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Means the pertinent items of income

referred to in Sec 32 of the tax code
- It includes all income from whatever
source (unless exempt from tax by law)
including but not limited to, the following
1. Compensation for services in whatever
form paid including fees, salaries, and
wages, commissions, and similar items
2. Gross Income derived from the conduct of
trade or business or the exercise of a
3. Gains from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partners distributive share from the net
income of general professional partnership
Gross Compensation Income means any
remuneration for rendering personal services. It is
obtained from an employer-employee relationship
between payor and recipient
The basis upon which the remuneration is paid is
immaterial in determining whether the
remuneration constitutes compensation. Thus, it
may be paid on the basis of piecework, or
percentage of profits and may be paid hourly,
daily, weekly, monthly or annually.
There is no determination of compensation until
the service is rendered
Exception: the compensation income including
overtime pay, holiday pay, night shift differential
pay, and hazard pay, earned by Minimum Wage
Earners (MWE) who has no other returnable
income are non-taxable and not subject to
withholding tax on wages

When does an employer-employee

relationship exist?
Generally, an employer-employee relationship
exists when the person for whom services are
rendered has the right to control and direct the
individual who performs the services, not only as
to the result in accomplishing the work but also

as to the details and means by which that result

is accomplished
Remuneration for services constitutes
compensation even if the relationship of
employer and employee does not exist any longer
at the time when payment is made between the
person in whose employ the services had been
performed and the individual who performed
Compensation income subject to tax is based on gross
income less applicable exemptions. No business and
personal expenses are allowed as deductions from
gross compensation income
The rule on compensation income applies only to
resident citizens, resident aliens and non-resident
citizens and non-resident aliens engaged in business in
the Philippines. It does not apply to non-resident aliens
not engaged in business. Neither does it apply to
corporations, estate and trusts because compensation
presupposes personal service.

Classification of Gross Compensation

1. Basic Salary or Wage
Salary refers to earnings received
periodically for a regular work other than
manual labor, such as a monthly salary
of an employee
Wages are earnings received usually
according to specified intervals of work, as
by the hour, day or week. E.g.
carpenters daily wage
Backwages are subject to income tax and
the withholding tax on wages
2. Honoraria are payments given in
recognition for services performed for
which established practice discourages
charging a fixed fee. The honorarium of a
guest lecturer is an example.
3. Fixed or variable allowances
In general, fixed or variable transportation,
representation, COLA and other
allowances that are received by a public
officer or employee or officer or employee
of a private entity in addition to the
regular compensation fixed for his position
or office, are compensation subject to
withholding tax

Any amount paid specifically, either as

advances or reimbursements for
travelling, representation and other bona
fide ordinary and necessary expenses
incurred or reasonably expected to be
incurred by the employee in the
performance of his duties are not
compensation subject to withholding tax,
if the following conditions are satisfied:
a. It is for ordinary and necessary
travelling and representation or
entertainment expenses paid or
incurred by the employee in the
pursuit of the employee in the pursuit
of the employers trade business or
b. The employee is required to
account/liquidate for the foregoing
expenses pursuant to substantiation
requirements of Sec. 34 of the tax
The excess of actual expenses over advance
made shall constitute taxable income if such
amount is not returned to the employer
Latest Rulings on Allowances:
a. Transportation and cell phone allowances
given to call center employees are not
taxable compensation
1. Fixed monthly transportation
allowance of P1500 for rank-and-file
employees and P3000 for supervisory
employees precomputed on a daily
2. Mobile phone allowance of P1200 for
supervisors, managers, and directors
who are expected to be on call 24
hours a day
b. Transportation and Night Shift Allowances
granted to night shift employees and Meal
and/or Out-of-Town Allowances granted to
employees assigned to conduct field work
are not subject to FBT, income tax and
withholding tax.
c. Taxi/transportation allowance of P100 per
day given by BPO company servicing
global businesses 24 hours a day to
employees who work overtime beyond
10PM or whose work shift starts at 10 PM
onwards is exempt from tax
d. Where taxi/transportation allowance is
precomputed on a daily basis and is paid

to employees while they are on

assignment or duty, it is not subject to
substantiation requirement or to income
and withholding tax
4. Commission is usually a percentage of
total sales or on certain quota of sales
volume attained as part of incentive such
as sales commission
5. Fees are received by an employee for the
services rendered to the employer
including a directors fee of the company,
fees paid to the public officials, such as
clerks of court or sheriffs for service
rendered in the performance of their
official duty over and above their
regular salaries.
Legal fees paid by a union on behalf of its
president constitute compensation
Marriage fees, baptismal offerings, sums
paid for conducting masses for the dead
and other contributions received by a
clergyman, evangelist, or religious worker
for services rendered are considered
6. Tips and gratuities paid directly to an
employee (by a customer of the employer)
which are not accounted for by the
employee to the employer are considered
taxable income, but not subject to
withholding tax
7. Hazard or Emergency pay an
additional payment received due to
workers exposure to danger or harm while
working. This is normally night differential
pay to arrive at gross salary.
Hazard, overtime, night shift differential
and holiday pay of a minimum wage
earner is non-taxable as long as the MWE
has no other reportable income
8. Retirement pay it refers to a lump sum
payment received by an employee who
has served a company for a considerable
period of time and has decided to
withdraw from work into privacy.
in general, retirement pay is taxable
except in the following instances:
SSS or GSIS retirement pays


Retirement pay due to old age

provided that the following
requisites are met:
a. The retirement program is
approved by the BIR
b. It must be a reasonable benefit
plan. Its implementation must
be fair and equitable for the
benefit of all employees (from
president to labour)
c. The retiree should have been
employed for 10 years in the
said company
d. The retiree should have been
50 years old at the time of
e. It should have been availed of
for the first time

9. Separation pay taxable if voluntarily

availed of. It shall not be taxable if
involuntary. Examples of involuntary
separation are:
a. Death
b. Sickness
c. Disability
d. Reorganization/merger of
e. Company at the brink of
When a company is at the brink of bankruptcy,
the sequence of satisfying the companys
indebtedness should be in this order
a. BIR
b. Employee
c. Creditors
As a rule, any amount received by an official or
employee or by his heirs from the employer due
to death, sickness or other physical disability or
for any cause beyond the control of the said
official or employee(such as retrenchment,
redundancy, or cessation of business) are
exempted from tax
The phrase for any cause beyond the control of
the said official or employee connotes
involuntariness on the part of the official or
employee. The separation from the service of the
official or employee must not be asked for or
initiated by him.
Amounts received by reason of involuntary
separation remain exempt from income tax even

if the official or the employee, at the time of

separation, had rendered less than 10 years of
service and/or is below 50 years of age.
Any payment made by an employer to an
employee on account of dismissal constitutes
compensation regardless of whether the
employer is legally bound by contract, statute or
otherwise, to make such payment
10.Pension is a stated allowance paid
regularly to a person on his retirement or
to his dependents on his death, in
consideration of past services, meritorious
work, age, loss or injury.
Pension pay is TAXABLE unless the law
states otherwise, or unless the BIR
approves the pension plan of a private
11.Vacation and Sick Leave
Taxable or Not:
a. If paid or availed of as salary of an
employee who is on vacation or on sick
leave notwithstanding his absence from
work, it constitutes taxable compensation
b. Monetized value of unutilized vacation
leave credits of 10 days or less which were
paid to private employees during the year
are not subject to tax and to the
withholding tax
c. Monetized value of vacation and sick leave
credits paid to government officials and
employees are not subject to income tax
and to the withholding tax
12.Thirteenth month pay and other
As a general rule, thirteenth month pay
and other benefits are not taxable if the
total amount received is P82000or less.
Any amount exceeding P82000 is taxable.
13.Fringe benefits and de Minimis
FRINGE BENEFITS - as any good,
service, or other benefit furnished or
granted by an employer, in cash or in
kind, in addition to basic salaries of an
individual employee
De Minimis benefits - privileges of
relatively small value as given by the
employer to his employees. They are not
considered as compensation subject to

income tax and consequently to

withholding tax.
14.Overtime Pay refers to premium
payment received for working beyond
regular hours of work which is included in
the computation of gross salary of
employee. Back pay and overtime pay
constitute compensation.
15.Profit sharing proportionate share in
the profits of the business received by the
employee in addition to his wages
16.Awards for Special Services the
amount received as an award for special
services of employee, or suggestions to
employer resulting in the prevention of
theft or robbery. Awards for past services
and the like are also compensations
17.Beneficial payments such as where an
employer pays the income tax owned by
an employee are additional compensation
18.Other forms of Compensation
received due to service rendered are
compensation paid in kind. It is to be
noted that compensation can be paid in
kind but taxes are generally paid in
money. For example, an insurance
premium paid by employer for insurance
coverage where the heirs of employee are
the beneficiaries is the employees
Shares of Stock Received as Compensation
Compensation paid to an employee of a
corporation in its stock is to be treated as if the
corporation sold the stock at its market value and
paid the employee in cash
Hence, if compensation is received in the form of
shares of stock, the fair market value of the
shares of stock at the time the service is
rendered is the basis of tax.
Employee stock option
A stock option is a privilege granted to some key
employees of a corporation to avail of the said
corporations share of stock in the future for a
certain price.

The following rules shall be observed when a

company issues a stock option to its employees:
1. Compensation income if the market
price is greater than the option price, the
difference is a compensation income at
the date of grant.
2. Capital gain when the stocks are sold,
the excess of the market price at the date
of sale over the market price at the date
of grant is a capital gain
Cancellation of Debt
The cancellation and forgiveness of indebtedness
may amount to a payment of income, gift, or
capital transaction, depending upon the
circumstances. The following rules shall then be
1. If a creditor merely desires to benefit a
debtor and without any consideration
cancels the debt, the amount of the
cancelled debt is a gift, not an income of
2. If a corporation to which a stockholder is
indebted forgives the debt, the transaction
has the effect of the payment of a
dividend income to debtor
3. If however a debtor performs services for
a creditor, who, in consideration thereof
cancels the debt, the debtor realizes
income for his services to the extent of the
amount of debt cancelled
Insurance Premiums as Compensation
These are premiums paid by the employer on life
insurance coverage of the employee wherein the
beneficiary is the employees family. These
constitute taxable income on the basis of the
amount of premium paid.
Income Tax Paid as Compensation
For income tax paid by the employer in favour of
the employee, the basis of tax is the amount of
tax paid.
Convenience of the Employers Rule
This tax rule provides that allowances in kind
furnished to the employee for and as a necessary
incident to the performance of his duties are not
taxable. Examples are food and lodging benefit
by a household maid, driver, etc.

Living Quarters

Gross Income from Business and Profession

The following rules govern the living quarters and


Business means any commercial activity

engaged in as a means of livelihood or profit of
an individual or group of individuals. Examples
are trading, merchandising, manufacturing and
other similar benefits

1. When living quarters are furnished in

addition to cash salary, the rental value of
such quarters should be reported as
2. However, if living quarters or meals are
furnished to an employee for the
convenience of the employer, the value
thereof need not be included as part of
compensation income
Unless provided for the exclusive benefit of the
employer, the rental value of living quarters is
compensation income to the employee to the
extent of his reasonable needs, and the excess
shall be considered as expenses of the

Profession primarily any endeavour or work

requiring specialized training in the field of
learning, art, or science engaged in as a means of
livelihood or profit of an individual or group of
individuals. In general, a practice or profession is
a service business.
Gross income from Business

Long-term contract

Meals Subsidized by Employer

The value of any board and lodging furnished by
an employer is ordinarily taxable to the employee
The exclusion for meals is allowed only when
meals are furnished or subsidized to an employee
for the convenience of the employee and
incidental to the requirement of his work or
Remuneration for Casual Labor
1. Remuneration for casual labor not in the
course of an employers trade or business
is not considered compensation
The term casual labor includes labor
which is occasional, incidental or regular.
The expression not in the course of the
employers trade or business includes
labor that does not promote or
advance the trade or business of the
2. Any remuneration paid for casual
labor( that is, labor which is occasional,
accidental or irregular, but which is
rendered in the course of the
employers trade or business) is
considered compensation
3. Any remuneration paid for casual labor
performed for a corporation is considered
as compensation

In case of manufacturing, merchandising or

mining business, Gross income shall mean gross
sales less sales returns, discounts and
allowances, and cost of goods sold, plus any
income from investment and other incidental or
outside operations or sources
In determining gross income, subtractions should
not be made for depreciation, depletion, selling
expenses or losses or for items not ordinarily
used in computing the cost of goods sold
In the case of taxpayers engaged in the sale of
service, gross income is based on gross receipts
less returns
The Cost of Sales
Cost of Goods Sold shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present
location and use. The cost of sale is deducted
from the net sales to calculate gross income from
business. Cost of Sales of a business may be
classified as follows:
1. Cost of Goods Manufactured and Sold
it shall include all costs of finished goods
that are sold such as raw materials used,
direct labor and manufacturing overhead,
freight cost, insurance premiums and






other costs incurred to bring the raw

materials to the factory or warehouse
Cost of goods sold of trading or
merchandising concern refers to the
invoice cost of goods sold, plus import
duties and freight incurred in transporting
the goods to the place where they are
actually sold, including insurance while
the goods are in transit
Cost of Service of Servicing Concern
for minimum corporate income tax
purposes, gross income from service
business is gross receipts less returns,
allowances, discounts and cost of services.
The Cost of Services shall include the
direct costs and expenses necessarily
incurred to provide the services required
by the customers and clients which
include the following items:
Benefits of personnel, consultants
and specialists directly rendering the
Cost of facilities directly utilized in
providing the service such as
depreciation or rental of equipment
used and cost of supplies
In the case of banks, costs of services
shall include interest expense.

Telegraph and Cable Services of a foreign

corporation shall include income from services
within the Philippines only. Specifically, the
income may be derived from the following:
1. Gross revenues derived from messages
originating in the Philippines
2. Amount received by the company
collected abroad on collect messages
originating in the Philippines and
deducting from such amounts paid or
accrued for transmission of messages
beyond the companys own circuit
Amounts received by the foreign company in the
Philippines with respect to collect messages
originating outside the Philippines.
Rental Income refers to earnings derived from
leasing real estate as well as personal property.
Aside from the regular amount of payment for
using the property, rental income also includes all
other obligations assumed to be paid by the
lessee to the third party in behalf of the lessor

Rental income is generally determined by the

gross receipts for the year, (earned and unearned
under accrual basis) because the nature of
business involved is service.

1. Prepaid rental if the advance payment

is a prepaid rental received without
restriction as to its use the entire
amount is taxable in the year it is
received whether the lessor uses cash or
accrual method of accounting
2. Security Deposit with Restriction if
the advanced payment is a security
deposit which restricts the lessor as to its
use, then such amount should be
excluded in the determination of rental
3. Security Deposit with an Acceleration
Clause if the advanced payment is a
loan deposit, or option money for the
property or security deposit for the faithful
compliance of the lessee of the lease
contract, such advance payment is not an
income to the lessor. The income to the
lessor inures when the lessee violates the
terms of the contract.
Income from Leasehold Improvement when
the lessee erected or built permanent
improvements on the leased property which will
become the property of the lessor upon the
expiration of the lease, the value of the
improvements should be reported as income
of the lessor using either outright method or
spread out method.
a. Outright method the income from leasehold
improvement shall be recognized when the
improvement is completed at its fair market
b. Spread-out method the estimated book
value of the leasehold improvement at the end
of the lease is spread over the term of the
lease and is reported as income for each
year of the lease an aliquot part thereof
Termination of the Contract of Lease
Where there is an immovable improvement made
by the lessee on the lease property and the
termination of the contract of lease is made
before the expiration of the lease term, the

following rules should regulate the

1. If the improvement is destroyed
BEFORE the expiration of the lease, the
lessor is entitled to deduct as a loss
for the year, when such destruction
takes place, the amount previously
reported as income less any salvage
value, to the extent that such loss was not
compensated for by insurance
2. If for any reason other than a bona fide
purchase from the lessee by the lessor,
the lease is terminated so that the lessor
comes into possession of the property
prior to the final fixed period of the lease
contract, the lessor receives additional
income for the year if the value of
improvement exceeds the amount of
income already reported
No appreciation in value due to causes
other than the premature termination of
lease shall be included.
Gains from Dealings in Property
This refers to the income derived from the sale,
and/or exchange of assets, which results in gain
because of the excess of the amount or value
received by the taxpayer over the determined
value of the property he has disposed of.
The general rule is that the entire amount of the
gain or loss arising there from is a taxable gain or
deductible loss.
Passive Income
A final tax is imposed upon gross passive income
of citizen and resident aliens
An income is considered passive if the taxpayer
merely waits for it to be realized. Examples of
passive income are:
1. Yield from deposit substitutes and
trust fund
Deposit substitute is a debt
instrument issued by the bank to borrow
money from the public other than from the
clients deposit
Trust fund is any estate, especially
stock, securities, or money which is held in

trust by a person in behalf of another

Both deposit substitute and trust fund
yield earnings that are to be treated as
interest income
2. Interest income an 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, is subject to
income tax
For individuals, except non-resident aliens not
engaged in trade or business in the
Philippines, interest income from long-term
deposit or investment shall be exempt from
income tax, provided that the following
conditions must be met:
a. The deposit or investment must be
evidenced by certificates conforming to
the Bangko Sentral ng Pilipinas prescribed
b. The same must have a maturity period of
not less than five years and in
denominations of P10,000 or other
denominations as may be approved by
BSP issued by banks(not by non-bank
financial intermediaries or finance
However, should the holder of the certificate
pre-terminate the deposit or investment
before the fifth year, a 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, as follows:
Final tax of 5% ------------------- 4 years to less
than 5 years
Final tax of 12% ------------------3 years to less
than 4 years
Final tax 20% ---------------------less than 3 years

Classifications of Interest Income

a. Exempt from Income tax if received
1. By members from a duly-registered

2. BSP prescribed form of investments

maturing more than 5 years
3. Expanded foreign currency deposit
system by non-resident
4. A tenant who paid to a landowner
on the price of land under a tenantpurchaser agreement as part of
b. Subject Final Withholding tax
Interest income on deposits made in
banking institutions is a passive income
which is usually subjected to final
withholding tax of 20%
c. Subject to Normal Tax (lending is the
Main Course of Business)
These are earnings derived from lending
money, goods or credits from one person
to another without any withholding tax
made. Since these interest earnings are
received in its total amount, they should
be subject to normal tax of the taxpayer
Since the interest income is earned in the
normal conduct of business, this shall be
included as part of income to be reported
in the Annual Income Tax Return
3. Royalty income is a payment or portion
of proceeds paid to the owner of a right,
such as an oil right or a patent for the use
of it, or a portion of the proceeds from the
work of an author or composer.
a. In general, royalty income includes those
which are derived from natural
resources or products such as coal, gas,
oil, copper, silver, gold, and other similar
products. These kinds of royalty income
are subject to 20% final tax
b. Royalties on books, literary works and
musical composition are royalty income
subject to 10% final tax
4. 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
Such earnings may be exempt from income
tax, or subject to either final tax or on the
normal year-end tax of individuals or
Tax Rules on Dividend Income

1. If received by a domestic or resident

corporation from a domestic corporation
subject to tax, such dividend is tax exempt
(non-taxable inter-corporate principle)
2. Pure stock dividends, dividends received
from cooperative, and pure liquidating
dividends are tax-exempt
3. Cash or property dividend is subject to
final tax if received by an individual or
non-resident corporation from a domestic
corporation subject to income tax
a. If received by a resident citizen, nonresident citizen and resident alien, the
final tax applicable is 10%
b. If received by a non-resident alien
engaged in business in the Philippines,
the final tax is 20%
c. If received by a non-resident alien not
doing business within, the final tax is
d. If received by a non-resident foreign
corporation from a domestic
corporation, the final withholding tax is
4. Other dividends excluded from rules 1,2,
and 3 are included in the computation of
the taxable income and income tax at the
end of the year
Forms and Valuations of Dividend
For income tax purposes, the form of dividend
income shall determine its applicable
treatment. Dividends that are usually received
by a stockholder are as follows:
1. Cash dividend the most common form
of dividend. It is valued and taxable to the
extent of amount of money received by
the stockholder
2. Property dividend a dividend payable
in property of an issuing corporation is a
property dividend. The property dividend
is usually valued and taxable to the extent
of the fair market value of the property
received at the time of declaration
a. Merchandise inventory, supplies,
b. Shares of stock of another
c. Treasury stock of issuing
corporation if acquired at cost
different from its par value

3. Stock Dividend pure stock dividends

are not subject to tax because they simply
involve a transfer of the retained earnings
to the paid-in capital account, except
when the following circumstances exists:
a. There is an option that some
stockholders could take cash or
property dividends instead of stock
b. Some stockholders exercised the
option to take cash or property
c. The exercise of option resulted in a
change of the stockholders
proportionate share in the outstanding
shares of the corporation
Redemption of Stock Dividend
If the corporation cancels or redeems stock
issued as a dividend at such time and in such
manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in
redemption or cancellation of the stock is
considered taxable income to the extent that it
represents a distribution of earnings or profits.
Stock Dividends Different from Shares
Previously Acquired
When stock dividends received are of a different
class from shares previously acquired, the stock
dividends are not income, and therefore, not
taxable. The original cost of the investment is
allocated between the original shares and the
stock dividends on the basis of their respective
market value at the date of receipt
4. Scrip Dividend is issued in the form of
promissory note and is taxable to the
extent of its fair market value. It is taxable
in the year when the warrant was issued.
5. Indirect Dividends are those other
dividends representing payments or rights
received by the taxpayer, which are really
6. Liquidating Dividend are return of
stockholders investment. It arises from the
distribution of assets by a corporation to
its stockholders upon corporate dissolution
As a rule, the excess amount of liquidating
dividends over cost of shares surrendered

is taxable. Such excess is a gain realized

which is taxable.
Distribution of liquidating dividends is to
be treated as a sale of stock. The
difference between the cost or other basis
of the stock and the amount received in
liquidation of the stock is a capital gain or
a capital loss. The gain realized or loss
sustained by the stockholder is a taxable
income or deductible loss, as the case
may be. Consequently, the capital gain on
liquidating dividend is not subject to final
5. Prizes and winnings
Prize is a reward for a contest or a competition.
It represents remuneration for an effort reflecting
ones superiority, like prize money of a boxing
Winnings is a reward for an event that
depends on chance such as winnings from
gambling, lottery or raffle ticket
In general, prizes are subject to final tax of 20%
except if the amount of the prize is ten
thousand (P10,000) or less which shall be
subjected to normal tax. Winnings are subject
to final tax final tax of 20% regardless of
Prize and winnings are generally taxable except
when the law provides for their exemption


The partners share in the distributive profit of a
professional partnership represents his gross
Other Sources of Income generally incidental
earnings or not common source earnings

