GROSS INCOME

'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of
goods sold.

For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of
the goods sold, plus import duties, freight in transporting the goods to the place where the
goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, ‘cost of goods manufactured and sold' shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances, discounts and cost of services

SEC. 32. Gross Income. -

(A) General Definition. - Except when otherwise provided in this Title, gross income
means all income derived from whatever source, including (but not limited to) the
following items:

(1) Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;

(2) Gross income derived from the conduct of trade or business or the exercise of a
profession;

(3) Gains derived from dealings in property;

(4) Interests;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Annuities;
 (9) Prizes and winnings;

(10) Pensions; and

(11) Partner's distributive share from the net income of the general professional
partnership.

G.R. No. L-12287 August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,

vs.

JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION,

Deputy Collector of Internal Revenue, defendants-appellees.

Income as contrasted with capital or property is to be the test. The essential difference between
capital and income is that capital is a fund; income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services rendered by that capital by the payment of
money from it or any other benefit rendered by a fund of capital in relation to such fund through
a period of time is called an income. Capital is wealth, while income is the service of wealth.
(See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses
the thought in the following figurative language: "The fact is that property is a tree, income is the
fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs. City of
Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. "Income," as here used,
can be defined as "profits or gains."

Case Digest:

FACTS:

• Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914.
The marriage was contracted under the provisions of law concerning conjugal
partnership

• On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of
P296,302.73

• Vicente Madrigal was contending that the said declared income does not represent his
income for the year 1914 as it was the income of his conjugal partnership with Paterno.
He said that in computing for his additional income tax, the amount declared should be
divided by 2.

• The revenue officer was not satisfied with Madrigal’s explanation and ultimately, the
United States Commissioner of Internal Revenue decided against the claim of Madrigal.

• Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08
alleged to have been wrongfully and illegally assessed and collected by the CIR.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be

divided into 2 in computing for the additional income tax.

HELD:

• No! The point of view of the CIR is that the Income Tax Law, as the name implies,
taxes upon income and not upon capital and property.

• The essential difference between capital and income is that capital is a fund; income is
a flow. A fund of property existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time is called
income. Capital is wealth, while income is the service of wealth.

• As Paterno has no estate and income, actually and legally vested in her and entirely
distinct from her husband’s property, the income cannot properly be considered the
separate income of the wife for the purposes of the additional tax.

• To recapitulate, Vicente wants to half his declared income in computing for his tax
since he is arguing that he has a conjugal partnership with his wife. However, the court
ruled that the one that should be taxed is the income which is the flow of the capital,
thus it should not be divided into 2.

Concept of income from whatever source derived

SEC. 29. GROSS INCOME. — (a) General definition. — "Gross income" includes gains, profits,
and income derived from salaries, wages, or compensation for personal service of whatever
kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce,
sales or dealings in property, whether real or personal, growing out of ownership or use of or
interest in such property; also from interests, rents, dividends, securities, or the transactions of
any business carried on for gain or profit, or gains, profits, and income derived from any source
whatsoever.

SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES.

(a) Gross income from sources within the Philippines. — The following items of gross income
shall be treated as gross income from sources within the Philippines:

xxxxxxxxx

(5) SALE OF REAL PROPERTY. — Gains, profits, and income from the sale of real property
located in the Philippines;

xxxxxxxxx

It appears then that the acquisition by the Government of private properties through the exercise
of the power of eminent domain, said properties being JUSTLY compensated, is embraced
within the meaning of the term "sale" "disposition of property", and the proceeds from said
transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax
Code of the Philippines.
Case Digest:

Blas Gutierrez and Maria Moralez, petitioners vs Collector of Internal Revenue

CTA Case No. 64

FACTS:

1. Maria Morales, married to Gutierrez(spouses), was the owner of an agricultural land. The
U.S. Gov(pursuant to Military Bases Agreement) wanted to expropriate the land of Morales to
expand the Clark Field Air Base.

2. The Republic was the plaintiff, and deposited a sum of Php 152k to be able to take immediate
possession. The spouses wanted consequential damages but instead settled with a
compromise agreement. In the compromise agreement, the parties agreed to keep the value of
Php 2,500 per hectare, except to some particular lot which would be at Php 3,000 per hectare.

3. In an assessment notice, CIR demanded payment of Php 8k for deficiency of income tax for
the year 1950.

4. The spouses contend that the expropriation was not taxable because it is not "income derived
from sale, dealing or disposition of property" as defined in Sec. 29 of the Tax Code. The
spouses further contend that they did not realize any profit in the said transaction. CIR did not
agree.

5. The spouses appealed to the CTA. The Solicitor General, in representation of the respondent
Collector of Internal Revenue, filed an answer that the profit realized by petitioners from the sale
of the land in question was subject to income tax, that the full compensation received by
petitioners should be included in the income received in 1950, same having been paid in 1950
by the Government. CTA favored SolGen but disregarded the penalty charged.

6. Both parties appealed to the SC.

ISSUES:
1. Whether or not that for income tax purposes, the expropriation should be deemed as income
from sale and any profit derived therefrom is subject to income taxes capital gain?

2. Whether or not there was profit or gain to be taxed?

HELD: Yes to both. CTA decision affirmed. It is subject to income tax.

RATIO 1: It is to be remembered that said property was acquired by the Government through
condemnation proceedings and appellants' stand is, therefore, that same cannot be considered
as sale as said acquisition was by force, there being practically no meeting of the minds
between the parties. U.S jurisprudence has held that the transfer of property through
condemnation proceedings is a sale or exchange within the meaning of section 117 (a) of the
1936 Revenue Act and profit from the transaction constitutes capital gain" "The taking of
property by condemnation and the, payment of just compensation therefore is a "sale" or
"exchange" within the meaning of section 117 (a) of the Revenue Act of 1936, and profits from
that transaction is capital gain.

