FINAL INCOME TAXATION

WHAT IS INCOME?

Income means all wealth, which flows

into the taxpayer other than as a mere
return of capital.

GOMEZ
 WHAT IS INCOME TAX?

Income Tax is a tax on a person's

income LESS the deductions

GOMEZ
 T YPES OF INCOME

GENERAL (Part of GI, subject to 5%- SPECIAL (not part, subject to final tax)
32%)
• Compensation income • Interests, royalties, prizes and
• Business income other winnings subject to final
tax (Passive income)
• Income from • Cash and property dividends,
profession except stock dividends
(Passive Income)
• Capital gains from sale of:
 Real property;
 Unlisted shares of stock;
and
 Listed shares of stock
(OPT)
GOMEZ
 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
PH

GOMEZ
 RATIONALE

For the taxpayer and government

convenience

GOMEZ
 ISSUE

 Non-resident person not

engaged in trade or business
in the PH
 Non-resident aliens not engaged
in trade or business (NRA -NETB)
 Non-resident Foreign Corporation
(NRFc)
NON-RESIDENT PERSON NOT General
ENGAGED IN TRADE OR final tax
BUSINESS rate
NRA-NETB 25%
NRFCs 30%

GOMEZ
PASSIVE INCOME

GOMEZ
PASSIVE INCOME

GOMEZ
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 net income of a business
partnership, taxable associations, joint
ventures, joint accounts, or co-
ownership
5 . Royalties
6. Prizes exceeding Php10,000
7. Winnings
8. Informer’s tax reward
9. Interest Income on tax-free
corporate covenant bonds
 INTEREST INCOME OR YIELD

Recipient
Source of Interest Income Individuals Corporation

Short term deposits 20% 20%

Long term Exempt 20%

deposits/investment
certificates

NOTE: EXEMPTION DOES NOT INCLUDE NRA -NETB

GOMEZ
 ILLUSTRATION

A taxpayer earned the following interest income

from various time deposits:

6-month time deposit 8,000

2-year time deposit 12,000
5-year time deposit 40,000
Total Interest income 60,000

GOMEZ
 ILLUSTRATION

A resident taxpayer received a Php16,000

interest income from a bank. Determine
the final tax withheld at source.

GOMEZ
 ILLUSTRATION

Banko Negro incurs the following interest in its savings and

time deposit accounts from the following depositor:

Depositors Amount
Resident Individual Php 600,000
Resident and Domestic Corporation 800,000
Non-resident alien not engaged in business 200,000
Non-resident foreign corporation 100,000
TOTAL Php 1 ,700,000

Compute the total final income tax to be withheld by Banko Negro

GOMEZ
TAX ON PRE-TERMINATION OF LONG-TERM
DEPOSITS OF INDIVIDUALS

Holding Period Final Tax

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%

GOMEZ
 ILLUSTRATION

On January 1, 2011, Alice invested

Php1,000,000 in Baguio Bank’s 5-year
time deposit. The deposit pays 10%
interest annually. Alice Pre-terminated the
deposit on July 1, 2014.

GOMEZ
 NOTE:

Savings or time deposits with cooperatives are

not subject to final tax

Other applications of the final tax on interest:

Deposit Substitute
Government Securities
Money market placements
Trust Fund
Other investments evidenced by certificates prescribed in
BSP

GOMEZ
 FOREIGN CURRENCY DEPOSIT WITH FOREIGN
CURRENCY DEPOSITORY BANK

Taxpayer Individuals Corporatio

ns
Residents 7.5% 7.5%
Non- Exempt Exempt
residents
*joint accounts

GOMEZ
 ILLUSTRATION

Mr. Siman is an OFW. He deposits all his savings in a

savings account under the FCDU of a domestic bank.
During the month, the savings deposit account earned
USD1,000 interest equivalent to Php41,500.

