The proceeds of life insurance policies They do the heirs or beneficiaries upon death of the insured shall

be exempt from income tax. The proceeds of life insurance are treated more as an indemnity for the life
lost instead of as gain, profit, or income.

Note: interest payment made by the insurer constitutes income to the recipient.

2. Amount received by insured as return of premium.

The amount received by the insured as a return of premium paid by him under life insurance,
endowment, or annuity contracts, either During the term or at the maturity of the term mentioned in
the contract or upon surrender of the contract.

Notes:

a) The excess of the proceeds received over the premium paid is included in gross income.

b) Participating dividends distributed to life insurance policy holders are actually a return of
overpaid premiums. They are therefore excluded from gross income of the insured.

3. Gifts, bequests, and devices

The value of property acquired by gift, bequest, devise or descent are exempt from income taxation.

Note: The income from the lease, sale, exchange, investment, or other disposition of such property shall
be subject to income tax.

4. Compensation for injury or sickness

a) Amounts received, through accident or health insurance, or under worksmen’s Compensation Acts, as
compensation for personal injuries or sickness; plus

b) the amounts of any damages received, whether by suit or agreement, on account of such injuries or
sickness.

c) Damages representing compensation for personal injuries arising from libel, defamation, slander,
breach of promise to marry, or alienation of affection.

- includes moral damages: Moral damages include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury.

-includes exemplary or corrective damages. These are imposed by way of example or correction for the
public good.

5. Income Exempt Under Treaties.

Income of any kind, To the extent required by any treaty obligation. Are international agreement to be
exempt from taxation by the Republic of the Philippines
6. , Retirement benefit, pensions, gratuities, Separation pay which are exempt from income tax.

As a general rules, the following benefits and payments are exempt from income tax.

Under R.A No. (7641 retirement pay law). plan for employees. Employers are required to pay it
Retirement benefit equal to at least one ½ month salary for every year of service.

Requisites for exemption;

1. The employee has reached the age of 60 or more but not beyond 65 and

2. The employee hi served for at least five years in the same establishment.

under the tax code, retirement benefits and or pension amounts received by officials and employees Of
private firms whether individual or corporate shall be exempt from income tax with the requisites for
exemption in the tax code are complied with.

Requisite for exemptions:

1. There must be a reasonable private benefit plan maintained by the employer.

2. The retiring official or employee has been in the service of the same employer for at least 10
years

3. Retiring official or employee is not less than 50 years of age at the time of his retirement

4. The benefits of exemptions granted shall be availed of by an official or employee only once.

b) pay due to A cause beyond the control of the employee

Any amount received by an official or employee or by his heirs from the employer as a consequence of
separation of such official or employee from the service of the employer due to;

1. Death

2. Sickness

3. Other physical disability; and

4. For any cause beyond the control of the said official or employee.

Note: Separation pay due to the above mentioned causes are exempt from income tax regardless of age
or length of service of the employee.

The exemptions does not cover salaries 13 month pay and other benefits in excess of 90,000 and other
payments which are properly taxable to the employee.
c) Social Security benefits retirement gratuities pensions and other similar benefits received by
residents or non residents citizens of the Philippines are aliens who come to reside in the Philippines
from the boring agencies and other institutions private or public.

d) Payment of benefits you are to become due to any person residing in the Philippines under the
laws of the United States and administered By the United states veteran administration

e) Benefits received from or enjoyed under the Social Security system (SSS) in accordance with the
provisions of R.A No. 8282.

f) Benefits received from the GSIS under R.A No. 8291, including Retirement gratuity received by
the government officials and employees.

g) Maternity benefits advanced by the employer to the employee.