RATIO 2: As to appellant taxpayers' proposition that the profit, derived by them from the
expropriation of their property is merely nominal and not subject to income tax, We find Section
35 of the Tax Code illuminating. Said section reads as follows:

SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER DISPOSITION
OF PROPERTY. —The gain derived or loss sustained from the sale or other disposition of
property, real or personal, or mixed, shall be determined in accordance with the following
schedule:

(a) xxx xxx xxx

(b) In the case of property acquired on or after March first, nineteen hundred and thirteen, the
cost thereof if such property was acquired by purchase or the fair market price or value as of the
date of the acquisition if the same was acquired by gratuitous title.

xxxxxxxxx

The records show that the property in question was adjudicated to Maria Morales by order of the
Court of First Instance of Pampanga on March 23, 1929, and in accordance with the
aforequoted section of the National Internal Revenue Code, only the fair market price or value of
the property as of the date of the acquisition thereof should be considered in determining the
gain or loss sustained by the property owner when the property was disposed, without taking
into account the purchasing power of the currency used in the transaction. The records placed
the value of the said property at the time of its acquisition by appellant Maria Morales
P28,291.73 and it is a fact that same was compensated with P94,305.75 when it was
expropriated. The resulting difference is surely a capital gain and should be correspondingly
taxed.

Sources of income subject to tax

Compensation income is the income of the individual taxpayer arising from services
rendered pursuant to an employer-employee relationship. Under the NIRC of 1997, as
amended, every form of compensation for services, whether paid in cash or in kind, is
generally subject to income tax and consequently to withholding tax. The name
designated to the compensation income received by an employee is immaterial. Thus,
salaries, wages, emoluments and honoraria, allowances, commissions, fees, (including
director's fees, if the director is, at the same time, an employee of the
employer/corporation), bonuses, fringe benefits (except those subject to the fringe
benefits tax under Section 33 of the Tax Code), pensions, retirement pay, and other
income of a similar nature, constitute compensation income that are taxable and subject
to withholding.

Case Digest:
G.R. No. 213446 July 3, 2018

CONFEDERATION FOR UNITY, RECOGNITION AND ADVANCEMENT OF

GOVERNMENT EMPLOYEES, Petitioner VS. COMMISSIONER, BUREAU OF

INTERNAL REVENUE, Respondent

Taxation; National Internal Revenue Code; RR No. 2-98; Sec 2.78; Who may be subject
to withholding tax on compensation. Withholding tax on compensation applies to all
employed individuals whether citizens or aliens, deriving income from compensation for
services rendered in the Philippines. The employer is constituted as the withholding
agent.

The term employee covers all employees, including officers and employees, whether
elected or appointed, of the Government of the Philippines, or any political subdivision
thereof or any agency or instrumentality while an employer embraces not only an
individual and an organization engaged in trade or business, but also includes an
organization exempt from income tax, such as charitable and religious organizations,
clubs, social organizations and societies, as well as the Government of the Philippines,
including its agencies, instrumentalities, and political subdivisions. The law is therefore
clear that withholding tax on compensation applies to the Government of the
Philippines, including its agencies, instrumentalities, and political subdivisions.

Exemption to taxable compensation income. However, not all income payments to

employees are subject to withholding tax. These are the allowance, bonuses or
benefits, excluded by the NIRC. While Section III enumerates certain allowances which
may be subject to withholding tax, it does not exclude the possibility that these
allowances may fall under the exemptions identified under Section IV, thus, the phrase,
"subject to the exemptions enumerated herein."

FACTS: The petitioners in the present case assail the validity of the provisions of RMO
No. 23-2014, specifically Secs. III and IV, for subjecting to withholding taxes non-
taxable allowances, bonuses and benefits received by government employees. The
respondent, on the other hand, argues that RMO No. 23-2014 that allowance, bonuses
or benefits listed under Sec. III of the assailed RMO are not fringe benefits within the
purview of the Tax Code, hence, it may not be subjected to withholding tax. The Court
issued a Resolution directing the Fiscal Management and Budget Office of the Court to
maintain the status quo by the non-withholding of taxes from the benefits authorized to
be granted to judiciary officials and personnel until such time that a decision is rendered
in the instant consolidated cases. Hence, the present petition.
ISSUE: Whether or not Sec. III of the RMO is valid.

HELD: AFFIRMATIVE. Under the NIRC of 1997, every form of compensation for
services, whether paid in cash or in kind, is generally subject to income tax and
consequently to withholding tax. Sec 2.78 of RR No. 2-98 provides that withholding tax
on compensation applies to all employed individuals whether citizens or aliens, deriving
income from compensation for services rendered in the Philippines. The employer is
constituted as the withholding agent. It further provides that the term employee covers
all employees, including officers and employees, whether elected or appointed, of the
Government of the Philippines, or any political subdivision thereof or any agency or
instrumentality while an employer embraces not only an individual and an organization
engaged in trade or business, but also includes an organization exempt from income
tax, such as charitable and religious organizations, clubs, social organizations and
societies, as well as the Government of the Philippines, including its agencies,
instrumentalities, and political subdivisions. The law is therefore clear that withholding
tax on compensation applies to the Government of the Philippines, including its
agencies, instrumentalities, and political subdivisions. The Government, as an
employer, is constituted as the withholding agent, mandated to deduct, withhold and
remit the corresponding tax on compensation income paid to all its employees.

