Gross Income Gross Income: (CGG Irr Dappp)

Chapter 7 Gross Income
 Gross Income
Gross income means all income derived from whatever source, including (but not limited
to) the following items: (CGG IRR DAPPP)
1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items
2. Gross income derived from the conduct of trade or business or the exercise of a
profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions and
11. Partner's distributive share from the net income of the general professional
partnership (Sec. 32, NIRC)
The term “gross income” whenever used without qualification, is comprehensive, as

defined above, and is different from the limited meaning of gross income for purposes of
minimum corporate income tax or the gross income tax of corporations. http://www.scribd.com/doc/33337629/UP08-Tax-01-amp-02
Income derived from illegal business (gain) Examples of income from illegal sources - Taxable
Gambling, kidnapping, extortion, smuggling, embezzlement
Recovery of lost earnings Taxable
Recovery of damages pertaining to recovery or return of loss income or profit Taxable
Recovery of items previously deducted from gross income (tax benefit rule) Taxable
Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution) Taxable
Forgiveness of indebtedness in exchange of a service performed Taxable
Recovery of damages (compensation for injury; from tortuous acts) Not taxable
Forgiveness of indebtedness (if effect of entire transaction is a reduction of Not taxable

purchase price of property acquired in prior year)
BIR Ruling No. 17-2003

The transfer of land made by a person to another in payment of services rendered in the form of attorneys
fees shall be considered as part of the gross income of the latter valued at either the fair market value or the
zonal valuation, whichever is higher, in the taxable year received.
 Gross Income vs. Net Income vs. Taxable Income
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Gross income (See definition above)
Net income means gross income less statutory deductions and exemptions. It is referred to
as “taxable income” under the NIRC.
Taxable income means the pertinent items of gross income specified in this Code, less the
deductions and/or personal and additional exemptions, if any, authorized for such types of
income by this Code or other special laws. (Sec. 31, ibid.) (AKA Net Income)
 Classification of Income as to Source
Gross income and taxable income from sources within the Philippines
1. Gross Income from Sources within the Philippines
Income Test of source of income
Interests Residence of Debtor
Dividends a) From domestic corporation – income within
b) From foreign corporation:
Income within if more than 50% of the gross
income of such foreign corp. for the 3-yr. period
ending with the close of the taxable year prior to
the declaration of dividends (or for such part of
such period as the corporation has been in
existence) was derived from sources w/in the PH
Extent:
PH GI
x Dividend = Income within
Total GI
Income without if less than 50% of the gross

income of such foreign corp. for the 3-yr. period
ending with the close of the taxable year prior to
the declaration of dividends was derived from
sources w/in the Philippines. Therefore, nothing
of such dividends forms part of income within
Services (Compensation for Place of performance of service
labor/personal services)
Rentals Location of the property/interest in such property
Royalties Place of use or location of intangibles (such as
patents, trademarks, etc.) giving rise to royalties
Gain on sale of Real property Location of property
Gain on sale of personal Place of Sale
property other than shares of
stock in a domestic
corporation purchased in one
country and sold in another
Gain on sale of shares of Philippines regardless of where sold
stock in a domestic corp.
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Note:
Royalties (from property or use of property located in Philippines), includes:
 Use of/the right/privilege to use in the Philippines any copyright, patent,
design or model, plan, secret formula or process, goodwill, trademark,
trade brand or other like property or right
 Use of/the right to use in the Philippines any industrial, commercial or
scientific equipment
 Supply of scientific, technical, industrial or commercial knowledge or
information
 Supply of any assistance that is ancillary & subsidiary to, & is furnished as
a means of enabling the application or enjoyment of, any such
property/right in (a) above, such equipment in (b) above or knowledge/info
in (c) above
 Supply of services by a nonresident person/his employees in connection
with the use of prop./rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased from such
nonresident person
 Technical advice, assistance or services rendered in connection with
technical mgt./admin. of any scientific, industrial or commercial
undertaking, venture or project
 The use of or the right to use:
a) motion picture films
b) films or video tapes for use in connection with TV
c) tapes for use in connection with radio broadcasting
2. Taxable Income from Sources within the Philippines

General Rule:
Gross Income (within the Philippines)
Less: Deductions (attributable to GI within)
Taxable Income
Gross income and taxable income from sources without the Philippines
1. Gross Income from sources without the Philippines
 Interests (other than those derived from sources within the Philippines)
 Dividends (other than those derived from sources within the Philippines)
 Compensation for labor or personal services performed without the
Philippines
 Rentals or royalties from property located without the Philippines or from
any interest in such property including rentals/royalties for the use of or for
the privilege of using w/o the Philippines, patents, copyrights, secret
processes & formulas, goodwill, trademarks, trade brands, franchises &
other like properties
 Gains, profits & income from the sale of real property located without the
Philippines
TIP: The foregoing enumeration is similar to the enumeration of gross income from sources within the
Philippines. Hence, as long as you know which income are considered as income within, all else are
income without.
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2. Taxable Income from Sources without the Philippines

