CHAPTER 5 - FINAL INCOME TAXATION

Chapter Overview and Objectives

This Chapter discusses the features of final income taxation, the items of income, and the class
of taxpayers subject to final income tax.
Final tax is one of the exceptions to the scope of the regular income tax. An excellent
understanding of the items of passive income and those taxpayers subject to final tax including their
final tax rates is extremely crucial to your mastery of income taxation.
After finishing this Chapter, readers are expected to demonstrate:
a. Understanding and appreciation of the features and scope of final tax
b. Mastery of those certain passive income subject to final tax and their corresponding final tax rates
c. Mastery of the general final tax rates on certain non-residents and their exceptions
d. Knowledge of the other applications of the final income tax scheme

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 Philippines

The Final Withholding System

The final withholding system imposes upon the person making income payments the
responsibility to withhold the tax. The tax which will be deducted at source 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.
The final withholding system is inherently territorial. It applies only to certain passive income
earned from sources within the Philippines. Note that taxation is territorial and we cannot impose tax
obligation (filing or withholding) against non-resident subjects of foreign sovereignty. Hence, all items of
income earned from sources abroad, passive or active, are subject to tax under the general scope of the
regular income tax.
Rationale of Final Income Taxation
The final withholding tax is built upon taxpayer and government convenience. It relieves the
taxpayer of the obligation to file an income tax return. This is very convenient for taxpayers who are
limited by distance, time and cost to comply. For the government, the final withholding system is the
most convenient and effective system in collecting taxes on income where there is high risk of non-
compliance or tax evasion.
Under the NIRC, final income tax is imposed on certain passive income and upon non-resident
persons not engaged in business in the Philippines.

Passive income
Items of passive income are earned with very minimal involvement from the tax payer and are
generally irregular in timing and amount. Unlike items of active income, they are not usually specifically
monitored by taxpayers. When not recorded by the taxpayer, their existence can be difficult to predict
while their actual amount may be difficult to determine. Thus, the final withholding at source is the
most favored scheme in taxing items of passive income.

Non-resident persons not engaged in business in the Philippines

Non-resident persons not engaged in trade or business in the Philippines, such as non-resident
aliens not engaged in trade or business (NRA-NETBS) and non-resident foreign corporations (NRFCs),
have high risk of non-compliance. These taxpayers do not have offices or fixed places of business in the
Philippines making tax compliance very unlikely due to their absence and distance in the Philippines.
Also, the Philippine government cannot impose upon them the obligation to file return due to territorial
consideration.
Thus, the law subjects them to final income tax wherein Philippine residents paying them
income, passive or active, are obligated to withhold the following final tax:
Non-resident person not engaged in trade or General Final tax rate
business
Non-resident alien not engaged in trade or 25%
business
Non-resident foreign corporation 25%

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, ventures, joint accounts, or
co-ownership
5. Royalties, in general
6. Prizes exceeding P10,000
7. Winnings
8. Informer's tax reward
9. Interest income on tax-free corporate covenant bonds

FINAL TAX ON INDIVIDUALS AND CORPORATIONS

Unless otherwise indicated, the final tax rates to be discussed in the following sections apply to
all taxpayers (individuals and corporations) other than:
a. Non-resident alien not engaged in trade or business (NRA-NETB), and
b. Non-resident foreign corporation (NRFC).

INTEREST INCOME OR YIELD

Interest income or yield from local currency bank deposits, deposit substitutes trust funds and
similar arrangements are subject to final tax as follows:

Local currency deposits

 On interest income recipient
From banks Individuals Corporations
- Short-term
deposits/certificates
- Long-term 20% 20%
deposits/certificates
From non-bank institutions Exempt RIT^1
- Short-term
deposits/certificates
- Long-term RIT² RIT²
deposits/certificates
On interest income RIT² RIT²

Note:
1. Per Section 3 of RR 14-2012 and reiterated under RMC 7-2015
2. The final tax on deposits applies only to those made with banks.
3. NRA-NETBs and NRFCs are subject to the 25% general final tax on their interest income

Short term deposits are those made for a period of less than five years.
Long-term deposits or investment certificates refer to certificate of time deposit or investments in the
form of savings, common or 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 non-bank financial intermediaries or finance
companies) to individuals in denominations of P10,000 and other denominations as may be prescribed
by the BSP (RMC 14-2012)
Illustration 1
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

Required: Compute the final tax if the taxpayer is an individual and if a corporation.
Solution:
Individual taxpayers
6-month time deposit 8,000 x 20% 1,600
2-year time deposit 12,000 x 20% 2,400
5-year time deposit 40,000 x 0% 0
Final withholding tax. 4,000

Corporate taxpayers (P8K+ P12K) x 20% = 4.000

 The exemption of individuals on interest income on long-term deposits is anchored on the fact
that long-term deposits are usually channeled to the financing of long-term projects such as
infrastructures, property developments, and other construction projects which are deemed essential to
the development of the country. Note that corporations are not exempt but are subject to regular tax
on interest income on long-term deposit or investment certificates.