Scenario1: Mr. Siman deposited his savings through

the account of his resident wife

Scenario2: Mr. Siman deposited his savings account

through his own account.
 DIVIDENDS

it is any distribution made by corporation

to its shareholders out of its earnings or
profits and payable to its shareholder.
Whether in money or in other property.

MEJIA
 T YPES OF DIVIDENDS

 Cash Dividends – these are paid in cash

 Property Dividends – these are paid with a non-cash

properties including stocks or securities of another
corporation.

 Scrip Dividends – those paid in notes or evidence of

indebtness of the corporation

 Stock Dividends – paid stocks of the corporation

 Liquidating Dividends - distribution of corporate net

assets MEJIA
 As a rule: Dividends are INCOME SUBJECT TO TAX
BUT the following are not subject income subject for
taxation purposes.

 Stock Dividends – increase in corporate value taxed

when realized through disposal or sale of stock
investments
 Liquidating Dividends – Under NIRC, these are not
income but are an exchange of properties

LD>COST INV
Excess of such is taxable capital gain in which subject
to regular tax.
MEJIA
Stocks Dividends – normally are exempt from
income tax.

Exception, stock dividends are subject to tax at

fair value of the stocks received under the
following conditions:

Subsequent cancellation and redemption

If it leads to substantial alteration in
ownership in the corporation
MEJIA
 STOCK DIVIDENDS VS STOCK SPLIT

 Stock Dividends 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.

 Assuming a 2- for -1 split, a shareholder holding

one P50-par value stock will be given two P25 -
par value stocks. While stock dividend may be
taxable under certain conditions, stock split will
never be subject to income tax.

MEJIA
 DIVIDEND TAX RULES

Receipt of Dividends

Source of Dividends Individuals Corporations

Domestic corporation 10% Final Tax Exempt

Foreign corporation Regular Tax Regular Tax

MEJIA
 ILLUSTRATION

Calbayog Company declared a total of

P2,000,000.00 dividends. P800,000.00 is
due to corporate shareholders while
P1,200,000.00 is due to individuals
shareholders.

MEJIA
 ILLUSTRATION

Aborian Company declared a total of P1 ,000,000.00 dividends

in March 2014. An analysis of the recipient shareholders is
disclosed below:

Shareholders Amount
Resident aliens and citizens P 500,000.00
NRAs engaged in trade or business 100,000.00
NRAs are not engaged in trade/business 50,000.00
Non-residents corporations 100,000.00
Total Dividends P 750,000.00

MEJIA
 HISTORICAL DIVIDEND TAX RATES

Source Final Tax

Earnings before January 1, 1998 Exempt
Earnings from 1998 6%
Earnings from 1999 8%
Earnings from 2000 and thereafter 10%

MEJIA
 EXEMPT DIVIDENDS

 Inter-corporate dividends
I n te r - c o r p o r a te d i v i d e n d s r e c e i v e d b y a d o m e s t i c c o r p o r a t i o n a n d
r e s i d e n t f o r ei g n c o r p o r a t i o n f r o m a d o m e s t ic c o r p o r a t io n a r e ex e m p te d u n d e r t h e
N I RC to m i n i m iz e d o u b l e t a x a t i o n .

Problem
B, Inc. owns 100% of A Corp. During the year, A Corp declared
P100,000.00 dividends to B, Inc. B Inc. in turn declared the same
dividends to its shareholders. The following table illustrates the
double taxation A Corporation B Incorporation

Dividends declared P 100,000.00 90,000.00

Less:10% dividends tax 10,000.00 9,000.00

Net Dividends P 90,000.0 81,000.00

MEJIA
 EXEMPT DIVIDENDS

Dividends from cooperatives

 Under RA 9520, the distribution of dividends by an
exempt cooperative to its members either
representing interest on capital or as patronage
refunds shall not be subject to tax.