7. Miscellaneous items

a) Income derived by foreign governments, financing institution owned or controlled by foreign

governments and international original financial institution established by foreign governments from
investments or deposits in the Philippines.

b) Income derived by the Philippines government or its political subdivisions from the exercise of any
governmental functions.

c) Prizes and award Primarily In recognitions of religious, charitable, scientific, educational, artistic,
literary, civic achievement But only if;

1 The recipient well selected without any action on his part to enter the contest or proceeding; and

2 The recipient is not required to render substantial future services as a condition to receiving the prize
or award.

d) prizes and award granted to athletes in local and international sports competitions And tournaments
whether held in the Philippines or abroad and sanctioned by their national sports Association.

e) 13 month pay and other benefits perceived by officials and employees of public and private entities
are 13th month pay and other benefits which show include:

1. The 13th month pay and other Incentives such as productivity incentives and Christmas bonus; and

2. The excess of the “de minimis” fringe benefits over their respective ceilings.

Provided however that the total exclusion shall not exceed 90,000 pesos.

f) Compulsory or mandatory contributions Cox employees to gsis SSS medicare (PHIC) and PAG-IBIG And
union dues of individuals.

-These are actually deductions, but are labeled as exclusions in the tax code.
Note

Contribution in excess of mandatory contribution are not deductible from gross income.

Moreover, GSIS educational plan, GSIS optional insurance, GSIS unlimited optional insurance, GSIS
memorial plan premiums shall not be deductible.

g)gains from the sale, exchange or retirement of bonds, the debentures, or other certificates of
indebtedness with a maturity of more than five years.

h)gains from redemptions of shares in a mutual fund.

i) Income of nonresident from transaction with domestic depository banks and OBUs under the
expanded foreign currency deposit system.

j) Personal equity and retirement account

PERA Prefers to the voluntary retirement account of an individual “called a contributor” established
from his own qualified PERA Contributions or qualified employer contributions, for the purpose of being
invested solely In qualified or eligible PERA investment products.

1. The qualified employers contribution should be excluded from the employee’s taxable income.

2. Investment income of a contributor earn from the investments of is PERA shall be exempt from
income taxes, provided;

a) That each specific investment product is approved by the concern regulatory authority; and

b) That non income taxes, if applicable, relating to the investment income, shall be imposed. Such
taxes shall include (a) percentage taxes; (b) VAT (c) stock transaction tax under section 127(A) and (B) of
the tax code; and (d) documentary stamp tax.

3. Qualified PERA Distributions shall be excluded from gross income if;

a) After the contributor and his employer has made a qualified contributions and PERA qualified
employers contributions for At least five years which need not be consecutively made and after the
contributor reaches the age of 55, or

b) Upon death the contributor, irrespective of the contributors age or the number of yearly
contributions made at the time of his death.

4. Early withdrawals in the following circumstances should be excluded:

a) Withdrawal of PERA Assets from the administrator by reason of the suspension or revocation of
the accreditations of the administrator, provided that the entire PERA assets are transferred to another
administrator within two (2) working days from receipt of the contributor’s advice on the chosen
Administrator,
b) For payment of accident or illness related hospitalization in excess of 30 days or

c) For payment of a contributor who has been subsequently rendered permanently and totally
disabled as defined under the employees compensation law or Social Security system law.

k) Representation and transportation allowances (RETA) granted under section 34 of the General
Appropriation Act to certain officials and employees of the government From the rank Of Department
secretaries to division chiefs are Not subject to income tax into the withholding tax

i) Personal economic relief allowance (PERA) Granted to all employees of the national government, local
government units, including government owned or controlled corporations, is considered
remuneration/Compensation for services performed by the employees in the performance of official
duties, hence, not taxable income.

m) Capital contribution to Corporation/Partnership are not income of the Corporation/partnership, And

hence not subject to income tax

n) Project related income from the development of socialized housing sites. the private sector (ex.
Contractor) shall be exempt from payment of project related income taxes (including CGT) on a per
project basis on income realized from the development of socialized housing sites.

o) Income from the commercialization of technologies developed by local inventors or researchers

under R.A No. 7459 During the first 10 years from the date of the first sale.

p) Proceed which constitute a fund held interest by the taxpayer, and which do not redound To the
benefit of the taxpayer.

q) Income from the sale of gold pursuant to R.A. No. 7076 (the people’s small scale mining act of 1991).

1) Income from the sale of gold to the bangko central Ng pilipinas By registered the small scale miners
and accredited traders; and

2) Income from the sale of gold by registered small scale miners to accredited traders for eventual sale
to the Bangko Central ng Pilipinas.

Concept of gross income

Gross income means the total income of a taxpayer subject to tax. It includes the gains, Profit, and
income derived from whatever source. whether legal or illegal.

