Final_Income_Taxation

CORRESPONDENCE LEARNING MODULE
TAXN 1016 (Income Taxation)
Academic Year 2020-2021

Lesson 4: Final Income Taxation

Topic: Final Income Taxation
a. Sources of income under Final Income Taxation
b. Application of Tax rates
c. Creditable Withholding Tax Vs. Final Withholding Tax
d. Compliance Requirements

Learning Outcomes: At the end of this module, you are expected to explain each specific scheme of
taxation and assess sources of income under each scheme and their tax application

LEARNING CONTENT

Introduction:
In the past three weeks, we had learned the general concepts of taxation, elements and classification of

taxes, tax laws and tax administration as well as an introduction on income taxation. We also tackled tax,
schemes, difference between accounting period and taxation period and taxation reporting. We are now ready
to go on the specifics of income taxation. Recall that there three schemes of income taxation – Final income
taxation, capital gain taxation and regular income taxation. For now, we focus on final income taxation.

Lesson Proper

Remember the following features of Final Income Taxation

1. Final Tax

• The tax deducted at source is final

2. Tax withholding at source

• The final withholding system imposes upon the person making income payments the responsibility to

withhold the tax.

• 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.

• For the government, it is the most convenient and effective system in collecting taxes on income

where there is high risk of non-compliance or tax evasion

3. Territorial imposition

• The withholding system applies only to certain passive income earned from sources within the

Philippines

• All income earned from sources abroad are subject to tax under the general scope of the regular

income tax.

4. Imposed on certain passive income

• Items of passive income are earned with very minimal involvement from the taxpayer and are

generally irregular in timing and amount.

• When not recorded by the taxpayer, their existence can be difficult to predict while their actual amount

may be difficult to determine.

• Final withholding at source is the most favored scheme in taxing items of passive income

5. Imposed on persons not engaged in business in the Philippines

• They have high risk of non-compliance. These taxpayers do not have offices or fixed place of

business in the Philippines making tax compliance very difficult

• Final income tax rate applicable to them are

Non-resident alien not engaged in trade or business 25%

Non-resident foreign corporation 25%

PASSIVE INCOME SUBJECT TO FINAL TAX

A. Interest Income or Yield from local currency bank deposits or deposit substitutes

Applicable final tax are as follows: Recipient

Source of interest income individual corporation
Short term deposits (those made for a period of less than five years)
Long-term deposits/investment certificate (maturity is five years or more) 20% 20%

exempt 20%

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However, long-term deposits/investments of individuals may be pre-terminated before its maturity (which is

greater than five years). Any untaxed or exempted interest income on the pre-terminated deposit/investment

will be subjected to the following final taxes:

Holding period (how long you were HOLDING the deposit) Final Tax

1 day to less than 3 years 20%

3 years to less than 4 years 12%

4 years to less than 5 years 5%

5 years or more 0%

Moreover, time and savings deposits maintained by members with cooperatives are not subject to final tax.
Remember that cooperatives are exempt from taxation, thus the members’ deposits are also exempt. Final

tax on deposits is limited to banks only.

Other applications of the final tax on interest include
1. Deposit substitute

- An alternative form of obtaining funds from at least 20 persons at any one time other than deposits
- Through the issuance, endorsement or acceptance of debt instrument for the borrower’s own

account
- For the purpose of relending or purchasing of receivables and other obligations, or financing their

own needs or the needs of their agent or dealer
2. Government debt instruments and securities – Treasury bonds, Treasury bills, Treasury notes

- They are considered deposit substitutes irrespective of the number of lender or origination if such
debt instrument and securities are to be traded or exchanged in the secondary market.

3. Money market placements
4. Trust fund
5. Other investments evidenced by certificate prescribed by BSP

FOREIGN CURRENCY DEPOSITS
- The interest income from foreign currency deposits with foreign currency depositary banks by
residents (resident citizens, resident aliens, domestic corporations, resident foreign corporations) is
subject to final tax of 15%
- Foreign currency deposits of non-resident taxpayers (non-resident citizens, non-resident alien, non-
resident foreign corporations) are exempt from final tax
- The reduced final tax on interest income on foreign currency deposits and exemption of non-resident
depositors are intended to encourage the deposit of foreign currencies in our banks which will be
used to finance international trades as well as repay foreign currency denominated debts since the
Philippine peso is not a globally accepted currency
- Take note of the following rules in recognizing taxability of foreign currency remittances deposited
with domestic banks. (focus is on the owner of the savings account to which the remittance is
deposited)
a. if the savings account is solely owned by a resident citizen, the whole remittance is subjected to
15% final tax
b. if the savings account is a joint account in the name of a non-resident citizen and a resident
citizen, only 50% (the share of the resident citizen) is subjected to 15% final tax. The share of
the non-resident is exempt.
c. If the owner of the savings account is a non-resident citizen, the whole remittance amount is
exempt.

