May 2022

EXCLUSIONS FROM GROSS INCOME

Atty. C. Llamado

What are Exclusions?

Exclusions are income or receipts which are excluded from gross income, i.e. these
are not included in the determination of a taxpayer’s gross (taxable) income.

Hence, these incomes or receipts are not subject to income tax. However, despite
their non-inclusion from gross income, such income items may be subject to taxes
other than the income tax.

Exclusions Under the Tax Code

The following items shall not be included in gross income and shall be exempt from
income tax:

(1) Proceeds of Life Insurance Upon Death of the Insured

The proceeds of life insurance policies paid to the heirs or beneficiaries upon
death of the insured shall be exempt from income tax. The proceeds of life
insurance are treated more as an indemnity for the life lost instead of as gain,
profit, or income.

Note: Interest payments made by the insurer constitutes income to the recipient.

(2) Amount Received by Insured as Return of Premium

The amount received by the insured, as a return of 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.

Notes:

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

b) Participating dividends distributed to life insurance policy holders are

actually a return of overpaid premiums. They are therefore excluded from
gross income of the insured.

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(3) Gifts, Bequests, and Devices

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

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

(4) Compensation for Injury or Sickness

a) Amounts received, through accident or health insurance, or under Workmen’s

Compensation Acts, as compensation for personal injuries or sickness;
plus

b) The amounts of any damages received, whether by suit or agreement, on

account of such injuries or sickness.

c) Damages representing compensation for personal injuries arising from libel,

defamation, slander, breach of promise to marry, or alienation of affection.

- Includes moral damages. Moral damages include physical suffering,

mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation, and similar injury.

- Includes exemplary or corrective damages. These are imposed by way of

example or correction for the public good.

(5) Income Exempt Under Treaties

Income of any kind, to the extent required by any treaty obligation or international
agreement to be exempt from taxation by the Republic of the Philippines.

(6) Retirement Benefits, Pensions, Gratuities, Separation Pay Which Are

Exempt From Income Tax

As a general rule, retirement benefits, pensions, separation pay are all taxable.

As exceptions, the following benefits and payments are EXEMPT from income
tax:

(a) Retirement benefits and/or pensions which are exempt from income tax:

Under R.A. No. 7641 (Retirement
Pay Law). In the absence of a
retirement plan for employees,
employers are required to pay a
retirement benefit equal to at least ½
Under the Tax Code, retirement
benefits and/or pension amounts
received by officials and employees
of private firms, whether individual
or corporate, shall be exempt from

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May 2022

month salary for every year of income tax when the requisites for
service. exemption in the Tax Code are
complied with.

Requisites for exemption: Requisites for exemption:

i) The employee has reached the age (1) There must be a reasonable
of 60 or more, but not beyond private benefit plan maintained
65; and by the employer;
ii) The employee has served for at
least 5 years in the same (2) The retiring official or employee
establishment. has been in the service of the
same employer for at least 10
years;

(3) The retiring official or employee

is not less than 50 years of age at
the time of his retirement;

(4) The benefits of exemption

granted shall be availed of by an
official or employee only once.

(b) Separation Pay Due to a Cause Beyond the Control of the Employee

Any amount received by an official or employee, or by his heirs, from the

employer as a consequence of separation of such official or employee from the
service of the employer due to:

(1) Death;
(2) Sickness;
(3) Other physical disability; or
(4) For any cause beyond the control of the said official or employee.

Retirement pay given due to redundancy/retrenchment is also excluded from

gross income.

Notes:

(1) Separation pay due to the abovementioned causes are exempt from income
tax regardless of age or length of service of the employee.

(2) The exemption does not cover salaries, 13th month pay and other benefits
in excess of ₱90,000, and other payments which are properly taxable to
the employee.

(c) Social security benefits, retirement gratuities, pensions and other similar
benefits received by resident or non-resident citizens of the Philippines, or

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aliens who come to reside in the Philippines, from foreign agencies and other
institutions private or public.