However, not all income payments to employees are subject to withholding tax. These
are the allowance, bonuses or benefits, excluded by the NIRC. While Section III
enumerates certain allowances which may be subject to withholding tax, it does not
exclude the possibility that these allowances may fall under the exemptions identified
under Section IV, thus, the phrase, "subject to the exemptions enumerated herein." In
other words, Sections III and IV articulate in a general and broad language the
provisions of the NIRC on the forms of compensation income deemed subject to
withholding tax and the allowances, bonuses and benefits exempted therefrom. Thus,
Sections III and IV cannot be said to have been issued contrary with the provisions of
the NIRC of 1997, as amended, and its implementing rules.

Fringe benefits
FRINGE BENEFIT" means any good, service, or other benefit furnished or granted by
an employer in cash or in kind, in addition to basic salaries, to an individual

the valuation of fringe benefits shall be as follows:

(1) If the fringe benefit is granted in money, or is directly paid for by the employer,
then the value is the amount granted or paid for.

(2) If the fringe benefit is granted or furnished by the employer in property other
than money and ownership is transferred to the employee, then the value of the fringe
benefit shall be equal to the fair market value of the property as determined in
accordance with Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe Real
Property Values).

(3) If the fringe benefit is granted or furnished by the employer in property other
than money but ownership is not transferred to the employee, the value of the fringe
benefit is equal to the depreciation value of the property.

Professional income is an income derived from practice of one’s profession.

Business income is a type of earned income and is classified as ordinary

income for tax purposes. It encompasses any income realized as a result of
an entity’s operations. In its simplest form, it is a business entity’s net profit or
loss, which is calculated as its revenue from all sources minus the costs of
doing business.

Capital assets shall refer to all real properties held by a taxpayer, whether
or not connected with his trade or business, and which are not included
among the real properties considered as ordinary assets under Sec.
39(A)(1) of the Code.

Ordinary assets shall refer to all real properties specifically excluded from
the definition of capital assets under Sec. 39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec.
34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.
Real properties acquired by banks through foreclosure sales are considered as their
ordinary assets. However, banks shall not be considered as habitually engaged in the real
estate business for purposes of determining the applicable rate of withholding tax imposed
under Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as amended.

Real property shall have the same meaning attributed to that term under Article 415 of
Republic Act No. 386, otherwise known as the “Civil Code of the Philippines.”

Real estate dealer shall refer to any person engaged in the business of buying and selling or
exchanging real properties on his own account as a principal and holding himself out as a full or
part-time dealer in real estate. e. Real estate developer shall refer to any person engaged in the
business of developing real properties into subdivisions, or building houses on subdivided lots,
or constructing residential or commercial units, townhouses and other similar units for his own
account and offering them for sale or lease.

Real estate lessor shall refer to any person engaged in the business of leasing or renting real
properties on his own account as a principal and holding himself out as lessor of real properties
being rented out or offered for rent.

Taxpayers engaged in the real estate business shall refer collectively to real estate dealers,
real estate developers, and/or real estate lessors. Conversely, the term “taxpayers not engaged
in the real estate business” shall refer to persons other than real estate dealers, real estate
developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in
business, or whose Articles of Incorporation states that its primary purpose is to engage in the
real estate business shall be deemed to be engaged in the real estate business for purposes of
these Regulations.

V. Income from dealings in property

1. ORDINARY ASSETS – refer to properties held by the taxpayer used in connection with his
trade or business which includes the following: [SOUR]

a) Stock in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; (RM,
WIP, FG)

b) Property held by the taxpayer primarily for sale to customers in the ordinary course of
trade or business;

c) Property used in the trade or business of a character which is subject to the allowance
for depreciation provided in the nirc; and (PPE)

d) Real property used in trade or business of the taxpayer. (Inv Prop, PPE)

**Above-mentioned list is exclusive (BIR Ruling No. DA 212-07, Apr 3, 2007)

EXAMPLES OF ORDINARY ASSETS

 · The condominium building owned by a realty company, the units of which are for rent or
for sale

· Machinery and equipment of a manufacturing concern subject to depreciation

· The motor vehicles of a person engaged in transportation business.

1. CAPITAL ASSETS – include property held by the taxpayer (whether or not connected
with his trade or business) other than SOUR above.

EXAMPLES OF CAPITAL ASSETS

· AR, Securities held as investment, GW

· Jewelry not used for trade or business

· Residential houses and lands owned and used as such

· Automobiles not used in trade or business

· Stock and securities held by taxpayers other than dealers of securities

Why there’s a need to distinguish ordinary from capital assets?

** Ordinary asset and capital asset are subject to different rules. There are special rules that
apply only to capital asset transactions, to wit:

1. Holding period rule

2. Capital loss limitation

3. Net capital loss carry-over (NELCO)

Generally, income realized from the sale of capital assets are not reported in the income tax
return as they are already subject to final taxes (CGT on real property and shares of stocks not
traded in the stock exchange). What are to be reported in the annual income tax return are the
capital gains derived from the disposition of capital assets other than real property or shares of
stocks in domestic corporations, which are not subject to final tax.

Income realized from sale of ordinary assets is part of Gross Income, included in the Income
Tax Return (NIRC, Sec. 32 A [3]).
RR 7-2003

With respect to taxpayers engaged in the real estate business, the following real
properties shall be classified as ordinary assets:
1) all real properties acquired by the real estate dealer;
2) all real properties acquired by the real estate developer, whether developed or
underdeveloped as of the time of acquisition, and all real properties which are
held by the real estate developer primarily for sale or for lease to customers in the
ordinary course of his trade or business or which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year and all
real properties used in the trade or business, whether in the form of land,
building, or other improvements;
3) all real properties acquired by the real estate lessor, whether land and/or
improvements, which are for lease/rent or being offered for lease/rent, or
otherwise for use or being used in the trade or business; and
4) all real properties acquired in the course of trade or business by a taxpayers
habitually +engaged in the sale of real estate.

