MMSU

MARIANO MARCOS
College of Business,
Economics and Accountancy
STATE UNIVERSITY

Tax 20: INCOME TAXATION

Academic Year 2018-2019

Income is a fruit. By analogy, the tree represents the capital. The tax concept of income is referred
to as the “gross income” under the National Internal Revenue Code of 1997.

Gross income is an individual’s inflow of wealth derived from whatever source, whether legal or
illegal, including but not limited to the following:
1. Compensation
2. Gross income from profession, trade or business
3. Gains from dealings in property
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Prizes and winnings
9. Pensions
10. Partner’s share in the net income of the General Professional Partnership

Income Taxation Scheme

GROSS INCOME

Final Income Tax Capital Gains Tax Regular Income Tax

The tax scheme are mutually exclusive. An item of gross income that is subject to tax in one scheme
will not be taxed by the other schemes. Similarly, items of income that are exempted on one scheme
are not taxable by the other schemes.

FINAL INCOME TAXATION

§ It is characterized by final taxes where taxes are withheld or deducted at source.
§ The taxpayer receives income net of tax.
§ The payor of the income will remit the tax to the government.
§ Final Income Tax is applicable only to certain passive income. Passive Income are those income
earned with very minimal or even without active involvement from the taxpayer.

Rationale of Final Income Taxation

Passive income are not usually monitored by the taxpayers, hence, their existence and actual
amount can be difficult to assess and determine. Thus, the final withholding at source is the most
favored scheme in taxing items of passive income.

Features of Final Income Taxation

1. Final tax
2. Tax withheld at source
3. Territorial Imposition- passive income that are subject to final tax should be earned in the Philippines
4. Imposed on certain passive income and persons not engaged in business in the Philippines
Refer to the table below NRA-NETB 25% Final Tax; NR Foreign Corporation 30% Final Tax

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
College of Business,
Economics and Accountancy
STATE UNIVERSITY
SUMMARY OF FINAL TAX UNDER THE NIRC, AS AMENDED
With Updates from the TRAIN Law

Individual

Alien Corporation
Passive Income Citizen
Nonresident
RA
RC NRC ETB NETB* DC RFC NRFC*

Interest Income
Local Currency Deposits
Short term interest or yield (less than 5 years) 20% 20% 20% 20% 25% 20% 20% 30%

Long term interest or yield (more than 5 years) Exempt Exempt Exempt Exempt 25% 20% 20% 30%

Pre-termination of long term deposits (Individual)

Less than 3 years 20% 20% 20% 20% 25% 20% 20% 30%

3 years to less than 4 years 12% 12% 12% 12% 25% 20% 20% 30%

4 to less than 5 years 5% 5% 5% 5% 25% 20% 20% 30%

Foreign Currency Deposits

Interest Income from FCDUs/OBU depositary banks
- Old Law 7.5% Exempt 7.5% Exempt Exempt 7.5% 7.5% Exempt

- TRAIN Law 15% Exempt 15% Exempt Exempt 7.5% 7.5% Exempt

Interest on Foreign Loans N/A N/A N/A N/A N/A N/A N/A 20%

Dividend Income
- From domestic corporations 10% 10% 10% 20% 25% Exempt Exempt 15%

- From foreign corporations Regular Income Tax

Share in the Net Income of Taxable
10% 10% 10% 20% 25% 10% 10% 30%
Partnership, Joint Venture and co-ownership
Royalties
Passive Royalties from
20% 20% 20% 25% 25% 20% 20% 25%
cinematographic films and similar works
Passive Royalties from books, literary works,
10% 10% 10% 10% 25% 20% 20% 30%
and musical compositions
Other sources of passive royalties 20% 20% 20% 20% 25% 20% 20% 30%

Active Royalties Regular Income Tax

Prizes
Php 10,000 and below Regular Income Tax 25% Regular Income Tax 30%

Above Php 10,000 20% 20% 20% 20% 25% Regular Income Tax 30%

Winnings
In general 20% 20% 20% 20% 25% Regular Income Tax 30%

PCSO and lotto winnings

- Old Law Exempt

- Train Law Rules of Prizes will apply

Informer’s Tax Reward 10%

*Nonresident persons not engaged in trade or business in the Philippines, such as nonresident aliens not
engaged in trade or business (NRA-ETB) and nonresident foreign corporations (NRFC) have high risk of non-
compliance. These taxpayers usually do not have principal offices or fixed places of business in the Philippines.
Their distance and absence in the country make it very unlikely for tax compliance to be expected. Thus, the
law subjects them to Final Income Tax. Philippines residents shall withhold the final tax from their gross
income, active or passive, from all sources within the Philippines. NRA-NETB 25% Final Tax; NR Foreign Corporation 30% Final Tax