General Rule:
Gross Income (without the Philippines)
Less: Deductions (attributable to GI without)
Taxable Income
Income partly within or partly without the Philippines

These are:
1. Income from services rendered partly within and partly without;
2. Income from sale of personal property produced (in whole or in part) within and
sold without the Philippines;
3. Income from sale of personal property produced (in whole or in part) without and
sold within the Philippines.
Personal Property Income

Manufacturing Business
Produced here and sold without Income partly within, partly without
Produced here and sold here Income within
Produced abroad and sold here Income partly within, partly without
Trading Business
Purchased without and sold within Income within
Purchased within and sold without Income without
Purchased within and sold within Income within
Taxpayer sells it abroad through a sales office Income partly within, partly without
As for unallocated expenses, meaning those which are not entirely attributable to
either income within or without, such expenses shall be allocated using the
following formula:
Income without Unallocated Deductions from

x Expense = Income Without
Worldwide Income
Income within Unallocated Deductions from

x Expense = Income Within
Worldwide Income
 Sources of Income Subject to Tax
Compensation income
In general, the term "compensation" means all remuneration for services
performed by an employee for his employer under an employer-employee
relationship, unless specifically excluded by the Code. Included only when the
taxpayer is subject to Net Income Tax
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1. Monetary benefits
 Salaries, wages, emoluments and honoraria, allowances, commissions
(e.g. transportation, representation, entertainment and the like);
 Fees including director's fees, if the director is, at the same time, an
employee of the employer/corporation;
 Taxable pensions and retirement pay;
 Other income of a similar nature
2. Non-monetary
 Taxable bonuses and fringe benefits except those which are subject to
the fringe benefits tax under Sec. 33 of the Code;
Fringe benefits (See Chapter 6 Taxation of Fringe Benefits)
Professional income
Income earned from the practice of profession provided there is no employer-
employee relationship between him and his clients.
Profession is primarily any endeavor 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.
Income from business
In the case of manufacturing, merchandising, or mining business, “gross income”
means the total sales, less cost of goods sold, plus any income from investments
and from incidental or outside operations or sources. In determining gross income,
deductions 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 sellers of services, their gross income is computed by deducting all
direct costs and expenses as prescribed in RMC Nos. 04-2003 and 30-2008.
Income from dealings in property
1. Types of properties
 Ordinary assets – assets that are used primarily in the ordinary course of
trade or business, such as
a) Stock in trade of taxpayer
b) Property which would properly be included in an inventory of the
taxpayer, if on hand
c) Merchandise inventory
d) Depreciable assets used in the trade/business
e) Real property used in trade/business
 Capital assets – properties of a taxpayer other than ordinary assets,
such as
a) Stock and securities held by taxpayers other than dealers in
securities
b) Interest in partnership and joint venture
c) Goodwill (Car used partly for business & partly for personal purposes = Partly)
d) Real property not used in trade or business like residential house
and lot (Business of sole proprietorship sold to a corp. = Partly OA/Partly CA)
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e) Investment property (Accounts receivable = CA)
2. Types of gains from dealings in property

 Ordinary gain (loss) vs. Capital gain (loss)
a) Ordinary gain is derived from the sale or exchange of ordinary
assets including gains from performance of services and
business; included in the gross income.
b) Ordinary loss is the excess of business expenses and losses
over the business income of the taxpayer derived from the sale or
exchange of ordinary assets; deductible from gross income.
c) Capital gain is the excess of value received over the determined
cost from the sale or exchange of capital asset. The following are
the rules on the taxability of capital gains:
(1) Sale of stocks of a domestic corp. –
subject to CGT
(2) Gain derived from sale of real property
in the Philippines – subject to CGT
(3) Other capital assets – excess of the
gains from sales or exchanges of other capital assets
over the losses from such sales or exchanges; included
in the gross income
d) Capital loss is the excess of the losses from sales or exchanges
of other capital assets over the gains from such sales or
exchanges; deductible only from capital gains.
 Actual gain vs. Presumed gain

a) Actual gain is the amount realized from the sale of the asset in
excess of the cost to the taxpayer.
b) Presumed gain is the presumption of the law of the existence of
a gain from sale of real property which subjects the said sale to
CGT of 6% based on the selling price or FMV whichever is
higher.
 Short term capital gain vs. Long term capital gain (holding period )
In case of individuals, the percentages of gain or loss to be taken into
account shall be:
a) Short term - 100% if the capital asset has been held for 12
months or less; and
b) Long term - 50% if the capital asset has been held for more than
12 months.
In case of a corporation, the holding period is not applicable;
the capital gain and loss are to be reported in full amount
regardless of the number of years the capital asset is held.
 Net capital gain, net capital loss

a) Net capital gain is added to ordinary gain.
b) Net capital loss is not deductible from ordinary gain.
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 Computation of the amount of gain or loss

a) Gain = excess of the amount realized over the basis/adjusted
basis (selling price > cost)
b) Loss = excess of the basis/adjusted basis over amount realized
(cost > selling price)
c) Amount realized = money received + fair market value of the
property (other than money, if any) received
(1) Cost or basis of property sold:

