Bac03-Chapter 5

CHAPTER 5
INTRODUCTION TO GROSS INCOME
After this chapter, students must be able to comprehend and demonstrate mastery of the
following:
1. Gross Income and when does income become taxable
2. Items of gross income
3. Exclusions of gross income
4. Deductions of gross income
5. Features of final income taxation
LESSON 1: GROSS INCOME
GROSS INCOME
 It means total income of a taxpayer subject to tax.
 All income from whatever source, derived within or without the Philippines, legal or
illegal.
 “Income” means all wealth which flows into the taxpayer, other than return of capital.
Gross income is gain. It is gain derived from:
(a)Capital; or
(b)Labor; or
(c)Capital and labor, combined; or
(d)Sale or conversion of asset
RETURN OF CAPITAL VS. RETURN ON CAPITAL
BAC03- Income Taxation

RETURN OF CAPITAL VS. RETURN ON CAPITAL
While Capital is the tree, Income is the fruit.

Capital constitutes the investment which is the source of income.
Therefore, capital is fund while income is the flow. Capital is wealth, while income is the service
of wealth.
CLASSIFICATION OF INCOME
WHEN IS INCOME TAXABLE?
TAXABLE INCOME means the pertinent items of gross income specified in the Tax Code, less
the deductions and/or personal and additional exemptions, if any, (under NIRC), authorized for
such types of income by the Tax Code or other special laws.
It does not include income excluded by law, or which are exempt from income tax as well as
income subject to final taxes.
It includes the gains, profits, and income derived from whatever source, whether legal or illegal.
REQUISITES FOR INCOME TO BE TAXABLE
a. There must be gain.

b. The gain must be realized or received.
c. The gain must not be excluded by law from taxation.
WHEN IS THERE A CONSTRUCTIVE RECEIPT?
There is constructive receipt of income when:

 Payment is credited to payee’s account; or
 Payment is set aside for the payee, or otherwise made
available so the payee may draw upon it at any time, or
so the payee could have drawn upon it during the taxable
year if notice of intention to withdraw had been given
without substantial limitations.

INCOME TAX SYSTEMS
1. SCHEDULAR TAX SYSTEM VS. GLOBAL TAX SYSTEM
2. GROSS INCOME TAXATION VS. NET INCOME TAXATION
LESSON 2: ITEMS OF GROSS INCOME
GROSS INCOME
Gross compensation income is income arising from an employer-employee relationship.

Examples are salaries, bonuses, and benefits.
Employee – an individual performing services under an employer-employee

relationship.
Employer-employee relationship – exists when the person for whom the services were performed
has the right to control and direct the individual who performs the services, not only as to the
result to be accomplished, but also as to the details and means by which such results are
accomplished.
PRO-FORMA

INCLUSIONS IN THE GROSS INCOME
Section 32(A) of the Tax Code provides that unless specifically excluded under the code, gross
income includes but not limited to the following:
1. Compensation for services, “in whatever form paid”, including but not limited to fees,
salaries, wages, commissions and similar item.
COMPENSATION INCOME
It is an income arising out of an employer-employee relationship. It encompassed all

remuneration for services performed by an employee for his employer whether paid in cash or in
kind.
The term or label by which it is designated and the basis upon which the remuneration is paid is
immaterial.
COMPENSATION INCOME:
 Fringe Benefits And 13th Month Pay
 Fixed Or Variable Allowances
 Advances And Reimbursements For Travelling And Entertainment
 Expenses
 Premiums On Life Insurance
 Deductible Expense Of The Employer
 Retirement Benefits, Separation Pay, Pension, Etc.
 Tips And Gratuities
 Vacation And Sick Leave Allowances

 Representation And Transportation Allowances (Rata)
 Stipends Of Resident Physicians
 Service Fees And Royalties, Distinguished
 Cost Of Living Allowance (Cola)
 Income Or Gain From The Exercise Of Stock Option Plans
2. Gross income derived from the conduct of trade or business or the exercise of profession
(business income)
These are gross income derived from the conduct of trade or business of the exercise of
profession. They may arise from the sale of products or services.
Business income is taxed at progressive rates on net business income, or income from the
practice of a profession (net income after deduction of certain specified expenses and any excess
of personal and additional exemptions over compensation income).
In the case of manufacturing, merchandising, or mining business “Gross income” means total
sales, less the cost of goods sold plus any income from investments and from incidental or
outside operations or sources.
BAD DEBT RECOVERY
Subsequent recovery of a bad debt previously written off in the books is a taxable income
provided that the write-off of the account resulted to a lower taxable income at the time of write
off.
TAX REFUND
Tax refunds are taxable if the tax, when paid, was deducted from gross income (i.e., local taxes
and fringe benefit tax).
Taxes which were not previously allowed as deductions from the gross income should not form
part of taxable income when refunded.
Tax refunds shall be reported as income in the year it was received, if the accounting method
employed by the taxpayer is the cash method.
Otherwise, if the accounting method used is the accrual basis, the tax refund must be reported in
the year the refund was ordered.
The following tax refunds are not taxable:

1. Income tax (except fringe benefit tax)
2. Estate tax
3. Donor’s tax
4. Special assessment
5. Stock transaction tax
6. Income tax paid to a foreign country if the taxpayer claimed a credit for such tax in the year it
was paid.
CANCELLATION OR CONDONATION OF DEBTS

3. Gains derived from dealings in property
Gross income derived from dealings (sale, barter, or exchange) in property includes all income
derived from the disposition of property (real or personal, for sale or in exchange of other
property, or both) which results in gain or loss.
The gain from the transaction shall be taxable gain and the loss shall be deductible if incurred in
trade, profession, or business.
4. Interest
Gross income derived from interest should only refer to such interest as arising from
indebtedness (whether business or non-business, legal or illegal), that is, compensation for the
loan or forbearance of money, goods, or credits.
On the other hand, interest income on deposits made in banking institutions as well as interest
income on deposit substitutes are passive income subject to 20% final withholding tax.
Interest income derived from investments in government securities are also subject to 20% final
tax.
5. Rents
Rent paid by the lessee for the use or lease of property is taxable income to the lessor. Rent is the
amount paid for the use or enjoyment of a things (real or personal) or right.
RENT INCOME may be in the FORM of:

1. Cash, at stipulated price.
2. Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the
contract of lease such as real property taxes assumed by the lessee on the property being leased,
insurance or other fixed charges. Such payments shall be considered rental payments to be
reported by the lessor as part of its taxable income.
3. Advance payment, which may be:
* Prepaid rent
* A security deposit that is applied to rental is a taxable income of the
lessor.
Note: Prepaid rent shall be reported as income in full in the year of receipt, regardless of the
accounting method used by the lessor.
 NON-TAXABLE RENT
When a person borrows money from another, the amount borrowed is not income, as the same is
neither profit nor gain. This holds true also in cases of deposits given by a lessee to the lessor as
security. For the relationship between lessor and lessee, with regard to the security deposit, is
also that of debtor and creditor, respectively.
 LEASEHOLD IMPROVEMENT
It is an improvement made to a leased asset.
Buildings erected or improvements made by the lessee on the leased premises are taxable only if
the same were made pursuant to an agreement with the lessor and the buildings erected or
improvement made are not subject to removal by the lessee.
However, the lessor does not realize taxable gain from leasehold improvements turned over by
the lessee at the end of the lease where leasehold improvements are considered fully depreciated
and where the condition of said property is undertaken to restore the same to useful condition.
On the other hand, the lessee may claim depreciation of the improvements as deduction from the
lessee’s gross income over the remaining term of the lease or the life of the improvements,
whichever is shorter.
The lessor has the option to report as income, the fair market value of such buildings or
improvements (Outright Method), or to spread over the life of the lease the estimated depreciated

value of such buildings or improvements at the termination of the lease and report as income for
each the lease an aliquot part thereof (Spread-out Method).
 PRETERMINATION OF LEASE
ILLUSTRATION
Case A
On December 1, 2018, HP Company leased office space for 5 years to JC Corporation at a
monthly rental of P60,000. On the same date, the HP received the following amounts from JC:
1. First month’s rent P60,000.

2. Second month’s rent P60,000.
3. Last month’s rent P60,000.
4. Security deposit (refundable upon expiration of the lease) P80,000
JC also improved the office space for a total cost of P360,000.

Answer:
Answer:
Question: What amount should HP report as rental income in December 2018? P180,000
P180,000
Case B
In 2018, Roxanne leased a facility from Samantha Company. Part of the lease agreement is for
Roxanne to improve the facility. Details of the improvements were as follows:
Cost of construction (improvements) : P10,000,000

Estimated useful life of improvements : 20 years
Remaining lease term : 10 years
Question 1: What amount should Samantha report in 2018 as income from leasehold
improvement using the lump-sum method?
Question 2: What amount should Samantha report in 2018 as income from leasehold
improvement using the spread out method?
Answer:
Answer:
Q1:
Q1: P5,000,000
P5,000,000
Q2:
Q2: P500,000
P500,000
Case C
Question 3: Assume the income from the improvement is to be reported annually. However, at
the beginning of the 6th year, both parties agreed to terminate the lease agreement.
Consequently, Samantha took possession of the improvements. The fair value of the
improvements at the time was P3,500,000. What amount should Samantha report as income from
improvement on the 6th year of the lease agreement?
Answer:
Answer:
Q3:
Q3: P1,000,000
P1,000,000
FV
FV P3,500,000
P3,500,000
Less:
Less: Income
Income 2,500,000
2,500,000
6. Royalties
ROYALTY INCOME
A share of the earnings as from invention, books or play, paid to the inventor, writer, etc. for the
right to make, use or publish the same.

TAX TREATMENT OF ROYALTY INCOME
7. Dividends
Dividends are payments made by a corporation to its shareholder members.

It is the portion of corporate profits paid out to stockholders, direct or indirect.
*Direct dividend is one where the paying corporation acknowledges the distribution of dividend
through a resolution of the Board of Directors declaring such distribution as distribution of
dividend.
**Indirect dividend is a distribution of profits disguised as payment of services, properties, etc.
DIRECT AND INDIRECT DIVIDENDS ARE SUBJECT TO TAX.
TAX TREATMENT OF DIVIDEND INCOME
TYPES OF DIVIDENDS
• CASH DIVIDENDS
• PROPERTY DIVIDENDS
• LIQUIDATING DIVIDENDS
• STOCK DIVIDENDS
8. Annuities
Annuity income refers to specified income payable at stated intervals for a fixed or a contingent
period, often for the recipient’s life, in consideration of a stipulated premium paid either in prior
installment payments or in a single payment.
Annuity payments received by a taxpayer represent a part which is taxable and not taxable.
The amount received representing return of premium is considered return of capital, hence,
should be excluded in the determination of taxable income.
In contrast, the annuity received representing interest or amounts over the premiums paid are
considered return on capital, thus, should form part of the recipient’s taxable income.
ILLUSTRATION
CASE A
Pedro purchased a life insurance contract ten (10) years ago requiring him to pay an annual
insurance premium of P6,000 for a period of 15 years. The contract provides that should Pedro
die or outlived his policy within the 15-year period, his beneficiaries will receive P300,000. On

January 1, 2018, Pedro outlived the policy. Consequently, he received the P300,000 as stipulated
in the contract.
Q1: How much is the taxable income of Pedro on January 1, 2018?
Q2: Assume Pedro died within the 15-year Answer

Answer Q1:
Q1: P210,000
P210,000
period, how much should be reported by his beneficiaries Taxable
Taxable income
income == P300,000
P300,000 –– (P6,000
(P6,000 xx 15)
15) ==
as taxable income from the insurance contract? P210,000
P210,000
Answer
Answer Q2:
Q2: PP 00 (non
(non taxable)
taxable)
Answer
Answer Q3:
Q3: P2,000
P2,000 representing
representing interest
interest
Q3: Assume Pedro died in 2016 (within the 15-year period). income
income
His beneficiaries agreed to receive P30,000 a year plus
P2,000 annual interest for the next ten (10) years,
how much should be reported by his beneficiaries as taxable income in 2016?
CASE B
In 2009, George Garcia purchased a life insurance by paying
P300,000 premium. As stipulated in the contract, the taxpayer
Answers:
Answers:
would receive P500,000 as annuity for four (4) years payable as 1.
1. 2015
2015 :: P0
P0
follows: 2.
2. 2016
2016 :: P0
P0
Year Amount 3.
3. 2017
2017 :: P100,000
P100,000
4.
4. 2018
2018 :: P100,000
P100,000
2015 P100,000
2016 125,000
2017 175,000
2018 100,000
Determine the taxable income from the annuity contract for 2015 to 2018.
9. Prizes and winnings

