GROSS INCOME

Definition

- all income of whatever kind and derived by a taxpayer from whatever source
but not including exempt income (exclusions) and items of gross income (passive
income) subject to final income tax.

- all forms of income not expressly falling under any of the items enumerated
below such as those derived from expropriation of one’s property and from
gambling and other illegal transactions are taxable.

Concept of income from whatever source derived

- all income not expressly excluded or exempted from the class of taxable
income, irrespective of the voluntary or involuntary action of the taxpayer in
producing the income and regardless of the source of income, is taxable
(Gutierrez v. Collector of Internal Revenue, CTA Case No. August 31, 1965;
Banco de Oro et.al., v. Republic, G.R. No. 198756, January 13, 2015).

Proceeds of stolen or embezzled property is part of gross income

It opined that unlawful, as well as lawful gain is comprehended within the term
“gross income” (James v. United States, 366 U.S. 213 May 15, 1962) because
the money or other proceeds of the sale or disposition of stolen property are
received under a claim of right (US v. Lozia, 104 F. Supp. 346, DCJDNY, 1952).

Items of Gross Income:

1. Compensation for services in whatever form paid including salaries,

commissions, and similar items;
2. Gross income derived from conduct of trade or business or 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 a general professional
partnership.

Sources of income subject to tax:

1. Compensation income
 2. Fringe benefits
3. Professional income
4. Income from business
5. Income from dealings in property
6. Passive investment income
7. Annuities and proceeds from life insurance or other types of insurance
8. Prizes and awards
9. Pension, retirement benefit, or separation pay
10. Income from any source

a. Distinguish: gross income, net income, and taxable income

GROSS INCOME NET INCOME TAXABLE INCOME

All income, gain or profit Gross income less Pertinent items of gross
subject to income tax statutory deductions income specified in the
under Sec. 32 (a) of the Code, less deductions, if
NIRC. (R.R. No. 02-04, Sec. 36) any, authorized for such
types of income by the
Code or other special laws.

(NIRC, as amended by
TRAIN Law, Sec. 31)

Sources of income subject to tax

1. Compensation income

Definition

All remunerations for services performed by an employee for his employer under
an employer-employee relationship UNLESS excepted under the provisions of
the NIRC are considered as compensation income (R.R. No. 02-98, Sec. 2.78.1,
R.R. No. 2408, as amended).

Test to determine whether an income is compensation or not

Whether such income is received by virtue of an employer-employee relationship

“Love gifts” received by pastors from their pastoral ministry are taxable
compensation income

It is subject to income and withholding tax. Every form of compensation for

personal services is taxable, regardless of how it is earned, by whom it is paid,
the label by which it is designated, the basis upon which it is determined, or the
form by which it is received (BIR Ruling No. DA-214-06, April 5, 2006).
Bonuses, 13th month pay, and other benefits may be part of compensation income

When they exceed the threshold amount of PhP 90,000.00, the excess of which
shall be subject to tax (R.A. No. 10653).

Note: The amount of tax-exempt 13 th month pay and other benefits is increased
to PhP 90,000.00 (OLD: PhP 82,000.00) pursuant to TRAIN Law.

2. Fringe benefits

Definition

Any good, service or other benefit furnished or granted in cash or kind by an

employer to an individual employee (except rank-and-file employees) (NIRC Sec.
33 (b)).

Fringe Benefit Tax (FBT)

Final income tax on the employee that shall be withheld and paid by the
employer on a calendar quarterly basis (CIR v. Secretary of Justice and
PAGCOR, G.R. No. 177387, November 9, 2016).

Who pays the FBT?

FBTs is due from the employee but paid by the employer for and in behalf of the
employee. The tax is additional cost to the employer. When the employer pays
the FBT in behalf of the employee, the tax becomes an additional benefit of the
employee subject thereto. Thus, the need to gross up the monetary value of the
fringe benefit received in computing the FBT due thereon (R.R. No. 3-98, Sec.
2.33. (a); DE LEON, NIRC Annotated, supra at 389).

Scope

Covers only the taxable fringe benefits of managerial and supervisory

employees.

Managerial Employees – given powers to lay down and execute

management policies and/or to hire, transfer, suspend, lay-off, recall,
discharge, assign or discipline employees.

Supervisory Employees – who effectively recommend such managerial

actions if the exercise of such authority is not merely routinary or clerical in
nature but requires the use of independent judgment.

Rank-and-File Employees – holding neither managerial nor supervisory

position.
Tax treatment of Fringe Benefits

If the benefit given is not exempt from tax, and the recipient is a:

1. Rank-and-File Employees – the value of such fringe benefit shall be

considered as part of the compensation income of such employee
subject to withholding from the employee’s compensation and to the
graduated tax rates under Sec. 24 (a) of the NIRC.

2. Managerial and Supervisory Employees – the value shall not be

included in the compensation income of such employee subject to tax.
The fringe benefit is instead levied upon the employer who is required
to pay (NIRC, Sec. 33).

Special Treatment of FBT

FBT on fringe benefit is paid by the employer but he is allowed by law to deduct
the grossed up monetary value of fringe benefit furnished or granted to the
employee as a business expense in determining his taxable income provided that
the final tax imposed under Sec. 33 has been paid (NIRC, Sec. 34. Par. (a)(1)(a)
(i)). The FBT is not an additional tax on the employer. He can claim the fringe
benefit and the FBT as a deductible expense from his gross income
(DIMAAMPAO, supra at 40).

Basis
FBT is imposed on the grossed-up monetary value of fringe benefit furnished,
granted, or paid by the employer to the employee, except rank-and-file
employees, whether such employers is an individual, professional partnership, or
corporation, regardless of whether the corporation is taxable or not, or the
government and its instrumentalities (R.R. No. 03-98, Sec. 2.33.(a)).