Mode of Acquisition Basis for Determining Gain/Loss from
Sale/Disposition of Property
Purchase Cost of property acquired on/after 3/1/1913
Inheritance Fair market value as of the date of acquisition (at the
time of death)
Gift the cost to the donor or to the previous owner who
did not acquire it by gift; but, if such basis > FMV at
the time of the gift, the basis shall be such FMV for
the purpose of determining the loss
Acquired for less than Amount paid by the transferee
adequate consideration
Property acquired Basis of stock or securities received by transferor:
where gain or loss is not Same as the basis of property, stock/securities
recognized (tax-free exchanged
exchanges) 1. increased by:
 divide
nds
 amou
nt of any gain recognized by the exchange
2. decreased by:
 mone
y received
 fair
market value of the other property received
 liabilit
y assumed by the transferee
Basis of the property transferred in the hands of the
transferee:
Same as it would be in the hands of the transferor
increased by the amount of the gain recognized to the
transferor on the transfer.
(2) Cost or basis of the property exchanged in corporate

readjustment
Non-recognition of gain or loss if exchange of property
is solely in kind:
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 A corporation exchanges property solely for

stocks in a corporation (both parties to
merger/consolidation), or
 A shareholder exchanges stock in a corp. for the
stock of another corp. (both corps. are parties to
the merger/consolidation), or
 A security holder of a corporation exchanges his
securities in such corp. solely for stock or
securities in another corp. (both corps. are
parties to the merger/consolidation)
 If property is transferred to a corporation by a
person in exchange for stock/unit of participation
in such corporation of which as a result of such
exchange such person, alone/together with
others, not exceeding 4 persons, gains control of
said corporation
(3) Recognition of gain or loss in exchange of property

 General rule: The entire amount of the gain or
loss shall be recognized upon the sale or
exchange of property.
 Exception: No gain or loss is recognized (tax-
free exchanges)
If in pursuance to a plan of merger or
consolidation,
a) a corporation exchanges property solely for
stocks in a corporation (both parties to
merger/consolidation), or
b) A shareholder exchanges stock in a corp. for
the stock of another corp. (both corps. are
parties to the merger/consolidation), or
c) A security holder of a corp. exchanges his
securities in such corp. solely for stock or
securities in another corp. (both corps. are
parties to the merger/consolidation)
If property is transferred to a corporation by a
person in exchange for stock/unit of
participation in such corporation of which as
a result of such exchange such person,
alone/together with others, not exceeding 4
persons, gains control of said corporation.
Control is ownership of stocks in a
corporation possessing at least 51% of the
total voting power of all classes of stocks
entitled to vote.
 Income tax treatment of capital loss
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a) Limitation on capital loss

(1) General rule: Allowed only to the extent of the gains
from such sales or exchanges, hence, the net capital
loss is not deductible from ordinary income; applicable
to both corporations and individuals.
(2) Exception: Losses from such sale incurred by a
domestic bank/trust company substantial part of
business is receipt of deposits, sell any bond,
debenture, note or certificate or other evidence of
indebtedness issued by any corporation, with interest
coupons or in registered form (including one issued by
the government or political subdivision)
b) Net Capital Loss Carry-Over
(1) Corporations cannot carry over a net capital loss
(2) If net capital loss is sustained in any taxable year, such
loss is treated in the succeeding taxable year as a loss
from the sale/exchange of a capital asset held for not
more than 12 mos. (100% deduction)
(3) Such net capital loss that should be carried over should
not exceed the net income for the year Incurred (prior
year’s net income)
(4) Example:
Net income in 2011 = P 6,000
Net capital loss in 2011 = 10,000
Amount deductible in 2012 is P6,000 only since it

should not exceed the net income of the taxable year
where the loss was incurred. Note that the allowable
capital loss to be deducted in 2012 (i.e. P6,000) is only
to the extent of the capital gain for 2012.
Net income should be understood as taxable income
according E.O. 37
 Dealings in real property situated in the Philippines

a) Involves the sale or other disposition of real property classified as
capital asset located in the Philippines by a non-dealer in real
estate.
b) If the sale is made by a dealer in securities or if the real property
is an ordinary asset, the resulting gain or loss will be considered
as ordinary income.
c) Tax base: the higher between
(1) Gross selling price
(2) Prescribed zonal value of real properties determined by
the Commissioner
(3) Fair Market Value as determined by the Provincial and
City Assessors
Note: Gain or loss is immaterial since there is a conclusive
presumption of gain.
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An individual taxpayer has the option to treat the capital gain as

subject to 6% CGT or 0-32% graduated tax IF the buyer of the
real property is the Government or any of its political subdivision,
or GOCC.
Tax rate: 6%
 Dealings in shares of stock of Philippine Corporations