(d) Payment of benefits due or to become due to any person residing in the
Philippines under the laws of the United States administered by the United
States Veteran Administration.

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

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

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

(h) Retirement benefits received from June 5, 2020 to December 31, 2020.
Retirement benefits received by officials and employees of private firms,
whether individual or corporate, from June 5, 2020 until December 31, 2020,
shall be excluded from gross income and shall be exempt from taxation.
Provided, any re-employment of such official or employee in the same firm
within the succeeding twelve (12)-month period shall be considered as proof of
non-retirement. In such case, such benefits received shall be subject to the
appropriate taxes.1

(7) Miscellaneous Items

(a) Income derived by foreign governments, financing institutions owned

or controlled by foreign governments, and international or regional
financial institutions established by foreign governments from
investments or deposits in the Philippines.

- Includes exemption from the stock transaction tax

(b) Income Derived by the Philippine Government or its Political

Subdivisions from the exercise of any governmental function.

(c) Prizes and awards primarily in recognition of religious, charitable,

scientific, educational, artistic, literary, or civic achievement but only if:
(1) The recipient was selected without any action on his part to enter the
contest or proceeding; and
(2) The recipient is not required to render substantial future services as a
condition to receiving the prize or award.

(d) Prizes and awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports association.

1
Sec. 5, R.A. No. 11494.
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May 2022

(e) 13th Month Pay and Other Benefits received by officials and employees
of public and private entities as “13th month pay and other benefits” which
shall include:

(1) The 13th month pay, and other incentives such as productivity incentives
and Christmas bonus; and

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

Provided, however, that the total exclusion shall not exceed Ninety
Thousand Pesos (₱90,000).

(f) Compulsory or mandatory contributions of employees to GSIS, SSS,

Medicare (PHIC), and PAGIBIG, and union dues of individuals.

- These are actually deductions, but are labelled as exclusions in the Tax
Code.

Note: Contributions in excess of the mandatory contributions are not

deductible from gross income.

Moreover, GSIS Educational Plan, GSIS Optional Insurance, GSIS

Unlimited Optional Insurance, and GSIS Memorial Plan premiums
shall not be deductible.

(g) Gains from the sale, exchange or retirement of bonds, debentures, or

other certificate of indebtedness with a maturity of more than 5 years.

(h) Gains from Redemption of Shares in a Mutual Fund

(i) Income of non-residents from transactions with Domestic Depository

Banks and OBUs Under the Expanded Foreign Currency Deposit
System

(j) Personal Equity and Retirement Account (“PERA”)

PERA refers to the voluntary retirement account of an individual (called a

“Contributor”) established from his own Qualified PERA Contributions
and/or Qualified Employer Contributions, for the purpose of being invested
solely in qualified or eligible PERA investment products.

1) The Qualified Employer’s Contribution shall be excluded from the

employee’s taxable gross income.

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May 2022

2) Investment income of a Contributor earned from the investments of

his PERA Assets shall be exempt from income taxes, provided:

(a) that each specific investment product is approved by the concerned

regulatory authority; and
(b) that non-income taxes, if applicable, relating to the investment
income, shall be imposed. Such taxes shall include (a) percentage
taxes; (b) VAT; (c) stock transaction tax under Section 127 (A) and
(B) of the Tax Code; and (d) documentary stamp tax.

3) Qualified PERA Distributions shall be excluded from gross income if:

(a) After the Contributor and/or his employer has made the Qualified
PERA Contributions and/or Qualified Employer’s Contributions for
at least five (5) years (which need not be consecutively made), and
after the Contributor reaches the age of fifty-five (55); or

(b) Upon death of the Contributor, irrespective of the Contributor’s age

or the number of yearly contributions made at the time of his death.

4) Early Withdrawals in the following circumstances shall be excluded

from gross income:

(a) Withdrawal of PERA Assets from the Administrator by reason of the

suspension or revocation of the accreditation of the Administrator,
provided that the entire PERA Assets are transferred to another
Administrator within two (2) working days from receipt of the
Contributor’s advice on the chosen Administrator;

(b) For payment of accident or illness-related hospitalization in excess

of thirty (30) days; or

(c) For payment to a Contributor who has been subsequently rendered

permanently and totally disabled as defined under the Employees
Compensation Law or Social Security System Law.