PRIZE is an award to be given to a person or a group of people to recognize and reward actions
or achievements. Prizes are also given to publicize noteworthy or exemplary behaviour, and to
provide incentives for improved outcomes and competitive efforts.
WINNINGS, on the other hand, for tax purposes, should refer to rewards/income by virtue of
chance or bets.
TAX TREATMENT OF PRIZES AND OTHER WINNINGS
ILLUSTRATION
CASE A
A taxpayer received the following prizes and winnings: Answer:
Answer: P15,000,000
P15,000,000
Cash prize – “The Voice” Philippines P2,000,000 Note:
Note: Prizes
Prizes received
received from
from singing
singing
House and Lot won as grand champion 3,000,000 contest
contest constitute
constitute gains
gains from
from labor
labor
Philippine lotto winnings 10,000,000

Question: how much is the correct amount of winnings and prizes subject to tax?
CASE B
JC, a young artist and designer, received a prize of P100,000 for winning in the “on-the-spot
poster contest”. Is the prize taxable?
Answer:
Answer: Yes,
Yes, the
the prize
prize is
is taxable,
taxable,
subject
subject to
to aa final
final tax
tax of
of 20%,
20%, the
the
amount
amount thereof
thereof being
being in
in excess
excess of
of
P10,000.
P10,000.
The
The prize
prize was
was given
given primarily
primarily in
in recognition
recognition of
of
JC’s
JC’s artistic
artistic achievement
achievement which
which hehe won
won
due
due to
to an
an action
action on
on his
his part
part to
to enter
enter the
the
contest
contest (gains
(gains from
from labor)
labor)
10. Pensions
PENSIONS & PARTNERS’
DISTRIBUTIVE SHARES FROM THE INCOME OF A GPP
Pensions, like retirement benefits, are generally taxable unless exempt under the law.
11. Informer’s Award
Income derived as informer’s reward to persons instrumental in the discovery of violations of the
NIRC and in the discovery and seizure of smuggled goods is subject to 10% final tax.
The following rewards shall be subject to 10% final withholding tax:

• Those given to persons, except an Internal Revenue official or employee, or other public
official or employee or his relative within the 6th degree of consanguinity, who voluntarily give
definite and sworn information not yet in the possession of the BIR, leading to the discovery of
frauds upon the Internal Revenue laws or violations of any of the provisions thereof, thereby
resulting in the recovery of revenues, surcharges, and fees and/or the conviction of the guilty
party and/or imposition of any fine or penalty.
The following rewards shall be subject to 10% final withholding tax:

• Those given to an informer where the offender has offered to compromise the violation of law
committed by him and his offer has been accepted by the Commissioner and collected from the
offender.
The amount of reward shall be equivalent to 10% of the revenues, surcharges or fees recovered
and/or fine or penalty imposed and collected or P1,000,000 per case, whichever is lower. The
reward shall be paid under the rules and regulations issued by the secretary of Finance upon the
recommendation of the Commissioner or any of his deputies or agents or examiners, or the
Secretary of Finance or any of his deputies or agents.
LESSON 3: EXCLUSIONS FROM THE GROSS INCOME
 Exclusions from the gross income refer to the flow of wealth to the taxpayers which are not
considered part of gross income for purposes of computing the taxpayer’s taxable income
due to the following:
1. It is exempted by the fundamental law or by statute

2. It does not come within the definition of income
 Exemption from taxation is a grant of immunity to particular persons or corporations of a

particular class from a tax which persons and corporations generally within the same
jurisdiction are obliged to pay.
Exemptions are not favoured and are construed strictly against the taxpayer and liberally in
favour of the government.

 A tax cannot be imposed unless it is supported by the clear and express language of a statute;
on the other hand, once the tax is unquestionably imposed, “a claim of exemption from tax
payments must be clearly shown and based on language in the law too plain to be mistaken.”
EXCLUSIONS VS. DEDUCTIONS
The exclusion of income should not be confused with the reduction of gross income by the
application of allowable deductions.
Exclusions are not taken into account in determining gross income, however, deductions are
subtracted from the gross income to arrive at taxable income.
EXCLUSIONS FROM GROSS INCOME
The following are typical exclusions from gross income (exempt from income tax):
a. Proceeds of insurance, except crop insurance;

b. Gifts or inheritance received;
c. Compensation for death or physical injuries;
d. Retirement benefits of an employee from a reasonable funded retirement plan of his
employer, if the employee was not less than sixty (60) years of age at the time of
retirement and was not less than ten (10) years of employment with the employer (but
this benefit of exclusion is available once only in the lifetime of the employee);
e. Separation pay received by an employee on account of death, sickness, physical
disability, or any cause beyond the control of the employee;
f. Thirteenth month pay and other benefits received by employees, up to the amount of
ninety thousand pesos (P90,000), including productivity, incentives and Christmas bonus;
g. The minimum wage, holiday pay, overtime pay, night shift differential pay, and hazard
pay of a minimum wage earner;
h. Benefits received or enjoyed from the Government Service Insurance System (GSIS) or
the Social Security System (SSS)
i. GSIS, SSS, Medicare and Pagibig Contributions and union dues of individuals (will
reduce the income from employment received by the employee);
j. Prizes and awards for outstanding achievements in religious, charitable, scientific,
educational, artistic, literary or civic achievement, (1) if the winner was selected without
action on his part to enter the contest or proceedings, and (2) the recipient is not required
to render substantial future services;
k. Prizes and awards granted to athletes in local and international competitions and
tournaments sanctioned by their national sports associations;
l. Stock dividend (as a general rule).

