FINAL INCOME

TAXATION
Module No. 5

BAINCTAX
Income Taxation

LEARNING OUTCOMES TOPICS INCLUDED

At the end of this module, you are expected to: Included in this module are the following:
1. Define the characteristics of final income 1. Definition
taxation; 2. Features
2. Differentiate passive and active income; 3. Passive and Active Income
3. Explain the coverage of final taxes on income 4. General Coverage
of non-residents; 5. Final Tax Rates
4. Identify the final tax rates for different income 6. Accounting for Final Taxes
types; 7. Filing and Payment
5. Properly journalize final taxes in the books of
the payor and payee; and
6. Identify the required forms to be filed and
their deadlines.
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Pre-Activity
Try to answer the following questions.
1. When you open the bank statement of your deposit account, do you see an item “Tax
Withheld” showing up every quarter?
2. Assuming your bank account earns a 4% interest per annum, how much is its effective
interest rate considering the tax consequences?
3. Would you rather want your tax directly deducted from your income or still get the
whole of your income and then pay the corresponding tax later?
4. Assume your rich grandfather died recently and he was your favorite grandchild.
Since he says that you are a great accountant, you should be the executor of his will,
with the free portion directly going to you. Which would you like the estate to be?
One mostly consisting of cash in various bank deposits or one mostly in the form of
tangible assets? Why?
5. Why do you think most game shows of raffle promos limit most of their regular prizes
at P10,000? Why won’t they adjust it to reflect inflation?
6. If you won P250 million from the lotto today, by how much would you be richer once
you redeem your ticket?
7. Supposed you informed BIR on a tax fraud and it awarded you a reward for that. Will
BIR tax that reward back?

DEFINITION
Final Withholding Tax is a kind of withholding tax which is prescribed only for certain payors
and is not creditable against the income tax due of the payee for the taxable year. Income Tax
withheld constitutes the full and final payment of the Income Tax due from the payee on the
said income. Final Income Taxation is characterized by final taxes where taxes are withheld or
deducted at source. The taxpayer receives the income, net of tax. The payor of income remits the
tax to the government. Final taxation is applicable only on certain passive income. Not all
passive income is subject to final tax.

Passive Income vs. Active Income

Passive incomes are earned with very minimal or even without active involvement of the
taxpayer in the earning process and are generally irregular in timing and amount, whilst,
active income arises from transactions requiring a considerable degree of effort or
undertaking from the taxpayer.

The final withholding tax is built upon the taxpayer and government convenience. It relieves
the taxpayer of the obligation to file an income tax return. This is very convenient for taxpayers

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who are limited by distance, time and cost to comply. For the government, the final withholding
tax system is the most convenient and effective system in collecting taxes on income where
there is no risk of non-compliance or tax evasion.

FEATURES
The final tax scheme has the following features:

1. Full and final payment

2. Tax withholding at source
3. Territorial imposition
4. Imposed on certain passive income and persons not engaged in business in the
Philippines
5. No filing of income tax return by the payee

GENERAL COVERAGE
Unless otherwise indicated, the final tax rates shall apply to all taxpayers, except for non-
resident aliens not engaged in trade or business who are taxed at 25% and non-resident foreign
corporations which are taxed at 30%.

Individuals in this discussion would involve: Resident Citizens, Non-Resident Citizens,

Resident Aliens and Non-Resident Aliens engaged in trade or business, whereas, corporation
would include: Domestic Corporations and Resident Foreign Corporations.

INTEREST INCOME ON SHORT-TERM PESO DEPOSITS

There shall be a final tax at the rate of 20% imposed on the interest income or yield from the
following sources:

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Illustration 5.1
Banco del Oro incurs the following interest in its deposit accounts from depositors:
Non-resident Citizens 600,000
Resident Aliens 100,000
Non-resident Corporation 200,000

The total final tax withheld would be:

Non-resident Citizens 600,000 x 20% =120,000
Resident Aliens 100,000 x 20% = 20,000
Non-resident Corporation 200,000 x 30% = 60,000
TOTAL 200,000
The depositors would only receive the following amounts:
Non-resident Citizens 480,000
Resident Aliens 80,000
Non-resident Corporation 140,000
TOTAL 700,000

INTEREST INCOME ON LONG-TERM PESO DEPOSITS

There shall be a final tax at the rate of 20% imposed on the interest income or yield from long-
term deposits and deposit substitutes earned by corporations. Interest income earned by
individuals on the same financial products are exempt from this final tax.

