Normal Tax Vs Final Tax

Normal Tax – regular, customary or ordinary

tax
• Creditable withholding tax –tax withheld on
certain income payments intended to equal
or at least approximate the tax due of the
payee on said income.
• Earnings outside the Philippines by resident
Filipino Citizens (except OFW) and domestic
corporations are subject to regular tax in the
Philippines.
 Normal Tax Vs Final Tax
Final Tax – tax on earnings that have been
subjected to complete withholding tax
payments at source.
• Interest
• Royalties
• Dividends
• Prizes and winnings
• Gains from dealings in property
 Subject to NORMAL TAX
• Compensation Income
• Business Income
NO
• Professional Income
• Other passive income
not subject to final tax
Is taxable
income subject
to Final Tax? For supplemental
disclosure only, no need
YES to be taxed again
• Interest, dividend &
royalty
• Sales of real property
and shares of stocks
classified as capital asset
 Forms and Valuation of Income

• CASH – money or money substitutes

received as compensation or earnings
derived from labor, practice of profession
and conduct of business.
• PROPERTY- income denotes the right of
ownership over a tangible or intangible
thing.
• SERVICE-a form of income based on the
performance received in payment for the
work previously rendered by one person to
another.
 Valuation of Income
• Cash received for income earned
• Fair value of property received as payment for
income earned
• Fair value (at the date income is earned) of the
share of stocks received as payment of income
earned
• Fair value of the services received (in the
absence of any stipulated price) as payment of
income earned
• Fair value of the promissory notes received as
payment of income is
• Face value of the note, if interest bearing
• Discounted value of the note, if non-interest
bearing
 Tax accounting periods to report income

• Calendar period

• Fiscal period

• Short period

• Variable period
 Methods of reporting income
Illustration:
Mr. Sy reported a total collection of for year 2017 with the
following assumptions:
1. The collection of P1,400,000 represents a payment of
• Cash Method rent covering the period of December 1, 2017 to January
31, 2018.
2. The above collection consist of the following:
• Accrual Method Cash sales, 2017 P 900,000
Collection of 2016 sales on account 300,000
Advance collection of Sales for 2018 200,000
Total Collections P 1,400,000
In addition, the sales on account in 20017 was P1,100,000.
 PASSIVE INCOME
An income is considered passive if the taxpayer merely waits
for it to be realized:

• Interest Income;
• Yield from deposit substitutes and trust fund;
• Royalty Income;
• Dividend Income;
• Prizes and Winnings

• As a rule, once a passive income has been subjected to

final tax, it is no longer included in the ITR taxable income.
• Passive income from outside the Philippines is subject to
normal tax.
 1. Interest Income/Deposit Substitutes
Interest Income – earning derived from
depositing or lending of money, goods or credits.
*Unless exempted by law, interest income
received by the taxpayer, whether or not
usurious, subject to income tax.

Classification of Interest Income:

• Exempt from income tax

• Subject to final withholding tax
• Subject to normal tax
Tax Exempt Interest Income Interest Income – earning derived from
depositing or lending of money, goods
1. By members from a duly-
or credits.
registered cooperative;
2. BSP prescribed form of *Unless exempted by law, interest
investments maturing income received by the taxpayer,
more than 5 years whether or not usurious, subject to
3. Expanded foreign currency income tax.
deposit system by non-
resident citizens/aliens Classification of Interest Income:
4. A tenant who paid a
landowner on the price of
land under tenant- • Exempt from income tax
purchaser agreement of • Subject to final withholding tax
CARP • Subject to normal tax
A deposit substitute – is a debt instrument
issued by the bank to borrow money from the
public other than the client’s deposit.

A trust fund – any estate, especially stock,

securities, or money which is held in trust by a
person in behalf of another person.