GROUNDS FOR GRANTING TAX EXEMPTIONS
Based on contract, law or treaty.
EXAMPLES:
Based on Law • Tax exemptions granted to cooperatives registered under
the Cooperative Development Authority.
• Travel tax exemptions as provided for by Presidential
Decree (PD) 1183
Based on Treaty • Salaries of officials of the United Nations assigned in the

Philippines.
• Citizens of the United States working in consular offices
in the Philippines are exempt from payment of all taxes
(national or local, salaries, allowances, fees, or wages).
• Salaries of diplomatic officials and agents
ILLUSTRATION
FACTS
Mr. and Mrs. Smith, both tax residents of the United Kingdom, were invited to teach for two (2)
years in the Philippines by School X.
ISSUE
Is the remuneration received by Mr. and Mrs. Smith exempt from Philippine income tax?
RULING
Yes. Under Article 20 of the Philippines-United Kingdom Tax Treaty, an individual who, at the
invitation of a Philippines school, visits the Philippines for a period not exceeding two (2) years
solely for the purpose of teaching at such educational institution, and who is, or was,
immediately before that visit a resident of the United Kingdom, shall be exempt from income tax
in the Philippines on any remuneration from teaching at such school.
2. Based on some ground of public policy such as to encourage direct foreign investments,
encourage new industries, or foster charitable institutions, and the like.
EXAMPLES
• Tax holidays granted by the Bureau of Investments (BOI) to foreign investors and pioneer
companies in new industries
• Tax exemptions granted to companies incurring heavy losses due to legitimate business
reverses such as exemption from MCIT.
3. Based on grounds of reciprocity or to lessen the rigors of international double or multiple

taxation
EXAMPLES
• Exemptions granted to nonresident aliens engaged in trade or business.
TAX TREATY UNDER REVENUE MEMORANDUM ORDER NO. 1-2000
BIR required that the availment of a tax treaty provision must be preceded by an application for a
tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any
erroneous interpretation and/or application of the treaty provisions with which the Philippines is
a signatory to.
The application must be filed at least 15 days before the transaction accompanied by supporting
documents justifying the relief. If a ruling for treaty relief was not secured, RMO 1-2000 only
requires audit offices of the BIR to notify ITAD of treaty relief availment by taxpayers which are
not covered by an application within fifteen days from discovery.

ITEMS OF INCOME OR PROCEEDS EXCLUDED FROM THE GROSS INCOME
A. Life insurance
B. Amount received by the insured as a return of premium
C. Value of property acquired by gratuitous transfer (gifts, bequests, and devises) but not the
income from such property.
D. Compensation for injuries or sickness
E. Income exempt under treaty
F. Retirement benefits, pensions, gratuities, etc.
G. Miscellaneous items
ITEMS OF INCOME OR PROCEEDS EXCLUDED FROM THE GROSS INCOME –

(A) PROCEEDS OF LIFE INSURANCE
The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under
an agreement to pay interest thereon, the interest payments shall be included in the gross income.
ILLUSTRATION
CASE A:
In 2015, Bruno obtained a life insurance policy on his own life in the amount of P2,000,000.00
designating 1⁄2 of the policy to his wife, Perla, as irrevocable beneficiary. Bruno designated his
son, Pedro, as revocable beneficiary for the remaining 50% of the policy. On September 2018,
Bruno died and his wife and son went to the insurance company to collect the proceeds of the
policy.
QUESTION: ARE THE PROCEEDS OF THE INSURANCE SUBJECT TO INCOME TAX

ON THE PART OF PERLA AND PEDRO FOR THEIR RESPECTIVE SHARES?
Answer:
Answer: NO
NO
CASE B:
In 2015, Bruno obtained a life insurance policy on his own life in the amount of P2,000,000.00
designating 1⁄2 of the policy to his wife, Perla, as irrevocable beneficiary. Bruno designated his
son, Pedro, as revocable beneficiary for the remaining 50% of the policy. On September 2018,
Bruno died and his wife and son went to the insurance company to collect the proceeds of the
policy.
Assume further that Perla agreed to claim her share of the policy on installment basis with the
condition that the outstanding balance is subject to a 10% annual interest. During the year, Perla
received P80,000 interest.
SHOULD PERLA REPORT THE P80,000 INTEREST IN HER INCOME TAX RETURN FOR
THE YEAR? Answer:
Answer: YES
YES
(B) RETURN OF PREMIUM UNDER LIFE INSURANCE, ENDOWMENT AND ANNUITY

CONTRACTS
The amount received by the insured, as return of premiums 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 is not subject to income tax. However, if the

amounts, when added to amounts received before the taxable year under such contract, exceed
the aggregate premium paid, whether or not paid during the taxable year, then the excess shall be
included in gross income.
The funds transferred to a resident of the Philippines upon the surrender of the policy or even
upon its partial surrender shall generally not be subject to Philippine Income Tax. Such transfers
are considered as returns of the premiums paid by the insured, of which shall be excluded in the
computation of the taxpayer’s gross income.
ILLUSTRATION : life insurance – return of premium or capital
CASE A:
Juan took out a 15-year life insurance policy naming his son. Pedro, as his beneficiary. Under the
terms of the policy, the insurance company will pay P1,000,000 to Juan should he outlived the
policy or P1,000,000 to his son should he die on or before the expiration of the policy.
QUESTION 1: ASSUME JUAN OUTLIVED THE POLICY. TOTAL

PREMIUMS PAID FOR AFTER 15 YEARS WAS P650,000.
HOW MUCH SHOULD JUAN REPORT AS PART OF HIS
TAXABLE INCOME?
ANSWER:
ANSWER:
Q1:
Q1: P350,000
P350,000
QUESTION 2: ASSUME JUAN DIED BEFORE THE Q2:
Q2: TAX
TAX EXEMPT
EXEMPT
EXPIRATION OF THE POLICY. CONSEQUENTLY PEDRO
RECEIVED P1,000,000 FROM THE INSURANCE COMPANY.
HOW MUCH SHOULD PEDRO REPORT AS PART OF
HIS TAXABLE INCOME?
ILLUSTRATION : Annuity Contracts

CASE B:
Mr. Sigurista purchased a life annuity for P10,000,000 which would pay him P1,250,000 a year
for 15 years. Under the terms of the policy, Mr. Sigurista is required to pay a premium of
P1,000,000 for the first ten (10) years before receiving the annuity for 15 years. He started
receiving the annuity during the year 2010. Determine the following:
1. Mr. Sigurista’s income from the policy in 2016. ANSWER:

ANSWER:
Q1:
Q1: 00
2. Mr. Sigurista’s income from the policy in 2017. Q2:
Q2: 00
3. Mr. Sigurista’s income from the policy in 2018. Q3:
Q3: P1,250,000
P1,250,000
(C) GIFTS, BEQUESTS, AND DEVISES
The value of a property acquired by gift, bequest, devise, or descent is excluded in the
determination of gross income. However, income from such property, as well as gift, bequest,
devise or descent shall be included in gross income.
(D) COMPENSATION FOR INJURIES/ DAMAGES OR SICKNESS
EXAMPLES OF TAXABLE DAMAGES

• Representing recovery of lost income
• Compensation for unrealized earnings
• Interest on non-taxable damages
• Interest for non-taxable damages
EXAMPLES OF NON-TAXABLE DAMAGES

• Representing recovery of lost capital
• Actual damages for injuries suffered
• Moral damages for grief, anxiety, etc.
• Exemplary for loss of earning capacity
• Damages for loss of earning capacity
• Damages for loss of goods and other belongings.