Grossed-Up Monetary Value

1. The whole amount of income realized by the employee which includes the net
amount of money or net monetary value of the property which has been
received;

2. The amount of FBT thereon otherwise due from the employee but paid by the
employer for and in behalf of the employees (R.R. No. 03-98, Sec. 2.33 (a)).
Taxable Fringe Benefits

The Fringe Benefits subject to FBT are the following:

1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate to the extent of the difference
between the market rate and actual rate granted;
6. Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and,
10. Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows (NIRC, Sec. 33 (b)).

FBT Rates to come up with the grossed-up monetary value

The range of fringe benefit tax vary depending on how the employees are taxed.
The reason is that the FBT tends to recover income tax of the employee so the
rate follows the income taxation of such employees as shown in the table below.

RC, NRC, RA, NRA, NETB Special Alien

NRAET Employees (SAE)
and Special
Filipino
Employees (SPE)

Monetary Value / PhP XX PhP XX PhP XX

Gross Monetary 65% 75% 85%
Value Factor

Grossed-Up PhP XX PhP XX PhP XX

Monetary Value x 35% 25% 15%
FBT Rate

Fringe Benefit Tax PhP XX PhP XX PhP XX

Note:
 1. Prior to 2018, the FBT was 32%.
2. Upon effectivity of the TRAIN Law, SAEs and SFEs are now subject to
graduated tax rate on their compensation income. Consequently, the FBT
rate applicable to them shall be 35% beginning January 1, 2018. Therefore,
the 15% tax rate illustrated in the table shall only apply if the taxable fringe
benefit was given prior to 2018 taxable year.

Valuation of Fringe Benefits

If the fringe benefit is granted or furnished in:

1. Money, or is directly paid by the employer – the value is the amount

granted or paid for.

2. Property other than money and ownership is transferred to the

employee – the value of the fringe benefit shall be equal to the fair market
value of the property. The FMV of the property is the FMV determined by the
BIR Commissioner or the FMV determined by the Provincial or City Assessor
whichever is higher (NIRC Sec. 6, (e)).

3. Property other than money BUT ownership is NOT transferred to the

employee (i.e. only the usufruct) – the value of fringe benefit is equal to the
depreciation value of the property (R.R. No. 03-98, Sec. 2.33(a)).

Instances when housing privilege is Instances when housing privilege is

subject to FBT NOT subject to FBT

1. Employer leases residential 1. Housing privileges of military

property for use of the employee;
2. Employer owns a residential
property and assigns the same for
use by the employee;
3. Employer purchases a residential
property on installment basis and
allows use by the employee;
4. Employer purchases a residential
property and transfers ownership
to the employee; or
officials of the AFP consisting of
officials of the Philippine Army,
Philippine Navy and Philippine Air
Force;
Rationale:
The State shall provide its soldiers
with necessary quarters which are
within or accessible from the
military camp so that they can
readily be on call to meet the
exigencies of their military service.

5. Employer provides a monthly fixed 2. Housing unit which is situated

amount for the employee to pay inside or adjacent (i.e. the unit is
his landlord (R.R. No. 03-98, Sec. located within a maximum of 50
2.33 (b)(1)). meters from the perimeter of the
 business premises) to the
premises of a business or factory;
and

3. Temporary housing for an

employee who stays in a housing
unit for 3 months or less (R.R. No.
03-98, Sec. 2.33, (b)(1)).

Expenses incurred by the employee are subject to FBT

1. Expenses incurred by the employee, but which are paid by his employer
EXCEPT when the expenditures are duly receipted for and in the name of the
employer and the expenditures do not partake the nature of a personal
expense attributable to said employee;

2. Expenses paid for by the employee but reimbursed by his employer EXCEPT
when the expenditures are duly receipted for and in the name of the employer
and the expenditures do not partake the nature of a personal expense
attributable to said employee; and

3. Personal expenses of the employee paid for or reimbursed by the employer

whether or not the same are duly receipted for in the name of the employer
(R.R. No. 03-98, Sec. 2.33 (b)(2)).

Instances where Motor Vehicles privilege is subject to FBT

1. Employer purchases vehicle in employee’s name;

2. Employer provides employee cash for vehicle purchase;
3. Employer purchases car on installment and the ownership of which is placed
in the name of the employee;
4. Employer shoulders a portion of purchase price;
5. Employer owns and maintains a fleet of motor vehicles for use of business
and employees;
6. Employer leases and maintains a fleet of motor vehicles for the use of the
business and employees;
7. The use of aircraft owned and maintained by the employer; and.
8. The use of yacht whether owned and maintained or leased by the employer
(2 CASANOLA, NIRC (2013), p. 267-269) [hereinafter 2 CASANOLA NIRC].

Use of aircraft NOT subject to FBT

The use of aircraft including helicopters owned and maintained by the employer
shall be treated as business use and not subject to FBT (R.R. No. 03-98 Sec.
2.33 (b)(3)(g)).
Use of yacht subject to FBT

The use of yacht whether owned and maintained or leased by the

employer shall be treated as taxable fringe benefit (R.R. No. 03-98, Sec.
2.33 (b)(b3)(n).

3. Professional Income

Definition

Includes fees derived from engaging in an endeavor requiring special training as

professional as a means of livelihood, which includes, but is not limited to, the
fees of CPAs, doctors, lawyers, engineers, and the like (R.R. No. 02-98).

Professional Income Tax Payer

Person certified by a professional body belonging to a specific profession by

having completed a required course of studies and or practice (DASCIL, NIRC of
the Philippines (2018), p. 57 [hereinafter, DASCIL, NIRC Annotated]. It also
refers to a person who engages in some art or sport for money, as a means of
livelihood, rather than as a hobby (TABAG, Income Taxation; supra at 69).