FINAL INCOME TAX

• Final tax

  Tax withholding at source, Territorial imposition, Imposed on certain passive income and persons not engage in business in the Philippines
• Final withholding system

  Imposes upon the person making income payments the responsibility to withhold the tax, The tax withheld is final, 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
• Final withholding system is inherently territorial, It applies only to certain passive income earned from sources within the Philippines
• Rationale of final income taxation

  Relieves the taxpayer of the obligation to file an income tax return, Convenient for taxpayers who are limited by distance, time and cost to comply, Effective system in collecting taxes on income where there is high risk of non-compliance or tax evasion
• Taxpayers subject to final income tax

  • Certain passive income earners
  • Non-resident persons not engaged in business in the Philippines
• Passive income

  Earned with very minimal involvement from the taxpayer, Generally irregular in timing and amount, Difficult to predict and determine the accrued amount
• Non-resident persons not engaged in business in the Philippines

  Higher risk of non-compliance, Do not have offices or fixed places of business in the Philippines, Philippine government cannot impose return filing obligation due to territorial consideration
• Final tax rates for non-resident persons not engaged in business

  • Non-resident aliens not engaged in trade or business: 25%
  • Non-resident foreign corporation: 30%
• Passive income subject to final tax

  • Interest or yield from bank deposits or deposit substitutes
  • Domestic dividends in general
  • Dividend income from a Real Estate Investment Trust
  • Share in the net income of a business partnership, taxable associations, joint ventures, joint accounts, or co-ownership
  • Royalties in general
  • Prizes exceeding P10,000
  • Winnings
  • Informer's tax reward
  • Interest income on tax-free corporate covenant bonds
• Final tax rates on interest income

  • Short term deposits (less than 5 years): Individuals and corporations - 20%
  • Long term deposits/investment certificates: Corporations - 20%, Individuals - Exempt
• Tax on pre-termination of long term deposits of individuals

  • 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%
• Savings or time deposits with cooperatives are not subject to final tax
• Other investments subject to final tax on interest

  • Deposit substitute
  • Government securities
  • Money market placement
  • Trust funds
  • Other investments evidenced by certificates prescribed by BSP
• Final tax rates on foreign currency deposits

  • Residents (individuals and corporations): 15%
  • Non-residents: Exempt
• Dividends

  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
• Types of dividends

  • Cash dividends
  • Property dividends
  • Scrip dividends
  • Stock dividends
  • Liquidating dividends
• Stock dividends representing transfer of surplus to capital account shall not be subject to tax
• The distribution of stocks of another corporation as dividends is a taxable property dividend and not a stock dividend
• Liquidating dividends are not viewed as income but as exchange of properties
• Taxability of stock dividends

  Normally exempt, but subject to tax at the fair value of the stocks received if: 1) Subsequent cancellation and redemption, 2) If it leads to substantial alteration in ownership in the corporation
• Stock dividend vs stock split

  Stock dividend is a capitalization of earnings, Stock split results in reduction of par value of stock and an increase in the number of shares of shareholders
• Dividend tax rules


  • Dividends from domestic corporations: 10% final tax for individuals, Exempt for corporations
  • Dividends from foreign corporations: Regular tax for individuals and corporations
• If a distribution is made in such a manner as to make the distributions and cancellations or redemption in whole or in part equivalent to the distribution of a taxable dividend, the amount so distributed shall be taxable to the extent it represents a distribution of earnings or profit
• If it leads to substantial alteration in ownership in the corporation
• Stock dividend


  Capitalization of earnings
• Stock split


  Reduction of par value of stock and an increase in the number of shares of shareholders
• Stock dividend may be taxable under certain conditions, stock split will never be subject to income tax
• Dividend Tax Rules


  • Domestic corporations 10% final tax exempted
  • Foreign corporations regular tax
• A NRA-ETB is subject to a 20% final tax on dividend, not to the usual 10% but a NRA-NETB is subject to a 25% final tax
• A NRFC is not exempt but is subject to the 30% general final tax rate. However, the imposable dividend tax shall be 15% when the tax sparing rule applies
• Shareholders


  • Resident aliens and citizens P 500,000
  • NRAs engaged in trade and business P 100,000
  • NRAs not engaged in trade or business P 50,000
  • Total dividends P 750,000
• The exemption extends to dividends received by business partnerships from domestic corporations since business partnerships are considered corporations under NIRC. However, the exemption does not extend to dividends received by general professional partnerships exempt joint ventures and exempt co-ownership because they are not considered corporations under the NIRC
• The exemption of inter-corporate dividend does not apply to the share of a corporation from the net income of a business partnership due to absence of express legal exemptions
• Dividends from cooperatives under the 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
• Entities taxable as corporations are subject to 10% final tax

  • Real estate investment trusts
  • Business partnerships
  • Taxable associations
  • Taxable joint ventures, joint accounts or consortia
  • Taxable co-ownerships
• Real Estate Investment Trust (REIT)


  A publicly listed corporations established principally for the purpose of owning income-generating real estate assets
• Recipients of REIT dividends exempt from final tax

  • Non-resident alien individuals or non-resident foreign corporations entitled to claim preferential tax rate pursuant to applicable tax treaty
  • Domestic corporations or resident foreign corporation
  • Overseas Filipino investors – exempt from REIT dividend tax until August 12, 2018 (7 years from the effectivity of RR13-2011which took effect on August 12, 2011)
• Under sec. 73 of the NIRC, the net income of business partnerships, taxable associations, joint venture, joint associates or co-ownerships is deemed constructively received by the partners, members or venturers respectively in the same year the net income is reported. Hence, the 10% final tax applies at the point of determination of the income, not at the point of actual distribution
• Share in business partnership net income

  • Includes the share in the residual profit and provisions for salary, interest and income tax to a partner
  • If the provisions for salaries, interests and bonuses are expensed as such in the book of the partnership, they are subject to regular tax to the receiving partner, not the final tax. Only the share in the residual income after such provisions is subject to final tax
• A person, member or venturer who is a NRA-ETBs, NRA-NETBs, or NRFC shall be subject respectively to 10%, 20% and 30% final tax rate