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
College of Business,
Economics and Accountancy
STATE UNIVERSITY
FINAL TAX ON INDIVIDUALS AND CORPORATIONS

A. Interest Income or Yield

Individual
Alien Corporation
Passive Income Citizen
Nonresident
RA
RC NRC ETB NETB DC RFC NFRC
Interest Income
Local Currency Deposits
Short term interest or yield (less than 5 years) 20% 20% 20% 20% 25% 20% 20% 30%
Long term interest or yield (more than 5 years) Exempt Exempt Exempt Exempt 25% 20% 20% 30%

Short term deposits are those made for a period of less than five years while long term deposits are those
made for a period of more than 5 years. Long term deposits or investment certificates refer to certificate of time
deposit or investment in the form of saving, individual trust funds, deposit substitutes, investment management
accounts and other investments with a maturity of not less than five years, the form of which shall be prescribed
by the BSP and issued by banks only, not by bank financial intermediaries or finance companies, to
individuals*.
*For corporations

Deposit substitute means 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, 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.

Government debt instruments and securities including Treasury bonds, Treasury bills, and Treasury notes
shall be considered as deposit substitute irrespective of the number of lender at origination if such debt
instruments and securities are to be traded or exchanged in the secondary market.

Final tax on pre-termination of a long term deposit of individuals

If the long term deposit or investment placement of individual taxpayers is pre-terminated with less than five
years of holding period, any previous untaxed or exempted interest income will be subject to the following final
taxes upon pre-termination:
Individual
Alien
Passive Income Citizen
Nonresident
RA
RC NRC ETB NETB
Pre-termination of long term deposits
Less than 3 years 20% 20% 20% 20% 25%
3 years to less than 4 years 12% 12% 12% 12% 25%
4 to less than 5 years 5% 5% 5% 5% 25%

B. Foreign currency deposit with foreign currency depositary banks

Individual
Alien Corporation
Passive Income Citizen
Nonresident
RA
RC NRC ETB NETB DC RFC NFRC
Foreign Currency Deposits
Interest Income from FCDUs/OBU depositary banks
Old Law 7.5% Exempt 7.5% Exempt Exempt 7.5% 7.5% Exempt
TRAIN Law 15% Exempt 15% Exempt Exempt 15% 15% Exempt
Interest on Foreign Loans N/A N/A N/A N/A N/A N/A N/A 20%

The interest income from foreign currency deposits under the foreign currency system or expanded foreign
currency deposit system by residents are subject to 7.5% (15% under the TRAIN law for individuals). Resident
taxpayers include resident citizen, resident alien, domestic corporations and resident foreign corporations.

The reduced final tax rates on interest income on foreign currency deposit and the exemption of non-resident
depositors is intended to encourage the deposit of foreign currencies to the Philippine banks which will be used
in the financing of our international trades.

Joint Account on Forex deposits

If the bank account is a joint account in the name of a resident and a nonresident taxpayer, 50% of the interest
shall be exempt while the other 50% shall be subject to the 7.5% (15% under the TRAIN law) final tax.

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
College of Business,
Economics and Accountancy
STATE UNIVERSITY
C. Dividend Income
Individual
Alien Corporation
Passive Income Citizen
Nonresident
RA
RC NRC ETB NETB DC RFC NFRC
Dividend Income
- From domestic corporations 10% 10% 10% 20% 25% Exempt Exempt 15%
- From foreign corporations Regular Income Tax
Share in the Net Income of Taxable Partnership,
10% 10% 10% 20% 25% 10% 10% 30%
Joint Venture and co-ownership

Dividends means any distribution made by a corporation to its shareholders out of its earnings or profits and
payable to its shareholders, whether in money or in other property.

