Module 5: Final Income Taxation

• Final income tax is imposed on certain passive income and upon non resident persons not engaged in business in the Philippines.
• Passive income is earned with very minimal involvement from the taxpayer and are generally irregular in timing and amount.
• Unlike items of active income, passive income are not usually specifically monitored by taxpayers.
• The final withholding at source is the most favoured scheme in taxing items of passive income.
• Non- Resident persons not engaged in trade or business in the Philippines, such as non residents aliens not engaged in trade or business ( NRA-NETBs) and non- resident foreign corporations ( NRFCs), have high risk of non-compliance.
• Non- Resident persons not engaged in trade or business in the Philippines usually do not have principal offices or fixed places of business in the Philippines.
• The distance and absence of non- resident persons not engaged in trade or business in the Philippines make it very unlikely for tax compliance to be expected.
• Non- resident persons not engaged in trade or business in the Philippines are subject to final income tax.
• Philippine residents shall withhold the final tax from their gross income, active or passive, from all sources within the Philippines.
• The general final tax rate for non- resident alien not engaged in trade or business is 25%.
• The general final tax rate for non- resident foreign corporation is 30%.
• Interest or yield from bank deposits or deposit substitutes are subject to final tax at 20%.
• Domestic dividends are subject to final tax at 10%.
• Dividend income from a Real Estate Investment Trust is subject to final tax at 10%.
• Share in the net income of a business partnership, taxable associations, joint ventures, joint accounts, or co-ownership is subject to final tax at 10%.
• Royalties are subject to final tax at 20%.
• Prices exceeding P10,000 are subject to final tax at 20%.
• Winnings are subject to final tax at 20%.
• Informers tax reward is subject to final tax at 10%.
• Interest income on tax-free corporate covenant bonds is subject to final tax at 30%.
• PCSO & LOTTO winnings exceeding P10,000 are subject to final tax at 20%.
• Unless otherwise indicated, the final tax rates to be discussed in the sections apply to all taxpayers ( individuals and corporations) other than: Non Resident alien not engaged in trade or business ( NRA-NETB), and Non resident foreign corporation ( NRFC ).
• Interest income or yield from local currency bank deposits or deposit substitutes are subject to final tax as follows: The final withholding system imposes upon the persons making income payments the responsibility to withhold the tax.
• The tax which will be deducted at source is final.
• The final withholding system is inherently territorial.
• The final withholding system applies only to certain passive income earned from sources within the Philippines.
• The Philippine government cannot compel non- residents subjects of foreign countries to withhold the tax as this is inherently territorial.