MEJIA
 ENTITIES TAXABLE AS CORPORATIONS
ARE SUBJECT TO 10% FINAL TAX
The 10% final withholding tax also applies to
dividends or share in the net income of entities
considered corporations under the NIRC and special
laws, such as:

 Real Estate Investment Trusts

 Business Partnership
 Taxable Associations
 Taxable Joint Venture, Joint Accounts or Consortium
 Taxable Co-Ownership

MEJIA
 REAL ESTATE INVESTMENT TRUST OR
REIT
A REIT is a publicly listed corporation established
principally for the purpose of owning income -
generating real estate assets.

The following recipients of REIT dividends are exempt to the

final tax.

 Non-resident alien individual or non -resident foreign

corporations entitled to claim preferential tax rate in pursuant
to applicable tax treaty.
 Domestic corporation or resident foreign corporation.

MEJIA
BUSINESS PARTNERSHIP, TAXABLE ASSOCIATIONS,
JOINT VENTURE, JOINT ACCOUNTS, CO -OWNERSHIP

SEC 73 of the NIRC

10% final tax applies AT POINT OF

DETERMINATION of the income, not at
the point of actual distribution

GOMEZ
 ILLUSTRATION

The partnership profit distribution of partners Andy and Mar

based on their agreed profit distribution scheme as follows:

Andy Mar
Salaries to industrial partner P 40,000 P 0
Interest to capitalist partner - 12,000
Bonus to industrial partner 25,000 -
Residual Profit Sharing 8,000 24,000
Profit Sharing 73,000 36,000

GOMEZ
 ROYALTIES

Recipient
Individuals Corporations
Source of Passive Royalties
Books, literary works, and musical 10% Final Tax 20% Final Tax
compositions
Other Sources 20% Final Tax 20% Final Tax

DE LEON
 PRIZES

Recipient
Individuals Corporations
Amount of taxable prize
Prizes exceeding P10,000 20% Final Tax Regular Tax

Prizes not exceeding P10,000 Regular Tax Regular Tax

Exempt prizes:
1. Received without any effort on his part to join a contest.
2. From sports competitions that are sanctioned by their respective national
sport organization

Requisites:
a. Selected without action on his part
b. Recipient is not required to render substantial future service as to
condition
DE LEON
 WINNINGS

Recipient
Individuals Corporations
Types of winnings
PCSO or lotto winnings Exempt Exempt

Other winnings, in general 20% Final Tax Regular Tax

DE LEON
 TAX INFORMER’S REWARD

Amount of Cash Reward – whichever is the

LOWER of the ffg per case:
1.) 10% of revenues, surcharges, or fees
recovered and or fine or penalties imposed and
collected
2.) P1,000,000

SUBJECT TO 10%
FINAL WITHHOLDING TAX

DE LEON
 TAX FREE CORPORATE COVENANT BONDS

Bond Investor
Individuals Corporation
Tax on interest income on 30% Final tax Regular Income Tax
tax-free corporate
covenant Bonds

DE LEON
 E XC E P TI ONS TO T H E G E N E RAL F I N AL TA X ON N ON - RE SI DENT
P E RSON S N OT E N G AG ED I N T RA DE OR BUSI N ESS I N T H E
P H I LI P P I NE S

DE LEON
 Capital Gains Tax
Special Aliens
The Tax Sparing Rule- NRFC – 15% Final Tax
on dividend income
Filipino Employees qualified as Special Aliens
Fringe Benefit Tax
Interest and other Income payments to
depository banks under the Expanded FCD
System
DE LEON
  Income tax payments to subcontractors of petroleum service
contractors
 Final withholding tax return

Deadline and places for manual filing:

 or before the 10 th day of the month following the month on
which the withholding was made
 For EFPS filing
 Group A - 15 days ffg the EOM
 Group B - 14 days ffg the EOM
 Group C - 13 days ffg the EOM
 Group D - 12 days ffg the EOM
 Group E - 11 days ffg the EOM

DE LEON