Illustration 2
A resident taxpayer received a P16,000 interest income from a bank. Determine the final tax
withheld at source.
Solution:
Gross interest income (P16,000/80 %) P 20,000
Multiply by: final tax rates 20%
Final tax withheld 4.000

Illustration 3
Banko Negro incurs the following interest in its savings and time deposit accounts from the
following depositors:
Depositors Amount
Resident individuals P 600,000
Resident and domestic corporations 800,000
Non-resident aliens not engaged in business 200,000
Non-resident corporations 100.000
Total accrued interest expense P 1.700.000
Required: Compute the total final income tax to be withheld by Banko Negro,
Solution:
Depositors Amount Rate Final Tax
Resident individuals P 600,000 x 20% 120,000
Resident/domestic 800,000 x 20% 160,000
corporations
NRA-NETB 200,000 x 25% 50,000
NRFCS 100,000 x 25% 25.000
Total accrued interest 1,700,000 P 355.000
expense

Savings or time deposits with cooperatives are not subject to final tax
The final tax is limited to banks and shall not be applied with time and savings account deposit
maintained by members with cooperatives and by primary cooperatives with their federations.
(Dumaguete Cathedral Credit Cooperative v CIR, G.R. 182722)

Deposit substitutes
 Deposit substitute means an alternative form of obtaining funds from the public 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. Public means 20 or more corporate lenders at any
one time.

The 19-lender rule

The mere flotation of a debt instrument is not considered to be a public borrowing and is not
deemed a deposit substitute if there are only 19 or less individual or corporate lenders at any one time..

The 19-lender rule does not apply to government securities

Government debt instruments and securities including Treasury bonds, Treasury bilk 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 traded or exchanged in the secondary market.
Debt instrument issued for interbank call loans with maturity of not more than 5 days to cover
deficiency in reserves against deposit liabilities, including those between or among banks and quasi-
banks, shall not be considered as deposit substitutes.

Classification of debt instruments

Number of borrowers at origination
Issuer of debt instrument 19 or less 20 or more
Corporate issuer Private borrowing Deposit substitute
Government including BSP Deposit substitute Deposit substitute

Note:
1. Origination means issuance
2. Interest on deposit substitute (Le public borrowing) is subject to final tax Interest on private
borrowing is subject to regular income tax
Any person holding any interest, whether legal or beneficial, on a debt instrument or holding
thereof either by assignment or participation, with or without recourse, shall be considered as lender
and thus be counted in applying the 19-lender rule.
Thus, debt instruments may not be initially considered deposit substitute for failing the 19-
lender rule but may subsequently qualify as such when the number of lender increase to at least 20
when any of the original lenders assigned, securitized or participated out the debt instrument.

Timing of withholding of final tax

1. Zero coupon instruments or securities-upon origination
2. Interest-bearing instruments or securities- upon payment of interest

Summary of tax rules on interest on debt instruments

Deposit substitutes Recipient
Issued by banks: Individuals Corporations
 Short term 20% 20%
Long term Exempt RIT
Issued by non-banks
Short term 20% 20%
Long-term 20% RIT

*Per Section 3 of RR14-2012, exemption on long-term certificates or investments issued by banks only

Illustration 1
John earns interest income from the following investment placements in various debt
instruments:
Instrument Remarks Term
DI 1 BSP treasury notes 5 years
DI 2 BSP treasury bills 1 year
DI 3 Itogon Bank deposit certificates 5 years
DI 4 Ayala corporate bonds issued to 10 years
the public
DI S Securitized SB corporate bonds 3 years
(100 lender)
DI 6 Promissory note negotiated by 2 years
ABC Bank
DI 7 KT Bank bonds participated out 8 years
to 30 lenders
The interest income from the foregoing instruments shall be taxable as follows:
DI No. Debt instrument If John is a/an
classification Individual Corporation
Dl 1 Long-term deposit Exempt RIT
substitute (BSP)
DI 2 Short-term deposit 20% FIT 20% FIT
substitute (BSP)
Dl 3 Long-term bank Exempt RIT
deposit
DI 4 Long-term deposit 20% FIT RIT
substitute by a non-
bank
DI 5 Short-term deposit 20% FIT 20% FIT
substitute by a non-
bank
DI 6 Private borrowing by a RIT RIT
bank
DI 7 Long-term deposit Exempt RIT
 substitute by a bank

Note: The final tax exemption on interest income derived from long-term certificates or instruments
refers only to those issued by banks and applies only to individual taxpayers

Illustration 2
ABC Company wants to take advantage of the decreasing interest rates. It disposed its
investment in various short-term deposit substitutes. It gained total of P300.00 from the disposal
inclusive of P180,000 interest income.
Only the P180,000 interest income shall be subject to 20% final tax. The P120,000 (i.e. P300,000-
P180,000) trading gain on the debt instruments shall be subject to regular income tax. Also, forex gains
on trading foreign currency denominated instruments, if any, shall likewise be subject to regular tax.

