Final Tax

Final income tax – interests, royalties, awards, dividends, capital gains on sale of shares,
realty

Sec 24. (B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements; royalties, except on books, as well as other literary works and musical
compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes
amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under
Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes
and Lotto winnings), derived from sources within the Philippines: Provided, however, That
interest income received by an individual taxpayer (except a nonresident individual) from a
depository bank under the expanded foreign currency deposit system shall be subject to a
final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income:
Provided, further, That interest income from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of the certificate pre-terminate the
deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon
the cash and/or property dividends actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance or mutual fund companies
and regional operating headquarters of multinational companies, or on the share of an
individual in the distributable net income after tax of a partnership (except a general
professional partnership) of which he is a partner, or on the share of an individual in the net
income after tax of an association, a joint account, or a joint venture or consortium taxable
as a corporation of which he is a member or co-venturer:

Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999; and
Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after
January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall
not, even if declared or distributed on or after January 1, 1998, be subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The
provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange.

Not over P100,000……………………………........ 5%

On any amount in excess of P100,000………… 10%

(D) Capital Gains from Sale of Real Property. -

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent
(6%) based on the gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon
capital gains presumed to have been realized from the sale, exchange, or other disposition
of real property located in the Philippines, classified as capital assets, including pacto de
retro sales and other forms of conditional sales, by individuals, including estates and trusts:
Provided, That the tax liability, if any, on gains from sales or other dispositions of real
property to the government or any of its political subdivisions or agencies or to
government-owned or controlled corporations shall be determined either under Section 24
(A) or under this Subsection, at the option of the taxpayer.
(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or disposition of
their principal residence by natural persons, the proceeds of which is fully utilized in
acquiring or constructing a new principal residence within eighteen (18) calendar months
from the date of sale or disposition, shall be exempt from the capital gains tax imposed
under this Subsection: Provided, That the historical cost or adjusted basis of the real
property sold or disposed shall be
carried over to the new principal residence built or acquired: Provided, further, That the
Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the
date of sale or disposition through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the said tax exemption can only be
availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the
proceeds of sale or disposition, the portion of the gain presumed to have been realized from
the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling
price or fair market value at the time of sale, whichever is higher, shall be multiplied by a
fraction which the unutilized amount bears to the gross selling price in order to determine the
taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be
imposed thereon.

Sec 22 (Y) The term "deposit substitutes" shall mean an alternative from of obtaining funds
from the public (the term 'public' means borrowing from twenty (20) or more individual or
corporate lenders at any one time) 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. These instruments may include, but need not be limited to
bankers' acceptances, promissory notes, repurchase agreements, including reverse
repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP)
and any authorized agent bank, certificates of assignment or participation and similar
instruments with recourse: Provided, however, That debt instruments issued for interbank
call loans with maturity of not more than five (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 substitute debt instruments.

Tax Rate on Certain Passive Income on Citizens and Resident Aliens Final Tax

1. Interest under the expanded foreign currency deposit system (see RR 7.5% (vs exempt
10-98 below) Nonresident citizens: exempt for nonresident
aliens engaged in
trade/business)

2. Royalty from books, literary works, & musical compositions 10%

3. Royalty other than above 20%

4. Interest on any current bank deposit, yield or other monetary benefits 20%
from deposit substitute, trust fund & similar arrangement

5. Prize exceeding P10,000 20%

6. Other winnings, except Phil Charity Sweepstakes & Lotto 20%

7. Dividend from a domestic corp, or from a joint stock company, 10% (vs 20% for
insurance or mutual fund company, & regional operating headquarters of non-resident aliens
multinational company or share in the distributive net income after tax of engaged in
a partnership (except a general professional partnership), joint stock or trade/business)
joint venture or consortium taxable as a corporation
• But what about dividends from foreign corporations for citizens
(not resident aliens)? Well, the income here enters into the
computation for Sec 24 (a) tax calendar. For resident aliens, they
are not taxed since it’s income derived from abroad.

8. Interest on long-term deposit or investment in banks (with maturity of exempt

5 years or more)

Prize – the result of an effort (like a prize in a beauty contest)

Winning – the result of a transaction where the outcome depends upon
chance (like betting)
Deposit substitute – a means of borrowing money from the public (20 or
more individual or corporate lenders) other than by way of deposit with
banks through the issuance of debt instruments (like banker’s
acceptances, promissory notes, repurchase agreements, certificates of
assignment or participation

• The sources above are derived within the Philippines.

• Note the situs rules:
● For aliens, the royalties and stuff must come from within the Philippines since they
are only taxed here.
● For resident citizens, the passive income that come from outside the Philippines goes
into their gross income.
 Tax Rate on Interest Income from Foreign Currency Deposit (RR
10-98)

1. Interest income actually received by a resident citizen or 7.5% final

resident alien from FCD withholding tax

2. If it was deposited by an OCW or seaman or nonresident citizen Exempt

3. If it was in a bank account in the joint names of an OCW and his 50% exempt/
spouse (who is a resident) 50% final
withholding tax
of 7.5%

4. Interest income actually received by a domestic corporation or 7.5% final

resident foreign corporation from FCD withholding tax

• Interest income which is actually or constructively received by a resident citizen of the

Philippines or by a resident alien individual from a foreign currency bank deposit will be
subject to a final withholding tax of 7.5%. The depository bank will withhold and remit the tax.
If a bank account is jointly in the name of a non-resident citizen, 50% of the interest income
from such bank deposits will be treated as exempt while the other 50% will be subject to a
final withholding tax of 7.5%. The Regulations will apply on taxable income derived
beginning January 1, 1998 pursuant to the provisions of Section 8 of RA8424. In case of
deposits which were made in 1997, only that portion of interest which was actually or
constructively received by a depositor starting January 1, 1998 is taxable. (RR 10-98)

Tax Rate on Capital Gains

1. On sale of shares of stock of a domestic corporation

NOT
listed and NOT traded thru a local stock exchange held as
a capital asset,
o Capital gains not over P100,000 15% of the net capital gains
o Capital gains in excess of P100,000 (see RR 6-2008 15% of the net capital gains
below)

2. On sale of real property in the Philippines held as a 6% of the gross selling

capital price, or the current market
asset (see RR 8-98 below) value at the time of sale,
whichever is higher