Generally, the rule is dividends received from domestic corporations are subject to final tax while the dividends
received from foreign corporations are subject to regular income tax. However, the following types of dividends
are not subject to final tax:
1. Stock dividends
2. Liquidating dividends
3. Intercorporate dividends
4. Dividends from cooperatives

The 10% final withholding tax applies to dividends or share in the net income of entities considered as
corporations under the NIRC and special laws, such as:
1. Real Estate Investment Trusts
2. Business Partnership
3. Taxable associations
4. Taxable joint venture, joint accounts, consortium, or co-ownership

D. Royalties
Individual
Alien Corporation
Passive Income Citizen
Nonresident
RA
RC NRC ETB NETB DC RFC NFRC
Passive Royalties from
20% 20% 20% 25% 25% 20% 20% 25%
cinematographic films and similar works
Passive Royalties from books, literary works,
10% 10% 10% 10% 25% 20% 20% 30%
and musical compositions
Other sources of passive royalties 20% 20% 20% 20% 25% 20% 20% 30%
Active Royalties Regular Income Tax

Under the regulations, the 10% preferential royalty final tax on books and literary works pertain to printed
literatures. Royalties on books sold on e-copies or CDs such as e-books are subject to the 20% final tax.

Passive vs Active Royalties

If the taxpayer has an active involvement in the undertaking which results to a royalty, then it is an active
income, therefore, royalty will be subject to regular income tax.

E. Prizes
Individual
Alien Corporation
Passive Income Citizen
Nonresident
RA
RC NRC ETB NETB DC RFC NFRC
Prizes
Php 10,000 and below Regular Income Tax 25% Regular Income Tax 30%
Above Php 10,000 20% 20% 20% 20% 25% Regular Income Tax 30%

The taxation of prizes can either be exempt from income tax or subject to final tax or regular income tax.
Generally, if the prize is Php 10,000 and below, it will be subject to regular income tax. However, if the prize
exceeds Php 10,000, it will be subject to 20% final tax. There are, however, exempt prizes.

Exempt Prizes (regardless of amount)

1. Prizes received by a recipient without effort on his part to join a contest. Examples include prizes from
awards such as Nobel Prize, Most Outstanding Citizen, Most Benevolent Citizen of the year and similar
awards.
2. Prizes from sports competitions that are sanctioned by their respective sport organization
Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
College of Business,
Economics and Accountancy
STATE UNIVERSITY
Requisite of exemptions:
1. The recipient was selected without any action on his part to enter the contest; and
2. The recipient is not required to render substantial future services as a condition to receiving the
price or award.

F. Winnings
Individual
Alien Corporation
Passive Income Citizen
Nonresident
RA
RC NRC ETB NETB DC RFC NFRC
Winnings
In general 20% 20% 20% 20% 25% Regular Income Tax 30%
PCSO and lotto winnings
- Old Law Exempt
- Train Law Rules of Prizes will apply

For individual income taxpayers, winnings received from sources within the Philippines are generally subject
to 20% final tax. Similar to prizes, there is no final tax imposed on corporate winnings under the NIRC. Winnings
that are not subjected to final tax by the payor should be reported as part of the regular income.

G. Tax Informer’s Reward

Individual
Alien Corporation
Passive Income Citizen
Nonresident
RA
RC NRC ETB NETB DC RFC NFRC

Informer’s Tax Reward 10%

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

Requisites 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 official employee in a and b

Amount of Cash Reward

1. 10% of revenues, surcharges, or fees recovered and or fine or penalty imposed and collected; or
2. Php 1,000,000, whichever is lower.

Exceptions to the General Final Tax on

Nonresident Persons Not Engaged in Trade or Business in the Philippines

NRA-ETB NRFC
General Final Tax Rate 25% 30%
Exceptions:
1. Rentals on cinematographic films and similar works 25% 25%
2. Rentals of vessels 25% 25%
3. Rentals of aircrafts, machinery, and other equipment 25% 7.5%
4. Special Aliens* (Special employees) 15% N/A
5. Interest income under the foreign currency deposit system Exempt Exempt
6. Interest on foreign loans N/A 20%

*Special Aliens are NRA-NETBs employed by regional or area headquarters and regional operating
headquarters of multinational companies, offshore banking units, or petroleum service contractors or
subcontractors. Special aliens are subject to a final tax of 15% on gross income from their employees.

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
College of Business,
Economics and Accountancy
STATE UNIVERSITY

Final Withholding Tax Return

The final withholding tax return, Monthly Remittance Return of Final Income Taxes Withheld (BIR Form 1601-
F), shall be filed in triplicate by every withholding agent or payor who is either an individual or a corporation.