(k) Representation and transportation allowances (“RATA”) granted under

Section 34 of the General Appropriation Act to certain officials and
employees of the government from the rank of Department Secretaries to
Division Chiefs are not subject to income tax and to the withholding tax.

(l) Personnel Economic Relief Allowance (“PERA”) granted to all

employees of the National Government, Local Government Units, including
government owned or controlled corporations, is considered
remuneration/compensation for services performed by the employees in the
performance of official duties, hence, not taxable income.

(m) Capital contributions to corporations/partnerships are not income of

the corporation/partnership, and hence not subject to income tax.
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May 2022

(n) Project-related income from the development of socialized housing

sites. The private sector (ex. contractors) shall be exempt from payment of
project-related income taxes (including CGT) on a per project basis on
income realized from the development of socialized housing sites.
Yield or income from any low-cost or socialized housing-related asset-
backed security.

(o) Income from the commercialization of technologies developed by local

inventors or researchers under R.A. No. 7459 during the first ten (10)
years from the date of the first sale.

(p) Homeowners’ Association (HOA) dues or contributions but only when

the LGU having jurisdiction over the HOA certifies the lack of
resources of the HOA to render its services.

(q) Proceeds which constitute a fund held in trust by the taxpayer, and
which do not redound to the benefit of the taxpayer.2, 3

(r) Income from the sale of gold pursuant to R.A. No. 7076 (the People’s
Small-Scale Mining Act of 1991)4

(1) Income from the sale of gold to the Bangko Sentral ng Pilipinas by
registered small-scale miners5 and accredited traders; and

2
An example of this would be membership fees, assessment dues, and other fees collected by clubs
organized and operated exclusively for pleasure, recreation, and other non-profit purposes. These
constitute contributions and/or replenishment of the funds for the maintenance and operations of the
facilities offered by such clubs to their exclusive members. They represent funds held in trust by
these clubs to defray their operating and general costs, and hence constitute infusion of capital which
is not taxable to such clubs (Association of Non-Profit Clubs, Inc. (“ANPC”) vs. CIR, Supreme Court
(2nd Division), G.R. No. 228539, June 26, 2019).
3
Another example would be condominium dues. Association dues, membership fees, and other
assessments/charges collected by condominium corporations are not subject to income tax. They do
not constitute profit nor gain. They are collected purely for the benefit of the condominium owners.
They are the incidental consequence of a condominium corporation’s responsibility to effectively
oversee, maintain, or improve the common areas of the condominium as well as its governance (CIR
vs. First E-Bank Tower Condominium Corporation, Supreme Court (1st Division), G.R. No. 215801,
January 15, 2020).
4
Sec. 32(B)(7)(i) as inserted by R.A. No. 11256.
5
Small-scale miners refer to Filipino citizens who, individually or in the company of other Filipino
citizens, voluntarily form a cooperative duly licensed by the Department of Environment and Natural
Resources to engage, under the terms and conditions of a contract, in the extraction or removal of
minerals or ore-bearing materials from the ground (Sec. 3(c), R.A. No. 7076).

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 May 2022

(2) Income from the sale of gold by registered small-scale miners to

accredited traders for eventual sale to the Bangko Sentral ng Pilipinas.6

(s) Compensatory interest

The right to recover interest arises either by virtue of a contract (monetary

interest), or as damages for the delay or failure to pay the principal loan on
which the interest is demanded (compensatory interest).

Monetary interest, as a rule, is taxable income.

