Final Withholding Taxes (Final Income Taxation) PDF

BAINCTAX Income Taxation 1TAY2022 Final Withholding Taxes Final Income Taxation  DEFINITION Final Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and...

BAINCTAX Income Taxation 1TAY2022 Final Withholding Taxes Final Income Taxation  DEFINITION Final Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is not creditable against the income tax due of the payee for the taxable year. Income Tax withheld constitutes the full and final payment of the Income Tax due from the payee on the said income. Final Income Taxation is characterized by final taxes where taxes are withheld or deducted at source. The taxpayer receives the income, net of tax. The payor of income remits the tax to the government. Final taxation is applicable only on certain passive income. Not all passive income is subject to final tax. Passive Income vs. Active Income Passive incomes are earned with very minimal or even without active involvement of the taxpayer in the earning process and are generally irregular in timing and amount, whilst, active income arises from transactions requiring a considerable degree of effort or undertaking from the taxpayer. The final withholding tax is built upon the 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 tax system is the most convenient and effective system in collecting taxes on income where there is no risk of non-compliance or tax evasion. Final Withholding Taxes Final Income Taxation page 1  FEATURES The final tax scheme has the following features: 1. Full and final payment 2. Tax withholding at source 3. Territorial imposition 4. Imposed on certain passive income and persons not engaged in business in the Philippines 5. No filing of income tax return by the payee GENERAL COVERAGE Unless otherwise indicated, the final tax rates shall apply to all taxpayers, except for non-resident aliens not engaged in trade or business and non-resident foreign corporations which are taxed at 25%. Individuals in this discussion would involve: Resident Citizens, Non-Resident Citizens, Resident Aliens and Non-Resident Aliens engaged in trade or business, whereas, corporation would include: Domestic Corporations and Resident Foreign Corporations. INTEREST INCOME ON SHORT-TERM PESO DEPOSITS There shall be a final tax at the rate of 20% imposed on the interest income or yield from the following sources: Final Withholding Taxes Final Income Taxation page 2  Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC Deposits (Substitutes), 20% 25% 20% 25% Government Securities, Others Illustration 5.1 INTEREST ON SHORT-TERM DEPOSITS Banco del Oro incurs the following interest in its deposit accounts from depositors: Resident Citizens 900,000 Non-resident Citizens 600,000 Resident Aliens 100,000 Non-resident Corporation 200,000 The final tax and net proceeds would be: Interest Final Tax Net Proceeds Resident Citizens (20%) 900,000 180,000 720,000 Non-resident Citizens (20%) 600,000 120,000 480,000 Resident Aliens (20%) 100,000 20,000 80,000 Non-resident Corporation (25%) 200,000 50,000 150,000 Total 1,800,000 370,000 1,430,000 Final Withholding Taxes Final Income Taxation page 3  INTEREST INCOME ON LONG-TERM PESO DEPOSITS In the context of this final tax, a deposit/deposit substitute is considered long-term if the holding period is at least five years. Since individual taxpayers are exempt if the deposit is long-term, most would just open a long-term one and then pre-terminate such to avoid the final tax. As such, if the deposit or investment placement of individual taxpayers is pre-terminated before five years, any previously untaxed or exempted interest income will be subjected to the following final taxes upon pretermination depending on the length of the holding period. Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC Long-Term Interest/Yield Exempt 25% RIT* 25% If pre-terminated before fifth year, a final tax shall be imposed on the holding period: Less than 3 years 20% Three to less than four years 12% 25% 20% 25% Four to less than five years 5% *RR 14-2012, as clarified by RMCs 77-2012, 81-2012 and 7-2015, indicated the regular income tax scheme as the appropriate tax treatement for said income. Some argues that this lacks basis. Final Withholding Taxes Final Income Taxation page 4  Illustration 5.2 INTEREST ON LONG-TERM DEPOSITS On January 1, 2021, AMC invested P2,000,000 in a 5-year bank deposit with an interest of 5% annually. AMC pre-terminated the deposit on September 30, 2024. Assume interest is paid out every quarter-end. The final tax and net proceeds are computed as follows: AMC is a: DC RC Tax Base Interest Income (2,000,000 x 5% x 3.75) 375,000 Untaxed Interest Income (2,000,000 x 5% x 3.75) 375,000 Tax Rate 20% 12% Final Tax 75,000 45,000 Gross Proceeds Interest Earned (2,000,00 x 5% x 3/12) 25,000 Carrying Amount (2,000,000 + 375,000) 2,375,000 Final Tax 5,000 45,000 Net Proceeds 20,000 2,330,000 Final Withholding Taxes Final Income Taxation page 5  INTEREST INCOME FROM FOREIGN CURRENCY DEPOSITS AND LOANS Interest income derived from the following sources shall be imposed with the respective rates of final tax: Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC Foreign Currency Deposit 15% Exempt 15% Exempt Exempt 15% Exempt Loans Payable to EFCDU/OBU 10% Exempt 10% Exempt Exempt 10% Exempt Loans Payable to NRFC N/A 20% Offshore Banking Unit" or "OBU" shall refer to a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank of the Philippines to conduct of banking transactions in foreign currencies involving the receipt of from external sources and utilization of such funds. "Foreign currency deposit unit" or "FCDU" shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Central Bank to engage in foreign currency-denominated transactions. AMOUNTS WITHDRAWN FROM DECEDENT'S DEPOSIT ACCOUNT If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall allow the withdrawal from the said deposit account, subject to a final withholding tax of six percent (6%) of the amount to be Final Withholding Taxes Final Income Taxation page 6  withdrawn, provided that the withdrawal shall only be made within one year from the date of the decedent. Such withheld tax shall not be creditable to the estate tax in relation to the death of the decedent. Illustration 5.3 DECEDENT DEPOSIT ACCOUNT Assume your rich grandfather died recently and he was your favorite grandchild. Since he says that you are a great accountant, you should be the executor of his will, with the free portion directly going to you. suppose there is a P1,000,000 deposited in the bank account of your grandfather and the rest of his estate consists of several parcels of land readily divided for the legitime of the mandatory heirs, including the free portion that you can get. The titles of the lands cannot be transferred if the Estate Tax of P940,000 cannot be paid with the BIR. You may withdraw the full amount of the bank deposit but it will be subject to 6% final tax amounting to P60,000. The net proceeds of P940,000 can be used to pay the estate tax to BIR. Once paid, you can already be issued the electronic Certificate of Authority to Register and transfer the titles to the heirs and yours. TAX-FREE COVENANT BONDS Interest income or other payments of any individual taxpayer, including NRA-NETB, from tax-free covenant bonds, mortgages, deeds of trust or other obligations of domestic and resident foreign corporations shall be subject to final withholding tax of 30%. Interest Income RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC Tax-Free Covenant Bonds 30% RIT Final Withholding Taxes Final Income Taxation page 7  Illustration 5.4 TAX-FREE COVENANT BONDS Juana del Cruz, a resident entered into a tax-free covenant bond agreement with Salakot Corporation, a domestic corporation. The bonds carried a 10% interest for the principal amount of P7,000,000. The interest received will be assumed as net of tax. Principal 7,000,000 Multiply: Rate of interest 10% Interest Income, net 700,000 Divide by to Gross-up 70% Interest Income, gross (Tax Base) 1,000,000 Multiply: Final Tax Rate 30% Final Tax Withheld 300,000 CASH AND PROPERTY DIVIDENDS Dividends received by the following taxpayers, whether in cash or in kind, shall be subject to the following final tax rates depending on the payor. Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC Domestic Corporation 10% 20% 25% Exempt 25%/15%* Final Withholding Taxes Final Income Taxation page 8  Domestic REITs 10% Exempt 10% Exempt 10% Foreign Corporations RIT RIT** RIT *The tax sparing rule shall apply to an NRFC which is a resident or is domiciled in a country which: (1) has no effective tax treaty with the Philippines; (2) has a worldwide system of taxation; and (3) allows a tax credit against the tax due from the NRFC dividend taxes deemed to have been paid in the Philippines equivalent to 15%. **These dividends may be exempted provided the following requisites are met: 1. Reinvested in the business operation of the domestic corporation in the next taxable year 2. Only for fund working capital requirements, capital expenditures, dividend payments, investment in domestic securities, and infrastructure projects 3. Two-year minimum holding period of at least 20% in value of outstanding shares of the foreign corporation A real estate investment trust (REIT) is a corporation whose primary business is owning, developing, and managing real estate properties, such as apartment buildings, office buildings, hotels, warehouses, health care facilities, shopping malls or golf courses. Final Withholding Taxes Final Income Taxation page 9  SHARE IN NET INCOME IN A TAXABLE PARTNERSHIP, ASSOCIATION, JOINT ACCOUNT, JOINT VENTURE OR CONSORTIUM The share in the net income of the following taxpayers shall be subject to the respective final tax rates as summarized below: Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC Taxable Partnerships 10% 20% 25% RIT 25% Exempt Partnerships RIT It is to be noted that this is only applicable to taxable partnerships. Notice that the rates are mostly similar to that of the final taxes with dividends. In essence, shares of partners in the net income of a partnership are dividends available for withdrawal. Illustration 5.5 SHARE IN NET INCOME OF TAXABLE PARTNERSHIP Paul, Lee and Kath formed a partnership engaged in a merchandising business in Batangas. The three personally manages the business. Paul and Kath are Filipinos. Lee’s Chinese citizenship adds effectiveness in managing the business. During the year, they reported net income of P600,000 which they divide equally among themselves. The three partners will have a share of P200,000 each. They are, however, subject to 10% final tax, therefore, each will only receive P180,000. Final Withholding Taxes Final Income Taxation page 10  PASSIVE ROYALTIES Passive royalties received by a taxpayer shall be subject to the following final tax rates: Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC Books, Literary Works, Musical 10% 25% Compositions Cinematographic Films and 20% 25% 20% 25% Similar Works All Others 20% 25% Illustration 5.6 PASSIVE ROYALTIES Consider the following scenarios: Film-ipino Inc. received a check for P640,000 from FilmWorld Corp. as royalties for its cinematographic films and similar works. Michael Angan is an author of an accounting book. He earned a 10% royalty for every P500 copy of his book sold. During the month, his book sold 900 copies. The final tax to be remitted to BIR is: Final Withholding Taxes Final Income Taxation page 11  Tax Base Tax Rate Tax Amount Cinematographic Films 800,000 160,000 640,000 Books 45,000 4,500 40,500 Total 845,000 164,500 680,500 PRIZES AND WINNINGS OF INDIVIDUALS Prizes and winnings of individuals obtained from local sources shall be taxed at the following final rates: Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC Prizes P10,000 and below RIT 25% RIT 25% Above P10,000 20% Winnings PCSO Winnings > P10,000 20% 20% PCSO Winnings ≤ P10,000 Exempt 25% Exempt 25% All others 20% RIT Final Withholding Taxes Final Income Taxation page 12  It should be noted that the P10,000 threshold is not an exemption threshold rather it only determines whether the income is included in final tax or regular income tax. As such, prizes at most P10,000 is still taxable under regular taxation and those above P10,000 is fully taxable under final taxation. Exemption The following are exempt prizes: 1. Prizes received by a recipient without any effort on his part to join a contest. Examples include prizes Coverage from awards like Nobel Prize, Most Outstanding Citizen, etc. 2. Prizes from sports competitions that are sanctioned by their respective national sport organizations Exempt prizes mentioned above should meet the following requisites: 1. The recipient was selected without any action on his part to enter the contest. Requisite 2. The recipient is not required to render substantial future services as a condition to receiving the price or award. A prize is a reward for a contest or competition. In other words, a prize represents a remuneration for an Prize effort reflecting one’s superiority. A winning is a reward for an event that depends on chance such as winnings from gambling, lottery or Winning raffle ticket. Final Withholding Taxes Final Income Taxation page 13  Illustration 5.7 PRIZES AND WINNINGS Lucky Manzañas won in a raffle promo and took home P9,000 cash. Two days after, he played in “Bawal Judgemental”, earning a prize of P35,000 since he got three wrong answers. Compute the final taxes withheld from him. The P9,000 cash winnings from the raffle promo was subjected to final tax regardless of the amount. This amount is already the net receipts. The grossed-up amount of P11,250 is multiplied by 20% to get the final tax of P2,250. As for the prize, the gross amount of P35,000 is multiplied by 20% since it exceeds P10,000. The final tax on such is P7,000. INFORMER’S CASH REWARD A 10% final tax shall be imposed on rewards received from informing on violations of NIRC and discovery and seizure of smuggled goods which were deemed legitimate and collectible against the violator. It should be noted, however, that the amount of reward is 10% of the collection from the information or P1,000,000, whichever is lower. Source RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC Violations of National Internal Revenue Code 10% 25% 10% 25% Discovery and Seizure of Smuggled Goods Final Withholding Taxes Final Income Taxation page 14  Illustration 5.8 INFORMER’S TAX REWARD Wiz L. Blue shared two pieces of information with the BIR that allegedly proves two tax evading companies. Company A was then assessed and was forced to pay P500,000 of deficiency taxes. Company B was also assessed and was liable to deficiency taxes of P12,000,000. Wiz will be earning 10% of P500,000 as reward related to Company A’s violation. The P50,000 reward will be subject to 10% final tax, reducing the cash receipt to P40,000. For the information provided anent to Company B, the 10% of P12,000,000 exceeds the maximum reward of P1,000,000, therefore, the basis of the 10% final tax is P1,000,000. OTHER ITEMS OF INCOME SUBJECT TO FINAL TAX The following are other items of passive income specifically subject to final tax. 15% Branch Profit Remittance of Corporations (except PEZA, SBMA, CDA registered enterprise) 4.5% Gross Rentals, lease and charter fees derived by non-resident owner or lessor of foreign vessels Gross rentals, charters and other fees derived by non-resident lessor of aircraft, machineries and 7.5% equipment 8% Payments to oil exploration service contractors/sub-contractors Payments to non-resident individual/foreign corporate cinematographic film owners, lessors or 25% distributors Final Withholding Taxes Final Income Taxation page 15  ACCOUNTING FOR FINAL TAXES To illustrate the journal entries for the recording of final taxes, let us journalize some of the illustrations given. Illustration 5.1 Books of Payor Books of Payee Interest Expense 900,000 Cash in Bank 700,000 Final Tax Withholdings Payables 200,000 Income Tax Expense 200,000 Cash 700,000 Interest Income 900,000 Final Tax Withholdings Payables 200,000 Cash 200,000 Illustration 5.6 (Books) Books of Payor Books of Payee Royalty Expense 800,000 Cash 640,000 Final Withholding Taxes Payable 160,000 Income Tax Expense 160,000 Cash 640,000 Royalty Income 800,000 Final Withholding Taxes Payable 160,000 Cash 160,000 Final Withholding Taxes Final Income Taxation page 16  FILING AND PAYMENT OF FINAL TAXES Every withholding agent (WA)/payor required to deduct and withhold taxes on income payments subject to Final Withholding Taxes shall file the following within the specified deadlines: Deadline Form Name Manual Filing eFPS Filing Monthly Remittance Form of Final Income tenth (10th) day following the 11th-15th day following 0619F Taxes Withheld month in which withholding withholding month depending was made on the taxpayer’s line of business Monthly Remittance Form of Tax Withheld on on or before the 10th day following the month when the 0620 the