a) Listed and traded in the stock exchange (Stock Transaction Tax)
Tax rate — one-half of one percent (1/2 of 1%)
Tax base — Gross selling price or gross value in money of the
shares of stock sold, bartered, exchanged or otherwise disposed
which shall be assumed and paid by the seller or transferor
through the remittance of the stock transaction tax by the seller or
transferor's broker.
b) Not listed and not traded in the stock exchange (Capital Gains
Tax)
Amount of capital gain: Tax rate
On the net capital gain: Domestic Corp. only 15%
Tax base – net capital gains realized during the taxable year
from the sale, barter, exchange or disposition of shares of stock
not listed and not traded in the stock exchange.
(1) Shares of stock becoming worthless
 Losses from shares of stock, held as capital
asset, which have become worthless during the
taxable year shall be treated as capital loss as of
the end of the year.
 This loss is not deductible against the capital
gains realized from the sale, barter, exchange or
other forms of disposition of shares of stock
during the taxable year, but must be claimed
against other capital gains to the extent provided
for under Sec. 34 of the Tax Code, as amended.
(2) Wash sales of shares of stock

 Wash sales is a sale of substantially identical
stock within a period beginning 30 days before
the date of such sale or disposition and ending
30 days after such date (referred to as the 61-
day period). (RR 6-2008)
 General rule: Losses from wash sale are not
deductible while gains are taxable.
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 Does not apply in the case of a dealer in stock if

the sale or other disposition of stock is made in
the ordinary course of the business of such
dealer.
 Formula:
Numbers of shares bought
Nondeductible = (During the prohibited period) X Amount
Loss Numbers of shares sold of loss
Numbers of shares bought

(During the prohibited period)…………….. Pxx
Add: Wash sale loss (nondeductible)……. xx
Basis or cost of the shares acquired……. xx
c) Dealer in securities (ordinary income)

The gain on this type of transaction shall be considered as
ordinary income subject to 5%-32% for individuals and 30% for
corporations.
Note:
(1) The capital losses realized from the sale or disposition
of stocks not listed and traded during the taxable year
are deductible only to the extent of capital gains from
the same type of transaction during the same period.
(2) If the transferor of the shares is an individual, the rule
on holding period and capital loss carry-over will not
apply.
(3) Non-deductibility of losses on wash sales and short
sales.
(4) Gains from sale of shares of stock in a foreign
corporation are not subject to capital gains tax but to
graduated rates either as capital gain or ordinary
income depending on the nature of the trade or
business of the taxpayer.
 Sale of principal residence (Capital gain tax exemption)
a) The term "Principal Residence" shall refer to the dwelling house,
including the land on which it is situated, where the husband and
wife or an unmarried individual, whether or not qualified as head
of family, and members of his family reside. Actual occupancy of
such principal residence shall not be considered interrupted or
abandoned by reason of the individual's temporary absence
therefrom due to travel or studies or work abroad or such other
similar circumstances. Such principal residence must be
characterized by permanency in that it must be the dwelling
house in which, whenever absent, the said individual intends to
return.
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b) General rule: The address shown in the ITR is conclusively

presumed as the principal residence.
c) Exception: If the taxpayer is not required to file a return,
certification from Barangay Chairman or Building Administrator
shall suffice.
d) Requisites:
(1) Sale or disposition of the old actual principal residence.
(2) By a citizen or resident alien.
(3) Proceeds of which is utilized in acquiring or
constructing a new principal residence within 18
calendar months from date of sale or disposition.
(4) Notify the Commissioner within 30 days from the date
of sale or disposition through a prescribed return of his
intention to avail tax exemption.
(5) Can be availed of only once every 10 years.
(6) The historical cost or adjusted basis of his old principal
residence shall be carried over to the cost basis of his
new principal residence. Basis NPR = Cost Old + (Cost New – SP)
(7) If there is no full utilization, the portion of the gains
presumed to have been realized shall be subject to
capital gains tax, and
(8) The 6% capital gains tax due shall be deposited with
an authorized agent bank subject to release upon
certification by the RDO that the proceeds of the sale
have been utilized.
e) Formula: If sales proceeds partially applied
Gross Selling Price or
Taxable = Unutilized Selling Price X Zonal Value at the time
Amount Gross Selling Price of sale, whichever is higher
Basis of the new = Partly utilized Selling Price X Basis of the old
Principal residence Gross Selling Price principal residence
Passive Investment Income

As a rule, passive income subjected to final tax is no longer included in the
computation of the annual taxable income. (See Chapter 4 Taxation of Individuals & Chapter 5
Taxation of Corporations)
 Interest income – earned on currency bank deposits & yield or any other
monetary benefit from deposit substitutes & from trust funds & similar
arrangement.
 Dividend income – Any distribution made by a corporation to its