It does not include income excluded by law, or which are exempt from income tax.

Gross income defined

Gross income means all income derived from whatever source, including (but not limited to) The
following items;

1. Compensation for service;

-Including pensions and retiring allowances (except those exempt by law).

2. Gross income derived from the conduct of trade or business or the exercise of a profession.

3. Partners distributive show from the net income of a general professional partnership;

4. Rent;

5. Annuities (excess over premium paid).

6. Gains derived from dealing in property.

7. Interest income,

8. Royalties

9. dividends

10. prizes and winnings

Note: The above enumeration is not exclusive, gross income may also include other forms of income
which are not even mentioned in the list above. An example of this would be income from illegal
sources.

Items of gross income

1. Compensation for service, of whatever kind and it whatever form paid, forms part of gross
income. The name by which the remuneration For service is designated Is immaterial. Thus, salaries,
wages, emoluments and honoria, Allowances, commissions (e.g. Transportation, representation,
entertainment, and the like); Fees, including director's fees, if the director is, at the same time,
unemployed of the employee or corporate; taxable bonuses and fringe benefits Except those which are
subject to the fringe benefit tax under section 33 Of the tax code; Taxable pensions and retirement pay;
And other income of a similar nature constitute compensation income.

A. Compensation income which may be in the following forms;

a) Cash

b) Allowances

c) Property – The FMVOf the team taken in payment is the amount of compensation.
d) Employer’s stock- The FMV Of the shares at the time the service were rendered.

e) Promissory notes – The fair discounted value of the note as of the time of receipt. the employee
shall also record additional income upon the recovery of the discount.

f) Forgiveness of debt for services Rendered to a creditor

Note: Where the debtor is stockholder of the Corporation condoning the debt, The condonation of the
debt amounts to an indirect payment Of the dividend.

g) Income tax of the employee assume or paid by the employer, in consideration of the latter
services.

h) Pension and retiring allowances – Except those exempt by law.

i) Stock options – the FMV Of the stock option at the time the service we're rendered by the
employee.

B) Stock option

1. The amount of compensation shall be the FMV Of their stock options at the time the services were
rendered.

2. When the employee exercised the option by paying the exercise price (equity-settlement option), it
results additional income. Such additional income shall equal the higher of the book value of FMV of the
shares, less the exercise price.

a) If the employee is a rank and fire employee, the additional income shall be recognized by the
employee as taxable compensation and shall be subject to the CWT on compensation.

b) If the employee is supervisory or managerial employee, the additional income shall be treated as a
fringe benefit subject to the final FBT.

3. When the Grantor (The Corporation) simply paste the difference between the FMV of the shares and
the exercise price (cash settlement option), The same rules in (2) above apply.

c) fringe benefits which may be in the form of meals furnish or subsidized by the employer, (2) living
quarters, (3) life insurance premiums paid by the employer where the insured employee is the
beneficiary, (4) facilities are privilege provided by the employer, or (5) allowances.

Fringe benefits, are classified under the following categories, namely;

Those subject to the fringe benefit tax (FBT)

Fringe benefit given to employees holding managerial or supervisory positions, in which are listed in RR
No. 3-98, as amended.
Those included in gross income in the ITR.

Fringe benefits given to rank and file employee

Fringe benefits given to employees holding managerial or supervisory employees and which are not
listed in RR No. 3-98, as amended.

Those which are not taxable

Fringe benefits given to employees for the convenience of the employer, or if incurred By the employee
in the pursuit Of the trade, business, or professions of the employer and is liquidated an accounted by
the employee.

“De minimus”. Fringe benefits.

E. Separation pay not due to a cause beyond the control of the employee.

General rule: Separation fee is included in gross income of separated employee.

Exception: If separation is caused by something not of the employee's making. For example, with
separation is due to cessation of the business, or as a consequence of death, sickness, Other physical
disability, or for any cause beyond his control, the separation they shall be exempt from tax.

F. Fees

Fees received by an employee for the performance of a service for the employer, including directors
fees (including per diems and allowances) are regarded as compensation income.

Marriage fees, but this man offerings, sums paid for sale masses for the dead, and other contribution
received by a clergyman, evangelist, or religious worker for services rendered are considered
conversation.