Compensatory interest, on the other hand, is considered a form of penalty or

indemnity for damages, and cannot be rightfully considered as taxable
income.7

(t) The wage subsidy given to employees under the Small Business Wage
NEW Subsidy Measure (“SBWS”) shall not be considered as part of gross
income, and therefore not subject to income tax, pursuant to Section 4(z) of
R.A. No. 11469 (Bayanihan to Heal as One Act)8

The SBWS is a wage subsidy that complements the social amelioration

programs of R.A. No. 11469 by providing targeted support to formal sector
employers and their employees. It covers eligible small business
employers9 and their employees employed as of March 1, 2020 which were
affected by the enhanced community quarantine to address the COVID-19
pandemic. The wage subsidy shall largely be based on the regional
minimum wage (from ₱5,000 to ₱8,000) to be given in 2 tranches.

NEW (u) COVID-19 Special Risk Allowance of Health Workers

Under Section 4(h) of R.A. No. 11494, the National Government shall
provide all public and private health workers directly catering to or in
contact with COVID-19 patients with a monthly COVID-19 special risk

6
All gold sold to the BSP by accredited traders shall be presumed to have been purchased by said
traders from small-scale miners (Sec. 4, R.A. No. 11256).
7
Such legal interest awarded to the petitioner should not have been subjected to the FWT of 20%
based on Section 24(B)(1) of the NIRC (Emmanuel C. Oñate vs. CIR, CTA Case No. 9498).
8
BIR and SSS Joint MC No. 1-2020, April 28, 2020.
9
Eligible employers are small business employers belonging to an industry classified as Non-
Essential (non-food raw materials, non-essential manufacturing, tobacco, construction, airlines,
non-essential services, hotels and restaurants, rental and leasing of personal goods, and
entertainment) or Quasi-Essential (textiles, wearables, leather for export, electronics
manufacturing, retail trade, public transportation, trucking and cargo handling (food and non-food),
business process outsourcing, banks, personal service and domestic activities (salons, laundry,
funeral, domestic help, others)). Such employers must be registered with the BIR, have complied
with their tax obligations in the past 3 years up to January 2020, and registered with the SSS and
have paid the SSS contributions in the past 3 years up to January 2020 (BIR and SSS Joint MC No.
1-2020, April 28, 2020).

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allowance.10 This shall be given for every month that they serve during the
state of national emergency as declared by the President. The COVID-19
special risk allowance shall be exempt from income tax.

NEW (v) Compensation to Health Workers Contracting COVID-19 in the Line of

Duty

Under Section 4(k) of R.A. No. 11494, the National Government, beginning
February 1, 2020, shall provide the following amounts to public and private
health workers who have contracted COVID-19 in the line of duty upon
submission of the required documents:

(1) In case of death of the health worker, One Million Pesos (₱1,000,000)
shall be provided to the heirs;
(2) In case of sickness, for a severe or critical case, One Hundred Thousand
Pesos (₱100,000) shall be provided to the health worker;
(3) In case of sickness, for a mild or moderate case, Fifteen Thousand Pesos
(₱15,000) shall be provided to the health worker.

The abovementioned amounts shall be exempt from the applicable taxes

under the Tax Code.11

(w) Active hard duty pay received by temporary Human Resources for
NEW Health (HRH) medical and allied staff serving at the front lines during
the State of National Emergency declared by the President.12

10
This COVID-19 special risk allowance shall be in addition to the hazard pay granted under R.A.
No. 7305 (the Magna Carta of Public Health Workers), and the active hazard duty pay granted
under R.A. No. 11494 (Sec. 4(h), R.A. No. 11494).
11
Sec. 4(k) of R.A. No. 11494 shall survive the expiration of R.A. No. 11494 for as long as a health
worker contracts the COVID-19 infection while in the line of duty or dies while fighting during the
state of national emergency as declared by the President (Sec. 4(k), R.A. No. 1194).
12
Section 4(w), R.A. No. 11494.
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May 2022

GROSS INCOME
By: Atty. Llamado

Concept of Gross Income

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

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

Gross Income Defined

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

(1) Compensation for services;

- Including pensions and retiring allowances (except those exempt by law)
(2) Gross income derived from the conduct of trade or business or the exercise of
a profession;
(3) Partner’s distributive share from the net income of a general professional
partnership;
(4) Rents;
(5) Annuities (excess over premium paid);

(6) Gains derived from dealings in property;

(7) Interest income;

(8) Royalties;
(9) Dividends;
(10) Prizes and winnings;

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

Items of Gross Income

1. Compensation For Services

Compensation for services, of whatever kind and in whatever form paid, forms part
of gross income. The name by which the remuneration for services is designated
is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances,
commissions (e.g. transportation, representation, entertainment, and the like); fees,
including director’s fees, if the director is, at the same time, an employee of the
employer/corporation; taxable bonuses and fringe benefits, except those which are
subject to the fringe benefits tax under Section 33 of the Tax Code; taxable

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pensions and retirement pay; and other income of a similar nature constitute
compensation income.

A) Compensation Income which may be in the following forms:

a) Cash
b) Allowances
c) Property – the FMV of the thing taken in payment is the amount of
compensation.
d) Employer’s stock – the FMV of the shares at the time the services were
rendered.
e) Promissory notes – the fair discounted value of the note as of the time of
receipt. The employee shall also record additional
income upon the recovery of the discount.
f) Forgiveness of debt for services rendered to a creditor
Note: Where the debtor is a stockholder of the corporation condoning the
debt, the condonation of the debt amounts to an indirect payment of
dividend.
g) Income tax of the employee assumed or paid by the employer, in
consideration of the latter’s services.
h) Pensions and retiring allowances – except those exempt by law
i) Stock options – the FMV of the stock option at the time the services
were rendered by the employee.

B) Stock Options

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

2) When the employee exercises the option by paying the exercise price
(equity-settlement option), it results in additional income. Such additional
income shall equal the higher of the book value or FMV of the shares, less
the exercise price.
(a) If the employee is a rank-and-file employee, the additional income shall
be recognized by the employee as taxable compensation and shall be
subject to the CWT on compensation.
(b) If the employee is a supervisory or managerial employee, the additional
income shall be treated as a fringe benefit subject to the final FBT.

3) When the grantor (the corporation) simply pays the difference between the
FMV of the shares and the exercise price (cash-settlement option), the same
rules in (2) above apply.

C) Fringe Benefits which may be in the form of (1) meals furnished or subsidized
by the employer; (2) living quarters; (3) life insurance premiums paid by the
employer where the insured employee is the beneficiary; (4) facilities or
privileges provided by the employer; or (5) allowances.

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May 2022

Fringe benefits are classified under the following categories, namely:

Those subject to the fringe benefits tax (“FBT”)

- Fringe benefits given to employees holding managerial or supervisory

positions, and which are listed in RR No. 3-98, as amended.

Those included in gross income in the ITR

- Fringe benefits given to rank and file employees

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

Those which are not taxable

- Fringe benefits given to employees for the convenience of the

employer, or if incurred by the employee in the pursuit of the trade,
business, or profession of the employer and is liquidated and accounted
for by the employee.
- “De minimis” fringe benefits

D) Salaries and Allowances During Leaves of Absence

E) Separation Pay NOT Due to a Cause Beyond the Control of the

Employee

General Rule: Separation pay is included in gross income of separated

employee.

Exception: If separation is caused by something not of the employee’s

making. For example, if separation is due to cessation of the
business, or as a consequence of death, sickness, other physical
disability, or for any cause beyond his control, the separation pay
shall be exempt from tax.

F) Fees

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

Marriage fees, baptismal offerings, sums paid for saying masses for the dead,
and other contributions received by a clergyman, evangelist, or religious worker
for services rendered are considered compensation.

Exception: Authorized fees paid to public officials, such as notaries public,

clerks of court, sheriffs, etc., for services rendered in the
performance of their official duties, are not considered wages.

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G) Dismissal Payment

Any payment made by an employer to an employee on account of dismissal,

that is, involuntary separation from the service of the employer, constitutes
wages, regardless of whether the employer is legally bound by contract, statute,
or otherwise to make such payment.

H) Tips and Gratuities

Tips or gratuities paid directly to an employee (by a customer of the employer)

which are not accounted for by the employee to the employer are considered
taxable income, but not subject to withholding tax.