Trust funds or investment management accounts

Investments in trust funds of banks (except qualified exempt employee trust funds),
orinvestment management accounts are subject to the same final tax rules. However, in order to claim
final tax exemption on long-term investment, it is also mandatory that
a. The investment of the individual investor in the common or individual trust fund
or investment management account must be held/managed by the bank for at least 5 years.
b. The underlying investments of the individual trust account or investment management
account must qualify as a deposit substitute issued by a bank
c. The individual trust account or investment management account must hold on such
underlying investment for at least 5 years.

Illustration 1
Mr. Acebo appointed the trust department of RCBC Bank to manage his money through a trust
agreement. The RCBC Bank trust department invested Mr. Acebo’s money in 5-year corporate bonds.
Even if Mr. Acebo does not withdraw his money from the trust agreement for at lea years, his
interest income from the trust agreement will still be subject to 20% final since the underling instrument
(Le corporate bonds) is not issued by a bank
Illustration 2
Assume instead that the RCBC trust department invested Mr. Acebo's money in a 10 year time
deposit under its own name without mentioning that it was in trust for him.
The investor in this case to the 10-year time deposit is the bank which is a corporate taxpayer
subject to regular tax. Mr. Acebo would not qualify for exemption to the 20% final tax since the
investment was not made "in trust for the name of specific and qualified individual
Illustration 3
instead that RCBC trust department invested the money under the name of Mr. Acebo's in a 10-
year long-term deposit.
 Mr. Acebo's interest income derived from the trust agreement shall be exempt from income tax
provided both he will hold such deposit or investment in a continuous and uninterrupted period for at
least 5 years. The trust must also hold the underlying instrument (10-year deposit) for at least 5 years.

Pre-termination of long-term deposits or investment of individuals

If the deposit or investment placement of individual taxpayers is pre-terminated before 5 years,
any previously untaxed or exempted interest income will be subjected to the following final taxes upon
pre-termination:
Holding period Pre – termination 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%

Illustration-long-term deposits
On January 1, 2020, Patricia invested P1,000,000 in Baguio Bank's 5-year time deposit The
deposit pays 10% interest annually. Alice pre-terminated the deposit on July 1, 2023
The final tax on pre-termination will be computed as follows:
2020 interest income (P1,000,000 x 10 %) 100,000
2021 Interest income (P1,000,000 x 10 %) 100,000
2022 interest income (P1,000,000 x 10 %) 100,000
2023 accrued interest income (P1,000,000 x 10 % 50.000
x 6 months/12 months)
Total interest income P 350,000
Final tax rate applicable to less than 4-year pre- 12%
termination
Final tax 42.000

The net proceeds of the deposit and accrued interest to be released to the deposit upon pre-
termination shall be:
Principal balance P 1,000,000
Accrued interest for 2023 50,000
Final tax to be withheld (42.000)
Net proceeds to be released to the depositor P 1.008.000

Pre-termination, transfer or negotiation of investment certificates

For purposes of applying the pre-termination rates for individual taxpayers on long-term
investment certificates, the remaining maturity of the instrument must still satisfy the 5-year
requirement.
Illustration 1
A debt instrument with a maturity of 10 years was held by Mr. X (a resident citizen) for 6 years
then transferred it to Mr. Y (another resident citizen) who in turn held it for 4 years until the instrument
matured
The final tax due on the interest income of each holder shall be as follows:
Holder Classification Remaining Holding period Final tax
maturity
Mr.X RC 10 years-long- 6 years Exempt
term
Mr. Y RC 4 years-short- 4 years 20% FWT
term

Note: Mr. Y's remaining maturity upon acquisition of the instrument is already less than 5 years so le is
now subject to 20% final tax (See Q&A Nos 2 and 3 of RMC81-2012 dated December 10, 2012)

Illustration 2
A debt instrument with a maturity of 10 years was held by Mr. X (a non-resident citizen) for 3
years and transferred it to Mr. Y (a resident alien). Mr. Y held it for two years before subsequently
transferring it to Mr. Z (a resident citizen) who held it until maturity or 5 years.
The final tax due on the interest income of each holder shall be as follows:
Holder Classification Remaining Holding period Final tax
maturity
Mr. X NRC 10 years-long- 3 years 12% FWT
term
Mr. Y NRA 7 years-long-term 2 years 20% FWT
Mr. Z RC 5 years-long-term 5 years Exempt