Exception: Authorize be paid to public officials, such as notaries public, clerks of court, sheriffs, etc., For
service rendered in the performance of their official duties, are not considered wages.

G. Dismissal payment

Any payment made by an employer to an employee on account of dismissal, that is, involuntary
separation from the service of the employer, Constitute wages, regardless whether the employer is
legally bound by contract, statute, or otherwise to make such payment.

H. Tips and gratuities.

Tips or 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.
2. Gross income from business

1. In general, “gross income” means total sales less COGS, plus any income from investment and
from any incidental or outside operations or sources.

Formula:

Gross sale

Less: Cost of good sold

Gross profit from sales

Add: Other income:

(a) Income from investment

(b) Income from incidental or outside operations or sources.

Gross income

2. Income from long-term contracts

The term “long-term contracts” refers to Construction, installation, or building contract requiring a
period longer than one (1) year for completion.

Income therefrom is reported under percentage of completion basis.

3. Gross income from farming

The income tax regulations prescribed three (3) methods of reporting the gross income from farming,
namely;

a) Cash basis, or receipts and disbursement basis. Under this method, no inventory is used to
determine profits.

Formula

Cash from sales of livestock and other products raised in the farm

+ value of property received from sales.

+ Profits/gains from the sale of livestock or other items purchased

+ Gross income from all other sources

Total gross income

b) Accrual basis. Under this method, inventory is used to determine profits.

Formula

Sales

Ending inventory

Less: Beginning inventory

Less: Purchases

Gross income

c) Crop basis. This method of reporting income may be used by a farmer engaged in producing
crops which take more than (1) year from the time of planting to the time of gathering in disposing of
the crop.

In such cases, The entire cost of producing the crop must be taken as a deduction in the year in which
the gross income from the crop is realized.

4. Gross income from petroleum operation.

Gross income from petroleum operation means its total entitlement of the gross proceeds from the sale
at the market price, during the taxable year, of petroleum produced under the service contract, and
such other income incidental to and arising from anyone or more of the petroleum operation of
contractor.

Provided, the amount of Filipino participation incentive allowance received By a Philippine Corporation
to an operating agreement under a petroleum service contract between a service contractor and
government under P.D. No. 87 Shall not be included in the gross income of the Philippine Corporation.

3. payment made by a GPP to a partner, and the distributive share of partners in the net income of
GPP.

4. Rent or lease income

Reporting of income by a lease

Rent paid by the lessee for the use early or lessee of property is taxable income to the lessor.

Rent income maybe in the following forms:

1. Cash, at the stipulated price;

2. Obligations of the lessor to third persons paid or assumed by the lessee In consideration of
contract Lease. An example is the real estate tax on the property leased assumed by the lessee.

3. Advance payment which must be prepaid rentals and not (A) a loan to the lessor, or (B) option
money for the property, or (C) security deposit for the faithful performance of the lessee’s obligation.

However, he security deposit that is applied to rentals is taxable income to the lessor.

Prepaid rent must be reported in full in the year of receipt, regardless of the accounting method used by
the lessor.

4. Leasehold improvement.

the contract of lease may provide that the lessee may make permanent improvement on the leased
property and said improvements will belong to the lessor upon termination of the lease.

Income and reduction from leasehold improvement.

(a) Income of lessor

The lessor, in such a case, may, at his operation, report Income under any of the following menthods;

1. Outright Method – lessor Reports as income the FMV of the improvement in the year of
completion.

2. Spread-out Method – the lessor shall Spread over the remaining term of the lease the estimated
depreciated (book) value of such buildings or Improvements at the termination of the lease, and report
as income for each remaining term of the lease an aliquot part thereof.

Formula
Cost of leasehold improvement

Less: Depreciation for remaining term of lease

Book value, end of lease

Book value end of lease = income per year

Remaining term of lease

(b) Deduction of lessee (depreciation expense)

The lessee may claim depreciation of the improvement over the remaining term of the lease or the life
of the improvement, whichever is shorter.

(c) Computation of income from leasehold improvement arising from the pretermination of lease
contract.

The lessor receives additional Income for the year in which the lease so is terminated to the extent that
the value of such building when he become entitled to such possession exceeds the amount already
reported as income on account of the erection of such building.

