PASSIVE INCOME SUBJECT TO FINAL TAX

Passive Income in General

What is mean by income subject to “final tax”? Give at least two examples of income of resident individuals that is subject to final tax. (2001)

Income subject to final tax refers to an income collected to through the withholding tax system.

The payor of the income withholds the tax and remits it to the government as a final settlement of the income tax due to said income. The recipient is no longer required to include the income subject to a final tax as part of his gross income reportable in the annual income tax return.

Among the examples of income subject to final tax are dividends, interest on bank deposits, royalties, etc.

Taxation of Passive Income

Mr. Juan, while relaxing in his living room, picked up the telephone which had just rung. The voice at the other end, after asking for the name and address of Mr. Juan, announced that he, Mr. Juan, had just won a prize of P5,000. Within the week, his prize arrived through mails.

The program was sponsored by a manufacturing company. The choice of Mr. Juan was done by the announcer who picked up the telephone directory, flicked to a page theein and ran down his fingers to the 29th name on the page.

Is the amount he received considered part of taxable income as this term is defined in Sec. 31 of the NIRC? Reason out your answer. (1979)

Yes. The amount of the prize being less than P10,000 shallnot be subject to final tax. (Sec. 24 (B) (1), NIRC OF 1997) but shall be included in the gross income less the deductions and/ or personal and additional exemptions, if any (Sec. 31, Ibid.), then subjected to the schedular rate. (Sec. 24 (A) (1) (c), Ibid)

Mr. X received income and you were asked to prepare his income tax return. Is he required to include as part of gross income proceeds from his winnings from the gambling casino? Give your reason. (1998)

No. If the winnings exceed P10,000, they shall be subject to a final tax of 20% hence not to be included in the income tax return. (Sec. 24 (B) (1), NIRC of 1997)

What are disguised dividends in income taxation? (1994)

These are payments, usually for services, made in the form of dividends in order to evade the higher taxes imposed on gross income. They are not dividends in legal contemplation because they are not return from investments.

May a stock dividend constitute taxable income to the shareholder who receives it? Why? (1977)

During the year, a domestic corporation derived dividends from its stock investments in domestic corporations. In preparing the corporate income tax return, what should be the tax treatment? (1997)

No. A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. (1st sentence, Sec 73 (B), NIRC OF 1997)
Stock dividends are unrealized gain and cannot be subject to income tax until the gains have not been realized. Stock dividends represent capital and do not constitute income to its recipients. The mere issuance thereof is not subject to income tax as they are nothing but an “enrichment through the increase in value of capital investment”.

As capital, stock dividends postpone the realization of profits because the “fund represented by the new stock has been transferred from surplus to capital and no longer available for actual distribution.”

Before realization, stock dividends are nothing but a representation of an interest in the corporate peoperties. As capital, it is not yet subject to income tax. (CIR v. CA, et al., January 20, 1999)

From the following list of taxpayer’s receipts during a taxable year, select and write down all the items that would fall under his taxable income under Sec. 31 of the NIRC; as well as what falls under gross compensation income:

a. Salaries received from a private frim;
b. Proceeds from life insurance;
c. Sweepstakes prize;
d. Annual bonus;
e. Christmas bonus;
f. Per diems;
g. Dividends on life insurance;
h. Rentals;
i. Government backpay under RA 304;
j. Compensation for his injuries;
k. Sale of crops;
l. Interest on money loaned.
Explain your answer briefly. (1966)

The following falls under the taxpayer’s taxable income, having been earned from trade or business: (h) Rentals, (k) Sale of crops, and (l) Interest of money loaned.

Comprising his compensation income, which was earned as a result of employer-employee relationship are: (a) Salaries received from a private firm, (d) Annual bonus (e) Christmas bonus, and (f) Per diems, provided that for (d), (e) and (f), only the amount exceeding P30,000 should be includible in his compensation income.

It should be noted that items (b) Proceeds from life insurance and (j) Compensation for injuries, are not included as income hence part of the exclusions from gross income.

Items (c) sweepstakes prize, (g) dividends on life insurance, and (i) Government backpay under RA 3O4 are exempt from income taxation.

Romulus, 48 years of age and a retired employee had the following properties and transactions at the end of the 2002 taxable year:

a. Cash dividends received by Romulus from Sabinia Corp. during 2002 in the amount of P5,000.
b. Interest on time deposits with United Banana Bank received in 2002 in the amount of P80,000.

Are the above items subject to the regular rates found in the schedule under Sec. 24 of the NIRC, which states the tax rates on individual citizens and individual resident aliens in the Philippines? Explain your answer. (1986)

a. No. the cash dividends received by Romulus are not subject to the regular rates. They are subject to the regular rates. They are subject to final tax of 10% on the gross amount of the dividends.

b. No, because the interest on bank deposits are subject to final tax on 20% on the gross interest earned. (Sec. 24 (B) (1), Ibid)

During the year, a domestic corporation derived the following items of revenue: (a) gross receipt from as trading business; (b) interest from money placement in the banks; (c) dividends from its stock investments in domestic corporations; (d) gains from stock transactions through the Philippine stock Exchange; (e) proceeds under an insurance policy on the loss of goods.

In preparing the corporate income tax return, what should be the tax treatment on each of the above items?

Only the gross receipts from a trading business should be included as part of gross income reportable in the corporate return. The proceeds under an insurance policy should not be included as it is not income being merely compensation for the loss suffered. All the other items are subject to a final tax and should not be reportable.