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Note further that the following interest income generated by banks are subjected to regular interest:
1. Lending activities, whether or not in the course of business
2. Investment in bonds
3. Promissory notes
4. Foreign sources, whether bank or non-bank
5. Penalty for legal delay or default

B. Domestic dividends, in general

Dividends are distributions of earnings or profits made by a corporation to its shareholders. As a rule,

dividends are income subject to tax.
a. Cash dividend – paid in cash
b. Property dividend – paid in non-cash properties including stocks or securities of another corporation
c. Scrip dividend – paid in notes or evidences of indebtedness of the corporation
d. Stock dividend – paid in the stocks of the corporation

- Note that the following are not income for taxation purposes
✓ Stock dividends representing transfer of surplus to capital account shall not be subject to tax.
✓ Stock dividends are in the form of increase in corporate value (capital gain) which should be

properly taxable when realized through the disposal or sale of the stock dividend
✓ The distribution of stocks of another corporation as dividends is a taxable property dividend and

not a stock dividend.

- Stock dividends are subject to tax at fair value of the stock received under the following conditions:
✓ If the corporation cancels or redeems the stock issued as dividend at such time it must be

distributed. In this scenario, the stock dividend declared is a cash dividend.
✓ If it leads to substantial alteration in ownership in the corporation such as declaring stock

dividend instead of cash dividend.

- Stock dividend is a capitalization of earnings while stock split results in reduction in the par value

of stock and an increase in the number of shares of shareholders.
e. Liquidating dividend – distribution of corporate net assets

- Note that the following are not income for taxation purposes
✓ The receipt of liquidating dividends is not income but an exchange of properties
✓ When the liquidating dividend exceeds the cost of the investment, the excess is a taxable capital
gain. Any loss is deductible only to the extent of the capital gain.

Dividend Tax Rules Recipient of Dividend

Source of Dividend individual NRA-ETB NRA-NETB Domestic Corp RFC NRFC
Domestic Corporation 10% final tax 20% Exempt 25%/15%
Foreign Corporation Regular tax 25% Exempt

20%/25%

Exempt Dividends
1. Inter corporate dividends – dividends received by a domestic corporation and resident foreign

corporation from a domestic corporation are exempted under the NIRC to avoid double taxation
2. Dividends from cooperatives – the Cooperative Law (RA9520) exempts from tax the distribution of

dividends by an exempt cooperative to its members either representing interest on capital or as

patronage refund.

Dividends or share in the net income of the following entities considered as corporations under the NIRC
are subject to 10% final withholding tax:
1. Real Estate Investment Trust – 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 final tax:

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a. Non-resident alien individuals or non-resident foreign corporations entitled to claim preferential
tax rate pursuant to applicable tax treaty

b. Domestic corporations or resident foreign corporations
c. Overseas Filipino investors - exempt from REIT dividend tax until August 12, 2018

2. Business Partnership
3. Taxable associations
4. Taxable joint ventures, joint accounts or consortia
5. Taxable co-ownerships

- Share in the net income of a business partnership, taxable associations, joint ventures, joint
accounts or co-ownership are deemed constructively received by the partners, members or
venturers in the same year the net income is reported. The 10% final tax applies at the point of
determination of the income and not at the point of distribution

Domestic corporations cannot avoid dividends tax by simply not declaring dividends. Corporations which
accumulate earnings beyond the reasonable business needs are imposed 10% Improperly Accumulated
Earnings Tax

C. Royalties, in general individual Recipient of Dividend NRFC
10% NRA-ETB NRA-NETB Corporation 25%
Source of Passive Royalty
Books, Literary works, musical 20% 20%
compositions (printed) 20%
Books (e-copies, CDs) 20%
Other sources
Cinematographic works and 25% 25%
similar works

Active Royalty Income – accrues from an undertaking where the taxpayer has active involvement. It is an
income subject to regular tax

Passive Royalty Income – taxpayer do not have active involvement in the undertaking

Sources of passive royalty income include
✓ Royalties of claim owners or land owners of mining properties
✓ Royalties of inventors from companies that manufacture and sell their invention
✓ Royalty from licensing agreements that transfer the use of trademark or technology

Royalties earned from sources abroad are subject to regular income tax

D. Prizes Recipient

Source of taxable prize individual corporation
Prizes exceeding P10,000
Prizes not exceeding P10,000 20% final tax Regular tax
Prizes from foreign sources
Regular tax Regular tax

Regular tax Regular tax

EXEMPT PRIZES
1. Prizes received by recipient without any effort on his part to join a contest such as Nobel Prize, Most

Outstanding Citizen, and the likes
2. Prizes from sports competition that are sanctioned by their respective national sport organization.