Illustration 3
An instrument with a maturity of 10 years held by Mr. X (a NRA-NETB) for 3 years a transferred it
to Mr. Y (a NRA-ETB). Mr. Y held it for 2 years before subsequently transferring it to Mr. Z (a resident
alien), who pre-terminated it after 4 years.
The final tax due on the interest income of each holder shall be as follows:
Holder Classification Remaining Holding period Final tax
maturity
Mr.X NRA-NETB 10 years long- 3 years 25% FWT
term
Mr. Y NRA-ETB 7 years-long-term 2 years 20% FWT
Mr.Z RA 5 years-long-term 4 years 5%

Note: NRA-NETBS are not subject to the reduced pre-termination tax rate on long-term deposits or
investment certificates.
Foreign currency deposit with foreign currency depositary banks
The interest income from foreign currency deposits under the foreign currency deposit system
or expanded foreign currency deposit system by residents is subject to a final tax of 15%.
Taxpayer Individuals Corporations
Residents 15% 15%
Non-residents Exempt Exempt
Note:
1. Resident taxpayers include resident citizens, resident aliens, domestic corporations and resident
foreign corporations.
2. Non-residents taxpayers include non-resident citizens, non-resident aliens and non-resident
foreign corporations.
3. It should be emphasized that NRA-NETBs and NRFCs are also exempt
4. There is no long-term or short-term classification of foreign currency deposits.

The reduced final tax rates on interest income on foreign currency deposit and the exemption of
non-resident depositors are intended to encourage the deposit of foreign currencies in our banks which
will be used in the financing of our international trades. Our Philippine peso is not a globally accepted
currency. Our foreign trade will be limited without adequate foreign currency reserves in our banking
sector.

Joint accounts on forex deposits

If the bank account is jointly in the name of a non-resident and a resident taxpayer, 50% of the
interest shall be exempt while the other 50% shall be subject to the 15% final tax.

Illustration
Mr. Seeman is an Overseas Filipino Worker. He deposits all his savings in a savings account
under the foreign currency deposit unit (FCDU) of a domestic bank. During the month, the savings
deposit account earned $1,000 interest equivalent to P41,500.
Scenario 1: Mr. Seeman deposited his savings through the account of his resident wife
The final tax shall be computed as follows:
Interest income P 41.500.00
Final tax rate 15%
Final tax P6.225.00

Scenario 2: Mr. Seeman deposited his savings through a joint account with his resident wife.
The final tax shall be computed as follows:
Interest income P 41,500.00
Portion taxable 50%
Taxable interest income P 20,750.00
Multiply by: final tax rate 15%
 Final tax P 3.112.50
Scenario 3: Mr. Seeman deposited his savings account through his own account.
In this case, the interest income shall be exempt from final tax.

Interest income subject to regular tax

Interest income from the following sources is subject to regular income tax, not to final tax
1. Lending activities, whether or not in the course of business
2. Investments in corporate bonds
3. Promissory notes
4. Foreign sources, whether bank or non-bank
5. Penalty for legal delay or default

DIVIDENDS
"Dividends" means any distribution made by a corporation to its shareholden out of its earnings
or profits and payable to its shareholders, whether in money of in other property. (Sec. 73, NIRC)
Types of dividends:
1. Cash dividends-paid in cash
2. Property dividends-paid in non-cash of another corporation properties including stocks or securitie
3. Scrip dividends those paid in notes or evidence of indebtedness corporation
4. Stock dividends-paid in the stocks of the corporation
5. Liquidating dividends-distribution of corporate net asset

As a rule, dividends are income subject to tax. However, the following are not income for
taxation purposes:
1. Stock dividends
Stock dividends representing transfer of surplus to capital account shall not be subject to tax.
Stock dividends are in the form of increase in corporate value (ie. capital gain) which should be properly
taxable when realized through disposal or sale of the stocks investment.
The distribution of stocks of another corporation as dividends is a taxable property dividend and
not a stock dividend.
2. Liquidating dividends
Under the NIRC, the receipt of liquidating dividends is not viewed as income but as exchange of
properties. When the liquidating dividends exceed the cost of the investments, the excess is a taxable
capital gain, subject to regular income tax. Any loss is deductible only to the extent of capital gain.

Taxability of Stock Dividends

Normally, stock dividends are exempt from income tax. Exceptionally, stock dividends are subject to tax
at the fair value of the stocks received under the following conditions:
a. Subsequent cancellation and redemption
If a corporation cancels or redeems stock issued as a dividend at such time and in such manner
as to make the distribution and cancellation 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.