ILLUSTRATION :
Joseph filed a libel case against LJ for putting so much shame on him thru unfounded and
defamatory remarks. Joseph was hospitalized due to the incident. As a result, LJ was ordered by
a court to pay the following:
ANSWER:
ANSWER:
• Hospital dues of P100,000
Q1:
Q1: P100,000
P100,000 loss
loss of
of income
income
• Actual damages of P50,000
• Exemplary damages of P50,000
• Loss of income amounting to P100,000; and
• Moral damages of P100,000
(E) RETIREMENT BENEFITS, PENSIONS, GRATUITIES, ETC.
Retirement pay as a rule, is taxable, except those received by officials and employees of private
firms, whether individual or corporate, under a reasonable private benefit plan maintained by the
employer which meets the following requirements:
1. The retirement plan must be approved by the Bureau of Internal Revenue;

2. The retiring official or employees must have been in the service of the same employer for at
least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and
3. The retiring official or employee shall not have previously availed of the privilege under the
retirement benefit plan of the same or another employer.
In the absence of a reasonable retirement plan or an agreement (CBA or other applicable

employment contract) providing for retirement benefits of employees, an employee may receive
tax-exempt retirement benefits who has reached the age of 60 years or more, but not more than
65 years, who has served at least 5 years in the establishment.
ILLUSTRATION :
Case A – gifts over and above the retirement pay
A taxpayer worked as audit manager of a hospital for several years. When he retired at age 60, he
received retirement pay equivalent to two months’ salary for every year of service as provided in
the hospital BIR-approved retirement plan. The Board of Directors of the hospital felt that the
hospital should give the retired employee more than what was provided for in the hospital’s
retirement plan in view of his loyalty and invaluable services for several years. Hence, it
resolved to pay him a gratuity of P2,000,000 over and above his retirement pay.
The Commissioner of Internal Revenue taxed the P2,000,000 as part of the gross compensation
income of the retired employee who protested that it was excluded from income because it was a
retirement pay and a gift.
Question 1: should the additional P2,000,000 received by the retired ANSWER:

ANSWER:
employee be excluded from income? Q1:
Q1: NO
NO
Question 2: Is the taxpayer correct in claiming that the additional Q2:
Q2: NO
NO
P2,000,000 was a gift and therefore excluded from income?
(F)SEPARATION PAY DUE TO DEATH, ILLNESS OR ANY 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
death, sickness or other physical disability or for any cause beyond the control of the said official
or employee is exempt from taxes regardless of age or length of service.
The phrase “for any cause beyond the control of the said official or employee” in effect connotes
involuntariness on the part of the official or employee. The separation from the service of the
official or employee must not be of his own making. Whether or not the separation is beyond the
control of the said employee will be determined on the basis of prevailing facts and
circumstances.

Tax treatment of separation pay due to retrenchment
Separation or termination from the service as part of the company’s retrenchment programs are
considered separation that is beyond the control of the separated official or employee. As such,
any amount received by such officials or employees as a consequence of their separation shall
not be included in gross income and shall be exempt from taxation.
However, the tax exemption does not cover the payment of the separated employee’s salaries and
the payment of 13th month pay and other benefits in excess of the P90,000 threshold (previously
P82,000). As regards monetization of sick and vacation leave credits, only the cash equivalent
of vacation leaves not exceeding 10 days shall be exempt from tax, while the monetized value of
all sick leave credits of separated employees shall be subject to income tax.
ILLUSTRATION :
Which of the following income is excluded in the determination of taxable gross income?
1. Separation pay received by a 40-year old employee due to the retrenchment program of the
employer.
2. Separation pay received by an employee who resigned to join another company.
3. Separation pay received by an employee who was asked to resign because his position was
declared a redundant.
4. Retirement pay received from a retirement benefit plan registered with the BIR where at the
time the employee retired, he was 55 years of age, with his present employer for 5 years.
5. SSS and GSIS benefits
ANSWER:
ANSWER:
Items
Items 1,
1, 33 and
and 5.
5.
LESSON 4: DEDUCTIONS
DEDUCTIONS
Items or amounts of which the law allows to be deducted from gross income in order to arrive at
the taxable income.
EXCLUSIONS VS. DEDUCTIONS

BASIC PRINCIPLES GOVERNING DEDUCTIONS
A. The taxpayer seeking a deduction must point to some specific provisions of the statute
authorizing the deduction; and
B. Any amount paid or payable which is otherwise deductible from, or taken into account in
computing gross income or for which depreciation or amortization may be allowed, shall be
allowed as deduction only if it is shown that the tax required to be deducted and withheld there
from has been paid to the BIR.
DIFFERENT CLASSES OF DEDUCTIONS (BEFORE TRAIN)
A. Personal Exemption, Basic and Additional

B. Optional Standard Deductions (40% of the Gross Income in lieu of itemized deductions) or
Itemized deductions
C. Health Insurance Premium
D. Special Deductions
E. Distributed Income
ITEMIZED DEDUCTIONS
A. Ordinary AND necessary expenses
Necessary Expense – appropriate and helpful in the development of taxpayer’s business and are
intended to minimize losses or to increase profits. These are the day-to-day expenses.
Ordinary Expenses – normal or usual in relation to the taxpayer’s business and the surrounding
circumstances.
REQUISITES OF BUSINESS EXPENSE TO BE DEDUCTIBLE

A. Ordinary and necessary;
B. Paid or incurred within the taxable year;
C. Paid or incurred in carrying on a trade or business;
D. Substantiated with official receipts or other adequate records;
E. If subject to withholding taxes proof of payment to the Bureau of Internal Revenue must be
shown;
F. Must be reasonable (when the expense is not lavish, extravagant or excessive under the
circumstances)
NOTE: While illegal income will form part of income of the taxpayer, expenses which constitute
bribe, kickback and other similar payment, being against law and public policy are not deductible
from gross income.
Capital Expenditures – an expenditure that benefits not only the current period but also future
periods. It is not deductible but depreciable, EXCEPT, if the taxpayer is a non-profit proprietary
educational institution which may elect either to deduct the capital expense or depreciate it.
B. Interest
REQUISITES FOR DEDUCTIBILITY OF INTEREST EXPENSE