What constitutes long-term?

In the context of this final tax, a deposit/deposit substitute is considered long-term if the
holding period is at least five years.

Since individual taxpayers are exempt if the deposit is long-term, most would just open a long-
term one and then preterminate such to avoid the final tax. As such, if the deposit or investment
placement of individual taxpayers is preterminated before five years, any previously untaxed or
exempted interest income will be subjected to the following final taxes upon pretermination
depending on the length of the holding period.

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Illustration 5.2
On January 1, 2018, AMC invested P2,000,000 in a 5-year bank deposit with an interest of 5%
annually. AMC preterminated the deposit on July 1. 2021.
 If AMC is a corporation.
Interest Income (2,000,000 x 5% x 3.5) 350,000
Multiply: Final Tax Rate 20%
Final Tax 70,000
 If AMC is a resident citizen.
Untaxed Interest Income (2,000,000 x 5% x 3.5) 350,000
Multiply: Final Tax Rate 12%
Final Tax on Pre-termination 42,000

INTEREST INCOME FROM FOREIGN CURRENCY

DEPOSITS AND LOANS
Interest income derived from the following sources shall be imposed with the respective rates of
final tax:

Offshore Banking Unit" or "OBU" shall refer to a branch, subsidiary or affiliate of a foreign
banking corporation which is duly authorized by the Central Bank of the Philippines to
conduct of banking transactions in foreign currencies involving the receipt of from external
sources and utilization of such funds.

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"Foreign currency deposit unit" or "FCDU" shall refer to that unit of a local bank or of a local
branch of a foreign bank authorized by the Central Bank to engage in foreign currency-
denominated transactions.

AMOUNTS WITHDRAWN FROM DECEDENT'S DEPOSIT

ACCOUNT
If a bank has knowledge of the death of a person, who maintained a bank deposit account alone,
or jointly with another, it shall allow the withdrawal from the said deposit account, subject to a
final withholding tax of six percent (6%) of the amount to be withdrawn, provided that the
withdrawal shall only be made within one year from the date of the decedent. Such withheld
tax shall not be creditable to the estate tax in relation to the death of the decedent.

Illustration 5.3
Going back to question number 4 in the pre-activity, suppose there is a P1,000,000 deposited
in the bank account of your grandfather and the rest of his estate consists of several parcels of
land readily divided for the legitime of the mandatory heirs, including the free portion that
you can get. The titles of the lands cannot be transferred if the Estate Tax of P940,000 cannot
be paid with the BIR.

You may withdraw the full amount of the bank deposit but it will be subject to 6% final tax amounting
to P60,000. The net proceeds of P940,000 can be used to pay the estate tax to BIR. Once paid, you can
already be issued the electronic Certificate of Authority to Register and transfer the titles to the heirs
and yours.

TAX-FREE COVENANT BONDS

Interest income or other payments of any individual taxpayer, including NRA-NETB, from tax-
free covenant bonds, mortgages, deeds of trust or other obligations of domestic and resident
foreign corporations shall be subject to final withholding tax of 30%.

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Illustration 5.4
Juana del Cruz, a resident entered into a tax-free covenant bond agreement with Salakot
Corporation, a domestic corporation. The bonds carried a 10% interest for the principal
amount of P7,000,000.

The interest received will be assumed as net of tax.

Principal 7,000,000
Multiply: Rate of interest 10%
Interest Income, net 700,000
Divide by to Gross-up 70%
Interest Income, gross (Tax Base) 1,000,000
Multiply: Final Tax Rate 30%
Final Tax Withheld 300,000

CASH AND PROPERTY DIVIDENDS

Dividends received by the following taxpayers, whether in cash or in kind, shall be subject to
the following final tax rates depending on the payor.

The tax sparing rule shall apply to an NRFC which is a resident or is domiciled in a country
which: (1) has no effective tax treaty with the Philippines; (2) has a worldwide system of
taxation; and (3) allows a tax credit against the tax due from the NRFC dividend taxes
deemed to have been paid in the Philippines equivalent to 15%.

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A real estate investment trust (REIT) is a corporation whose primary business is owning,
developing, and managing real estate properties, such as apartment buildings, office
buildings, hotels, warehouses, health care facilities, shopping malls or golf courses.