shareholders out of its earnings or profits and payable to its shareholders,
whether in money or in other property.
Types of Dividends:
a) Cash dividend – valued and taxable to the extent of amount of
money received by the stockholder.
b) Stock dividend – generally, pure stock dividends are tax-exempt
except if a corporation cancels or redeems stock issued as a
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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
shall be considered as taxable income to the extent that it
represents a distribution of earnings or profits.
c) Property dividend – property of an issuing corporation distributed
as a dividend; valued and taxable to the extent of fair market
value of the property received at the time of declaration.
d) Liquidating dividend – return of stockholders investment in the
form of asset distribution upon corporate dissolution; generally,
the gain realized or loss sustained by the stockholder, whether
individual or corporate, is a taxable income or a deductible loss,
as the case may be.
e) Script dividend – in the form of promissory notes; taxable to the
extent of its fair market value and in the year when the warrant
was issued.
 Royalty income – A payment or a portion of proceeds paid to the owner of

a right for the use of such right. (E.g. from books, literary works and
musical sources).
 Rental income – Amount or compensation paid for the use or enjoyment

of a thing or a right and implies a fixed sum or property amounting to a
fixed sum to be paid at a stated time for the use of property.
Tax treatment:
a) Income from leasehold improvements – 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 either through:
(1) Outright method – the income shall be recognized
when the improvement is completed at its fair market
value.
(2) Spread-out method – the estimated book value of the
leasehold improvement at the end of the lease is
spread out over the term of the lease and is reported
as income for each year of the lease, an aliquot part
thereof.
b) VAT added to rental/paid by the lessee
(1) All forms of property for lease, whether real or
personal, are liable to VAT.
(2) If advance payments are received for the faithful
performance of certain obligations of the lessee, it is
not subject to VAT.
(3) A security deposit that is applied to rental shall be
subject to VAT at the time of its application.
c) Advance payment/long term lease
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(1) If the advance payment is a prepaid rental without

restriction as to use, the entire amount is taxable in the
year it is received.
(2) If the advance payment is a security deposit which
restricts the lessor as to its use, such amount shall be
taxable only at the time it is applied.
(3) If the advance payment is a loan deposit, or option
money for the property or a security deposit to insure
the faithful performance of certain obligations of the
lessee, such amount shall not be taxable to the lessor
unless the lessee violates the terms of the contract.
Annuities, Proceeds from Life Insurance or Other Types of Insurance

 Annuity – installment payments for life, or for a guaranteed fixed period of
time, whichever is longer
 Amounts excluded from gross income:
a) Amount received by insured as return of premium received either
during the term or at the maturity of the terms or upon surrender
of the contract.
b) Proceeds of life insurance policies paid to the heirs/beneficiaries
upon the death of the insured.
c) If such amounts are held by the insurer under an agreement to
pay interest, the interest payments shall be included in the gross
income.
Note: The insured must die to avail of total exemption. If he
survives, there/s only partial exemption  to the extent
that the proceeds constitute return of capital (total amount
of premiums previously paid).
Prizes and Awards

 Amounts in cash or in kind received by chance or through luck are
generally taxable unless otherwise provided.
a) If the prizes are derived from sources without – the said amount
is included in the gross income for taxpayers who are taxable
within and without the Philippines.
b) Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civic
achievement, but only if:
(1) Recipient was selected without any action on his part.
(2) Recipient is not required to render substantial future
services as a condition of receiving the prize/award.
(3) Example: Nobel prize award
(4) Construed strictly, take note of 7 categories. It does not
include athletic achievement.
(5) Contemplates a rational selection process; cannot just
be randomly selected.
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c) Prizes, awards in sports competition sanctioned by national

sports associations whether held in Philippines or abroad.
(1) Contemplates a particular competition, not a
cumulative achievement (E.g. Sportsman of the year
award does not qualify for exemption)
Pensions, Retirement Benefit or Separation Pay

 Pension – lump sum payment or on a staggered basis in consideration of
services rendered given after an individual reaches the age of retirement.
 Amounts excluded from gross income (see exclusions from gross income)
a) Retirement benefits received under RA 7641 (Labor Code of the
Philippines)
b) Retirement benefits received under a Reasonable Private Benefit
Plan
c) Amount received as a consequence of separation for any cause
beyond control (death, sickness or other physical disability)
d) Benefits received from a foreign government by resident of
nonresident citizens or aliens who reside permanently in the
Philippines
e) Veterans benefits
f) Benefits under SSS
g) Benefits received from GSIS
Income from any source whatever

 Forgiveness of Indebtedness
A gift – if effect of entire transaction is a reduction of Not
purchase price of property acquired in prior year) Taxable
Capital transaction – if the forgiveness of a
stockholder is equivalent to dividend distribution Taxable
A taxable income – in exchange of a service
performed Taxable
 Recovery of amounts previously written off

a) Recovery of bad debts previously allowed as deduction in the
preceding years shall be included as part of gross income in the
year of recovery to the extent of the income tax benefit of such
deduction. (Tax Benefit Rule)
 Receipt of tax refund or tax credit

a) Taxes, when refunded or credited, shall be included as part of
gross income in the year of receipt to the extent of income tax
benefit of said deduction. (Tax Benefit Rule)
b) The following are non-taxable tax refunds: (non-deductible taxes)
(1) Philippine income tax (but FBT can be
deducted from gross income as provided for in RR 8-
98)
(2) Income tax imposed by authority of any foreign country
(except when the taxpayer signifies his desire to avail
of the tax credit for taxes of foreign countries)
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(3) Estate & donor’s taxes