In the case of a taxpayer not engaged in the real estate business, real properties,
whether land, building, or other improvements, which are used or being used or have
been previously used in the trade or business of the taxpayer shall be considered as
ordinary assets. However, real property used by an exempt corporation in its exempt
operations shall not be considered used for business purposes, and therefore,
considered as capital asset.

Changing of taxpayers’ business from real estate business to non-real estate

business shall not result in the re-classification of real property held by it from ordinary
asset to capital asset.

In the case of subsequent non-operation by taxpayers originally registered to be

engaged in the real estate business, all real properties originally acquired by it shall
continue to be treated as ordinary assets.

Real properties formerly forming part of the stock in trade of a taxpayer engaged
in the real estate business, or formerly being used in the trade or business of a taxpayer
engaged or not engaged in the real estate business, which were later on abandoned and
became idle, shall continue to be treated as ordinary assets. Real property initially
acquired by a taxpayer engaged in the real estate business should not result in its
conversion into a capital asset even if the same is subsequently abandoned or becomes
idle.

Provided however, that properties classified as ordinary assets for being used in
business by a taxpayer engaged in business other than real estate business are
automatically converted into capital assets upon showing of proof that the same have
 not been used in business for more than two (2) years prior to the consummation of
the taxable transactions involving said properties.

Real properties classified as capital or ordinary asset in the hands of the

seller/transferor may change their character in the hands of the buyer/transferee. The
classification of such properties shall be determined in accordance with the rules
specified in the Regulations.

In the case of involuntary transfer of real properties, including expropriation or

foreclosure sale, the involuntariness of such sale shall have no effect on the
classification of such real property in the hands of the involuntary seller.

Gains/income derived from sale, exchange, or other disposition of real properties

shall, unless otherwise exempt, be subject to applicable taxes (as specified in the
Regulations), depending on whether the subject properties are classified as capital
assets or ordinary assets

b) Types of gains

Ordinary Income Capital Gain

It includes the gain derived from the sale or It includes the gain derived from the sale or
exchange of ordinary asset. exchange of a capital asset

Not adjusted Can be adjusted by the holding period

Ordinary losses are deductible from capital Capital loss shall be deducted only to the
gains but net capital loss cannot be extent of capital gains
deducted from ord. gain/income

Actual gain Presumed Gain

 Excess of the selling price over the cost of The law presumes that the seller of real
the asset property classified as capital asset realized
gains, which is taxed at 6% of the selling
price or fair market value, whichever is
higher

Long-Term Capital Short-Term Capital

Held for more than 12 mos Held for 12 mos. or less

Net Capital Gain Net Capital Loss

Excess of gains from sale or exchanges of Excess of losses from sale or exchanges of
capital assets over the losses from such capital assets over the gains from such
sales or exchanges (NIRC, Sec 39 (A)(2)) sales or exchanges (NIRC, Sec 39 (A)(3))

c) Special rules pertaining to income or loss from dealings in property classified as

capital asset (loss limitation rule, loss carry-over rule, holding period rule)

INDIVIDUAL CORPORATE

Holding Period Rule X

Loss Limitation Rule Except trust company and bank

Net Capital Loss Carry Over X

Ø CAPITAL LOSS LIMITATION RULE

Losses from sale or exchanges of capital assets shall be allowed only up to the extent of the
gains from such sales or exchanges (NIRC, Sec. 39 (C)).

Thus, under this capital loss limitation rule, capital loss is deductible only up to the extent of
capital gain. The taxpayer can only deduct capital loss from capital gain. If there is no capital
gain, then no deduction is allowed because you cannot deduct capital loss from ordinary
gain. – based on matching principle; only business exp are deductible from gross income and
capital loss is not a business exp

Rationale: To allow the deduction of non-business (capital) losses from business (ordinary)
income or gain could mean the reduction or even elimination of taxable income of the taxpayer
through personal, non-business related expense, resulting in substantial losses of revenue to
the government.

Where the capital loss limitation rule will not apply:

· If a bank or trust company is incorporated under the laws of the Philippines,

· a business whose substantial part is the receipt of deposits,

· sells any bond, debenture, note or certificate or other evidence of indebtedness issued
by any corporation, with interest coupons or in registered form,

· any losses resulting from such sale shall not be subject to the above limitations and shall
not be included in determining the applicability of such limitation to other losses (NIRC,
Sec. 39 [C]).

Q: Can you deduct ordinary loss from ordinary gain and from capital gain?

A: YES in both cases. Ordinary loss may be deducted from ordinary gain while only from certain
types of capital gain may ordinary loss be deducted.

RULE ON MATCHING COST

Under this rule, only ordinary and necessary expenses are deductible from gross income or
ordinary income. Capital loss is a non-business connected expense as it can be sustained only
from capital transactions. To allow that capital loss as a deduction from ordinary income would
run counter to the rule on matching cost against revenue.

Ø Net Capital Loss Carry Over (NCLCO)

If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such
loss (in an amount not in excess of the net income for such year) shall be treated in the
succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more
than 12 months (NIRC, Sec. 39 [D]).

Rules with regard to NCLCO

1) NCLCO is allowed only to individuals, including estates and trusts. (INDIVIDUALS)

2) The net loss carry-over shall not exceed the net income for the year sustained and is
deductible only for the succeeding year. (NOT IN EXCESS OF NI)

3) The capital assets must not be real property or stocks listed and traded in the stock
exchange.

4) Capital asset must be held for not more than 12 months.(SHORT TERM)

Ø HOLDING PERIOD RULE

Holding period – the length of time the asset was held by the taxpayer. It covers the period
from the date of acquisition of the assets to the date of sale.