Deadline and place for filing

§ The return shall be filed and the tax paid on or before the tenth (10th) day of the month following the
month in which withholding was made.
§ The return shall be filed and the tax paid with the Authorized Agent Bank (AAB) of the Revenue District
Office (RDO) having jurisdiction over the withholding agent's place of business/office. In places where
there are no Authorized Agent Banks, the return shall be filed and the tax paid with the Revenue
Collection Officer or the duly Authorized City or Municipal Treasurer within the Revenue District where
the withholding agent’s place of business/office is located, who will issue a Revenue Official Receipt
(BIR Form No.2524) therefor.
§ Where the return is filed with an AAB, taxpayer must accomplish and submit BIR-prescribed deposit
slip, which the bank teller shall machine validate as evidence that payment was received by the AAB.
The AAB receiving the tax return shall stamp mark the word “Received” on the return and also machine
validate the return as proof of filing the return and payment of the tax by the taxpayer, respectively. The
machine validation shall reflect the date of payment, amount paid and transactions code, the name of
the bank, branch code, teller’s code and teller’s initial. Bank debit memo number and date should be
indicated in the return for taxpayers paying under the bank debit system.
§ A taxpayer may file a separate return for the head office and for each branch or place of business/office
or a consolidated return for the head office and all the branches/offices except in the case of large
taxpayers where only one consolidated return is required.

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
College of Business,
Economics and Accountancy
STATE UNIVERSITY

Final Income Tax Drills

1. Winnie, a resident citizen, deposited P2,000,000 in the 180-day time deposit of BDO. The deposit
pays 8% interest. Compute the final tax on maturity of the deposit.
2. Assume that Winnie is a non-resident alien not engaged in trade or business, compute the final
tax on maturity of the deposit.
3. Renz received P42,000 interest from short-term deposits. Compute the final tax withheld on the
interest.
4. On January 1, 2017, Mr. Aljon invested P2,000,000 in the six-year time deposit of Unibank which
pays 10% annual interest. Compute the final tax to be withheld by Unibank on December 31,
2017.
5. Assume that Mr. Aljon pre-terminated the time deposit on July 31, 2021. Compute the final tax
to be withheld on pre-termination.
6. Boy, a resident citizen, received the following interest income:
a. P80,000 from short-term Peso time deposit
b. P60,000 from a five-year bonds issued by a commercial bank
Compute the final tax withheld from Boy.
7. Yvonne, a non-resident alien not engaged in trade or business, made a 5-million dollar deposit
to an FCDU Bank. The deposit pays 8% annual interest. Compute Yvonne’s final tax in the first
year.
8. Benito Mojica, a non-resident citizen, invested in an 8-year long-term deposit in Rizal Commercial
Banking Corporation amounting to P2,000,000 paying 20% interest annually. Compute the final
tax withheld on the fourth year.
9. Mr. Neis, a resident citizen owns 40% of the shares of Coco Corporation, a resident corporation.
Coco declared P200,000 dividends in 2014. How much final tax should be withheld?
10. Mr. Sieg, resident citizen, received P100,000 dividend income from Vodka, Inc., a domestic
corporation. How much final tax must have been withheld by Vodka, Inc.?
11. Mr. Bayugan, published his book abroad for the international market. During the first quarter, he
earned a gross royalty of P1,000,000. How much final tax will be withheld by the foreign
publisher?
12. Mr. Tuao won an P800,000 prize in a national dancing competition. The organizer of the event
declared that the P800,000 grand prize was “tax free.” How much final tax must be remitted by
the organizer to the BIR?
13. The Gambling World, Inc. a residrnt foreign corporation, Inc. has been trying its luck with the
Philippine Charity Sweepstakes Lotto. It spent P800,000 for losing PCSO lotto tickets. Luckily,
one ticket costing P10 won the P218,000,000 Superlotto 6/49 draw on July 24, 2017. How
much is the tax withheld?
14. Aris, resident citizen, won 10 billion in the Superlotto 6/49 on March 5, 2018. How much is the
tax withheld?
15. Mr. Conrado won a gold medal and a P50,000 cash prize for chess competition in the Palarong
Pambansa. How much final tax should be withheld from the prize?

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph