Exclusions from Gross Income

What is the rationale for exclusions to gross income?

These items are not included in the determination of gross income either because:
• they represent return of capital or are not income, gain, or profit;
• they are subject to another kind of internal revenue tax;
• they are income, gain, or profit expressly exempt from income tax.

Who may avail of exclusions?

All taxpayers may avail of exclusions from gross income.

Differentiate exclusions, deductions, and tax credits.

EXCLUSIONS DEDUCTIONS TAX CREDIT

not included in the computation included in the computation of paid beforehand and deducted
of gross income gross income but deducted later from the tax liability of the
taxpayer
income received or earned but
not taxable as income because of
exemption by virtue of law or
treaty

What are the different exclusions from gross income provided by the Constitution, Tax Code, and
Special Laws?

Tax Code Constitution Special Laws

Proceeds of life insurance Income derived by the Personal Equity and Retirement
policies government or political Act of 2008
subdivisions from exercise of (PERA Act, R.A. 9505)
essential governmental functions
Employee contributions to PERA
voluntary retirement account are
excluded.
Amount received by insured as
return of premium
Amounts received under life
insurance, endowment, or
annuity contracts
Value of property acquired by
gifts, bequest, devise or descent
Amount received through
accident or health insurance
Income exempt under treaty
Retirement benefits, pensions,
gratuities received under R.A.
7641
Amount received as a
consequence of separation for
any cause beyond one’s control
(death, sickness, or other
physical disability)
Benefits received from a foreign
government by residents or
nonresident citizens or aliens
who reside permanently in the
Philippines
Veteran’s benefits

Winnings, prizes and awards

Imposition of VAT

Is VAT imposed on sale of goods or properties?

Yes. Every sale, barter, or exchange of goods or properties shall be subject to 12% VAT based on the
gross selling price or gross value in money of the goods or properties sold.

What are covered by the term “goods”?

Goods refers to all tangible and intangible objects capable of pecuniary estimation, including:
• real properties held for sale or for lease
• right or privilege to use intellectual property
• right or privilege to use in the Philippines any industrial, commercial, or scientific equipment
• right or privilege to use motion picture films, tapes, and disc
• radio, television, satellite transmission, and cable television time

Is a sale of goods or services essential?

Yes. For there to be a sale, the taxpayer must be engaged in the business of providing the goods or service
he is receiving money for. In a case, reimbursements received by a mall owner for advances made for
payment of utilities (electricity, water, telephone bills) were held to be not subject to tax since the mall
owner was not in the business of providing electricity, water, janitorial service, or telephone lines. The
taxpayer did not directly supply goods and services to its lessees. (Tourist Trade and Travel Corp. v.
Commissioner of Internal Revenue, G.R. No. 164365, June 8, 2007).

An HMO was considered engaged in business as a service contractor and held liable to pay VAT even if
the actual health care service was provided by a 3rd party. (VAT Ruling No. 18-98)

What is gross selling price (GSP)?

The total amount of money or its equivalent paid by the purchaser in consideration of a sale, barter, or
exchange of goods, including any excise taxes if applicable, but excluding VAT.

What is the gross selling price in cases of sale of real property?

In cases of sale of real property subject to VAT, GSP is the higher amount between:
a. consideration in the document of sale; or
b. Fair market or zonal value determined by the CIR or by the schedule of Provincial/City Assessors.

What if the VAT is not billed separately in the document of sale?

The selling price will be deemed inclusive of VAT.
What if the selling price of real property is based on the zonal or fair market value?
The selling price will be deemed exclusive of VAT.

Are all sales of real properties subject to VAT?

No. Only sale of real properties held primarily for sale to customers or held for lease in the ordinary
course of business or trade are subject to VAT.

How will the sale of real property be treated if it’s on installment basis?
If the initial payment in the year of the sale do not exceed 25% of the GSP, the VAT shall be collected on
the installment payments. Initial payments are the downpayment or any other payment actually or
constructively received in the year of the sale, excluding any amount of mortgage or notes or evidence of
indebtedness.

How will the sale of real property be treated if it’s on deferred payment basis?
If the initial payment exceeds 25% of the GSP, the sale will be treated as a cash sale, and the entire selling
price will be taxable in the month of sale.

How is VAT imposed on imported goods?

VAT of 12% shall be levied, assessed, and collected on every importation of goods prior to their release
based on the following:
a. total value used by the BOC in determining tariff and customs duties;
b. customs duties;
c. excise taxes, if any; and
d. other charges.

If the duties are determined by the quantity/volume of the importation, 12% VAT will be based on the
landed cost plus excise taxes.

What if the goods were imported by tax-exempt persons and subsequently transferred to non-
exempt persons?
The non-exempt transferee or purchaser shall be considered the importer, and becomes liable for the tax
on such importation. The tax due will be considered a lien on the goods, irrespective of the possessor
thereof. (NIRC, Sec. 107(B)).

How is VAT imposed on services?

VAT of 12% shall be levied, assessed, and collected on gross receipts derived from the sale or exchange
of services, including the use or lease of properties. Gross receipts are the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental or royalty, including the
amount charged for materials supplied with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for services performed or to be performed for another,
excluding VAT.

What services are subject to VAT?

Section 108 provides a non-exhaustive list:
• construction and service contractors
• stock, real estate, commercial, customs and immigration brokers
• lessors of property, whether personal or real
• warehousing services
• lessors or distributors of cinematographic films
• persons engaged in milling, processing, manufacturing or repacking goods
• proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts
• proprietors or operators of restaurants, refreshment parlors, cafes, and other eating places, including
clubs and caterers
• dealers in securities
• lending investors
• transportation contractors on their transport of goods or cargoes for hire another domestic common
carriers by land relative to their transport of goods or cargoes
• common carriers by air and sea, relative to their transport of passengers, goods, or cargoes from one
place in the Philippines to another place in the Philippines
• sales of electricity by generation, transmission, and distribution companies
• services of franchise grantees of electric utilities, telephone and telegraph, radio and television
broadcasting except for those under Sec. 119, and non life insurance companies, including surety,
fidelity, indemnity, and bonding companies
• similar services whether or not the performance calls for the use of physical or mental faculties,
including:
• lease or use of right or privilege in relation to intellectual properties
• lease, use of, or right to use any industrial, commercial or scientific equipment
• supply of technical, scientific, industrial or commercial knowledge or information
• supply of ancillary and subsidiary assistance
• supply of services by a nonresident or his employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand, machinery, or other apparatus purchased
from such nonresident
• supply of technical advice, assistance, or service rendered in connection with technical management
or administration of any scientific, industrial, or commercial undertaking, venture, project or scheme
• lease of motion picture films, films, tapes, and discs
• the lease or use of or the right to use radio, television, satellite transmission, and cable television time.