Amount Withdrawn from the Decedent's withholding was made Deposit Account Quarterly Remittance Return of Final Taxes last day of the month following Not yet available 1602Q Withheld on Interest Paid on Deposits and the close of the quarter during Deposit Substitutes/Trusts/Etc. which withholding was made Quarterly Remittance Return of Final Income last day of the month following the close of the quarter during 1601FQ Taxes Withheld which withholding was made Final Withholding Taxes Final Income Taxation page 17  Quarterly Remittance Return of Tax Withheld not later than the last day of the month following the close of the 1621 on the Amount Withdrawn from Decedent's quarter during which withholding was made Deposit Account Certificate of Final Income Tax Withheld on or before January 31 of the year following the year in which 2306 income payment was made Annual Information Return on Final Income on or before January 31 of the year following the calendar year in 1604F Taxes Withheld which the income payments subject to final withholding taxes were (with Annual Alphabetical List of Payees) paid or accrued References: Banggawan, R. (2019). Income Taxation. Pasay City: Real Excellence Publishing. Valencia, G. & Roxas, E. (2016). Income Taxation. Baguio City: Valencia Educational Supply. Reyes, V. (2019). Income Tax Law and Accounting under the TRAIN Law. Manila: GIC Enterprises & Co., Inc. Ampongan O. (2018). Income Taxation. Mandaluyong City: Millennium Books, Inc. Final Withholding Taxes Final Income Taxation page 18  Self-Check! Basing on your readings, answer the following questions. 1. How is final income taxation different from the other income tax schemes? 2. What is the difference between passive and active income? 3. What is the general final tax rate for NRA-NETBs? For NRFCs? 4. What are the types of passive income subject to final tax? What is the tax rate applicable to each? 5. What is the proforma entry for recording transactions subject to final tax? 6. What are relevant BIR forms for final taxes? What are the deadlines? Exercise 5.1 TRUE OR FALSE Determine whether the following statements are true or false. 1. Prizes and winnings received by corporate taxpayers are subject to regular income tax. 2. The interest income received by corporate taxpayers from tax-free covenant bonds are deemed net-of-tax. 3. Final tax is generally applicable to passive income since these are more susceptible to non-reporting. 4. Income subjected to final tax are not reported in the income tax return. 5. Active royalties are mostly subject to 20% final tax. Final Withholding Taxes Final Income Taxation page 19  6. The maximum net cash receipts from rewards on informing BIR on tax violations is P900,000. The payee of an income subject to final tax is also called the withholding agent. 7. The first P10,000 of an prize is exempt from final taxes. 8. There is a separate quarterly remittance return for final taxes collected on income payments of banks. 9. Dividends received by resident aliens from non-resident foreign corporations are subject to 10% final tax. 10. The final tax withheld constitutes full payment. Exercise 5.2 MULTIPLE CHOICE Choose the best answer from the choices provided. 1. Who is subject to final tax on royalties earned, whether active of passive? a. Resident citizen b. Resident Alien c. Non-resident citizen d. Non-resident alien not engaged in trade or business 2. Which is the following recipients is exempt from final tax on dividends? a. Resident Alien b. Resident Citizen Final Withholding Taxes Final Income Taxation page 20  c. Resident Corporation d. Resident Foreigner 3. Which of the following is not subject to final tax? a. Prizes exceeding P10,000 b. Prizes not exceeding P10,000 c. Winnings exceeding P10,000 d. Winnings not exceeding P10,000 4. Which is not subject to 10% final tax? a. Royalties from a business trademark b. Royalties from literary works c. Dividends from a domestic corporation d. Share in the net income of a business partnership Exercise 5.4 FINAL TAX RATES Write the final tax rate applicable for each income. If it is exempt, write EX. If it is subject to other income tax schemes, write NA. 1. Jill, a non-resident alien engaged in trade, received a share in the net income of an exempt partnership 