• Both deposit substitute and trust fund yield

earnings that are to be treated as interest
income.
• Treasury Bills, Treasury Bonds, Treasury
Notes
ILLUSTRATIVE CASE
1. Mr. Suave put his retirement on the following account:
Time deposit, BPI (not prescribed form) 7% P 100,000
BSP deposit substitutes (more than 5 years) 12% 200,000
Quezon City Cooperative 24% 200,000

Total Investments P 500,000

The interest income not subject to income tax during the year would be
Interest Income-BSP deposit substitutes P 24,000
Interest Income-QC Cooperative 28,000
Interest Income subject to final tax P 5,600
 TAXPAYERS
14 RC NRC RA NRA- NRC- DC RFC NRFC
ETB NETB
Gross income, active or passive, from all 25 30
sources within the Philippines
Interest from any currency bank deposit and 20 20 20 20 25 20 20 30
yield or any other monetary benefit from
deposit substitutes and from trust funds and
other similar arrangements
Interest income from long-term deposit or
investment in form of savings, common or
individual trust funds, deposit substitutes,
investment management accounts, and
other investments evidenced by certificates
in such form prescribed by BSP
Pre-termination
< 3 years holding period 20 20 20 20 25
3 to less than 4 years holding period 20 20 20 20 25

5 years or more holding period Exempt Exempt Exempt Exempt 25

TRAIN
Interest Briefing
income – Income
from Tax
a depository bank 15 Exempt 15 Exempt Exempt 15 15 Exempt
under VER 1.0 – Januaryforeign
the expanded 2018 currency
 PASSIVE INCOME-Interest Income
Illustrative Cases
1. On April 30, 2018, Darby placed her retirement pay
amounting to P1,000,000:

a. PNB as time deposit with interest of 18%

b. P500,000 was used to purchased Treasury
bonds (5 years) with interest of 15% per annum
c. On the third year of the term, Darby pre-
terminated the certificate of the Treasury Bonds
d. On the 5th year, Darby claimed the
investment with interest.
 PASSIVE INCOME-Interest Income
Illustrative Cases
2. The following are the income of a resident citizen for the period:

Interest income from investment in a 10-year bonds P 40,000

Interest income form 5-year time deposit. Metro Bank 50,000
Interest income from expanded foreign currency deposit 60,000

Questions:
• How much is the interest income subject to final tax? How much is the tax
withheld from the tax payer?
• How much is the interest income subject to normal tax?
 SEATWORK
In 2018, Mr. Koala reported the following interest earnings:

Interest income –lending business P 500,000

Interest income-expanded foreign currency deposit, BDO 200,000
Interest income-peso time deposit, BPI 100,000
Interest income-Thomec (Cooperative) 50,000

Compute for the following:

1. If Mr. Koala is a resident Filipino citizen, how much is his total final taxes?
2. If Mr. Koala is a non-resident Filipino citizen, how much is income subject to
normal tax?
 SEATWORK
In 2018, Mr. Koala reported the following interest earnings:

Interest income –lending business P 500,000

Interest income-expanded foreign currency deposit, BDO 200,000
Interest income-peso time deposit, BPI 100,000
Interest income-Thomec (Cooperative) 50,000

Compute for the following:

1. If Mr. Koala is a resident Filipino citizen, how much is his total final taxes?
(200,000 x 15%) + (100,000 x 20%) = P50,000
1. If Mr. Koala is a non-resident Filipino citizen, how much is his total taxable
income? 500,000
 2. Royalty Income
A royalty income is a payment of portion of
proceeds paid to the owner of a right, such as an
oil right, or a patent or a copy right.

Classification of Royalty Income:

1. Derived from general royalties (20%)

2. Royalties on books, literary works and

musical composition (10%)
20

RC NRC RA NRA- NRC- DC RFC NRFC

ETB NETB
Royalties 20 20 30
Books, literary works 10 10 10 10 25
and musical
compositions
Other sources 20 20 20 20 25

TRAIN Briefing – Income Tax

VER 1.0 – January 2018
 PASSIVE INCOME-Royalties
Illustrative Cases

1. Mr. Goblin received the following royalties:

On sale of Goblins Hamburger (Franchise) P 200,000

On sale of books authored by Goblin (copyright) 300,000

How much is the total final tax due on royalties?