SHARE IN NET INCOME IN A TAXABLE PARTNERSHIP,

ASSOCIATION, JOINT ACCOUNT, JOINT VENTURE OR
CONSORTIUM
The share in the net income of the following taxpayers shall be subject to the respective final tax
rates as summarized below:

It is to be noted that this is only applicable to taxable partnerships. Notice that the rates are
similar to that of the final taxes with dividends. In essence, shares of partners in the net income
of a partnership are dividends available for withdrawal. Also notice that there are no rates for
corporations since partnerships can only be formed by natural persons.

Illustration 5.5
Paul, Lee and Kath formed a partnership engaged in a merchandising business in Batangas.
The three personally manages the business. Paul and Kath are Filipinos. Lee’s Chinese
citizenship adds effectiveness in managing the business. During the year, they reported net
income of P600,000 which they divide equally among themselves.

The three partners will have a share of P200,000 each. They are, however, subject to 10% final tax,
therefore, each will only receive P180,000.

PASSIVE ROYALTIES
Passive royalties received by a taxpayer shall be subject to the following final tax rates:

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Illustration 5.6
Michael Angan is an author of an accounting book. He earned a 10% royalty for every P500
copy of his book sold. During the month, his book sold 900 copies.

Michael will receive the following amount:

Copies Sold 900
Multiply: Sales Price 500
Sales 450,000
Rate 10%
Royalties earned 45,000
Less: Final Tax (45,000 x 10%) 4,500
Amount Received 40,500

Illustration 4.6
Film-ipino Inc. received a check for P640,000 from FilmWorld Corp. as royalties for its
cinematographic works.

The final tax to be remitted to BIR is:

Net Amount 640,000
Divide by to Gross-up 80%
Royalties 800,000
Rate 20%
Final Tax 160,000

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PRIZES AND WINNINGS OF INDIVIDUALS

Prizes and winnings of individuals obtained from local sources shall be taxed at the following
final rates:

It should be noted that the P10,000 threshold is not an exemption threshold rather it only
determines whether the income is included in final tax or regular income tax. As such, prizes at
most P10,000 is still taxable under regular taxation and those above P10,000 is fully taxable
under final taxation. Prizes and winnings of corporate taxpayers are subject to regular income
tax. Prizes and winnings not subjected to final tax are reportable under regular income taxation.

Exempt Prizes
The following are exempt prizes:

1. Prizes received by a recipient without any effort on his part to join a contest. Examples
include prizes from awards like Nobel Prize, Most Outstanding Citizen, etc.
2. Prizes from sports competitions that are sanctioned by their respective national sport
organizations

Requisite for Exemption

Exempt prizes mentioned above should meet the following requisites:

1. The recipient was selected without any action on his part to enter the contest.
2. The recipient is not required to render substantial future services as a condition to
receiving the price or award.

Prize vs. Winning

A prize is a reward for a contest or competition. In other words, a prize represents a
remuneration for an effort reflecting one’s superiority. A winning, in contrary, is a reward for
an event that depends on chance such as winnings from gambling, lottery or raffle ticket.

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Illustration 5.7
Lucky Manzañas won in a raffle promo and took home P9,000 cash. Two days after, he
played in “Bawal Judgemental”, earning a prize of P35,000 since he got three wrong answers.
Compute the final taxes withheld from him.

The P9,000 cash winnings from the raffle promo was subjected to final tax regardless of the amount.
This amount is already the net receipts. The grossed-up amount of P11,250 is multiplied by 20% to get
the final tax of P2,250. As for the prize, the gross amount of P35,000 is multiplied by 20% since it
exceeds P10,000. The final tax on such is P7,000.

INFORMER’S CASH REWARD

A 10% final tax shall be imposed on rewards received from informing on violations of NIRC
and discovery and seizure of smuggled goods which were deemed legitimate and collectible
against the violator. It should be noted, however, that the amount of reward is 10% of the
collection from the information or P1,000,000, whichever is lower.

Illustration 5.8
Wiz L. Blue shared two pieces of information with the BIR that allegedly proves two tax
evading companies. Company A was then assessed and was forced to pay P500,000 of
deficiency taxes. Company B was also assessed and was liable to deficiency taxes of
P12,000,000.

Wiz will be earning 10% of P500,000 as reward related to Company A’s violation. The P50,000
reward will be subject to 10% final tax, reducing the cash receipt to P40,000.
For the information provided anent to Company B, the 10% of P12,000,000 exceeds the maximum
reward of P1,000,000, therefore, the basis of the 10% final tax is P1,000,000.