(4) Taxes assessed against local benefits of a kind tending
to increase the value of the property assessed
(5) Final taxes, being in the nature of income tax
(6) Special assessments
 Income from any source whatever

a) “Income from whatever sources derived” means 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 taxpayer in producing the gains, and whether
derived from legal or illegal sources, such as:
(1) Gains from expropriation of property
(2) Income derived from illegal sources
(3) Compensation for damages if it
represents payment for loss of expected profits
 Exclusions from Gross Income

Exclusions from gross income refer to items that are not included in the determination of
gross income either because:
1. They represent return of capital or are not income, gain or profit.
2. They are subject to another kind of internal revenue tax.
3. They are income, gain or profit that is expressly exempt from income tax.
Exclusion vs. Deduction vs. Tax Credit

Exclusion: not included in the computation of gross income. Refers to income received or
earned but is not taxable as income because of exemption by virtue of a law or treaty.
Deduction: included in the gross income but later deducted.
Tax Credit: paid beforehand and is deducted from the tax liability of the taxpayer.
1. Under the constitution

Sec. 4(3) Art. XIV of the 1987 Constitution provides that all assets and revenues of
a non-stock, non-profit educational institution used directly, actually and
exclusively for private educational purposes shall be exempt from taxation.
2. Under the tax code (GIAL CRM)
 Gifts, bequests and devises

a) But, income from such property shall be included in gross income
b) Must be characterized by disinterested generosity and pure
liberality
c) Difficult to establish gift situations if there is an Employer-
Employee relationship (A bonus/assistance in recognition of
service rendered is not exempt)
d) If given under a) constraining force of any moral or legal duty or
b) from the incentive of c) an anticipated benefit of an economic
123
nature or where it is a return for services rendered, proceeds

cannot qualify as a gift.
e) Most critical is the giver’s intention or motive.
f) Can be a gift if given on account of filial relationship.
 Income exempt under treaty

a) To the extent required by any treaty obligation binding upon the
PH govt.
 Amount received by insured as return of premium

a) Under life insurance, endowment, or annuity contracts, received
either during the term or at the maturity of the terms or upon
surrender of the contract.
 Life insurance
a) Proceeds of life insurance policies paid to the heirs/beneficiaries
upon the death of the insured
b) If such amounts are held by the insurer under an agreement to
pay interest, the interest payments shall be included in the gross
income
c) Insured must die to avail of total exemption. If he survives, there/s
only partial exemption to the extent that the proceeds
constitute return of capital (total amount of premiums previously
paid).
 Compensation for injuries or sickness

a) Received through Accident/Health Insurance or Workmen’s
Compensation Act, as compensation for personal
injuries/sickness + amount of damages received on account of
such injuries/sickness
b) Damages will be exempt only if they arise together with personal
injury; however, if damages only amount to return of capital, it is
exempt (E.g. Damages from car accident exempt only if claim
includes compensation for personal injury. If no personal injury,
damages for car wreckage will only be exempt to the extent of the
amount of the actual damage return of capital)
c) Must be physical injury, not injury to rights.
 Retirement benefits, pensions, gratuities

a) Retirement benefits receive under R.A. 7641 (Labor Code of the
Philippines) and those received in accordance with a Reasonable
Private Benefit Plan
(1) R.A. 7641
124
 Conditions: (i) at least 60 years old; (ii) 5 years

of service at time of retirement
 Availed if there is no reasonable private benefit
plan (benefits under this option is less)
 Limited exemption: ½ month salary for every
year of service. In RPBP, all is excludable.
(2) Reasonable Private Benefit Plan (RPBP)

 Conditions: (i) at least 50 yrs old; (ii) in the
service of same employer for at least 10 years at
time of retirement
 Must be approved by BIR
 A pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit
of some or all of his officials/employees, wherein
contributions are made by such employer for the
officials/employees, or both, for the purpose of
distributing to such officials & employees the
earnings & principal of the fund thus
accumulated; & provided in the plan that no part
of the income shall be used for/be diverted to
any purpose other than for the exclusive benefit
of the said officials & employees
 Service must be continuous
 You can “avail of the benefits only once” (once
you’ve availed of RPBP, you cannot avail of
another RPBP); but you can avail of exemption
under another ground such as SSS or GSIS
benefits.

The phrase “shall not have availed of the privilege under a retirement benefit plan of the same or another ER”
found in Sec. 32(B)(6)(a) of the Tax Code means that the retiring official must not have previously received
retirement benefits from the same or another employer who has a qualified retirement benefit plan.
(3) Amount received as a consequence of separation for

any cause beyond control (death, sickness or other
physical disability)
 Sickness must be job threatening must
render taxpayer incapable of working (E.g. Does
not include STD)
 Benefits from separation due to retrenchment
come under exemption (no choice/option; but if
the Employee avails of an optional early
retirement plan, he cannot reason that he was
separated for reasons beyond his control,
therefore, he cannot claim exemption of the
125
benefits on this ground but he can claim

under other grounds such as RPBP or RA 7641.