 PASSIVE INCOME-Royalties
Illustrative Cases

2. The following are the gross royalty income of a resident citizen for the
period:

Royalty income as author P 100,000

Royalty income from franchising 200,000
Royalty income from goldmine 500,000

How much is the total final tax due on royalties?

 SEATWORK
Ms. X, a resident citizen, an inventor, a song writer and international singer,
reported the following:
Philippines Outside
Royalties from pain reliever invention P 100,000 200,000
Royalties from musical composition 200,000 300,000
Royalties from books 500,000 100,000

How much is the final tax on royalty income?

How much is the amount of royalty income subject to normal tax?

 SEATWORK
Ms. X, a resident citizen, an inventor, a song writer and international singer,
reported the following:
Philippines Outside
Royalties from pain reliever invention P 100,000 200,000
Royalties from musical composition 200,000 300,000
Royalties from books 500,000 100,000

How much is the final tax on royalty income?

(100,000 x 20%) + (200,000 +500,000 x 10%) = P90,000
How much is the amount of royalty income subject to normal tax?
P200,000 + 300,000 + 100,000= P600,000
 3. Prizes and Winnings
A prize is a reward for a contest or competition.
It is a remuneration for an effort reflecting one’s
superiority, like prize money in a boxing contest.

Winning is a reward for an event that depends

on chance such as winnings from gambling,
lottery or raffle ticket.

*all prizes and awards granted to athletes in local and

international sports competitions and tournaments, whether held
in the Philippines or abroad and sanctioned by their respective
national sports association, are exempt from income tax.
 RC NRC RA NRA- NRA- DC RFC NRF
26 ETB NETB C
Prizes
Exceeding P10,000 20 20 20 20 25
Exempt Exempt Exempt Exempt
P10,000 or less NT NT NT NT 25
Winnings
Tax Tax Tax Tax Tax
PCSO or lotto (should be Exempt Exempt Exempt Exempt Exempt
≤10,000)
PCSO or lotto in excess of 20 20 20 20 25
P10,000
Tax Tax Tax Tax Tax
Sports (Phil Sports Assn) Exempt Exempt Exempt Exempt Exempt
Religious, Charitable, Scientific, Tax Tax Tax Tax Tax
Exempt Exempt Exempt Exempt Exempt
Educational artistic, literary, civic
achievement (without any effort)
TRAIN Briefing – Income Tax
Tax informer’s reward
VER 1.0 – January 2018 10 10 10 10 10
 PASSIVE INCOME-Prizes and Winnings
Illustrative Cases

1. Regine Velasquez won the following prizes/winnings during the year:

First Prize – Singing Contest P 10,000

First Prize – PCSO 1,000,000
Third Prize – Raffle Ticket winnings 5,000

Which is subject to normal tax? Final tax?

 PASSIVE INCOME-Prizes and Winnings
Seatwork

2. JJ Bibo, a national athlete, received the following during the year:

Ramon Magsaysay award P 50,000
Athlete of the year award 100,000
Prize-KFC Raffle 5,000
Prize for winning an Olympic Award 500,000
Gift from Mayor Erap Estrada 250,000
Car from Honda as a gift 1,000,000
Winnings-Philippine Lotto 100,000
Gambling Winnings 500,000

Which is subject to normal tax? Final tax? Tax exempt?

 PASSIVE INCOME-Prizes and Winnings
Seatwork
2. JJ Bibo, a national athlete, received the following during the year:
Ramon Magsaysay award P 50,000
Athlete of the year award 100,000
Prize-KFC Raffle 5,000
Prize for winning an Olympic Award 500,000
Gift from Mayor Erap Estrada 250,000
Car from Honda as a gift 1,000,000
Winnings-Philippine Lotto 100,000
Gambling Winnings 500,000
Which is subject to normal tax? (5,000+250,000+1,000,000+500,000)
Final tax? (100,000-10,000+500,000)
Tax exempt? (50,000+100,000)
 4. Dividends
Dividend income is a form of earnings derived
from the distribution made by a corporation out
of its earnings or profits and payable to its
stockholders, whether in money or in other
property.