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OTHER ITEMS OF INCOME SUBJECT TO FINAL TAX

The following are other items of passive income specifically subject to final tax.

ACCOUNTING FOR FINAL TAXES

To illustrate the journal entries for the recording of final taxes, let us journalize some of the
illustrations given.

Illustration 5.1
Books of Payor Books of Payee
Interest Expense 900,000 Cash in Bank 700,000
Final Tax Withholdings 200,000 Income Tax Expense 200,000
Payables Interest Income 900,000
Cash 700,000

Final Tax Withholdings 200,000

Payables
Cash 200,000

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Illustration 5.6
Books of Payor Books of Payee
Royalty Expense 800,000 Cash 640,000
Final Withholding Taxes 160,000 Income Tax Expense 160,000
Payable Royalty Income 800,000
Cash 640,000

Final Withholding Taxes 160,000

Payable
Cash 160,000

FILING AND PAYMENT OF FINAL TAXES

Every withholding agent (WA)/payor required to deduct and withhold taxes on income
payments subject to Final Withholding Taxes shall file the following within the specified
deadlines: [You may click the form codes to access the link to the pdf file of said form.]

Deadline
Form Name
Manual Filing eFPS Filing
Monthly Remittance Form of tenth (10th) day 11th-15th day
Final Income Taxes Withheld following the month following
in which withholding month
0619F
withholding was depending on the
made taxpayer’s line of
business
Quarterly Remittance Return of last day of the Not yet available
Final Taxes Withheld on month following the
Interest Paid on Deposits and close of the quarter
1602Q
Deposit during which
Substitutes/Trusts/Etc. withholding was
made
Quarterly Remittance Return of last day of the month following the close of
1601FQ Final Income Taxes Withheld the quarter during which withholding was
made
Certificate of Final Income Tax on or before January 31 of the year
2306 Withheld following the year in which income
payment was made

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Annual Information Return on on or before January 31 of the year

Final Income Taxes Withheld following the calendar year in which the
1604F
(with Annual Alphabetical List income payments subject to final
of Payees) withholding taxes were paid or accrued

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Self-Check
Basing on your readings, answer the following questions.
1. How is final income taxation different from the other income tax schemes?
2. What is the difference between passive and active income?
3. What is the general final tax rate for NRA-NETBs? For NRFCs?
4. What are the types of passive income subject to final tax? What is the tax rate
applicable to each?
5. What is the proforma entry for recording transactions subject to final tax?
6. What are relevant BIR forms for final taxes? What are the deadlines?

Exercise 5.1 TRUE OR FALSE

Determine whether the following statements are true or false.
___________1. The maximum net cash receipts from rewards on informing BIR on tax
violations is P900,000. The payee of an income subject to final tax is also called
the withholding agent.
___________2. The first P10,000 of an prize is exempt from final taxes.
___________3. There is a separate quarterly remittance return for final taxes collected on
income payments of banks.
___________4. Dividends received by resident aliens from non-resident foreign corporations
are subject to 10% final tax.
___________5. The final tax withheld constitutes full payment.
___________6. Prizes and winnings received by corporate taxpayers are subject to regular
income tax.
___________7. The interest income received by corporate taxpayers from tax-free covenant
bonds are deemed net-of-tax.
___________8. Final tax is generally applicable to passive income since these are more
susceptible to non-reporting.
___________9. Income subjected to final tax are not reported in the income tax return.
___________10. Active royalties are mostly subject to 20% final tax.

Exercise 5.2 MULTIPLE CHOICE

Choose the best answer from the choices provided.
______1. Who is subject to final tax on royalties earned, whether active of passive?
a. Resident citizen
b. Resident Alien

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c. Non-resident citizen
d. Non-resident alien not engaged in trade or business

______2. Which is the following recipients is exempt from final tax on dividends?
a. Resident Alien
b. Resident Citizen
c. Resident Corporation
d. Resident Foreigner

______3. Which of the following is not subject to final tax?

a. Prizes exceeding P10,000
b. Prizes not exceeding P10,000
c. Winnings exceeding P10,000
d. Winnings not exceeding P10,000

______4. Which is not subject to 10% final tax?

a. Royalties from a business trademark
b. Royalties from literary works
c. Dividends from a domestic corporation
d. Share in the net income of a business partnership

