Chapter 7: Introduction to Regular Income Tax

General
The regular income tax applies to all items of income except those that are subject to final tax. Capital gains tax, and special tax
regimes.

Net Income Taxation

The regular tax is an imposition on residual profits or gains after deductions for expenses and personal exemptions allowable by
law.

Annual Income Tax

The regular income tax applies on yearly profits or gains. The gross income and expenses of the taxpayer are measured using the
accounting methods adopted by the taxpayer and are reported to the government over the accounting period selected by the
taxpayer.

Creditable Withholding Tax

Most items of regular income are subject to creditable withholding tax (CWT).

Progressive or Proportional Tax

The NIRC imposes a progressive tax on the taxable income of individuals while it imposes a flat or proportional tax of 30% upon
the taxable income of corporations

GROSS INCOME – All income from whatever sources.

Gross Income, for purposes of computing RIT, is all income from whatever sources (1) not subject to Final Tax; (2) not subject to
CGT; and (3) not exempt (Exclusion of Gross Income).

Classification of Gross Income

1. Compensation Income – Employee-Employer relationship

2. Business or Professional Income – Selling of goods or services
3. Other Taxable Income – Neither Compensation nor Business or Professional Income.
 Employees Source(s) of
Income
1. Purely Compensation Income
2. W/ Other Taxable Income
3. w/ Business or Professional
Income
Payment of Tax
Substituted Filing
Need to file an ITR –
Consolidated Income
Need to file an ITR –
Consolidated Income
Income Tax Return
No need to file an ITR
personally
Annual – BIR Form 1700
Quarterly and Annual – 1701

Note: Substituted Filing may only be availed by Pure compensation Income earners. The latter may relieve from the obligation to
file an annual ITR. Provided further that the latter has: (1) no other taxable Income; (2) no other employer; and (3) Income Tax
Withheld was correct.

Business or Professional Payment of Tax Income Tax Return

Income Source(s) of Income
1. Pure Business or Professional ITR Quarterly & Annually BIR Form 1701A – May use 8%
Income Optional Income Tax or Regular
Income Tax.
2. Mixed Income Earners ITR Quarterly & Annually BIR Form 1701
Note: The 8% Income Tax shall be in lieu of (1) Progressive Tax; and (2) 3% Progressive Tax.

Chapter 8: Exclusions in Gross Income

EXCLUSION FROM GROSS INCOME (Exempt from Tax)

1. Proceeds of Life Insurance policy payable upon the death of the insured. However, it is taxable if the insured outlives the
policy;
2. Return of premium either during the term, at the maturity, or upon surrender of the contract;
3. The value of the property acquired by gift, bequest or descent;
4. Compensation for personal injuries or sickness received from insurance plus damages;
5. Income of any kind which are contained in a treaty binding upon the Philippine government;
6. Retirement benefits, pension, etc.
a. Retirement Benefits – (R-1-10-50); and
b. Separation Pay – must be due to death, sickness, physical disability, and/or any cause beyond the control of the
employee.
7. Prizes and awards – those given to religious, charitable, scientific, educational, artistic, literary, or civic achievement, provided
that:
a. recipient did not join any contest; and
b. he’s not required to render substantial future services.
8. Benefits received by person residing in the Philippines under US laws administered by US Veterans Administration.
9. Benefits received from SSS, GSIS including retirement gratuity received by government officials and employees.
10. Income derived by foreign government
11. Income derived by the government or its political subdivisions from public utility or any essential government function.
12. Prizes and awards granted to athletes in –
a. local and international sports competition;
b. sanctioned by their national sports association; and
c. the sports association must be recognized by Philippine Olympic Committee.
13. 13th Month Pay and Other benefits up to P90,000.
14. SSS, GSIS, Philhealth, HDMF and Union dues of Individual.
15. Gain from sale of debenture, bonds and other certificates with maturity period of at least 5 years.
16. Compensation Income of Minimum Wage Earners.
17. Barangay Micro-Business Enterprise (BMBE)
Chapter 9: Inclusions in Gross Income

1. Compensation;
2. Gross Income from business or profession;
3. Gains from dealings in properties; 4. Interest;
5. Rents;
6. Royalties;
7. Dividends
8. Annuities;
9. Prizes and Winnings;
10. Pension; and
11. Partner’s distributive share in GPP.

Compensation – income that arises from EE-ER relationship.

