | ne 3 Income -
idatins lends exceed the
a ste ny declared a total of P2,000,000 dividends. P800,000 is due to corporate
Dut as exchange of properties. When the liquidating one
a taxable aj st regu i
of the investments, the excess is pI lar while P1,200,000 is due to individual shareholders.
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, stog,
dividends are subject to tax at the fair value of the stocks received under the
following conditions: P 1,200,000 x10% P 120,000
‘800,000 x 0% 9
P_120,000
‘a. Subsequent cancellation and redemption
redeems stock issued as a dividend at such time
If a corporation cancels or
y 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
‘shall be taxable to the extent it represents
dividend, the amount so distributed
a distribution of earnings or profit.
For instance, a corporation declared stock dividends and immediately called te ders
stock dividends for redemption and cancellation. This act Is equivalent to Be ceo vusiness
declaration of cash dividends. not engaged in trade/business
b. If it leads to substantial alteration in ownership in the corporation -resident corporations
‘Substantial alteration in ownership in a corporation may occur when stock
dividends are given in lieu of cash dividends or when the corporation declared ay site Oy aye Company sate!
an optional stock or cash dividend. Gea ile tobe witheld by Bayes Company 8
Been eat Dividends. Rate. —Final Tax
nt aliens and citizens P 500,000 x10% P 50,000
dividend vs. Stock split ~ incrsost cucleS
itock dividend is a capitalization of earnings while stock split results in reduction it lin trade or business 100,000 x 20% 20,000
par value of stock and an increase in the number of shares of shareholdes. 50,000 x 25%
suming a 2-for-1 split, a shareholder holding one P50-par value stock will be givet
P25-par value stocks. While stock dividend may ‘be taxable under certain
nditions, stock spit will never be subject to income tax.
146 Final Income Taxation
Chapter 5 - Final Income Taxation
Corporations freq porations
ular income tax. However gi rtis® corporations are generally
recer exer domestic corpor sient
and shall constitute a part of the annual inc: ntly accumulated profits or surp) F ipted under certain con, ee rate recipients joie a
which received. (Sec. 73(C), NIRC) ome of the distributee for the year which will be discus
Exempt Dividends withholding tax al
also appli
1. Inter-corporate dividend: fs plies to dividends from entities considered
2. Dividends from cooperatvey sag corporations ~ exempt from final ta speciallaws,sichast
Qualified fc r ate m final tax a
Jualified foreign-sourced dividends - exempt from regular tax pe
ier rene m dons carr
reeipeereorate dividends received by a domestic corporation and resi rate Investment Trust or REIT
foreign corporation from a domes corporation ae exempted unde the NIR mpIT 1s a publicly listed corporation established principally for the purpose of
7 i jenerating real .
nese Air ncome generating realestate assets,
B, Inc. owns 100% of A Corp. Duri hi
‘orp. During the year, A Corp. declared P100,000 dividends tg ness partnership, taxable associat
B, Inc. B, Inc, in turn, declared the same dividends to its shareholders. The follow: sastnershis ta
‘fhe share in net income from these unincorporated entities are subject to tax as
table illustrates the double taxation’
follows:
Dividends declared P 100,000 r
Less: 10% dividends tax ———10.000 2.000 verrecipier
Net dividends B__90,000 Pp 81.000 Individual taxpayers Final tax
i = Citizens or residents 10%
liminate the impact of double taxation, NRA-ETB Fae
‘This is a form of direct duplicate taxation. To eli
inter-corporate dividends such as those declared by A Corp. to B, Inc. Is exempted
rreholder, the 10% 25%
from final tax. When the dividend finally falls to an individual shar
final tax applies.
ilar income tax_
This exemption extends to dividends received by business partnerships from Regular income
domestic corporations since business partnerships are considered corporations Ee eae
under the NIRC. However, the exemption does not extend to dividends received by nier Sec. 73 of the NIRC, the net income of these enti
general professional partnership, exempt joint ventures and exempt co-ownership onstructively received by the partners, members or venturers, respectively, in
because they are not considered corporations under the NIRC. .e same year the net income is reported. Hence, the tax (final or regular) applies
On the other hand, the exemption of inter-corporate dividends does not apely tw mat tHe Point of determination ofthe income, netat the point of actual distribution.
the share of a corporation from the net income of a business partnership due. in pusiness partnership net income
absence of express legal exemption. Exemption is restricted to dividend jare in business partnership net incom
pn pao ore a The *share in net income” includes the share in the residual profit and provisions
for salary, interest and bonus to an individual partner. However, if the provisions
declaration only.
Dividends from cooperatives or salaries, interests, and bonuses are expensed as such in the book of the
Under RA 9520, the distribution of dividends by an exempt cooperative to is nership, they are subject to regular tax to the receiving partner, not to final
members either representing interest on capital or as patronage refunds shall not In this case, only the share in the residual income after such provisions is
ject to final tax.
be subject to tax.
149
148 — —————