Classification of Dividend Income

1. Tax exempt
2. Subject to Final Tax
3. Subject to Normal Tax
 • Received from a Domestic Corp by:
• Another Domestic Corporation
• Resident Foreign Corporation
Tax Exempt • Received from a cooperative
• Pure stock dividend
• Pure liquidating dividend

Received from a Domestic Corporation by:

• Citizen or resident alien (10%)
• NRA-ETB = 20%
Subject to Final • NRA-NETB = 25%
Tax • Non-resident Foreign Corporation = 15%
Share of individual in Trade partnership, association,
joint venture

Dividends are subject to normal tax of individuals or

corporation if:
Subject to • Not included as tax-exempt dividend
Normal Tax • Not subject to final tax
• Distributive shares of partner in a professional
partnership
 RC NRC RA NRA- NRA- DC RFC NRFC
32 ETB NETB
Cash and/or Property dividends
actually or constructively received
from a domestic corporation or from
a joint stock company, insurance or 10 10 10 20 25
mutual fund companies and regional
operating headquarters of
multinational companies
Dividends received from domestic Tax Tax 30/15
corporation Exempt Exempt

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 10 10 10 20 25
individual in the net income after tax
of an association, a joint account or
a joint venture or consortium taxable
TRAIN Briefing
as corporation of –which
Incomehe
Tax is a
member VERor
1.0co-venturer
– January 2018
 PASSIVE INCOME-Dividends
Dividend Income Taxable or Basic or Final
Exempt Tax
Dividend received by a resident citizen from domestic corps √ FT-10%
Dividend received by a resident alien from domestic corps √ FT-10%
Dividend received by a resident from a foreign corp √ B-GTR
Dividend received by a domestic corporation from another X X
domestic corporation
Dividend received by a domestic corp from a resident corp √ B-GTR
Dividend received by a resident foreign corp from domestic
X X
corporation
Dividend received by a resident foreign corp from another √ B-GTR
resident corp.
 5. Capital Gains
1. Sale of assets or properties that are :
• Not use in trade or business (Real or personal
property)
• Not held by the taxpayer primarily for sale to
customers in the ordinary course of business
• Real properties in the Philippines (capital asset)
• Valued at FMV or selling price whichever is higher

2. Capital Gains Tax of 6%

3. Sale of shares of stocks that are:

• Not traded in stock exchange
4. Capital Gains Tax of 15% from Capital Gain
 Income subject to capital gains tax (in percentages):
35

TAXPAYERS

RC NRC RA NRA- NRC- DC RFC NRFC

ETB NETB

Capital gains from sale of 15 15 15 15 15 15 15 15

shares of stock of a domestic
corporation not traded in the
stock exchange
Sale of real property classified 6 6 6 6 6 6 NA NA
as capital asset

TRAIN Briefing – Income Tax

VER 1.0 – January 2018
 PASSIVE INCOME-Capital Gains Tax
Illustrative Cases

1. The following are the transactions of Mr. Sha Na Wa pertaining to sale of

real properties:
• Sale of a parcel of land used in his trading business. Selling price is
P3,000,000. The property was acquired 5 years ago at P1,500,000.
• Sale of a taxpayer’s residential lot for P5,000,000. The fair market
value of the property was P6,000,000. The property was acquired 3
years ago at P4,000,000.

• How much is the capital gains tax?

 PASSIVE INCOME-Capital Gains Tax
Illustrative Cases

2. Determine the capital gains tax on the following transactions:

• Gerry sold 2,000 shares of a domestic corporation in the local stock

exchange at P110.00 per share. The shares were purchased 3 years ago
at P75 per share.