Gross Compensation Income
Less: Non-taxable Compensation
Taxable Compensation Income
All renumerations received by an employee.
1.Basic Pay;
2. Fixed Allowances;
3. Premium pay;
4. Other Additional Compensation (Overtime,NSD, etc.)
5. 13th Month Pay and other benefits exceeding P90,000;
6. Excess on allowable de minimis benefits; and
7. Other taxable benefits.
1. Mandatory Contributions (SSS,GSIS,Philhealth,HDMF
and Union dues);
2. Termination Benefits (Authorized Causes Only);
3. Retirement Benefits (R -1-10-50);
4. SSS and/or GSIS Benefits;
5. 13th Month Pay and other benefits not exceeding
P90,000; and
6. De minimis benefits*
Subject to Progressive Tax

Note:
(1) Necessity and Convenience of the Employer - benefits or allowances (aka facilities) furnished to the employees to enable them
to appropriately and effectively execute their duties are exempt from income tax.
(2) Compensation in kind is taxable at the fair value of the consideration received.
(3) Authorized Causes – beyond the control of the employee. Eg. Retrenchment, bankruptcy, redundancy, etc.

De Minimis Benefits
a. Monetized unused vacation leave of Private Not Exceeding 10 days
Employees
b. Monetized unused VL & SL paid to No Limit
government employees
c. Medical Cash Allowance to dependents Not exceeding P1500 per semester or P375 per
month
d. Rice Subsidy P 2,000 per month
e. Uniform & Clothing Allowance P 6,000 per annum
f. Actual Medical Assistance P 10,000 per annum
g. Laundry Allowance P300 per month
h. Employee Achievement Award P10,000 per annum
i. Gift given during Christmas or major P5,000 per annum
celebrations
j. Daily Meal Allowance for overtime work and 25% of Minimum Wage Rate
night or graveyard shift
k. Benefits by virtue of CBA P10,000 per annum
Note: (1) The 10 day rule applies only to vacation leaves. Monetization of sick leaves is taxable; and (2) Vacation and sick leave
of government employees are not subject to the 10 day limit rule.
(3) Christmas gift of government employees is designated by the NIRC to be part of 13th month pay and Other Benefits.

2. Gross Income from Business or Profession

General Rule: Income from the conduct of trade, business or exercise of a profession are subject to regular income tax.
Exceptions:
1. Those exempt from income tax
1.1 Barangay Micro Business Enterprises (BMBE) under RA 9178; and 1.2 Enterprises enjoying tax holidays – EO 226

2. Those Subject to Special Tax Regime

2.1 PEZA or TIEZA registered – 5%
2.2 Self employed or Professionals using 8% Optional Income Tax

3. Those subject to Final Income Tax

3.1 Subcontractor of Petroleum Service Contractor – 8% final tax
3.2 Business income of FCDU & OBU from Philippine residents – 10% final tax

3. Gains from Dealings in Properties – All gains or losses from the sale, exchange or disposition of (1) ordinary asset; (2)
movable properties classified as capital asset; and (3) stocks of Foreign Corporation are subject to regular income tax.

Rules on Sale or Exchange of Personal Property (Capital Asset)

a. Capital Losses are deductible only from capital gains;
b. Corporations has no holding period thus no carry over;
c. Holding Period: Short Term (within 12 months) – 100% Long Term (beyond 12 months) – 50%
d. Carry Over – limited only to the net income during the year.

4. Interest Income – Interest income that are not subject to final tax.
(1) Interest earned by banks and lending companies.
(2) Interest earned from bank deposits abroad.
(3) Interest income from bonds and promissory notes.

5. Rental Income – income arises from leasing properties.

Note: Rental income shall include non-refundable deposits and/or advances that will be applied to future rental payments.
It is taxable upon receipt of the latter.

6. Royalties
a. Within the Philippines – Final Tax
b. Without the Philippines – Regular Income Tax

7. Dividends – Cash and property dividends declared.

 FROM
Domestic Corporation
Foreign Corporation
TO Applicable Tax
Individual Final Tax – 10%
Domestic Corporation Exempt
Resident Foreign Corporation Exempt
Non-Resident Foreign Corp. Final Tax – May be subjected to
15% Tax Sparring Rule
Individual Regular Income Tax
Domestic Corporation Regular Income Tax
Foreign Corporation Exempt

8. Annuities – The excess of annuity payments received by the recipient over the premium paid is taxable
income in the year of receipt.

9. Prizes and Winnings – those prizes or winnings which are neither subject to final tax nor exempt.
a.) Prizes not exceeding P10,000
b.) Prizes and winnings earned outside the Philippines

10. Pensions – Pension or retirement benefits failed to meet all the criteria below.
a. The employer must maintain a private pension plan approved by the BIR;
b. At least 10 years in service in the same employer;
c. Must not be less than 50 years old upon retirement; and
d. Must be availed only once.

11. Partner’s distributive share in GPP – GPPs are exempt from income tax but its partners are liable
to pay taxes individually.

12. Other Sources

a. Income distribution from taxable estates and trust;
b. Farming Income;
c. Recovery of Accounts Receivable Written Off;
d. Cancellation of debt for a consideration; and
e. Share from the net income of joint venture or co-ownership.