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Interest income
Passive income Rules on Interest income
Source Residence of debtor, source within the Phils.
General rule Included in gross income
Passive income is income derived not from direct or active practice of trade, industry or Exceptions 1. If exempt from tax
profession. It is “passive” because it is income that originates from an existing asset or
investment (or an offshoot of an asset) and it is earned without active participation on 2. Subject to final tax at preferential rate
the part of the taxpayer.
Interest income subject to final tax
Rather than being subject to the graduated income tax (in case of individuals) or the
Type Individual (24.B.1) Corporation
regular corporate income tax (RCIT, in case of corporations), certain passive income are NRA-ETB NRA-NETB DC RFC NRFC
RC NRC RA
subject to final tax. (Refer to 24.B for individuals and 27.D for corporations) (27.D.1) (28.A.7)
Interest on any Part of Part of
currency bank 20% 20% 20% 20% gross 20% 20% gross
What are considered as passive income? deposit income income
1. Interest income (see page 1)
Yield or any other
2. Dividend income (see page 2) monetary benefit Part of Part of
3. Royalty income from deposit
20% 20% 20% 20% gross 20% 20% gross
4. Rental income substitutes, trust
income income
funds, and similar
5. Annuities/proceeds from life insurance/other types of insurance arrangements
6. Prizes and awards Interest income
7. Pensions/retirement benefits received from a
depositary bank 7½% Exempt 7½% Exempt Exempt 7½% 7½% Exempt
8. Income from whatever source
under the FCD
system
Interest income from Holding period Final tax Not subject to final tax.
long-term deposits or > 5 years Exempt Exempt Included as part of gross
investment 25% income.
4 to < 5 years 5%
3 to < 4 years 12% 25%
< 3 years 20% 25%
Interest on foreign
20%
loans
*If dividends received by NRFC do not qualify as enumerated above, included as part of gross
income, taxable at a fixed rate of 35%.
Special issues on Rental income Prizes and awards subject to final tax
Tax treatment of leasehold improvements by lessee – taxable income if the ownership of Type of Prize/award Individual (24.B.1) Corporation
RC NRC RA NRA-ETB NRA-NETB DC RFC NRFC
such improvements will transfer to the lessor at the end of the lease term. Taxable based on Recipient>> (25.A.2) (27.D.1) (28.A.7.d) (28.B.5.b)*
the fair market value of such improvements either as a one-time charge or on a staggered Prizes in general 20% 20% 20% 20% 20% 20%
basis. Prizes amounting to
Part of gross income 20% 20%
Tax treatment of advance rental/long-term lease – if prepaid, considered as taxable income P10k or less Part of Part of
when received. Winnings in general 20% 20% 20% 20% gross 20% 20% gross
Winnings from PCSO income income
20% 20%
Annuities/Proceeds from life insurance
Rules on Annuities/proceeds from insurance
General rule The proceeds of life insurance policies paid to heirs or
beneficiaries upon the death of the insured should be treated
as indemnity and not as gain or income. (32.B.1 and 32.B.2)
Exceptions 1. If such amounts are held by the insurer under an
agreement to pay interest thereon, such interest
payments shall be included in gross income.
2. Subject to estate tax if proceeds are from a life insurance
and:
Situs/Sources of Income 1.
2.
3.
Residence of the payor
Place where the contract was executed
Place of payment
*If deductions can be directly attributed to gross income derived from sources either within Exclusions
the Philippines or outside, the portion to be deducted as pertaining to Philippine sources is to An item may not be taxable for any of the following reasons:
be computed as follows: 1. The item of receipt does not fall within the meaning of income for income tax purposes
(e.g. return of capital)
2. A provision of law exempts it from income tax
a. Under the Constitution
b. Under the Tax Code
c. Under special laws
Exclusions under the Constitution
All assets and revenues of a non-stock, non-profit private educational institution used
directly, actually, and exclusively for private educational purposes shall be exempt from
taxation.
Exclusions under the Tax Code (32.B)
Item of income excluded Remarks
Proceeds from life insurance Proceeds are excluded from the gross
income of the beneficiary, but may be
subject to estate tax if:
1. Decedent is policy holder and
beneficiary is the estate, whether or not
irrevocable
2. Decedent is the policy holder and
beneficiary is anybody, but such
1. Any net loss incurred in a taxable year during which the taxpayer 3. Must not be between related parties
was exempt from income tax shall not be allowed as a deduction 4. Must be actually charged-off the books of accounts of the taxpayer
(Net operating loss during income tax holiday) as of the end of the taxable year
2. There is substantial change in the ownership of the enterprise. 5. Must be worthless and uncollectible (write-off)
When there is substantial change – If, as a result of a business
Recovery of accounts previously written-off – Tax Benefit Rule
combination, the stockholders of the transferor or the transferor,
Subsequent recovery of previously written-off accounts are to be
gains control of the enterprise claiming the NOLCO as a deduction
included in the gross income of the taxable year in which these were
such that they acquire:
received only to the extent the taxpayer was benefited when it claimed
a. Less than 75% of the outstanding shares or paid-in capital of
the write-off as a deduction.
the transferee enterprise
Depreciation Requisites for deductibility
b. Less than 75% interest in the business of the transferee
1. Must be reasonable
Sample application of NOLCO 2. Must be for property arising out of its use or employment in the
business or trade
3. Must be charged-off during the taxable year
Depletion
Pension trust Payments to employees’ pension trust (reasonable pension plan)
Charitable and Requisites for deductibility
other 1. Must actually paid or made to the Philippine government or any
contributions political subdivision thereof exclusively for public purposes
2. Must be made within the taxable year
3. Must not exceed 10% (individual) or 5% (corporation) of the
taxpayer’s taxable income before charitable contributions
Research and
development
Entitlement to NOLCO
Entitled Not entitled
1. Any individual engaged in 1. OBUs
trade or business or in the 2. FCDUs
practice of a profession 3. BOI-registered entity
2. Domestic corporations 4. PEZA, SBMA, CSEZ-
(including private registered enterprises
educational institutions) 5. Entity already enjoying
3. Resident foreign income tax holiday (ITH)
corporations (including
regional operating
headquarters
Bad debts Requisites of deductibility
1. There must be an existing indebtedness which must be valid and
legally demandable
2. Must be connected with the taxpayer’s trade, business or
profession
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FINALS REVIEWER Coverage: Passive income (p. 18 of course outline) onwards
TAXATION 1 – Prof. Othelo Carag Prepared by C. Gomez