Bad debt recovery

Tax refund or credit
Damages recovery
Income from whatever source

Tax Benefit Rule a general principle in

taxation which states that if a taxpayer deducted

an item on his income tax return and enjoyed a

tax benefit (reduced his income tax) thereby, and
in a subsequent year recovers all or part of that
item, he will recognize gross income in the year
the deducted item is recovered

Bad Debt Recovery

The following are the requisites for deductibility
of bad debts:
1. There must be a valid and existing debt
arising from business or trade of the
2. The debt must be actually ascertained to
be worthless and uncollectible during the
taxable year
3. The debt must be charged off during the
taxable year

As a rule, if the tax paid is deductible, refund is

taxable. If the tax paid is not deductible, refund
is not taxable.
TAX REFUND OR CREDIT shall be included as
part of gross income in the year of receipt to
the extent of the income tax benefit of the
said deduction
Damages Recovery an amount received by an
injured person as payment for loss income or
payment to compensate damage to property,
injury to person, or loss of life.
As a rule, recoveries of damage representing
compensation for loss of profit or income are
Recoveries that are to compensate for damages
to property, injury to person, or loss of life are not

For taxation purposes, bad debts are considered

the amounts of receivable being ascertained
worthless to be written off during the taxable

Annuities are instalment payments received

for life insurance sold by insurance companies.
The annuity payments represent a part that is
taxable and not taxable. If the part of annuity
payment represents interest, then it is
TAXABLE income. If the annuity is a return of
premium, it is NOT TAXABLE.

When a written off receivable has been recovered

in the succeeding year, the recovered amount
must be included in the gross income during the
taxable year of recovery. However, under the
doctrine of equitable benefit, the amount
recovered is only taxable to the extent of the tax
benefit in the year the account was written of

Under the contract of life annuity, the debtor

binds himself to pay an annual pension or income
during the life of one or more determinate
persons in consideration of a capital consisting of
money or other property, whose ownership is
transferred to him at once with the burden of the

Tax Refund or Credit

Income from whatever sources inclusion of

all income not expressly exempted within the
class of taxable income under the laws
irrespective of the voluntary or involuntary action
of the tax payer in producing the gains and
whether derived from legal or illegal sources

As a rule, refunds from taxes paid are taxable

except for the following:

Estate or Donors tax

Philippine income tax
Stock transaction tax
VAT, claimed as input tax

Tax refund is subject to the tax benefit rule which

states that the refund of tax would only be
subjected to tax if such tax was previously
deducted from gross income resulting in the
reduction of reported taxable income

Examples of Income from legal source are:

a. Employees salary bonus
b. Commissions/rebate of a medical
Examples of Income from illegal sources
a. Gambling
b. Kidnapping
c. Extortion

d. Smuggling
e. Embezzlement
Illegal Obtained Income
As a rule, illegal income is taxable. Income
obtained through illegal means is included in the
wrongdoers gross income even though he is
obligated to return it when discovered
The mere fact that a transaction is illegal does
not exempt it from income tax laws. Gains from
such transactions as gambling, extortion,
swindling and the like are all taxable
Income that is not realized is not taxable,
even though its absence is due to an illegal
act. Moral turpitude is not a touchstone of
The courts have sustained the BIR
Commissioners determination of the illegal gains
from such records as bank deposits, or on the
basis of commissions paid out, and even from a
formula determination based upon the nationwide
experience. The burden is on the taxpayer to
offer independent evidence to contradict such
Embezzled funds - are income without
consent (express or implied) with an obligation

to repay. If the embezzler reaps the fruit of his

crime without restriction as to disposition, he is in
receipt of income though it may be claimed he is
not entitled to the money and may be adjudged
liable to restore its equivalent. When reported as
income, actual repayment of embezzled fund will
give rise to deduction.
Income Received by Error
When income is received under a mistake of fact
or law, the income is included in the gross
taxable income of the recipient notwithstanding
the fact that the recipient may be required to
return the income item to the payor when the
error is discovered.