Stocks Trade and non-Traded Tax Rates

Listed And
Not Listed and Traded Traded
As to Nature Income Business
As to kind Capital Gains Tax Percentage Tax

Not over
₱100,000 = 5%
In excess of
₱100,000 = 10%, ½ of 1%, if
If before TRAIN before TRAIN
law was passed Law was
passed
15% final tax, if
covered by the
As Rate TRAIN Law 6/10 of 1%
As to tax Gross selling
base Net capital gain price
PASSIVE INVESTMENT INCOME

INTEREST - It is the amount of compensation paid for the use

of money or forbearance from such use.
Dividend income

Dividend is 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.

Kinds of dividends

1. Cash dividend – paid in given sum of money

2. Property dividend – one paid in corporate property such as bonds, securities or

stock investments held by the corporation, not its own stock. They are taxable to the
extent of the fair market value of the property received at the time of distribution.

3. Stock dividend – one paid by a coporation with its own stock.

4. Scrip dividend – one that is paid in the form or promissory notes

5. Indirect dividend – one made through the exercise of right or other means of
payment, e.g. Cancellation orcondonation of indebtedness

6. Liquidating dividend – one resulting from the distribution by a corporation of all its
property or assets in compete liquidation or dissolution. It is generally a return of
capital, and hence, it is not income. However, it is taxable income with respect to the
excess of amount received over cost of the shares surrendered
Royalty income is income received from allowing someone to use your property.
Royalty payments for the use of patents, copyrighted works, natural resources, or
franchises are most common. Many times, the person using the property does so to
generate revenue. Royalties are usually legally binding.

Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from

any interest in such property, including rentals or royalties for –

(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or

model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or

right;

(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific

equipment;

(c) The supply of scientific, technical, industrial or commercial knowledge or information;

(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means

of enabling the application or enjoyment of, any such property or right as is mentioned in

paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or

information as is mentioned in paragraph (c);

(e) The supply of services by a nonresident person or his employee in connection with the use

of property or rights belonging to, or the installation or operation of any brand, machinery or

other apparatus purchased from such nonresident person;

(f) Technical advice, assistance or services rendered in connection with technical management

or administration of any scientific, industrial or commercial undertaking, venture, project or

scheme; and

(g) The use of or the right to use:

(i) Motion picture films;

(ii) Films or video tapes for use in connection with television; and

(iii) Tapes for use in connection with radio broadcasting.

Rates On Royalty Income

 Royalties on books, other literary 10% Final Tax
works and musical composition
from sources within the
Philippines.
Royalties derived from sources 20% final
within the Philippines other than tax
royalties subject to 10% to final
tax.
Royalties derived by RC and DC Subject to
from sources without the basic tax
Philippines.

RENT INCOME
Rent income refers to revenue earned from leasing out properties, such as commercial
spaces, to third parties.

1. Outright Method – the fair market value of the building or improvement shall be reported as

additional rent income at the time when such building or improvements are completed; and

2. Spread Out Method – allocate over the life of the lease the estimated book value of such

buildings or improvements at the termination of the lease and report as additional rent for

each year of the lease an aliquot part thereof in addition to the regular rent income.
Rates for Rent Income
EXCLUSIONS FROM GROSS INCOME

Exclusions from 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:

I. It is exempted by the fundamental law or by statute;

II. It does not come within the definition of income.

The exlcusion of income should not be confused with the reduction of gross income by
application of allowable deductions. Exclusions are not taken into account in determining gross
income, however, deductions are subtracted from the gross income (Tabag, 2015)

Construction of exclusions

Exclusions are in the nature of tax exemptions, thus they must be strictly construed against the
taxpayer and liberally in favor of the Government. It behooves upon the taxpayer to establish
them convincingly.

III. Rationale:

There are exclusions from the gross income either because they:

1. Represent return of capital;

2. Are not income, gain or profit; or
3. Are subject to another kind of internal revenue tax;
4. Are income, gain or profit that is expressly exempt from income tax under the
Constitution, Tax treaty, NIRC, or general or a special law.
IV. Taxpayers who may avail
● All kinds of taxpayers – individuals, estates, trusts and corporations, whether citizens,
aliens, whether residents or non-residents may avail of the exclusions.
● Rationale: The excluded receipts are not considered as income for tax purposes
(Domondon, 2013)

V. Distinction: Exclusions, Deductions, and Tax Credits

EXCLUSIONS

● It refers to a flow of wealth to the taxpayer which are not treated as part of gross
income, for purposes of computing the taxpayer’s taxable income, due to the
following reasons: a. It is expressly exempted from income tax by the
fundamental law or statute; b. It is subject to another kind of internal revenue tax;
 and c. It does not come within the definition of income as when the amount
received represents return of capital.
● Pertains to the computation of gross income
● Something received or earned by the taxpayer which do not form part of gross
income
● Example of an exclusion from gross income is proceeds of life insurance
received by the beneficiary upon the death of the insured which is not an income
or 13th month pay of an employee not exceeding ₱82,000 which is an income
not recognized for tax purposes
● Incomes received or earned but are not taxable because of exemption by virtue
of a law or treaty; hence, not included in the computation of gross income.

DEDUCTIONS

● It refers to amounts which the law allows to be deducted from gross income in
order to arrive at net income.
● Pertains to the computation of net income
● Something spent or paid in earning gross income
● Example of a deduction is business rental
● These are included in the gross income but are later deducted to arrive at net
income

TAX CREDIT

● It refers to foreign taxes paid beforehand but are claimed as credits against
Philippine income tax to arrive at the tax due and payable

VI. Exclusions under the Constitution

Income derived by the Government or its political subdivisions from the exercise of any
essential government function Income derived by the Government or its political
subdivision is exempt from gross income, if the source of the income is from any public
utility or from the exercise of any essential governmental functions.

