5 - Final Income
Taxation
4 features of final income
taxation
1. Final tax
2. Tax withholding at sources
3. Territorial imposition
4. Imposed on certain passive
income and persons not
engaged in business in the
Philippines
Rationale of final income
taxation
- Taxpayer and government
convenience
Items of passive income
- those that are earned with
very minimal involvement
from the taxpayer and are
generally irregular in timing
and amount and is best used
with the final withholding
scheme for passive income
2 of the types of taxpayers that
have high risk of non
compliance, and are thus
subject to final income
1. NRA-NETBs
2. NRFCs
General final tax rate of
NRA-NETBs
- 25%
General final tax rate of NRFCS
- 30%
9 passive income subject to
final tax
1. Interest or yield from bank
deposits or deposit
substitutes
2. Domestic dividends, in
general
3. Dividend income from a Real
Estate Investment Trust
4. Share in the NI of a business
partnership, taxable
associations, joint ventures,
joint accounts, or
co-ownership
5. Royalties, in general
6. Prizes exceeding 10k
7. Winnings
8. Informer's tax reward
9. Interest income on tax-free
corporate covenant bonds
Final tax rate on interest earned
from short term deposits for
individuals and corporations
- 20%
Final tax rate on interest earned
from long term deposits for
individuals and corporations
- Individuals (except NRA
NETB) - exempt
- Corpos - 20%
Deposits made for a period of
less than 5 years
- Short term deposits
Deposits made for a period of 5
years or more
- Long term deposits or
investment certificates
Final tax rate on pre-termination
of long-term deposits of
individuals
- < 3 yrs - 20%
- 3-4 - 12%
- 4-5 - 5%
- > 5 yrs - 0%
Exempted savings and time
deposits from final tax
- Those of cooperatives'
5 other applications of the final
tax on interest
1. Deposit substitute
2. Government securities
3. Money market placements
4. Trust funds
5. Other investments
evidenced by certificates
prescribed by BSP
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 instruments for the
borrowers' own account
- Deposit substitute
Final tax rate on foreign current
deposit under foreign currency
depositary banks
- Residents - 7.5%
- Non - exempt (for both indiv
& corpo)
Final tax rate on interest from
joint accounts (by resident and
non res) on forex deposits
- 50% is exempt while 50% is
subject to 7.5% final tax rate
5 interest income subject to
regular income tax
1. Lending activities
2. Investment in bonds
3. Promissory notes
4. Foreign sources
5. Penalty for legal delay or
default
Any distribution made any
corporation to its shareholders
out of its earnings or profits and
payable to its shareholders
- Dividends
5 types of dividends
1. Cash
2. Property
3. Scrip
4. Stock
5. Liquidating
Cash dividends
- dividend paid in cash
Property dividends
- dividend paid in non cash
properties including stocks
or securities of another
corporation
Scrip dividends
- dividends paid in notes or
evidence of indebtedness of
the corporation
Stock dividends
- dividends paid in stocks of
the corporation
Liquidating dividends
- dividends for the distribution
of corporation net asset
2 dividends whose income are
not for taxation purpose
1. Stock dividends
2. Liquidating dividends
When does substantial
alteration in ownership in the
corporation occur?
- Stock dividends are given in
lieu of cash div or when
corporation declared an
optional stock or cash
dividend
Exception to the non taxability
of stock split
- NONE. It is absolutely not
subject to income
Dividend tax rules for dividends
from domestic corporations
- Individuals - 10% (nra etb 20%, nra netb -25%)
- Corpos - exempt (nrfc -30%,
or 15% in some cases)
Dividend tax rules for dividends
from foreign corporations
- Regular tax for both
individuals and corporations
2 exempt dividends
1. inter corporate
2. dividends from cooperative
dividends
Why are corporate (and
business partnership)
recipients of dividends
exempted from taxation?
- To eliminate the impact of
double taxation
5 entities taxable as corporation
and thus subject to 10% final
tax
1. Real estate investment
trusts (REIT)
2. Business partnerships
3. Taxable associations
4. Taxable joint ventures, joint
accounts or consortia
5. Taxable co-ownerships
REIT (Real Estate Investment
Trust)
- a publicly listed corporation
established principally for
the purpose of owning
income-generating real
estate assets
3 recipients of reit dividends
exempt from final tax
1. Non resident alien or
NRFCScs entitled to claim
preferential tax pursuant to
applicable tax treaty
2. Domestic corporations or
RFCS
3. Overseas filipino investors
(only until aug 12 2018)
For the last or remaining 4
exempted (from final tax)
entities, how is net income
received?
- Deemed constructively
received by PARTNERS,
MEMBERS, OR
VENTURERS
For the last or remaining 4
exempted (from final tax)
entities, when does the final tax
of 10% apply?
- Point of determination of
income, NOT at the point of
actual distribution
Inclusions of share in net
income of business partnership
1. Share in residual profit
(ONLY THIS IS SUBJECT
TO FINAL TAX if the other 2
are expensed, and are thus
subject to regular tax to
receiving partner)
2. Salary provisions
3. Interest & bonus to a partner
Penalty tax imposed to
corporation that accumulate
earnings beyond the reasonable
needs of business
- 10% Improperly
accumulated earnings tax
Tax rule for royalties from
sources within Ph. for
individuals
- Books (in print), literary
works, and musical
compositions - 10%
- Other sources - 20%
Tax rule for royalties (PASSIVE)
from sources within Ph. for
corporations
- Books (in print), literary
works, and musical
compositions - 20%
- Other sources - 20%
Tax imposed for royalties
(passive or active) from sources
abroad
- Regular income tax
2 prizes exempt from final tax
1. Received w/o effort to join
contest
2. From sports competitions
sanctioned by their
respective national sport
organizations
2 requisites of exemption for
prizes
1. Recipient was selected w/o
any action on his part to join
2. He is not req to render
substantial future services
as a condition to receive
prize or reward