For instance, a corporation declared stock dividends and immediately called the stock dividends
for redemption and cancellation. This act is equivalent to declaration of cash dividends.

b. If it leads to substantial alteration in ownership in the corporation

Substantial alteration in ownership in a corporation may occur when stock dividends are given in
lieu of cash dividends or when the corporation declared an optional stock or cash dividend.
Stock dividend vs. Stock split
Stock dividend 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.
Dividend Tax Rules
Recipient of dividends
Source of dividends Individuals Corporations
Domestic corporation 10% final tax^1 Exempt²
Foreign corporation Regular tax Regular tax^3
Note:
1. A NRA-ETB is subject to a 20% final tax on dividend, not to the usual 10%: but an NRA- NETB is subject
to a 25% final tax.
2. A NRFC is not exempt but is subject to the 25% general final tax rate. Howeve imposable dividend tax
shall be 15% when the tax sparing rule applies. This will be discussed later.
3. With conditional exemption for reinvestment to be discussed in detail in Chapter 9

Illustrative 1
Mati Company declared a total of P2,000,000 dividends. P800,000 is due to corp shareholders
while P1,200,000 is due to individual shareholders.
The final tax to be withheld by Mati Company shall be:
Shareholders Amount Rate Amount
Individual shareholders P 1,200,000 x 10% 120,000
Corporate shareholders 800,000 x 0% 0
Final tax 120.000

Illustrative 2
Bayog Company declared a total of P1,000,000 dividends in March 2021. An anal of the recipient
shareholders is as follows:
Shareholders Amount
Resident aliens and citizens P 500,000
NRAS engaged in trade or business 100,000
 NRAS not engaged in trade/business 50,000
Non-resident corporations 100.000
Total dividends P 750.000
The total final tax to be withheld by Bayog Company shall be:
Shareholders Dividends Rate Final Tax
Resident aliens and 500,000 x 10% 50,000
citizens
NRAS engaged in trade 100,000 x 20% 20,000
or business
NRAS-NETBS 50,000 x 25% 12,500
NRFCs 100.000 x 25% 25.000
Total P 750.000 107.500

Presumptive source of dividend distribution

Any distribution made to the shareholders or members of a corporation shall be deemed to
have been made from the most recently accumulated profits or surplus, and shall constitute a part of
the annual income of the distributee for the year in which received. (Sec. 73(C). NIRC)

Exempt Dividends
1. Inter-corporate dividends from domestic corporations – exempt
2. Dividends from cooperatives - exempt from final tax
3. Qualified foreign-sourced dividends - exempt from regular tax from final tax

Inter-corporate dividends from domestic corporations

Inter-corporate dividends received by a domestic corporation and resident foreign corporation
from a domestic corporation are exempted under the NIRC to minimize double taxation.

Illustration
B, Inc. owns 100% of A Corp. During the year, A Corp. declared P100,000 dividends to B, Inc. B,
Inc., in turn, declared the same dividends to its shareholders. The following table illustrates the double
taxation:
A Corp. B. Inc.
Dividends declared P100,000 90,000
Less: 10% dividends tax 10.000 9.000
Net dividends 90,000 81.000

This is a form of direct duplicate taxation. To eliminate the impact of double taxation, inter-
corporate dividends such as those declared by A Corp. to B, Inc. is exempted from final tax. When the
dividend finally falls to an individual shareholder, the 10% final tax applies.
This exemption extends to dividends received by business partnerships from domestic
corporations since business partnerships are considered corporations under the NIRC. However, the
exemption does not extend to dividends received by general professional partnership, exempt joint
ventures and exempt co-ownership because they are not considered corporations under the NIRC.

On the other hand, the exemption of inter-corporate dividends does not apply to the share of a
corporation from the net income of a business partnership due to absence of express legal exemption.
Exemption is restricted to dividend declaration only.

Dividends from cooperatives

Under RA 9520, the distribution of dividends by an exempt cooperative to members either
representing interest on capital or as patronage refunds shall be subject to tax.
Inter-corporate dividends from foreign corporations
Dividends received by corporations from foreign corporations are general subject to regular
income tax. However, domestic corporate recipients of sud dividends may be exempted under certain
conditions which will be discussed detail in Chapter 9.

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:
1. Real Estate Investment Trusts
2. Business partnerships
3. Taxable associations
4. Taxable joint ventures, joint accounts or consortia
5. Taxable co-ownerships

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 from the final tax:
a. Non-resident allen individuals or non-resident foreign corporations entitled to claim preferential tax
rate pursuant to applicable tax treaty.
b. Domestic corporations or resident foreign corporations
c. Overseas Filipino investors- exempt from REIT dividend tax until August 12, 2018 (7 years from the
effectivity of RR13-2011 which took effect on August 12, 2011)

Business partnership, taxable associations, joint venture, joint accounts of co-ownerships

Under Sec. 73 of the NIRC, the net income of these entities 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
The "share in net income” includes the share in the residual profit and provisions for salary, interest and
bonus to a partner. However, 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 to final tax. In
this case, only the share in the residual income after such provisions is subject to final tax.

Illustration
The partnership profit distribution of partners Andy and Mar based on their agreed profit
distribution scheme is as follows:
Andy Mar
Salaries to industrial partner P 40,000 0
Interest to capitalist partner - 12,000
Bonus to industrial partner 25,000 -
Residual profit sharing 8.000 24.000
Profit sharing P 73.000 36,000
Assuming the salaries, interest and bonus are not expense in the book, tax shall be:
Profit sharing 73,000 P 36,000
Multiply by: Final tax rate P 10% 10%
Final tax P 7.300 P 3.600
Note: A partner, member or venture who is an NRA-ETB. NRA-NETB or NRFC shall be subject respectively
to 20%, 25% and 25% final tax rate.