• Garry sold 2,000 shares of a domestic corporation directly to the buyer

at P180.00 per share. The shares were purchased 6 months ago at P105
per share.
Determine whether the income described below is subject to FINAL WITHHOLDING TAX,
NORMAL TAX or TAX EXEMPT. Write FWT if subject to final tax, NT subject to normal or basic
tax, CGT and EXMPT if exempted from final tax and normal tax. If FWT, write the tax rate.
Taxpayer is a Resident Citizen Tax Type Tax Rate
1. Interest from peso bank deposit, BDO, Makati FWT
2. Interest from US Dollar bank deposit, BPI-Manila FWT
3. Interest from a foreign currency deposit in Japan NT
4. Interest from money market placement, Philippines FWT
5. Interest from a foreign currency deposit in Australia by a non-resident citizen EXMPT
6. Interest from overdue receivables, Philippines NT
7. Compensation Income, Philippines NT
8. Business income, Philippines NT
9. Gain from sale of a rest house CGT
10. Gain from sale of delivery truck NT
11. Royalties from franchising, Davao outlet FWT
12. Royalties from copyright of a text book FWT
13. Prizes amounting to P30,000, Philippines FWT
14. Prizes amounting to P10,000, Philippines NT
15. Prizes amounting to P40,000, USA NT
Taxpayer is a Resident Citizen Tax Type Tax Rate
16. P30,000 other winnings, Philippines FWT
17. P15,000 other winnings, Canada NT
18. Philippine Lotto winnings, P250,000, Philippines EXEMPT/FWT
19. Philippine Lotto winnings, P250,000, Philippines, NRA-NETB FWT
20. Lotto winnings in London NT
21. Interest income from long-term investment with BSP certificates (10YRS) EXMPT
22. Interest income from a government issued bonds, 3 years FWT
23. Dividend income from a domestic corporation FWT
24. Dividend income from a resident foreign corporation NT
25. Dividend income from a domestic corporation by a non-resident alien
FWT
engaged in trade and business in the Philippines
26. Share in the distributive net income from a general professional
NT
partnership.
27. Share in the distributive net income from a general (trade) partnership. FWT
28. Gain on sale of shares of stock of a domestic corporation directly traded CGT
to a buyer
29. Gain on sale of properties used in business NT
30. Gain on sale of properties located in Singapore NT
 Mrs. Barboza, with two qualified dependent children is a citizen of a foreign country
residing in the Philippines. He had the following data for the taxable year:
Capital gain on sale of inherited real property in the Philippines
with a selling price of P4,000,000. P 300,000
Dividend from a domestic corporation 20,000
Dividend from a foreign corporation 15,000
PCSO lotto winnings 250,000
Royalties from book published by Anvil Publishing 25,000
5-year bond issued by China Bank signed by BSP 500,000
Deposits to Shanghai Bank, China (1.5% interest per annum) 800,000
Interest from deposits to China Bank, Makati 7,500
Bingo Prize 10,000
Net Income from business in the Philippines 200,000
Net Income from business outside the Philippines 500,000
a. Compute for the capital gain tax of Mrs. Barboza?
b. Compute for the passive income?
c. Compute the income tax due?
1. Mr. Marino sold a land and building in the Philippines
held as capital asset for P5,000,000 when the fair
market value was P5,200,000 and with a cost of
P2,000,000 and selling expenses of P20,000. Capital
gain from sale totals P2,980,000. Compute for capital
gain tax?
2. Mr. Go sold directly to a buyer shares of stock of a domestic corporation
held as capital asset. The selling price was P300,000 and the cost is
P250,000. Compute for the capital gain tax?

3. Mr. Hao sold directly to a buyer shares of stock of a domestic

corporation held as capital asset. The selling price was P200,000 at the
time when the fair market value of the shares sold was P250,000 and the
cost was P100,000. How much is the capital gain to be paid by Mr. Hao?