A. There must be indebtedness;
B. There should be an interest expense paid or incurred upon such indebtedness;
C. The indebtedness must be that of the taxpayer;
D. The indebtedness must be connected with the taxpayer’s trade, business, exercise or
profession;
E. The interest expense must have been paid or incurred during the taxable year;
F. The interest must have been stipulated in writing
G. The interest must be legally due.
LIMITATIONS – The amount of interest expense paid incurred by a taxpayer in connection

with his trade, business or exercise of a profession from an existing indebtedness shall be
reduced by an amount equal the following percentages of interest income earned which have
been subjected to final withholding depending on the year when the interest income earned, viz:

38% - beginning January 1, 2000 and thereafter
42% - beginning January 2005
33% - beginning January 2009
At the option of the taxpayer, interest incurred to acquire property used in trade or business may
be allowed as a deduction or treated as capital expenditure.
C. Taxes
Deductible taxes – All tax proper, hence, no deductions arising from interest, surcharges, or
penalties.
A. Income tax;
B. Estate and donor’s tax;
C. Special assessments;
D. Excess electric consumption tax;
E. Foreign income tax, war profits and excess profits tax, if the taxpayer makes use of tax credit;
and
F. Final taxes, being in the nature of income tax.
Taxes allowed as deductions, when refunded or credited, shall be included as part of gross
income in the year of the receipt to the extent of the income tax benefit of said deduction (Tax
Benefit Rule)
TAX CREDIT
It is a right of an income taxpayer to deduct from income tax payable the foreign income tax he
has paid to his foreign country subject to limitation.
WHO CAN CLAIM TAX CREDIT?

a. Resident citizens of the Philippines
b. Resident aliens under the principle of reciprocity
c. Domestic corporations which include partnerships except general
professional partnership
d. Beneficiaries of estate and trust
e. Members of beneficiaries of local partnerships
WHO ARE NOT ENTITLED TO TAX CREDIT?

a. non-resident citizens
b. Aliens (resident and non-resident)
c. Foreign corporations (resident and non-resident)
D. Losses
WHAT ARE LOSSES?
Refer to such losses which do not come under the category of bad debts, inventory losses,
depreciation, etc., and which arise in taxpayer’s profession, trade or business.
WHAT ARE THE REQUISITES FOR LOSSES?

A. Actually sustained during the taxable year
B. Connected with the trade, business or profession
C. Evidenced by a close and completed transaction
D. Not compensated for by insurance or other form of indemnity
E. Not claimed as a deduction for the estate tax purposes
F. Notice loss must be filed with the Bureau of Internal Revenue within 45 days from the date of
discovery of the casualty or robbery, theft, or embezzlement.
WHAT ARE THE DIFFERENT CATEGORIES AND TYPES OF LOSSES?

A. Ordinary losses
1. Incurred in trade or business, or practice of profession
Net operating loss carry-over (NOLCO)
Refers to the excess of allowable deductions over the gross income of the business for any
taxable year which had not been previously offset as deduction from gross income.

Can be carried over as a deduction from gross income for the next 3 consecutive years
immediately following the year of such loss.
2. Of property connected, with the trade, business or profession, if the loss arises from fires,
storms, shipwreck or other casualties, or from robbery, theft, or embezzlement.
a. Total destruction: The net book value (cost less accumulated depreciation) immediately
preceding the casualty, to be reduced by any amount of insurance or compensation received.
b. Partial destruction: The replacement cost to restore the property to its normal operating
condition, but in no case shall the deductible loss be more than the net book value of the property
as a whole, immediately after casualty. The excess over the net book value immediately before
the casualty should be capitalized, subject to depreciation over the remaining useful life of the
property.
B. Capital losses (losses are deductible only, to the extent of capital gain)
1. Losses from sales or exchange of capital assets
2. Losses resulting from securities of becoming worthless and which are capital assets
3. Losses from short sales of property
4. Losses due to failure to exercise privilege or option to buy or sell property
C. Special losses
1. Wagering losses : deductible only to the extent of gains or winnings; deemed to apply only to
individuals
2. Losses on wash sales of stocks: not deductible because these are considered to be artificial
loss.
Wash sales: A sale or other disposition of stock or securities where substantially identical
securities are acquired or purchased within 61-day period, beginning 30 days before the sake and
ending 30 days after the sale.
GENERAL RULE: Losses from wash sales are not deductible
Exception: When the sale is made by a dealer in stock or securities with respect to a transaction
made in the ordinary course of the business of such dealer, losses from such sale is deductible.
E. Bad debts
Refer to those debts resulting from the worthlessness or uncollectibility, in whole or in parts, of
amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of
income from goods sold or services rendered.
WHAT ARE THE REQUISITES OF BAD DEBTS?

A. Existing indebtedness due to the taxpayer which must be valid and legally demandable;
B. Connected with the taxpayer’s trade, business or practice of profession;
C. Must not be sustained in a transaction entered into between related parties;
D. Actually ascertained to be worthless and uncollectible as of the end of the taxable year; and
E. Actually charged off in the books of accounts of the taxpayer as of the end of the taxable year.
F. Depreciation
There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion and
wear and tear (including reasonable allowance for obsolescence) of property used in the trade or
business.
WHAT ARE THE REQUISITES OF DEPRECIATION?

a. The allowance for depreciation must be reasonable.
b. It must be for property use or employment in trade or business or out of it not being used
temporarily during the year.
c. The allowance must be charged off within the taxable year.
d. Schedule on the allowance must be attached to the return.

G. Depletion
Exhaustion of natural resources as in mines, oil, and gas wells. The natural resources are called
“wasting assets”. As the physical units representing such resources are extracted and sold, such
assets move towards exhaustion.
WHO MAY CLAIM DEPLETION?

 Only mining entities owning economic interest in mineral deposits.
 Economic interest means interest in minerals in place investment therein or secured by
operating or contract agreement for which income is derived, and return of capital expected,
from the extraction of mineral.
 Mere economic or pecuniary advantage to be derived by production but one who has no
capital investment in the mineral deposit does not amount to economic interest.
H. Charitable contributions
Contributions or gifts made to the government or non-government organizations (NGOs) may be
deducted against gross income.
WHAT ARE THE REQUISITES OF CHARITABLE CONTRIBUTIONS?

