Page 1 of 6 | SUBJECT Handouts No.

04

INCOME TAXATION
REX B. BANGGAWAN, CPA, MBA

FINAL INCOME TAXATION

REX B. BANGGAWAN, CPA MBA

PHILIPPINE INCOME TAX SCHEME

An identified gross income will be subject to tax as follows:

Identified item of gross income

Exception Tests:

Final Withholding Tax Taxable Capital Gains Tax

(Certain passive income only) at (Certain capital gains only)
either

Regular Income Tax

Individuals: Progressive Taxation (20-35%)
Corporations: Proportional Taxation (30%)
Catch-all for all item of gross income that are neither subject to final tax and capital gains tax nor exempted

FINAL WITHHOLDING TAX

Final withholding tax is imposed to certain passive income. Refer to H004.1 for the list. Under the final withholding
tax system, the taxpayer actually shoulders the tax but it is the income payor who withholds and pays the tax. The
amount of tax withheld is final. The taxpayer has no more responsibility to file an income tax return for the passive
income covered subject to final withholding tax.

Nature of Final Income Tax on Certain Passive Income:

1. Final tax applies only on the items of passive income that are expressly listed by the NIRC. (Check H004.1)
2. Final taxes are withheld at source by the payor. The income received by the payee (taxpayer) is net of the tax
which is deemed final. The income taxpayer need not file a tax return to report the income.
3. Withholding of final taxes applies only to payors or withholding agents in the Philippines.
4. Final tax applies to income of NRA-NETBs and NRFCs.

Final Withholding Tax vs. Creditable/Expanded Withholding Tax

Final Withholding Tax Creditable Withholding
Similarities: Tax
The income payor withhold a percentage of the income.
Serves to avoid cash flow problems to taxpayers by collecting at the moment cash is available.

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REX B. BANGGAWAN, CPA MBA

FINAL INCOME TAXATION

Differences:
Income tax withheld Full Only portion
Certain passive income Certain passive income
Coverage and regular income
Who remits the tax Income payor Income payor and the
taxpayer
Necessity for a consolidated/adjustment return None Required

Passive Income subject to Final Tax

1. Interest income 3. Royalty
2. Dividend income 4. Prizes
5. Winnings 8. Others
6. Informer’s reward a. interest payments to FCDUs/OBUs
7. Fringe benefits b. Tax-free covenant bonds
c. Petroleum service contractors
Entities Exempt from Final Tax
1. Foreign governments / GOCCs
2. International missions or organizations with tax immunity
3. General professional partnership
4. Qualified employee trust fund

Mode of Compliance
Indicate the withholding tax forms:
Month 1 Month 2 Quarter End
Final tax on fringe benefits
Final tax on bank interests
Final tax on other passive income

DRILL QUESTIONS

Interest income from bank

1. Andrew received the following gross interest income from various banks:

Interest from Peso deposits in a domestic bank P 40,000

Interest from Foreign currency deposits in domestic bank 42,500
Interest from Peso deposits with foreign banks 120,000
Interest from foreign currency deposits with foreign banks 60,000
Interest from bonds 30,000
Interest from client’s promissory notes 10,000
Interest from lending to friends 50,000

Required: Compute the following

1. Final tax ___________
2. Reportable income, assuming Andrew is a
a. Resident citizen ___________
b. Resident alien ___________

2. Banco Negrito had the following recorded income and expenses:

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REX B. BANGGAWAN, CPA MBA

FINAL INCOME TAXATION

Interest income received from loans made to other rural banks P 4,000,000
Interest income on loans made to other clients 12,000,000
Interest income received from deposits made to other banks 800,000
Interest expense on various savings deposits 3,000,000
Interest expense on bonds issued 2,100,000
Required:
1. Compute the final tax withheld from Banco Negrito ____________
2. Compute the final tax to be withheld by Banco Negrito ____________

3. On January 1, 2015, Helen invested P1,000,000 to RCBC Commercial Bank’s 5-year, tax-free time deposit. The
long-term deposit pays 15% annual interest every January 1. In need of cash, Helen pre-terminated her
investment on July 1, 2018. How much is the final tax due and the proceeds of Helen’s investment?
a. P9,000; P1,066,000 c. P18,750; P1,056,250
b. P63,000; P1,012,000 d. P30,000; P1,345,000

4. How much final tax is withheld in the interest income paid by the bank on January 1, 2018?
a. P0 b. P18,000 c. P30,000 d. P7,500

5. Assuming the same information in the problem above, except that the investment was made by a domestic
corporation, how much final tax shall be withheld upon pre-termination? How much is the proceeds to the
corporation?
a. P15,000; P1,060,000 c. P18,750; P1,056,250
b. P45,000; P1,030,000 d. P30,000; P1,345,000
6. Mrs. Makiri receives $100,000 monthly sustenance from her loving boyfriend who is working abroad. Mrs. Makiri
deposited this most of these savings to RCBC bank. The deposit earned $2,000 interest.

Required:
1. Determine the final tax.
2. Determine the final tax assuming the account is a joint account.
3. Determine the final tax assuming the dollar account was under the name of her boyfriend.