2. June, received a reward on whistleblowing on a tax violation Final Withholding Taxes Final Income Taxation page 21  3. A non-resident lessor of aircrafts earns rentals from domestic companies 4. A company engaged in arts primarily obtains income from royalties on its literary works 5. An NRFC received dividends from a domestic corporation which was subject to tax sparing rule 6. Jackie received P10,000 from a raffle promo 7. Jonny, a resident Italian, received P60,000 dividends from an REIT 8. Jimmy, preterminated a seven-year peso deposit four years before its maturity 9. Jessy, received the interest from her investment on Philippine t-bills 10. Justme, an NRFC, earned interest from a loan extended Problem 5.1 PASSIVE ROYALTIES Dina Amon, a resident citizen, earned the following royalties from her intellectual works: Cook Books 45,000 Musical Compositions 80,000 Other Passive Royalties 120,000 How much is the withheld final tax of Dina? Problem 5.2 PASSIVE ROYALTIES Jack Amon, a resident alien, received the following royalties during the taxable year: Final Withholding Taxes Final Income Taxation page 22  Hairy Cutter Novel Books 450,000 Patents 120,000 Other Passive Royalties 224,000 How much is the final tax of Jack? Problem 5.3 INTEREST INCOME Hannah Caiat, a non-resident citizen, was credited with the following interest income from her bank deposits: Banco de Oro(net of tax) 1,600 Bank of the Philippine Islands (gross of tax) 5,000 Metro Bank (net of tax) 8,000 Citi Bank (gross of tax) 9,6001 How much is the final tax on interest income on bank deposits of Hannah? Problem 5.4 DIVIDENDS Mary Ribook, received the following dividends in Philippine pesos, gross of tax. San Miguel Corporation 25,000 Apple Corporation 50,000 Ayala Land Corporation 30,000 Google Corporation 10,000 How much is the final tax from the said dividends? Final Withholding Taxes Final Income Taxation page 23  Problem 5.5 PRIZES AND WINNINGS Nash E. Mulan wants to experience placing a bet in the PCSO Ultra Lotto and tries to bet on the combination 06-19-23-39-41- 50. Knowing the minimal chance of winning, he did not watch the telecast of the draw. Getting the newspapers on the next day, it revealed the following winning numbers 41-23-19-51-06-39. The prizes are as follows: 6 digits – P55,000,000, 5 digits – P300,000, 4 digits – P4,000 and 3 digits – P20. How much is the final tax of Nash? Problem 5.6 PRIZES AND WINNINGS Nash, from the previous problem, was not satisfied of winning once and places again the same combination on the next draw of 6/58. Winning numbers were 06-56-47-41-50-23. How much is the final tax of Nash? Problem 5.7 PRIZES AND WINNINGS Nash, again from the previous problem, having been obsessed with lottery adapts the same combination as being his lucky numbers and places a bet on the Mexican Lottery. He won the jackpot prize of P960,000,000 during the draw. How much is the final tax of Nash? Problem 5.7 PRIZES AND WINNINGS Venti Lador, obtained the following winnings (gross of tax) during the taxable year. Final Withholding Taxes Final Income Taxation page 24  January 21 60,000 March 16 14,000 September 18 86,000 How much is the total final tax from the winnings? Problem 5.8 TAX INFORMER’S REWARD Lala Pit, reported to the BIR, Tim Maray, as having evaded from the payment of tax worth P9,000,000. Due to the information she provided, BIR was able to collect said amount. How much is the final tax? Problem 5.9 TAX INFORMER’S REWARD Assuming from the previous problem, the tax reported was P20,000,000. How much is the final tax? Case Study 5.1 WINNING A PRIZE Mina Lascia is a loyal customer of Johnnyson Supermarket. The grocery store gives a raffle ticket for every P1,000 purchase of every customer. Mina earned 50 entries during the promo period. Five raffle tickets are drawn on the draw and the winners are called to the store within the next two weeks. To determine the prize of the winners, they are given four minutes to gather Final Withholding Taxes Final Income Taxation page 25  anything they want from the store and take home everything they can. Because Mina has an asthma, she only got P8,500 worth of grocery items as her prize. Is the P8,500 subject to final tax? Final Withholding Taxes Final Income Taxation page 26