ROYALTIES
Passive royalty income received from sources within the Philippines is subject to the following
final tax rates:
Recipient
Source of passive royalties Individuals Corporations
Books, literary works, and 10% final tax 20% final tax
musical compositions
Other sources 20% final tax 20% final tax
Note:
1. 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
2. Royalties on cinematographic films and similar works paid to NRA-ETBS, NRA-NETES or NRFCS is
subject to a final tax of 25%.

Passive vs. Active royalties

Royalties of a passive nature such as royalties of claim owners or land owners of mining
properties, royalties of inventors from companies that manufacture and sell their invention, and royalty
from licensing agreements that transfers the use of trademark or technology are subject to 20% final
tax. When royalties accrue from an undertaking where the taxpayer has active involvement, it is an
active income subject to the regular income tax.
Illustration
E-Soft Inc. develops application programs for establishments. These programs were individually tailored
to meet specific requirements of the establishments and required upgrades, occasional troubleshooting,
and adjustments for problems. The developer receives 19% of the sales of the establishment as royalty.
E-Soft also developed a utility program and assigned it to an e-marketer which sells the utility
program through the Internet. E-Soft receives 30% royalty on each copy of the program sold.
The royalties from application programs are active income subject to regular income tax. The
royalty from the utility programs is passive income subject to final withholding tax, but if the e-marketer
is not a resident in the Philippines, the passive income from abroad shall be subject to regular tax.
Royalties, active or passive, earned from sources abroad are subject to regular income tax

PRIZES
The taxation of prizes varies. Prizes may be exempt from income tax or subject to either final tax
or regular income tax.

Exempt prizes
1. Prizes received by a recipient without any effort on his part to join a contest. Examples include prizes
from such awards 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 national sport organizations

Requisite of exemption
1. The recipient was selected without any action on his part to enter the contest
2. The recipient is not required to render substantial future services as condition to receiving the price or
reward.

Taxable prizes
For individual income taxpayers, taxable prizes are subject to either final tax regular tax
depending on the amount of the prize. There may be events of competitions where corporations earn
prizes. However, there is no final ta imposition on corporate prizes under the NIRC. Hence, the same
must be subject to regular income tax.
Recipient
Amount of taxable prize Individuals Corporations
Prizes exceeding P10,000 20% final tax Regular tax
Prizes not exceeding P10,000 Regular tax Regular tax
Recall also that final taxation does not apply to foreign passive income; hence, prizes from foreign
sources are subject to the regular income tax

WINNINGS
 For individual income taxpayers, winnings received from sources within the Philippines are
generally subject to 20% final tax, except winnings from Philippine Charity Sweepstakes Office (PCSO)
games amounting to P10,000 or less.

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. Also,
winnings from foreign sources are subject to regular income tax.

Recipient
Types of winnings Individuals Corporations
PCSO winnings not exceeding Exempt Exempt
P10,000
PCSO winnings exceeding 20% final tax 20% final tax
P10,000
Other winnings, in general 20% final tax Regular tax
Note: PCSO winnings of NRA-NETBs and NRFCs, regardless of amount, are subject to 25% final tax.
The tax rules on PCSO winnings shall be applied on a per ticket basis.

Illustration 1
Apolinario won P10,000 first place in the singing contest sponsored by Syd Company during their
company anniversary celebration
Since results of singing contest is based on effort rather than chance, the P10,000 payment is a
prize which is not subject to 20% final tax since it is below the P10,000 threshold. Apolinario shall report
the prize in his regular income tax return. If the amount exceeded P10,000, Syd Company shall withhold
20% final tax
Illustration 2
Roy's raffle ticket was selected as the second winning ticket in the raffle draw of ZFT Mall for
P10,000 dubbed as "2nd Prize".
Since raffle draw results is not based on effort but on chance, the P10,000 payment is a winning
which is subject to 20% final tax. The same shall be withheld by ZFT Mall Note that the P10,000
threshold applies only on prizes, not on winnings
llustration 3
Mr. Dante Paya made three bets to the PCSO lotto draws. All tickets won. The details of
winnings were:
- EZ2-P 4,000
- 6/42-P10,000 (3-digit winning numbers)
- 6/45 P20,000,000 Grand prize (sole winner)
The 6/42 and EZ2 winnings are exempt since they did not exceed P10,000 in amo PCSO shall withhold
20% final tax on the entire P20M amount of the winnings.

TAX INFORMER'S REWARD

 A cash reward may be given to any person instrumental in the discovery violations of the
National Internal Revenue Code or discovery and seizure 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/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 officials of employee in a. and b.