VII. Exclusions under the Tax Code

Items that are excluded in gross income and exempt from gross income taxation [GLAM-
RIC]

a. Gifts, bequests and devises

b. Life insurance proceeds
c. Amount received by insured as return of premium
d. Retirement benefits, pensions, gratuities, etc.
e. Income exempt under treaty
 f. Compensation for injuries or sickness
g. Miscellaneous items. (13P2IG3)
i. 13thmonth pay and other Benefits;
ii. Prizes and awards
iii. Prizes and awards in sports competitions
iv. Income derived by foreign government
v. Income derived by the government or its political subdivisions
vi. GSIS, SSS, Medicare and other contributions
vii. Gains from the sale of bonds, debentures or other certificate of
indebtedness
viii. Gains from redemption of shares in mutual fund

Gifts, bequests and devises

● The value of property acquired by gift, bequest, devise, or descent is excluded from
gross income. Provided, however, that income from such property, as well as gift,
bequest, devise or descent of income from any property, in cases of transfers of divided
interest, shall be included in gross income.
● NOTE: The consideration is based on pure liberality and is already subject to donor’s or
estate tax as the case may be. Moreover, there is no income.
● “Gift” is any transfer not in the ordinary course of business which is not made for full and
adequate consideration in money or money’s worth. The giver is called the donor and
the recipient is called the donee.

Bequest and Devise

● Bequest is a gift of personal property and devise is a gift of real property. Both are
donations mortis causa. The giver is either known as the testator or decedent while the
recipient may be the heirs or beneficiaries.
● Tax implications of a Bequest and Devise: The estate of the testator or the decedent is
subject to estate tax, while the heirs or beneficiaries are not required to pay donee’s tax
as the same was already abolished. The value of the bequest and/or the devise received
by the heirs or beneficiary/ies is/are not included in the computation of their gross
income since gifts, bequest and devises are excluded from gross income (NIRC, Sec. 32
[B])

Donation inter vivos and mortis causa

● Regardless of whether the donation is inter vivos or mortis causa, it is excluded from
gross income for it is not product of capital or industry. Furthermore, the property is
already subject to donor’s or estate taxes as the case may be.

Gift Tax Test

 ● When a person gives a thing or right to another and it is not a “legally demandable
obligation,” then it is treated as a gift and excluded from gross income. However, if there
is a legally demandable obligation to give such as for services rendered by one to the
donor or due to his merits, the amount received is taxable income to the recipient.

Life insurance proceeds

● Life insurance is insurance on human life and insurance appertaining thereto or

connected therewith (IC, Sec. 179).
● Conditions for the exclusion of life insurance proceeds from gross income
○ Proceeds of life insurance policies;
○ Paid to the Heirs or beneficiaries;
○ Upon the Death of the insured;
○ Whether in a single Sum or otherwise.
● Rationale for the exclusion of the proceeds from life insurance: They are not
considered as income because they partake in the nature of an indemnity or
compensation rather than gain to the recipient. Life insurance proceeds also serve the
same purpose as nontaxable inheritance.
● Exceptions to the rule that the amount of the proceeds of life insurance should be
excluded from the gross income:
○ If there is an Agreement between the insured and the insurer to the effect that
the amount shall be withheld by the insurer under an agreement to pay interest
thereon, the interest held by the insurer pursuant to that agreement is the one
taxable but not the principal amount (NIRC, Sec. 32 B [1]).
○ Where the life insurance policy is used to Secure a money obligation
○ Where the life insurance policy was transferred for a Valuable consideration
○ The recipient of the insurance proceeds is a business Partner of the deceased
and the insurance was taken to compensate the partner-beneficiary for any loss
in income that may result as the death of the insured partner
○ The recipient of the insurance proceeds is a Partnership in which the insured is a
partner and the insurance was taken to compensate the partnership for any loss
in income that may result from the dissolution of the partnership caused by the
death of the insured partner
○ The recipient of the life insurance proceeds is a Corporation in which the insured
was an employee or officer (R.R. No. 2, Sec. 62).
● Interest earned on the proceeds from life: If such amounts of the life insurance
proceeds are held by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in the gross income (NIRC, Sec. 32 [B][1]).
● Designation of the beneficiary: In determining income tax, life insurance proceeds are
always considered as exclusions regardless of whether the beneficiary is designated as
revocable or irrevocable. The designation is material only in determining the gross estate
of the decedent to determine his gross estate.
● Amounts received under life insurance contracts under life insurance endowment or
annuity contracts: Endowment –The insurer agrees to pay a sum certain to the insured
 if he outlives a designated period. If he dies before that date, the proceeds are to be paid
to the designated beneficiary.
● Treatment of proceeds received under endowment policies: If the insured dies and
the beneficiary receives the life insurance proceeds, these are not taxable income
because they are excluded from gross income as proceeds from life insurance. If the
insured does not die and survives the designated period, the amount pertaining to the
premiums he paid are excluded from gross income, but the excess shall be considered
part of his gross income.
● Return of premium paid: Conditions for the exclusion of the return of premium
paid from gross income
○ Amount received by insured;
○ As a return of premium paid by him;
○ Under a life insurance, endowment or annuity contract;
○ Either:
■ During the term;
■ At the maturity of the term mentioned in the contract; or
■ Upon surrender of the contract. NOTE: The amount returned is not
income but mere return of capital.
● Return of premium v. Life insurance proceeds: The difference lies in cases where the
insured in a life insurance contract survives. In order that life insurance proceeds may be
totally exempt from income taxation, the insured must die. If he survives, there is only a
partial exemption, i.e., only the portion of the proceeds representing return of premiums
previously paid is excluded, being a mere return of capital.
● Retirement benefits, pensions, gratuities, etc. that are excluded from gross
income [7FRUGS2]
○ Retirement benefits under R.A. 7641
○ Social security benefits, retirement gratuities, pensions and other similar benefits
received by resident or non-resident citizens or resident alien from Foreign
government agencies and other institutions, private or public
○ Retirement received by officials and employees of private firms, whether
individual or corporate, in accordance with a Reasonable private benefit plan
maintained by the employer
○ Benefits from the US Veterans Administration
○ GSIS benefits
○ SSS
○ Separation pay
○

Salient features of R.A. 7641, amending the Labor Code with regard to the retirement pay
of qualified employees in the absence of any retirement plan

1. Where the retirement plan is established in the CBA or other applicable employment
contract –Any employee may be retired upon reaching the retirement age established in
the CBA or other applicable employment contract.
 In case of retirement, the employee shall be entitled to receive such retirement benefits
as he may have earned under existing laws and any CBA and other agreements:
Provided, however, that an employee's retirement benefits under any collective
bargaining and other agreements shall not be less than those provided by the law.