A. The contribution or gift must be actually paid.
B. It must be given to the organizations specified in the code.
C. The net income of the institution must not inure to the benefit of any private stockholder or
individual.
WHAT ARE THE LIMITATIONS TO CHARITABLE CONTRIBUTIONS?

In case of corporation the allowable charitable contributions shall not exceed 5% of the taxable
income before charitable contributions.
In case of individual, the allowable charitable contributions shall not exceed 10% of the taxable
income before charitable contributions.
I. Research and Development
J. Pensions
A deduction applicable only to the employer on account of its contribution to a private pension
plan for the benefit of its employee.
HOW TO RECOGNIZE PENSION TRUST CONTRIBUTIONS?

A. PRESENT SERVICE COST – Amounts contributed by the employer during the taxable year
into the pension plan to cover the pension liability accruing during the year considered as
ordinary and necessary expenses;
B. PAST SERVICE COST – 1/10 of the reasonable amount paid by the employer to cover
pension liability applicable to the years prior to the taxable year, or so paid to place the trust in a
sound financial basis;
K. Non-deductible expenses
A. Personal, living or family expenses;

B. Amount paid out for new buildings or for permanent improvements, or betterment made to
increase the value of any property or estate, EXCEPT that intangible drilling and development
cost incurred in petroleum operations are deductible;
C. Amount expended in restoring property or in making good the exhaustion thereof for which
an allowance has been made;
D. Premiums paid on any life insurance policy covering the life of any officer or employee, or of
any person financially interested in any trade or business carried on by the taxpayer, individual
or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy.
E. Losses from sales or exchanges of property between related taxpayers.

LESSON 5: FINAL INCOME TAXATION
FEATURES OF FINAL INCOME TAXATION

1. Final tax
2. Tax withholding at source
3. Territorial imposition
4. Imposed on certain passive income and persons not engaged in business in the Philippines
THE FINAL WITHHOLDING SYSTEM
It imposes upon the person making income payments the responsibility to withhold the tax.
The tax which will be deducted at source is final.
The final withholding system is inherently territorial. It applies only to certain passive income
earned from sources within the Philippines.
PASSIVE INCOME
Items of passive income are earned with very minimal involvement from the taxpayer and are
generally irregular in timing and amount.
Unlike items of active income, they are not usually specifically monitored by taxpayers. When
not recorded by the taxpayer, their existence can be difficult to predict while their actual amount
may be difficult to determine. Thus, the final withholding at source is the most favoured scheme
in taxing items of passive income.
Non-resident person not engaged in trade or business General final tax rate
Non-resident alien not engaged in trade or business 25%
Non-resident foreign corporation 30%
PASSIVE INCOME SUBJECT TO FINAL TAX
1. Interest or yield from bank deposits or deposit substitutes

2. Domestic dividends, in general
3. Dividend income from a Real Estate Investment Trust
4. Share in the net income of a business partnership, taxable associations, joint ventures, joint
accounts, or co-ownership
5. Royalties, in general
6. Prizes exceeding P10,000
7. Winnings
8. Informer’s tax reward
9. Interest income on tax-free corporate covenant bonds

(1) Interest Income or Yield
Interest income or yield from local currency bank deposits or deposit substitutes are subject to
final tax as follows:
Recipient
Source of interest income Individuals Corporations

Short term deposits 20% 20%
Long-term deposits/ investment certificates Exempt* 20%

ILLUSTRATION
1. A taxpayer earned the following interest income from various time deposits:
6-month time deposit P 8,000

2-year time deposit 12,000
5-year time deposit 40,000
Total interest income P60,000
Required: Compute the final tax if the taxpayer is an individual and if a corporation.
ANSWER:
6-month time deposit P 8,000 x 20% = P1,600

2-year time deposit 12,000 x 20% = 2,400
5-year time deposit 40,000 x 0% = 0
Total interest income= Individual P4,000
Total interest income= Corporation P60,000 x 20% = P12,000
A resident taxpayer received a P16,000 interest income from a bank. Determine the final tax
withheld at source.
Solution:
Gross interest income (P16,000/80%) P20,000
Multiply by final tax rates 20%
Final tax withheld P 4,000
TAX ON PRE-TERMINATION OF LONG TERM DEPOSITS OF INDIVIDUALS

If the deposit or investment placement of individual taxpayers is pre-terminated before 5 years,
any previously untaxed or exempted interest income will be subjected to the following final taxes
upon pre-termination:
ILLUSTRATION
On January 1, 2016, Alice invested P1,000,000 in Baguio Bank’s 5-year time
deposit. The deposit pays 10% interest annually. Alice pre-terminated the
deposit on July 1, 2019.
2016 interest income (P1,000,000 x 10%) P100,000
2017 interest income (P1,000,000 x 10%) 100,000
2018 interest income (P1,000,000 x 10%) 100,000
2019 accrued interest income (P1,000,000 x 10% x 6 months/12 months) 50,000
Total interest income P350,000
Final tax rate applicable to less than 4-year pre-termination 12%
Final tax P42,000
Foreign currency deposit with foreign currency depositary banks
The interest income from foreign currency deposits under the foreign currency deposit system or
expanded foreign currency deposit system by residents subject to a final tax of 15%. The old law
imposed rate of 7.5% until 2017.
Taxpayer Individuals Corporations

Residents 15% 15%
Non-residents Exempt Exempt

(2) Dividends
Dividends
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
1. Cash dividends – paid in cash

2. Property dividends – paid in non-cash properties including stocks or securities of another
corporation
3. Scrip dividends – those paid in notes or evidence of indebtedness of the corporation
4. Stock dividends – paid in the stocks of the corporation
5. Liquidating dividends – distribution of corporate net asset
Stock and Liquidating dividends are not income for taxation purposes.
Dividend Tax Rules
Recipient of dividends
Source of dividends Individuals Corporations

Domestic corporation 10% final tax (See note 1) Exempt(See note 2)
Foreign corporation Regular tax Regular tax
Note:
1. A NRA-ETB is subject to a 20% final tax on dividend, not to the usual 10%; but an NRA
NETB is subject to a 25% final tax.
2. A NRFC is not exempt but is subject to the 30% general final tax rate. However, the
imposable dividend tax shall be 15% when the tax sparing rule applies.
ILLUSTRATION
Abortian Company declared a total of P1,000,000 dividends in March 2014.
An analysis of the recipient shareholders is as follows:
Shareholders Amount
Resident aliens and citizens P500,000
NRAs engaged in trade or business 100,000
NRAs not engaged in trade/business 50,000
Non-resident corporations 100,000
Total dividends P750,000
ANSWER:

(3) Royalties
Passive royalty income received from sources within the Philippines is subject to the following
final tax rates:

Recipient
Source of passive royalties Individuals Corporations

Books, literacy works, and
musical compositions 10% final tax 20% final tax
Other sources 20% final tax (See note 1) 20% final tax (See note 2)
Note:
1. Under the regulations, the 10% preferential royalty final tax on books and literary works
pertain to printed literatures. Royalties on books sold on e-copies or CDs such as e-books are
subject to the 20% final tax.
2. Royalties on cinematographic films and similar works paid to NRA-ETBs, NRA-NETBs, or
NRFCs is subject to a final tax of 25%.