Exercise 5.4 FINAL TAX RATES

Write the final tax rate applicable for each income. If it is exempt, write EX. If it is subject to other
income tax schemes, write NA.
______1. Jackie received P10,000 from a raffle promo
______2. Jonny, a resident Italian, received P60,000 dividends from an REIT
______3. Jimmy, preterminated a seven-year peso deposit four years before its maturity
______4. Jessy, received the interest from her investment on Philippine t-bills
______5. Justme, an NRFC, earned interest from a loan extended
______6. Jill, a non-resident alien engaged in trade, received a share in the net income of an
exempt partnership
______7. June, received a reward on whistleblowing on a tax violation
______8. A non-resident lessor of aircrafts earns rentals from domestic companies
______9. A company engaged in arts primarily obtains income from royalties on its literary
works
______10. An NRFC received dividends from a domestic corporation which was subject to tax
sparing rule

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Problem 5.1 PASSIVE ROYALTIES

Dina Amon, a resident citizen, earned the following royalties from her intellectual works:
Cook Books 45,000
Musical Compositions 80,000
Other Passive Royalties 120,000
How much is the withheld final tax of Dina?
1

Problem 5.2 PASSIVE ROYALTIES

Jack Amon, a resident alien, received the following royalties during the taxable year:
Hairy Cutter Novel Books 450,000
Patents 120,000
Other Passive Royalties 224,000
How much is the final tax of Jack?
1

Problem 5.3 INTEREST INCOME

Hannah Caiat, a non-resident citizen, was credited with the following interest income from her
bank deposits:
Banco de Oro (net of tax) 1,600
Bank of the Philippine Islands (gross of tax) 5,000
Metro Bank (net of tax) 8,000
Citi Bank (gross of tax) 9,600
How much is the final tax on interest income on bank deposits of Hannah?
1

Problem 5.4 DIVIDENDS

Mary Ribook, received the following dividends in Philippine pesos, gross of tax.
San Miguel Corporation 25,000
Apple Corporation 50,000
Ayala Land Corporation 30,000
Google Corporation 10,000
How much is the final tax from the said dividends?

Problem 5.5 PRIZES AND WINNINGS

Nash E. Mulan wants to experience placing a bet in the PCSO Ultra Lotto and tries to bet on
the combination 06-19-23-39-41-50. Knowing the minimal chance of winning, he did not watch
the telecast of the draw. Getting the newspapers on the next day, it revealed the following
winning numbers 41-23-19-51-06-39. The prizes are as follows: 6 digits – P55,000,000, 5 digits –
P300,000, 4 digits – P4,000 and 3 digits – P20.
How much is the final tax of Nash?

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Problem 5.6 PRIZES AND WINNINGS

Nash, from the previous problem, was not satisfied of winning once and places again the same
combination on the next draw of 6/58. Winning numbers were 06-56-47-41-50-23.
How much is the final tax of Nash?

Problem 5.7 PRIZES AND WINNINGS

Nash, again from the previous problem, having been obsessed with lottery adapts the same
combination as being his lucky numbers and places a bet on the Mexican Lottery. He won the
jackpot prize of P960,000,000 during the draw.
How much is the final tax of Nash?

Problem 5.7 PRIZES AND WINNINGS

Venti Lador, obtained the following winnings (gross of tax) during the taxable year.
January 21 60,000
March 16 14,000
September 18 86,000
How much is the total final tax from the winnings?

Problem 5.8 TAX INFORMER’S REWARD

Lala Pit, reported to the BIR, Tim Maray, as having evaded from the payment of tax worth
P9,000,000. Due to the information she provided, BIR was able to collect said amount.
How much is the final tax?

Problem 5.8 TAX INFORMER’S REWARD

Assuming from the previous problem, the tax reported was P20,000,000.
How much is the final tax?

Case Study 5.1 WINNING A PRIZE

Mina Lascia is a loyal customer of Johnnyson Supermarket. The grocery store gives a raffle
ticket for every P1,000 purchase of every customer. Mina earned 50 entries during the promo
period. Five raffle tickets are drawn on the draw and the winners are called to the store
within the next two weeks. To determine the prize of the winners, they are given four
minutes to gather anything they want from the store and take home everything they can.
Because Mina has an asthma, she only got P8,500 worth of grocery items as her prize.

Is the P8,500 subject to final tax?

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