Dividends
7. A corporation which earned 60% of its income in the last preceding three years from Philippine sources declared
P100,000 dividends to a recipient shareholder.

Required:
Determine the taxable amount of dividends, the tax scheme and rate that will apply if:
The recipient shareholder is a
The declaring corporation is a RC RA DC RFC
Domestic corporation
Foreign corporation

8. DEF Corporation had the following shareholders of its P10-par value outstanding common shares:

Name Residency and citizenship Share ownership

Mr. Tih Wong Resident Chinese 150,000
Mr. Kou Mags Non-resident Japanese 100,000
Ms. Tee Mang Resident citizen 300,000

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REX B. BANGGAWAN, CPA MBA

FINAL INCOME TAXATION

THY Corporation Non-resident corporation 50,000

DEF Corporation Resident foreign corporation 150,000
THI Company Domestic corporation 250,000
1,000,000
DEF Corporation declared P1/share dividend followed by a 20% stock dividend.
Required:
1. Compute the final withholding tax and the tax form to use.
2. Compute the final tax, if tax sparing rule applies

9. ABC Company is 70% owned by individual investors and 30% corporate investors.

Pre-tax income P 15,000,000

Profit distribution policy 50%
Required:
a. Compute the final tax to be withheld if ABC is a domestic corporation.
b. Compute the final tax to be withheld if ABC is a partnership or joint venture.

10. Partner Elio and Junior entered into a partnership. The partnership earned P800,000 before taxes and their
agreed salaries of P300,000 each.
Required:
1. Compute the final tax on the profit sharing of each partner.
2. Compute the final tax on the profit sharing of each partner assuming the salaries are agreed to be expensed
in the books of the partnership.

Royalties and others

11. ABC Books publishes various textbooks. It also obtained license to print and distribute books of foreign
publishers and authors. During the period, it determined the following royalty:
Royalties on sales of books
- Filipino authors P 3,000,000
- Foreign authors 1,800,000
- Dream Books, Limited. – United States 5,000,000
Total P 9,800,000
Required: Compute the total final taxes.

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?
a. P 200,000 c. P88,889
b. P 160,000 d. P 0

13. Tiong Department Store conducted a sales promotion where customers’ purchases exceeding P1,000 in one
transaction shall be entitled to a ticket. Mr. Shing won P10,000 cash prize. How much shall Tiong Department
Store withhold from the grand prize winning?
a. P2,000 c. P 500
b. P10,000 d. P 0

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REX B. BANGGAWAN, CPA MBA

FINAL INCOME TAXATION

14. On January 15, 2018, ABC bought a PCSO EZ-2 lotto ticket and a 6/42 PCSO lotto ticket. Both tickets won P
5,000 and P50,000, respectively. How much withholding tax must be withheld by the PCSO?
1. P 0 c. P 10,000
2. P 8,000 d. P 11,000

15. Indicate the appropriate tax treatment of the following income. Indicate FIT + tax rate, RIT or exempt.

RC / DC RA / NRC NRA-NETB / NRFC

Royalties from Philippines
Royalties from abroad
Rentals from the Philippines
Rentals from abroad
Service fees from Philippines
Service fees from abroad

16. BPI is a universal bank with both a regular business unit and an expanded foreign currency deposit unit. The
following pertains to the income and expense of the bank:

RBU EFCDU
Interest income:
- From residents P 8,000,000 $ 400,000
- From foreign clients 1,000,000 300,000
- From deposits with fellow banks 1,500,000 100,000
- From loans with fellow banks 1,000,000 50,000
Interest expense on short-term deposits
- From individuals (residents) 5,000,000 100,000
- From non-resident citizens 4,000,000 300,000
- From non-resident aliens 2,000,000 180,000
- From corporate (residents) 1,500,000 100,000
Interest expense on long-term deposits
- resident individuals 2,000,000 100,000
- non-resident aliens 800,000 30,000
- resident corporations 1,200,000 150,000
- non-resident corporations 500,000 50,000

Long-term deposits are at least 5 years in maturities.

Required:
1. Compute the final tax required to be withheld from Peso deposits by BPI.
2. Compute the final tax required to be withheld from FCDU deposits by BPI.
3. Compute the final tax to be withheld from BPI
a. Peso deposit
b. Dollar deposit
c. Foreign currency loans

17. Speedy Company, a non-resident foreign corporation, was contracted to design the website of Wesleyan
University for P2,000,000.

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REX B. BANGGAWAN, CPA MBA

FINAL INCOME TAXATION

Required: Compute the final tax if the website development is done

1. outside the Philippines?
2. within the Philippines?

18. The manual filing of the final withholding tax return for the first two months of the quarter by withholding agent
shall be made not later than
a. 10 days from the close of the month of withholding.
b. 20 days from the close of the month of withholding.
c. 25 days from the close of each calendar quarter.
d. the last day of the month following the close of the taxable quarter of withholding.

Query:
1. How about eFPS filing?
2. How about the quarterly final withholding tax return?

--- END OF HANDOUTS ---

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