(4) PRIZES
Prizes may be exempt from income tax or subject to either final tax or regular income tax.
Exempt prizes
1. Prizes received by a recipient without any effort on his part to join a contest. Examples include
prizes from such awards as Nobel Prize, Most Outstanding Citizen, Most Benevolent Citizen of
the Year, and similar awards.
2. Prizes from sports competitions that are sanctioned by their respective national sports
organizations.
Taxable prizes
For individual income taxpayers, taxable prizes are subject to either final or regular tax
depending on the amount of the prize. There may be events or competitions where corporations
earn prizes. However, there is no final tax imposition on corporate prizes under the NIRC.
Hence, the same must be subject to regular income tax.
Recipient
Amount of taxable prize Individuals Corporations

Prizes exceeding P10,000 20% final tax Regular tax
Prizes not exceeding P10,000 Regular tax Regular tax
Recall also that final taxation does not apply to foreign passive income; hence prizes from
foreign sources are subject to the regular income tax.

(5) Winnings
For individual income taxpayers, winnings received from sources within the Philippines are
generally subject to 20% final tax, except Philippine Charity Sweepstakes Office (PCSO) or lotto
winnings amounting to P10,000 or less.
Similar to prizes, there is no final tax imposed on corporate winnings under the NIRC. Winnings
that are not subjected to final tax by the payor should be reported as part of the regular income.
Also, winnings from foreign sources are subject to regular income tax.
Recipient
Types of winnings Individuals Corporations
PCSO/lotto winnings not exceeding P10,000 Exempt Exempt
PCSO/lotto winnings exceeding P10,000 20% final tax 20% final tax
Other winnings, in general 20% final tax Regular tax

Note: PCSO or lotto winnings of NRA-NETBs and NRFCs, regardless of amount, are
respectively subject to 25% or 30% final tax.

(6) Tax Informer’s Reward
A cash reward may be given to any person instrumental in the discovery of violations of the
National Internal Revenue Code or discovery and seizure of smuggled goods. The tax informer’s
reward is subject to 10% final tax.
Amount of Cash Reward – whichever is the lower of the following per case:
1. 10% of revenues, surcharges, or fees recovered and or fine or penalty imposed and collected
or
2. P1,000,000
The amount of cash reward is subject to 10% final withholding tax which shall be withheld by
the government.
EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSONS NOT

ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES

Bac03-Chapter 5

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bac03-Chapter 5

Uploaded by

Copyright:

Available Formats

CHAPTER 5

INTRODUCTION TO GROSS INCOME

LESSON 1: GROSS INCOME

 It means total income of a taxpayer subject to tax.

Gross income is gain. It is gain derived from:

RETURN OF CAPITAL VS. RETURN ON CAPITAL

BAC03- Income Taxation

While Capital is the tree, Income is the fruit.

WHEN IS INCOME TAXABLE?

REQUISITES FOR INCOME TO BE TAXABLE

a. There must be gain.

WHEN IS THERE A CONSTRUCTIVE RECEIPT?

There is constructive receipt of income when:

BAC03- Income Taxation

1. SCHEDULAR TAX SYSTEM VS. GLOBAL TAX SYSTEM

2. GROSS INCOME TAXATION VS. NET INCOME TAXATION

LESSON 2: ITEMS OF GROSS INCOME

Gross compensation income is income arising from an employer-employee relationship.

Employee – an individual performing services under an employer-employee

BAC03- Income Taxation

It is an income arising out of an employer-employee relationship. It encompassed all

BAC03- Income Taxation

BAD DEBT RECOVERY

The following tax refunds are not taxable:

CANCELLATION OR CONDONATION OF DEBTS

BAC03- Income Taxation

RENT INCOME may be in the FORM of:

BAC03- Income Taxation

1. First month’s rent P60,000.

JC also improved the office space for a total cost of P360,000.

Cost of construction (improvements) : P10,000,000

BAC03- Income Taxation

Dividends are payments made by a corporation to its shareholder members.

DIRECT AND INDIRECT DIVIDENDS ARE SUBJECT TO TAX.

TAX TREATMENT OF DIVIDEND INCOME

BAC03- Income Taxation

Q2: Assume Pedro died within the 15-year Answer

9. Prizes and winnings

TAX TREATMENT OF PRIZES AND OTHER WINNINGS

BAC03- Income Taxation

11. Informer’s Award

The following rewards shall be subject to 10% final withholding tax:

The following rewards shall be subject to 10% final withholding tax:

LESSON 3: EXCLUSIONS FROM THE GROSS INCOME

1. It is exempted by the fundamental law or by statute

 Exemption from taxation is a grant of immunity to particular persons or corporations of a

BAC03- Income Taxation

EXCLUSIONS VS. DEDUCTIONS

EXCLUSIONS FROM GROSS INCOME

a. Proceeds of insurance, except crop insurance;

BAC03- Income Taxation

Based on contract, law or treaty.

Based on Treaty • Salaries of officials of the United Nations assigned in the

3. Based on grounds of reciprocity or to lessen the rigors of international double or multiple

• Exemptions granted to nonresident aliens engaged in trade or business.

TAX TREATY UNDER REVENUE MEMORANDUM ORDER NO. 1-2000

BAC03- Income Taxation

ITEMS OF INCOME OR PROCEEDS EXCLUDED FROM THE GROSS INCOME –

QUESTION: ARE THE PROCEEDS OF THE INSURANCE SUBJECT TO INCOME TAX

(B) RETURN OF PREMIUM UNDER LIFE INSURANCE, ENDOWMENT AND ANNUITY

BAC03- Income Taxation

ILLUSTRATION : life insurance – return of premium or capital

QUESTION 1: ASSUME JUAN OUTLIVED THE POLICY. TOTAL