4. Mr. Vitug is a stock broker in securities. He sold securities to Philippine

Stock Exchange shares of stock of a domestic corporation with a selling
price of P1, 500,000. The cost of the stock is P1, 200,000, paid related cost
of P5,000. Compute for the capital gain tax?
A resident citizen, married with 4 qualified dependent children had the following data during the year:
Gross compensation income P 450,000
Personal and living expenses 80,000
SSS Premium Contributions 3,600
Philhealth Contributions 2,400
Pag-ibig Contributions 2,000
Union Dues 1,000
Premium payments on health 4,000

1. Determine the taxable income for the year. 441,000

Business income, Philippines P 3,500,000

Business income, US 2,500,000
Expenses, Philippines 2,000,000
Expenses, US 1,250,000

2. Compute the taxable income if Sharon is a resident citizen. 2,750,000

3. Compute the tax due if Sharon is a non-resident alien, ETB, married with 5 dependent children. 340,000
4. Compute the tax due if Sharon is a non-resident alien, NETB, single. 875,000
Rod, married, with two dependent children, had the following income and expenses in 2017:
(Note: No specific location on the sources of income, just follow the instruction per number item)

Salary P 550,000
13th month pay 45,000
Gross receipts from profession 880,000
Gross income from business 950,000
Rent income 360,000
Professional and business expenses 950,000
Compute the taxable income and tax due if the payer is a:
Inc-1,745,000/413,500
Exc-1,790,000/427,000
5. a Filipino and residing in the Philippines. His family has migrated to Canada and has been living
there for 5 years.
Inc-1,270,000/271,000
6. a Filipino who goes to Vietnam quarterly to check on his small business (business income
reported is from Vietnam with 50% expenses shared with Professional and business expenses Exc-1,315,000/284,500
reported).
7. a Canadian who works as part timer only on the Philippines in practice of his profession. 880,000-285,000=
Expenses from his practice of profession is shared 30% from the reported amount. 595,000/78,500
8. an American who acquired a small property in Batangas and leasing it to a couple who puts up a
resort. 360,000/22,000(360-
250*20%)
9. a Japanese who acquired jewelries in the Philippines amounting to P2,500,000 and sold it during
the taxable year in the Philippines for P3,500,000. 3,500,000/875,000
Spouses Carlos and Irene, a government employees, had the following data in 2017:
(Note: Taxes filed separately)

Carlos Irene
13th month pay and other benefits 120,000 85,000
SSS, Philhealth, Pag-ibig 84,000 34,500
Basic salary 1,500,000 925,000
Representation and travel allowances 96,000 0
Over time pay 22,450 6,000
Holiday pay 0 11,000
Hazard pay 0 8,000
Income from Buy and Sell Business 3,500,000 2,200,000
Expenses from business 1,250,000 850,000

10. How much is the income tax payable of Carlos from compensation if income is with a
Inc=1,500,000+96,000+22,450-90,000-84,000=1,444,450/323,335-420,000=(96,665)
withholding tax of P420,000?
Exc=1,500,000+96,000+22,450+30,000-84,000=1,564,450/359,335-420,000=(60,665)
11. How much is the income tax due of Carlos from business?
3,500,000-1,250,000=2,250,000/570,000
12. How much is the income tax payable of Irene from compensation if income is with a
withholding tax of P225,000? Inc=925,000+6,000+11,000+8,000-85,000-34,500=830,500/139,150-225,000(85,850)
Exc=925,000+6,000+11,000+8,000-34,500=915,500/164,650-225,000(60,350)
13. How much is the income tax due of Irene from business?
2,200,000-250,000 x 8% =156,000
A. Cara Blanca, a supervisor is receiving monthly the following:

Salary P 75,000
Representation and transportation allowance 10,000
Commissions (average per month) 15,000

B. Others:
Honorarium as speaker in one of ABC’s seminar 10,000
Retirement pay 1,500,000
Fee as member of ABC’s Board of Directors 50,000
15 days monetized vacation leave 30,000
Interest income from Time Deposit 15,000
Productivity incentive pay 20,000
13th Month pay 150,000

14. How much is the gross compensation income of Cara Blanca?

Exc=900,000+120,000+180,000+10,000+1,500,000+50,000+10,000+20,000+60,000=2,850,000
Inc=900,000+120,000+180,000+10,000+1,500,000+50,000+10,000+20,000-90,000=2,700,000