Formula

BV of leasehold improvement at termination of lease

Less: Amounts of income previously recognized

Additional income in year off termination

(d) Loss of lessor if leasehold improvement is destroyed before termination of lease.

Is the building or other leasehold improvement is destroyed before the expiration of the lease, the
lessor is entitled to the deduct as a loss for the Year when such destruction takes place, the amount
previously reported as income because of the erection of the improvement, less any salvage value, to
the extent that such loss was not compensated by insurance.

Formula

Income on leasehold improvement already reported

Less: salvage value

Total loss
Less: Compensation

(a) From insurance

(b) Others

Loss destruction of leasehold improvement.

5. Annuities and life insurance policies.

(a) Annuities – Annuities paid under an annuity contract in exceeds of the Consideration paid our
includible in gross income.

(b) Life insurance policies – Where insured outlives the term Of the policy, amounts received by an
insured in excess of the premium paid are included in gross income.

Note: Distribution paid-up a policies, which are made out of earnings of the insurance company subject
to tax, are in the nature of corporate dividends and should be taxed accordingly.

6. Gains derived from dealing in property.

Sale of 3 types of property which may give rise to taxable event.

Ordinary asset - 100% of the gain or lost shall be recognized in the ITR.

Capital asset – Subject to final taxes (capital gains tax)

Other capital asset – Holding period of the asset shall be taken into consideration if the seller is an
individual and only the next capital gains shall be included in the ITR.

1. Sale of tangible assets

2. Series of intangible assets (ex. Patents, copyrights,and goodwill)

3. Corporation sinking fund

4. Sale of real property

Gain From the sale of real property is classified as ordinary asset shall be included in gross income in the
ITR of the taxpayer.

Note: Real properties acquired by banks through foreclosure sales are considered as their ordinary
asset. However, banks shall not be considered as habitually engaged in the real estate business for
purposes determining the Applicable rate for creditable withholding tax imposed under Sec. 2.57.2 of
Rev. Reg. No. 2-98, as amended (Rev. Reg. No. 7-2003).

7. Interest Income
Interest income, as a rule, is taxable income included in the ITR.

EXC:

1. Interest income from deposits or deposit substitute in the Philippine subject to FT.

2. Interest income which are exempt from tax.

a) Interest Income from long term deposit or investment in the form of savings trust funds, deposits
Substitutes, investment management accounts

b) Interest income earned from passive investments of foreign governments, financing institutions
owned by foreign governments and international financial institution established by foreign
governments.

Note: Interest income on government securities is subject to final tax on passive income as such
securities are considered deposits substitutes.

8. Royalties

Royalties derived from sources within the Philippines are subject to a final tax of 20%, except royalties
on books, other literary works, and musical compositions which shall be subject to final tax of 10%.

Royalties received by resident citizens end domestic Corporation from sources without the Philippine
shall be included in the ITR.

9. Dividends

Dividend subject to FT: Cash or property dividends received by individuals and NFRCs from domestic
Corporation.

Dividends included in gross income in the ITR:

1. Generally, cash and/or property dividends received by a resident citizen or domestic

Corporation from a foreign Corporation.

2. Liquidating dividends

Liquidating dividends represent distribution of all property or assets of a Corporation in the complete
liquidation or dissolution.

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. where property is distributed in liquidation, the amount
received in the fair market value of such property.

Formula
Liquidating dividends

Less: Cost of stock investment or other basis

Capital gain or (Capital loss)

If the shareholder is a Corporation, the capital gain is taxable in full.

If the shareholder is an individual and their stocks were held for more than 12 months,. The capital gain
is taxable only to the extent of 50% thereof. (Sec. 39 (B), NIRC).

Dividends not subject to income tax.

1. Intercorporate Dividends from a domestic Corporation to another domestic Corporation or a

RFC.

2. Generally, stock dividends.

10. Prizes and Winnings

Subject to FT:

a) Prizes over 10,000 and winnings derived within the Philippines.

b) Prizes received by a NRANETB and by a NRFC within the Philippines.

Included in the ITR.

1) Prizes amounting to 10,000 or less received by a citizen, resident alien, or NRAETB.