2. In the absence of a reasonable private benefit plan or agreement providing for retirement
benefits of employees in the establishment
● Optional – the conditions are:
○ An employee upon reaching the age of 60 years or more but not beyond
65;
○ Who has served at least 5 years in the said establishment;
○ May retire and shall be entitled to retirement pay equivalent to ½ month
salary for every year of service, a fraction of at least 6 months being
considered as one whole year.
● Mandatory – the conditions are:
○ An employee upon reaching the age of beyond 65 years which is the
compulsory retirement age;
○ Who has served at least 5 years in the said establishment;
○ May retire and shall be entitled to retirement pay equivalent to ½ month
salary for every year of service, a fraction of at least 6 months being
considered as one whole year (RA 7641, Retirement Pay Law).

Reasonable Private Benefit Plan (RPBP)

● Pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the
benefit of some or all his officials or employees, wherein contributions are made by such
employer for the officials or employees, or both, for the purpose of distributing the
earnings and principal of the fund thus accumulated, any part of which shall not be used
or diverted to any purpose other than for the exclusive benefit of the said officials and
employees (NIRC, Sec. 32 B [6]a).
● Conditions in order to avail the exemption under a RPBP [Approved-10-50-once]
○ The RPBP must be approved by the BIR;
○ The retiree must have been in the service of same employer for at least 10 years
at the time of retirement;
○ The private employee or official must be at least 50 years old at the time of his
retirement; and
○ The benefits under the RPBP must have been availed of only once.
● NOTE: Once the benefits under the RPBP have been availed of, the retiree can no
longer avail of the same exemption for the second time under another RPBP but can
avail exemption under another ground such as SSS or GSIS benefits.
● Meaning of the phrase “shall not have availed of the privilege under a retirement
benefit plan of the same or another employer” under Sec. 32(B)(6)(a) of the NIRC
○ It means that the retiring official must not have previously received retirement
benefits from the same or another employer who has a qualified retirement
benefit plan (BIR Ruling No. 125-98).
 ● Retirement benefits paid by an employer which does not have a private benefit plan but
has an existing CBA providing for retirement benefits of employees are excluded from
income tax
○ It is excluded provided that the minimum age requirement and the length of
service are met. Under RA 7641, the actual retirement age may even be lower
than 60 years of age, pursuant to the CBA or other applicable employment
contract which is deemed the law between the parties Thus, for purposes of
determining the taxability of retirement benefits received by retiring employees,
the retirement age is that age established in the CBA or other applicable
employment contract. However, if the CBA or other applicable employment
contract does not provide for a retirement age, the minimum requirement of 50
years provided for under Section 32 (B)(6)(a), of the 1997 NIRC, as amended,
shall apply in order to qualify for the exemption granted therein (BIR Ruling No.
SB [041] 603-2009, September 22, 2009)

Conditions in order that separation pay may be excluded from gross income

1. Amount received by an official, employee or by his heirs;

2. From the employer; and
3. As a consequence of separation of such official or employee from the service of the
employer:
a. Because of death, sickness or other physical disability; or
b. For any cause beyond the control of the official or employee (NIRC, Sec 32 B [6]
b).

Causes beyond the control of the employee

1. Retrenchment
2. Cessation of business
3. Redundancy (R.R. 2-98, Sec. 2 b [2])

Tax treatment for separation pay

● Separation pay is not taxable irrespective of the age of the employee, length of service,
number of benefits received or the recipient thereof (NIRC, Sec. 32 B [6] b).
● Terminal leave pay is the amount received arising from the accumulation of sick leave or
vacation leave credits. (Commutation of leave credits)

Tax treatment of sick leave credits

● They are taxable irrespective of the number of days. This applies if the sick or vacation
leave credits do not form part of the compulsory retirement benefit.
Income exempt under tax treaty

● Income of any kind, to the extent required by any treaty obligation binding upon the
Government of the Philippines is exempt from tax(NIRC, Sec. 32 B [5]).
● NOTE: Public policy recognizes the principles of reciprocity and comity among nations.
● Reasons for granting tax exemption through a treaty
○ Reciprocity
○ To lessen the rigors of international juridical double taxation
● Examples of tax treaties entered into by the Philippines
○ RP-Japan Tax Treaty
○ RP-US Tax Treaty
○ RP-France Tax Treaty
○ RP-Switzerland Tax Treaty
○ RP-Netherlands Tax Treaty
● Most Favored Nation Clause: This grants to the contracting party treatment not less
favorable than which has been or may be granted to the most favored among other
countries. It allows the taxpayer in one state to avail of more liberal provisions granted in
another tax treaty to which the country ofresidence ofsuch taxpayer is also a party;
provided that the subject matter of taxation is the same as that in the tax treaty under
which the taxpayer is liable (CIR v. SC Johnson and Son Inc., G.R. No. 127105, June
25, 1999)

Compensation for injuries or sickness

● Kinds of compensation for injuries or sickness that may be excluded from gross income
○ Amounts received through accident or health insurance or Workmen’s
Compensation Act as compensation for personal injuries or sickness
○ Amounts of any damages received whether by suit or agreement on account of
such injuries or sickness (NIRC, Sec. 32 B [4]).
● NOTE: They are mere compensation for injuries or sickness suffered and not income. It
is intended to make the injured party whole as before the injury

Tax implication in the following insurances

● Life Insurance beneficiaries are not liable for income tax

● Fire insurance is not taxable because it is a mere return of capital.
● Accident insurance is not taxable because it is considered compensation for injuries
sustained.