The terminal leave pay of government employees whose employment is coterminous is exempt since it falls
within the meaning of the phrase “for any cause beyond the control of the said official or EE” found in Sec.
32(B) of the CTRP.
(4) Benefits received from a foreign government by

resident of nonresident citizens or aliens who reside
permanently in the Philippines
(5) Veterans benefits
(6) Benefits under SSS
(7) Benefits received from GSIS
 Miscellaneous items
a) Income derived by foreign government (from investments in
Philippines in loans, stocks, bonds or other domestic securities).
b) Refers only to passive income. If the foreign government
engages in trade, income is taxable.
c) Income derived by govt/its political subdivisions (from public utility
or exercise essential governmental function).
Note: Income should accrue to government; if the income is
retained by the public utility, it is not exempt look at charter of
political subdivision/GOCC to determine whether its income
accrues to the government or not.
d) Prizes, awards in sports competition sanctioned by national
sports associations whether held in Philippines or abroad.
Contemplates a particular competition, not a cumulative
achievement (E.g. Sportsman of the year award does not qualify for exemption)
e) Prizes and awards
In recognition of religious, charitable, scientific, educational,
artistic, literary or civic achievement, but only if:
(1) recipient was selected without any action on his part
(2) recipient not required to render substantial future
services as a condition of receiving the prize/award
(3) Example: Nobel prize award
(4) Construed strictly, take note of 7 categories. It does not
include athletic achievement.
(5) Contemplates a rational selection process; cannot just
be randomly selected.
f) 13th month pay and other benefits (i.e. productivity incentives &
Christmas bonus) the total of which does not exceed P82,000. If
the benefit exceeds P82,000, only the excess will be taxable.
g) GSIS, SSS, Medicare, Pag-ibig contributions & union dues of
individuals.
h) Gains from the sale of bonds, debentures or other certificates of
indebtedness with a maturity of more than 5 years.
126
i) Gains from redemption of shares in mutual fund.
3. Under a tax treaty

 Income of any kind, to the extent required by any treaty obligation binding
upon the Government of the Philippines, is exempt from income tax.
 Business profits of a foreign corporation organized under the laws of a

treaty country from sources within the Philippines are not subject to
Philippine income tax, unless such profits are attributable to a permanent
establishment of the foreign corporation created or deemed created in the
Philippines.
4. Under special laws

 R.A. 6938 Cooperative Code of the Philippines
Agricultural multi-purpose cooperative registered with the Cooperative
Development Authority is exempt from ordinary income tax on its
transactions with members and non-members for a period of ten (10)
years from the date of registration. Thereafter, the income tax exemption
shall be limited to business transactions with members only.
 R.A. 7279 Urban Development Housing Act of 1992

The National Housing Authority is exempt from all fees and charges of
any kind, whether local or national, while the private sector participating in
socialized housing shall be exempt from taxes on project-related income
directly realized from the development and capital gains tax on sale of raw
lands for use in socialized housing.
 R.A. 7653 New Central Bank Act (as amended by R.A. 8791)
The BSP is exempt from all national, provincial, municipal and city taxes
for a period of five years. It is exempt from DST under RA 9243.
 R.A. 7916 PEZA Law (as amended)

PEZA-registered enterprises are given income tax holidays of 6 or 4 years
from the date of commercial operations if their activities are considered
pioneer and non-pioneer, respectively.
 R.A. 9178 Barangay Micro Business Enterprises (BMBE) Act of 2002

BMBE shall be exempt from income tax from income arising from the
operation of the enterprise.
127
 Taxable Period
General rule: The accounting period of a taxpayer is a period of twelve (12) months.
1. Calendar year – accounting period from January 1 to December 31 which is
allowed if the:
 Taxpayer is an individual
 Taxpayer is a partnership
 Accounting period is other than a fiscal year
 Taxpayer has no accounting period
 Taxpayer does not keep books.
2. Fiscal year – accounting period of twelve (12) months ending on the last day of
any month other than December which is allowed only to corporations.
3. Short period – a taxpayer may have a taxable period of less than twelve (12)
months when:
 Taxpayer dies
 Corporation is newly organized
 Corporation changes its accounting period
 Corporation is dissolved.
 Methods of Reporting Income and Expenses

1. Cash method – recognition of income and expense dependent on inflow or outflow
of cash (meaning, you recognize the income when you actually receive the cash
payment for the sale, and you recognize the expense when you actually pay cash
for the expense).
2. Accrual method – method under which income, gains and profits are included in
gross income when earned whether received or not, and expenses are allowed as
deductions when incurred, although not yet paid. It is the right to receive and not
the actual receipt that determines the inclusion of the amount in gross income.
3. Special method
 Installment
a) The taxpayer may report income over the several taxable years in
which collections are made based on the terms of payment.
Generally, the income derived on installment sale is the
proportion of installment collection actually received during the
year in relation to the gross profit and contract price.
b) Formula:
The property is real/personal (ordinary asset)
Reportable = Gross Profit X Installment
Income Contract Price Collection received
The property is real (capital asset)
Installment = Installment Payment Received X Total tax due
Tax due Contract Price
c) When to use installment method