2) Prizes received by domestic corporations.

3) Prizes received by RFCs within the Philippines.

4) Prizes and winnings received by resident citizens from sources without the Philippines.

11. Income from other sources

1. Recovery of damages representing compensation for loss of profits or include are includible in
gross income.
Note: recoveries that are to compensate for damage to property, injury to person, or loss life are not
taxable.

Included in Gross Income.

1. Damages for lost profits.

2. Damages for lost income.

Not Taxable

1. Damages to compensation for damage or injury to the person or his property.

2. Damages for lost capital

3. Moral damages

4. Exemplary damages

5. Punitive damages.

2) recovery of bad debts previously deducted.

The “Tax Benefit Rule” is the doctrine observed in the Philippines in bad debt recoveries.

Rules on Bad Debt recovery:

(a) Taxable – if the deduction of bad debt in a prior year resulted in an income tax benefit to the
taxpayer, the bad debts recovered is taxable income in the year of recovery.

(b) Not Taxable – if the deduction of the bad debt did not result in an income tax benefit to the tax
payer (i.e., where the result of the business except PCSO and Lotto winnings of 10,000 or less of an
individual citizen or resident alien, and PCSO and Lotto winnings of a NRAETB regardless of amount,
which are exempt.

(c) Income from bad debt recovery – The recovered amount of the previously deducted bad debt
which resulted in an income tax benefit.

3. Refund of deductible tax

The tax benefit doctrine also applies with respect to refund or credit taxes which were claimed end
deducted in a previous year.

Rules on refund of taxes previously deducted:

(a) Taxable – If the tax paid is not a deductible tax. the refund or credit thereof is taxable in the year
of receipt.

(b) Not taxable - if the tax paid is not a deductible tax. Refund or credit there of is not taxable.

(c) Income from tax refund - the refunded amount of the tax which was previously deducted and
which resulted to an income tax benefit.

Example Of the deductible taxes are: OPT Concept the stock transaction tax under Sec. 127 Of that tax
code, excise taxes, occupation or professional taxes, real property taxes, FBT.

Examples of znon-deductible taxes are income tax, donor’s stocks, estate tax, VAT, stock transaction tax
under Sec. 127 of the tax code.

4. Tournament prizes

Included in the ITR: Cash prizes won By local players or participants in tournaments are not passive
income inasmuch as participating in such tournament is their profession and/or occupation.

Subject to FT: Cash prizes of foreign players or participants shall be subject to a final tax of 25%.

Exempt from income tax: prizes and awards granted to athletes in local and international sports
competitions and tournament whether held in the Philippines or abroad, And sanctioned By their
national sports Association.

5. Forgiveness of indebtedness.

Included that in the ITR: When a creditor Cancels a debt as part of a business transaction, or in
Consideration of personal services of the debtor, the condoned debt is taxable income to the debtor.

Taxed as a dividends: But where the debtor is a stockholder of the Corporation which condoned the
debt, the condonation is considered an indirect payment of dividend.

Subject to donor’s tax: If I credit or merely desires to benefit a debtor, and without any consideration
therefor cancels the debts, the amount of the debt is a gift from the creditor to the debtor.
6. Income from illegal source.

All unlawful gains are taxable and includible in the ITR. however, actual repayment of such illegal gains
will give rise to a deductions. (James vs. United States, 366 US 210).

7. Unutilized/excess Campaign funds.

Unutilized/excess Campaign funds, that is, campaign contribution net of the candidate's campaign
expenditure, shall be considered a subject to income tax. as such, the same must be included in the
candidate’s gross income as stated in his income tax return for the subject taxable year.

Any candidate who fails to file with the comelec the appropriate statement of expenditures required
under the omnibus election code, shall be automatically precluded from claiming search expenditures as
deductions from his campaign contribution. As such, the entire amount of his campaign contributions
shall be considered as directly subject to income tax.

8. Early withdrawals from a personal equity and retirement account {PERA} Which do not qualify
for exclusion from taxable gross income.

9. Gain in the sale or retirement by a Corporation of its own bonds.

Where the Corporation is able to buy back its own bonds for less than the value of such bonds as
reflected in the corporation’s books.

10. Stock options granted to a supplier of goods or services.