Profit actualized
 ● Profit actualized is always taxable as compared to salary actualized wherein we need to
qualify who paid the salary.

Miscellaneous items

● 13th month pay and other benefits: Gross benefits received by officials and
employees of public and private entities may be excluded from gross income provided
that the total exclusion shall not exceed P90,000. The excess would be considered as
part of the compensation income of the employee where it is subject on a schedular rate
● Prizes and awards including those in sports competition: Requisites in order for
prizes and awards be exempted from tax
○ Primarily in recognition of Scientific, Civic, Artistic, Religious, Educational,
Literary, or Charitable achievement [SCAR-CEL]
○ The recipient was selected without any action on his part to enter the contest or
proceeding; and
○ He is not required to render substantial future services as condition to receiving
the prize or award.
● prizes and awards in sports competition: Requisites for the exclusion of prizes and
awards in sports competition from gross income [PATS]
○ All Prizes and awards;
○ Granted to Athletes;
○ In local and international sports Tournaments and competitions; and
○ Sanctioned by their national sports associations
○ NOTE: National sports associations are those duly accredited by the Philippine
Olympic Committee. The sports competitions and tournaments are whether held
in the Philippines or abroad.
● Income derived by foreign government: For an income derived by foreign government
from investments in the Philippines be exempted from tax:
○ It must be an income derived from investments in the Philippines;
○ It must be derived from BOnds, Loans or other Domestic securities, Stocks or
Interests on deposits in banks; [BOLDSI] and
○ The recipient of such income from investment in the Philippines must be a:
■ foreign government;
■ financing institutions owned, controlled or financed by foreign
government; or
■ regional or international financing institutions established by foreign
government (NIRC, Sec. 32 B [7]).
● NOTE: The exclusion may be premised either on the principle of comity or upon
the principle of reciprocity.
● Income derived by the government or its political subdivisions from the exercise
of any essential government function
○ Income derived by the Government or its political subdivision is exempt from
gross income, if the source of the income is from any public utility or from the
exercise of any essential governmental functions.
○ Governmental Function:
 ■ GR: Government agencies performing governmental functions are tax
exempt
■ XPN: Unless expressly taxed
○ Proprietary Functions:
■ subject to tax
■ XPN: Unless expressly exempted
● NOTE: Under Sec. 27 (c) of RA 8424 the following corporations have been
granted exemptions:
○ Government Service Insurance System
○ Social Security System
○ Philippine Health Insurance Corporation
○ Philippines Charity Sweepstakes Office
● Gains from the sale of bonds, debentures or other certificate of
indebtedness The bonds, debentures or other certificate of indebtedness sold,
exchanged or retired must be with a maturity of more than 5 years.
● Gains from redemption of shares in a mutual fund company Mutual fund
company means an open-end and close-end investment company as defined
under the Investment Company Act (NIRC, Sec.22 [BB]).

Exclusions under special laws Statutory income tax exemptions

1. PD 87, Oil Exploration and Development Act, as amended by PD 1354

2. EO 226, The Omnibus Investment Code of 1987, as amended
3. RA 3538, the exemption of salaries paid in dollars to non-Filipino citizens for services
rendered to the Ford Foundation
4. RA 6938, Cooperative Code of the Philippines, as amended by RA 1176, 8241 and 8424
5. RA 7482, Senior Citizens Act as amended by RA 9257
6. RA 7929, Urban Development and Housing Act of 1992
7. RA 8502, Jewelry Industry Development Act of 1998
8. RA 8282, which exempts income of the SSS form income taxation
9. RA 8479, An Act Deregulating the Downstrean Oil Industry and For Other Purposes
10. RA 9182, The Special Purpose Vehicle Act
11. R.A. 9505, PERA Act of 2008

Personal Equity and Retirement Account (PERA)

● PERA refers to the voluntary retirement account established by and for the exclusive use
and benefit of the contributor for the purpose of being invested solely in PERA
investment products in the Philippines (R.A. 9505, Sec. 3).
● Contributors A contributor may be any person with the capacity to contract and who
possesses a tax identification number. The contributor establishes and makes
contributions to a PERA.
● PERA Investment Products It may be a unit investment bust fund, mutual fund, annuity
contract, insurance pension products, preneed pension plan, shares of stock and other
securities listed and traded in a local exchange, exchange-traded bonds or any other
 investment product or outlet which the concerned Regulatory Authority may allow for
PERA purposes.
● Regulatory Authority It refers to the Bangko Sentral ng Pilipinas (BSP) as regards
banks, other supervised financial institutions and trust entities, the Securities and
Exchange Commission (SEC) for investment companies, investment houses
stockbrokerages and pre-need plan companies, and the Office of the Insurance
Commission (OIC) for insurance companies.
● Requirement in order to qualify as PERA investment product To qualify as a PERA
investment product, the product must be non-speculative, readily marketable, and with a
track record of regular income payments to investors.
● Requirement for tax-exemption The concerned Regulatory Authority must first
approve the product before being granted taxexempt privileges by the BIR.
● Income earned from investments and reinvestments of the PERA All income earned
from the investments and reinvestments of the maximum amount allowed herein are tax
exempt.