Philippines Tax Updates: Final Tax (TRAIN LAW)

Changes in Final Tax


(In the Philippine Setting)


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Paying tax is not a punishment. It's a responsibility. - Chris Matthews

Recently, I have been doing this series of informative articles for you to read so as to know what are the Major Changes brought by this new Tax Law to our lives. As I it is my purpose to educate people, share my knowledge, and love to every one, I will always strive hard to do my best specially in simplifying things so that even a lay man can easily understand.

If you haven't read my previous articles, try to to visit them. Here are their links: Philippines Tax Updates: Personal Income Tax (TRAIN LAW), Philippines Tax Updates: TRAIN LAW and the Minimum Wage Earners. Hope you like it.

The new law amended a lot of provisions in the NIRC. Since it is already in effect, have you ever wondered what are the changes it brought to the Final Taxes?

What is a Final Tax?

Final Withholding Tax is a kind of withholding tax which is prescribed on certain income payments and is not creditable against the income tax due of the payee on other income subject to regular rates of tax for the taxable year.

Source: National Internal Revenue Code

Final taxes are taxes prescribed on certain income. Once an income is subjected to Final Tax, it will not be furthered taxed under the normal or capital gains tax. It is a tax specifically extracted on a specifically defined income on the Tax Law. They are somewhat treated in a special way since they have their own tax rate.

What are the Major Changes in Final Taxes?

1. All PCSO and Lotto Winnings are now Taxable


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In the Old Tax law (NIRC), lotto winnings and all PCSO prizes are tax exempt. If you are fond of watching lotto draws everynight, you will always notice that the host will always say that lotto winnings are tax free.

Moreover, in the Old NIRC, prizes are subject to final tax of 20% except if the amount of the prize is Php 10,000 or less which shall be subjected to normal tax. Winnings on the other hand are subject to 20% final tax regardless of amount.

In the new TRAIN Law, winnings (except PCSO and Lotto winnings amounting to Php 10, 000 or less) are subject to a final tax of 20%.

Source: Revenue Regulations No. 08-2018

Comparison of the TWO

Old NIRCTRAIN Law
Prizes - 20%Prizes - 20%
Winnings - 20%Winnings - 20%
PCSO and Lotto Winnings - ExemptPCSO and Lotto Winnings - 20%***

Prizes are subject to 20% Final tax if amount is above Php 10,000, if not, then subject to normal tax.
Winnings are subject to 20% Final tax regardless of the amount won.
***PCSO winnings and prizes amounting to more than Php 10,000 subject to 20%.

Example

Adam won the following prizes/winnings during the year:

Prizes/WinningAmount WonFinal Tax
Dance Contest15, 0003, 000
Raffle ticket winnings35, 0007, 000
PCSO Swertres143, 00028, 600

PCSO Swertres lotto winning before TRAIN Law was tax exempt regardless of amount won.

2. Capital Gains on shares NOT traded in the Stock Exchange


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The TRAIN law made the Final Tax on Net Capital Gains on shares not traded in the Stock Exchange to 15%. It replaced the two tier rate of 5% for the first Php 100,000 and 10% for the amount in excess of Php 100,000 in the Old NIRC.

Old NIRCTRAIN Law
Net Capital GainsNet Capital Gains
First Php 100,000 - 5%First Php 100,000 - 15%
In excess of Php 100,000 - 10%In excess of Php 100,000 - 15%

Net Capital Gains = Capital Gains minus Capital Loss
Net Capital Gains are now subject to 15%. No more two tier rate.

How about the Tax on Shares Traded in the Stock Exchange?


The changes to the Tax in Shares Traded in the Stock Exchanges will be discussed sooner as it is part of the Percentage taxes not on Final Tax.

3. Fringe Benefit Tax


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Lets define what is a Fringe Benefit. According to the law, Fringe Benefit is defined as

any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) in addition to basic salaries.

Source: Section 33 (B) of National Internal Revenue Code

Examples of Fringe Benefits: Housing, Expense Account, Vehicle of any kind, and etc.

Fringe benefits are benefits granted to managerial and supervisory employees. It is granted to person who has the power to hire and fire.

Why does employers grants fringe benefits? What are the rationale behind this?

  1. It is granted to encourage employee's productivity and loyalty to the employer.

  2. During financial difficulties, employers can easily decrease or discontinue giving fringe benefits. Unlike salaries and wages which cannot be decreased once it is given to the employees.

  3. Rather than increase the salary a non rank and file employee, employers choose to give them fringe benefits becaise it can be withdrawn anytime but salaries and wages cannot be reduced or decreased.

Fringe Benefits Tax increase from 32% to 35%

Computed base on the Grossed-up monetary value of the fringe benefit received by non-rank and file employees shall be divided by 65% to arrive at 100% gross-up monetary value.

Illustration

ABC company granted Adam (a Filipino branch Manager), in addition to his basic salaries, Php 15,000 cash per quarter for his personal membership fees at a Country Golf Club.

Computation:

Monetary Value of Fringe BenefitPhp 26, 000
Percentage Divisor Applicable65%
Fringe Benefit Tax Rate35%
Fringe Benefit TaxPhp 14, 000*

*26000/65% = Php 40, 000 (Grossed-up Monetary value) * 35% (FBT rate) = 14, 000

4. Foreign Currency Deposit Unit


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What is a FCDU?

"Foreign Currency Deposit Unit" or "FCDU" shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Central Bank to engage in foreign currency-denominated transactions, pursuant to the provisions of R.A. 6426, as amended.

Source: Bangko Sentral ng Pilipinas - Regulations

Final Tax on interest income received by an individual taxpayer (except non-resident individual) from a depository band under the expanded foreign currency deposit system is to be subjected to final tax of 15%.

From 7.5% to 15%

Conclusion

The government really do its best to adhere to the true principles of taxation: fair, simple, efficient. The changes as far as one can notice is taxation have been simplified and the tax rates are increased as it is the goal of the government to collect more revenue to finance its infrastructure projects and programs.



Sources:

  1. RA 10963 (TRAIN Law)
  2. Revenue Regulation 08-2018



PS: I am open for correction. Please comment down any violent reactions or corrections. Feel free to comment because it is free.



Your Lovely Accountant Steemian


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