Amount of Cash Reward - whichever is the lower of the following per case:
1. 10% of revenues, surcharges, or fees recovered and or fine or penalty imposed and collected or
2. P1,000,000
The amount of cash reward is subject to 10% final withholding tax which shall be withheld by
the government.

Illustration
Ms. Kirsten provided information to the BIR leading to the recovery of P12,000,000 unpaid taxes. The
cash reward shall be computed as follows:
10% cash reward (P12,000,000 x10%) P1.200.000
Cash reward limit P1,000,000

Cash reward (whichever is lower) P1,000,000

Less: 10% final withholding tax 100.000
Net amount to be released to the tax informer P 900.000

TAX-FREE CORPORATE COVENANT BONDS

Interest income of non-resident aliens, citizens or residents of the Philippines on bonds,
mortgages, deeds of trust, or other similar obligations of domestic or resident foreign corporations with
tax-free or tax-reduction provision where the obligor shoulders in whole or in part any tax on the
interest shall be subject to a final withholding tax of 30%.
Bond investor
Individuals Corporations
Tax on interest income on tax- 30% final tax Regular income tax
free corporate covenant bonds
Note:
 1. The final tax applies to all individuals, regardless of classification.
2. There is no similar final tax provision for corporate recipients of "tax-free" interest, hence, the
regular income tax shall apply.

EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSONS NOT ENGAGED IN TRADE OR
BUSINESS IN THE PHILIPPINES
NRA-NETB NRFC
General Final Tax Rate 25% 25%
Exceptions:
1. Capital gain on sale of 15% Capital gains tax 15% Capital gains tax
domestic stocks directly to
buyer
2. Rentals on cinematographic 25% of rentals. 25% of rentals
films and similar works
3. Rentals of vessels 25% of rentals 4.5% of rentals
4. Rentals of aircrafts, 25% of rentals 7.5% of rentals
machineries, and other
equipments
5. Interest income under the Exempt Exempt
foreign currency deposit system
6. Interest on foreign loans N/A 20%
7. Dividend income 25% 15% if tax sparing rule is
applicable
8. Tax on corporate bonds 30% 30%

Capital gains tax

As a rule, NRA-ETBS and NRFCs do not file income tax returns. Exceptionally, NRA NETBS and
NRFCs are required to file income tax returns to report their gain from dealings in domestic stocks
directly to buyers. Ownership of the stocks shall not be transferred to the assignee without the required
return and tax clearance
(Certificate Authorizing Registration or CAR) from the BIR that the tax on the transfer has been paid.

Illustration: NRA-NETBS
In 2021, Mr. Wang Lu, an NRA-NETB, was hired by Raha Humabon Company (RHC) domestic
manufacturer, to install his invention in RHC's factory. RHC pays him royalty and the installation fees.
Mr. Lu also agreed to design RHC's website which he designed and completed abroad. During Mr. Lu's
visit, he purchased shares of RHM and subsequently sold them directly to a buyer.
Royalties from invention P 300,000
Installation fees 1,000,000
Website development fees 500,000
Gain on sale of domestic stocks directly to a 40,000
 buyer

RHC shall withhold the following final taxes:

Royalties from invention P 300,000
Professional fees 1,000,000
Total gross income P1,300,000
Multiply by: final tax on NRA-NETB 25%
Total final withholding tax P 325,000
Note: 1
OUT
1. The final tax applies on gross income, whether active or passive. The same rule and final tax rate apply
with NRFC taxpayers
2. The website development fee is not subject to final tax since the same is earned abroad.
Note that the service is rendered abroad, not in the Philippines.
3. Mr. Lu shall file a capital gains tax return for the gain on the sale of domestic stocks.

The Tax Sparing Rule

NRFCs shall be subject to a 15% final tax on dividend income instead of the 25% general final tax
if the country of domicile of the NRFC credits against the tax due of such NRFC taxes presumed to have
been paid by such NRFC from the Philippines equivalent to 10% of the dividends.
In applying the tax sparing rule, the Supreme Court ruled that the NIRC does not require that the
foreign law of the non-resident corporation must give a deemed paid tax credit for dividend equivalent
to the percentage points waived by the Philippines pointing that the NIRC merely require the country of
the NRFC to a deemed paid tax equivalent to that waived by the Philippines. (CIR vs. Procter & Gamble
Philippines Manufacturing Corporation and the CTA (G.R. 66836))
Thus, the requirement of the tax sparing rule is deemed satisfied if the country t to which the
NRFC is domiciled imposes no tax on dividends from foreign sources. (BIR Ruling Nos. 104-2012, March
22, 2012)

Illustration: The Tax Sparing Rule with NRFCS

An NRFC is due to receive a dividend of P1,000,000 from a domestic corporation. The final tax to
be imposed by the Philippines which shall be withheld by the domestic corporation shall be 15%, not
25%, if the country of domicile of the NRFC also reduces its income tax upon the P1,000,000 dividend by
at least 10%, the dividend tax percentage waived by the Philippines from the 25% general final tax rate.
If the country of the NRFC does not reduce its tax on the dividend by at least 10%, the Philippines shall
impose the 25% final tax.

