Ch. 5 Final Income Taxation

Question 1

Enumerate the four features of Final Income Taxation

Answer 1

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.

Question 2

Explain the Rationale of Final Income Taxation (SUPER HABA)

Answer 2

IMPORTANT TEXT: It states that the final withholding tax is built upon the taxpayer and government’s convenience. It relieves the taxpayer of the obligation to file an income tax return.

Taxpayer (Talks A Lot): This is very convenient for taxpayers who are limited by distance, time, and cost to comply.

Government (Talks A Lot): For the government, it is very efficient when there is a high risk of non-compliance and evasion on the part of the taxpayer. To safeguard this system, the government must have put strict safety nets against the risk of non-remittance of the withheld tax on the part of withholding agents.

Question 3

Explain Passive Income

Answer 3

Items of passive income are earned with very minimal involvement from the taxpayer and are generally irregular in timing and amount.

Question 4

Why is the Final Withholding Tax system good for Passive Income?

Answer 4

Since Passive Income are not usually specifically monitored by the taxpayers, their existence can be difficult to prove and track, therefore the final withholding tax system is the most favored scheme.

Question 5

Explain the use of FWT system on NRA-NETBs and Non-Resident Foreign Corporations

Answer 5

These types of taxpayer are exposed to a high risk of non-compliance, they do not have fixed offices and are not obligated to file a tax return due to territorial consideration. Therefore, the law subjects the, to FWT wherein Philippine residents paying them income (both passive and active), are obligated to withhold the final tax.

Question 6

What is the general final tax rate for NRA-NETBs and NRFCs?

Answer 6

25%

Question 7

Give Examples of Passive Income Subject to Final Tax

Answer 7

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, joint ventures, joint accounts, 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 convenient bonds

Question 8

What are Short-term deposits?

Answer 8

Those made for a period of less than five years

Question 9

What are Long-term deposits?

Answer 9

TLDR: Those that have a maturity date of 5 years and more

Also called Investment Certificates, they refer to certificates of time deposit or investment in the form of savings, trust funds, deposit statutes, and other investments that has a maturity of not less than five years, the form of which shall be prescribed by the BSP and issued by banks only to individuals in denominations of P10,000 and other denomination as may be prescribed by the BSP

Question 14

Explain the concept of “Pre termination of long-term deposits or investment of individuals”

Answer 14

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 final taxes upon pre-termination.

Question 15

Explain Pre-termination

Answer 15

Pre-termination happens when you close the account and take your money out before the term ends or pay off a loan before it reaches maturity.

Question 16

What are the pre-termination tax rates for investments or deposits with a holding period of the following:
1. less than 3 yrs
2. 3-4 yrs
3. 4 but less than 5 yrs
4. 5 yrs or more

Answer 16

1. less than 3 yrs - 20%
2. 3-4 yrs = 12%
3. 4 but less than 5 yrs = 5%
4. 5 yrs or more = 0%

Question 17

Explain the rules for Pre-termination, transfer, or negotiation of investment certificates

Answer 17

The remaining maturity of the instrument must still satisfy the 5-yr requirement.