Requisites of Exemption
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 service as a condition to receiving the prize or

reward.

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E. Winnings Recipient

Type of Winning individual NRA-NETB NRFC corporation
PCSO/lotto winnings not exceeding P10,000 exempt exempt
PCSO/lotto winning exceeding P10,000 20% 25% 30% 20%
Other winnings 20%
Winnings from foreign sources 25% 30% Regular tax
Regular tax Regular tax

F. Informer’s tax reward

A cash reward may be given to any person instrumental in the discovery of violations of the NIRC or
discovery and seizure of smuggled goods. The tax informer’s reward is subject to 10% final tax.

Requisite 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
3. Enforcement results in recovery of revenues, surcharges and fees, and/or conviction of the guilty party
or imposition of any fine or penalty
4. The informer must not be a
a. BIR official or employee
b. Other public official or employee
c. Relative within the 6th degree of consanguinity of those officials or employee in a. and b.

Amount of cash reward = whichever is lower of the following per case
a. 10% of revenues, surcharges or fees recovered and/or fine or penalty imposed and collected or
b. P1,000,000

The amount of cash reward is subject to 10% final tax which shall be withheld by the government.

G. Interest income on tax-free corporate covenant bonds
Individual 30% final tax
Corporation regular income tax

EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENTS

NRA - NETB NRFC
30%
General Final Tax rate 25%
15% capital gains tax
Exceptions: 25% of rentals
4,5% of rentals
1. Capital gain on sale of domestic stocks directly to buyer 15% capital gains tax 7.5% of rentals
Exempt
2. Rentals on cinematographic films and similar works 25% of rentals 20%

3. Rentals of vessels 25% of rentals 15% if tax sparing
rule is applicable
4. Rentals of aircrafts, machineries and other equipment 25% of rentals
30%
5. Interest income under the foreign currency deposit system Exempt

6. Interest on foreign loans n/a

7. Dividend income 25%

8. Tax on corporate bonds 30%

OTHER FINAL INCOME TAXES
1. Fringe benefits of managerial or supervisory employees – subject to fringe benefit tax

2. Interest and other income payments to depositary banks under the expanded foreign currency deposit
system – 10% final withholding tax

3. Income payments to sub-contractors of petroleum service contractors – 8% of its gross income derived

from such contract

- Petroleum service contractors are subject to the regular income tax

FINAL WITHHOLDING TAX RETURN
- Monthly remittance return of final income taxes withheld for the first two months of each quarter shall
be filed by the withholding agent or payor not later than the 10th day of the month following the month
in which withholding was made with the authorized agent bank, revenue collection officer or
authorized city or municipal treasurer where the business is located.
- Quarterly remittance return of final income taxes withheld shall be filed on or before the last day of
the month after each quarter.

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ENTITIES EXEMPT FROM 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
*** END of LESSON 4***

REFERENCES
Textbooks

1. Banggawan, Rex (2021) Income Taxation, Real Excellence Publishing
2. Ampongan, O. (2019), CPA Reviewer in Taxation, Arts Review Center, Inc.
3. Tabag, E. (2018), Income Taxation, Maxcore Publishing House.
4. Reyes, Virgilio (2019) Income Taxation
5. Laco, et.al. (2021) The Tax Reviewer
Online Reference
1. TRAIN Law (2020) Income Tax Tables in the Philippines. https://www.pinoymoneytalk.com/new-income-

tax-table-rates-philippines/
2. RR 05-2021 (Amendments on Final Income Taxes due to CREATE)

https://www.bir.gov.ph/images/bir_files/internal_communications_1/Full%20Text%20RR%202021/RR%2
0NO.%205%20-%202021.pdf
3. TRAIN Tax Law: Primer and BIR Sample Computation. https://www.pinoymoneytalk.com/bir-tax-law-
philippines/
4. Income Taxation https://www.bir.gov.ph/index.php/tax-information/income-tax.html
5. www.bir.gov.ph

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