128
(1) Installment sale of personal property

 Personal property is regularly sold on an
installment basis by a dealer.
 Casual sale of personal property on installment
basis subject to the following conditions:
o Selling price exceeds P1,000
o Initial payment do not exceed 25% of SP (if
it exceed 25%  cash sale)
o The property sold is not inventory
o Selling price: Cash received + FMV of the
property received + Installment obligations
of the buyer (evidence of indebtedness) +
Mortgage assumed by the buyer
o Contract price: Selling price + Excess of
mortgage over cost – Mortgage assumed
by the buyer
o Initial payment: Downpayment +
Installments received in the year of sale +
Excess of mortgage over cost
(2) Installment of real property

 Initial payment do not exceed 25% of selling
price (subject to 5%-32% Income Tax if
Individual and 30% NIT if Corp.)
 Sale by individual of real property considered as
capital assets, if initial payment do not exceed
25% of selling price (subject to CGT 6% of SP or
FMV/ZV whichever is higher)
 Deferred payment
a) Where the initial payments on installment sale exceed 25% of the
selling price but they may only be realized in the subsequent
year, the taxpayer is allowed to defer reporting income. [Sec. 177, RR
No. 2 as cited in BIR Ruling No. 263-92 dated September 16, 1992]
b) In using the deferred payment method, the following rules must
be observed:
(1) The note evidencing the buyer’s obligation shall be
converted to its cash equivalent (discounted value).
(2) Income shall be reported over the years of collections.
(3) Previously reported income for current year collections
should reduce the current year’s reportable income.
 Long-term construction
a) Completed contract
b) Percentage of completion
 Farming
a) Cash basis – Disregards Inventory (Inventory NOT yet income)
b) Accrual basis – Considers Inventory
129
c) Crop basis - Where a farmer is engaged in producing crops which

take more than a year from the time of planting to the process of
gathering and disposal, expenses deducted may be determined
upon the crop basis, and such deductions must be taken in the
year in which the gross income from the crop has been realized.
130

Gross Income Gross Income: (CGG Irr Dappp)

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Gross Income Gross Income: (CGG Irr Dappp)

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Chapter 7 Gross Income

The term “gross income” whenever used without qualification, is comprehensive, as

Recovery of damages pertaining to recovery or return of loss income or profit Taxable

Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution) Taxable

Forgiveness of indebtedness in exchange of a service performed Taxable

Forgiveness of indebtedness (if effect of entire transaction is a reduction of Not taxable

BIR Ruling No. 17-2003

 Gross Income vs. Net Income vs. Taxable Income

Gross income (See definition above)

 Classification of Income as to Source

Income without if less than 50% of the gross

2. Taxable Income from Sources within the Philippines

2. Taxable Income from Sources without the Philippines

Income partly within or partly without the Philippines

Personal Property Income

Income without Unallocated Deductions from

Income within Unallocated Deductions from

 Sources of Income Subject to Tax

Profession is primarily any endeavor or work requiring specialized training in the

e) Investment property (Accounts receivable = CA)

2. Types of gains from dealings in property

 Actual gain vs. Presumed gain

 Net capital gain, net capital loss

 Computation of the amount of gain or loss

(1) Cost or basis of property sold:

(2) Cost or basis of the property exchanged in corporate

 A corporation exchanges property solely for

(3) Recognition of gain or loss in exchange of property

 Income tax treatment of capital loss

a) Limitation on capital loss

Amount deductible in 2012 is P6,000 only since it

 Dealings in real property situated in the Philippines

An individual taxpayer has the option to treat the capital gain as

 Dealings in shares of stock of Philippine Corporations

(2) Wash sales of shares of stock

 Does not apply in the case of a dealer in stock if

Numbers of shares bought

c) Dealer in securities (ordinary income)

b) General rule: The address shown in the ITR is conclusively

Passive Investment Income

 Dividend income – Any distribution made by a corporation to its

dividend at such time and in such manner as to make the

 Royalty income – A payment or a portion of proceeds paid to the owner of

 Rental income – Amount or compensation paid for the use or enjoyment

(1) If the advance payment is a prepaid rental without

Annuities, Proceeds from Life Insurance or Other Types of Insurance

Prizes and Awards

c) Prizes, awards in sports competition sanctioned by national

Pensions, Retirement Benefit or Separation Pay

Income from any source whatever

 Recovery of amounts previously written off

 Receipt of tax refund or tax credit

(3) Estate & donor’s taxes

 Income from any source whatever

 Exclusions from Gross Income

Exclusion vs. Deduction vs. Tax Credit

Deduction: included in the gross income but later deducted.

1. Under the constitution

2. Under the tax code (GIAL CRM)

 Gifts, bequests and devises

nature or where it is a return for services rendered, proceeds

 Income exempt under treaty

 Amount received by insured as return of premium