OTHER FINAL INCOME TAXES

1. Fringe benefits of managerial or supervisory employees
2. Income payments of residents other than depositary banks under the expanded foreign currency
deposit system (EFCDS) and expanded foreign currency deposit units (EFCDUS)
3. Income payments to oil exploration service contractors or sub-contractors

FRINGE BENEFITS TAX

Fringe benefits include all remunerations under an employer-employee relationship that do not
form part of compensation income. The fringe benefits of managerial and supervisory employees are
subject to a final fringe benefits tax. This will be discussed in detail in Chapter 11.

INTEREST AND OTHER INCOME PAYMENTS TO DEPOSITARY BANKS UNDER THE EXPANDED FOREIGN
CURRENCY DEPOSIT SYSTEM
Residents, other than depositary banks under the expanded foreign currency deposit system,
shall withhold 10% final tax on income payments such as interest income on loans from expanded
foreign currency deposit units (FCDUS). The final taxation of FCDUS and EFCDUs will be discussed in
Chapter 15-A.

INCOME PAYMENTS TO SUB-CONTRACTORS OF PETROLEUM SERVICE CONTRACTORS

Under PD 1354, every subcontractor, whether domestic or foreign, entering into a contract with
a service contractor engaged in petroleum operations in the Philippines shall be liable to a final income
tax equivalent to eight percent (8%) of Its gross income derived from such contract, such tax to be in lieu
of any and all taxes, whether national or local.
Provided, however, that any income received from all other sources within and without the
Philippines in the case of domestic subcontractors and within the Philippines in the case of foreign
subcontractors shall be subject to the regular income tax under the NIRC.
The term "gross income" means all income earned or received as a result of the contract entered into by
the subcontractor with a service contractor engaged petroleum operations in the Philippines under
Presidential Decree No. 87.
Note that the 8% final tax applies only to subcontractors, whether individuals or corporations,
resident or non-resident. Petroleum service contractors are subject to the regular income tax.
Persons or entities contracted by a petroleum service contractor to locally supply goods and
materials that are required by and in, or that are inherently necessary or incidental to, its exploration
and development of petroleum mineral resources and are entitled to the preferential 8% final tax on
their gross income derived from such contracts. (BIR Ruling No. 024-2001, June 13, 2001)

Note on Special Aliens

Under the old law, employees of offshore banking units, regional operating or regional
administrative headquarters of multinational companies, referred to as special aliens, are previously
subject to 15% final tax on gross compensation income. The special alien classification is now abolished
by virtue of a presidential veto to the TRAIN law. As such, these employees are now subject to regular
income tax if they are residents and 25% final tax if they are non-residents.

FINAL WITHOLDING TAX RETURN

The final withholding tax return (BIR Form 0619-F), Monthly Remittance Return of Final Income Taxes
Withheld, shall be filed in triplicate by every withholding agent or payor who is either an individual or
corporation for the first two months of the quarter.

Deadline and place for monthly manual filing

The return shall be filed and the tax shall be paid or before the 10th day of the month following
the month in which withholding was made with:
a. The authorized agent bank of the revenue district office having jurisdiction over the withholding
agent's place of business
b. In places where there are no authorized agent banks, to the revenue collection
C. officer The authorized city or municipality treasurer within the revenue district where the withholding
agent's place of business is located

Monthly deadline for eFPS filing

In accordance with the schedule set forth in RR No. 26-2002, the deadline fore filing of returns is
as follows:
Group A - Fifteen (15) days following the end of the month
Group B-Fourteen (14) days following the end of the month
Group C-Thirteen (13) days following the end of the month
Group D-Twelve (12) days following the end of the month
Group E-Eleven (11) days following the end of the month

Note: Please check the groupings of taxpayers under eFPS in Chapter 4.

Quarterly filing
The withholding agent shall file (BIR Form 1601-FQ), Quarterly Remittance Return of Final
Income Taxes Withheld, on or before the last day of the month after each quarter.
Penalties for Late Filing or Remittance of Final Income Taxes Withheld
The same penalties for late payment of income taxes as discussed in Chapter 4 apply for non-
withholding or non-remittance of final taxes.

ENTITIES EXEMPT FROM FINAL INCOME TAX

1. Foreign governments and foreign government-owned corporations
2. International missions or organizations with tax immunity
3. General professional partnership 4. Qualified employee trust fund

The first two categories are exempt on grounds of international comity. General professional
partnerships and qualified employee trust funds are expressly exempt from any income tax imposed
under the NIRC.
These entities are exempt not only to final tax but also to capital gains tax and regular income
tax.
A comprehensive summary of final tax rates is presented in Appendix 1.