2. Gross Income From Business

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

Formula:

Gross sales ₱ xxxxx

Less: Cost of goods sold (xxxxx)
Gross profit from sales ₱ xxxxx
Add: Other income:

(a) Income from investment ₱ xxxxx

(b) Income from incidental or outside
operations or sources xxxxx xxxxx
Gross income ₱ xxxxx

2) Income from Long-Term Contracts

The term “long-term contracts” refers to construction, installation, or building

contracts requiring a period longer than one (1) year for completion.

Income therefrom is reported under the percentage of completion basis.

3) Gross Income From Farming

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

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

Formula –

Cash from sales of livestock and other products raised in the farm
+ Value of property received from sales
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+ Profits/Gains from the sale of livestock or other items purchased

+ Gross income from all other sources
TOTAL gross income

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

Formula –

Sales xxxx
Ending inventory xxxx
Less beginning inventory (xxx)
Less purchases (xxx) (xxx)
Gross Income xxxx

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

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

4) Gross Income From Petroleum Operations

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

Provided, the amount of Filipino participation incentive allowance received by

a Philippine corporation pursuant to an operating agreement under a petroleum
service contract between a service contractor and the Government under P.D.
No. 87 shall not be included in the gross income of the Philippine corporation.

3. Payments Made by a GPP to a Partner, and the Distributive Share of

Partners in the Net Income of a GPP

4. Rent or Lease Income

Reporting of Income by a Lessor

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

Rent income may be in the following forms:

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(1) Cash, at the stipulated price;

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

(3) Advance payment which must be pre-paid rentals and not (a) a loan to
the lessor, or (b) option money for the property, or (c) security deposit for
the faithful performance of the lessee’s obligations

However, a security deposit that is applied to rentals is taxable income to

the lessor.

Pre-paid rent must be reported in full in the year of receipt, regardless

of the accounting method used by the lessor.

(4) Leasehold improvement.

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

Income and Deduction from Leasehold Improvement

(a) Income of Lessor

The lessor, in such a case, may, at his option, report income under any
of the following methods:

1) Outright method – lessor reports as income the FMV of the

improvement in the year of completion.

2) Spread-out method –

The lessor shall spread over the remaining term of the lease the
estimated depreciated (book) value of such buildings or
improvements at the termination of the lease, and report as income
for each remaining term of the lease an aliquot part thereof.

Formula:

Cost of leasehold improvements ₱ xxxxx

Less: Depreciation for remaining term of lease (xxxxx)
Book value, end of lease ₱ xxxxx

Book value end of lease = Income per year ₱ xxxxx

Remaining term of lease

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May 2022

(b) Deduction of Lessee (Depreciation expense)

The lessee may claim depreciation of the improvements over the

remaining term of the lease or the life of the improvements, whichever
is shorter.

(c) Computation of Income from Leasehold Improvement Arising from

the Pretermination of Lease Contract.

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

Formula –

BV of Leasehold Improvement at termination of Lease ₱ xxxx

Less: Amounts of income previously recognized (xxx)
Additional income in year of termination ₱ xxxx

(d) Loss of Lessor if Leasehold Improvement is Destroyed Before

Termination of Lease

If the building or other leasehold improvement is destroyed before the

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

Income on leasehold improvement already reported ₱ xxxxx

Less: Salvage value (xxxxx)
Total loss ₱ xxxxx
Less: Compensation received:
(a) From insurance ₱ xxxxx
(b) Others xxxxx (xxxxx)
Loss on destruction of leasehold improvement ₱ xxxxx

5. Annuities and Life Insurance Policies

(a) Annuities - Annuities paid under an annuity contract in excess of the

consideration paid are includible in gross income.

(b) Life Insurance Policies – Where insured outlives the term of the policy,
amounts received by an insured in excess of the premiums paid are included in
gross income.

Note: Distributions on paid-up policies, which are made out of earnings of the
insurance company subject to tax, are in the nature of corporate
dividends and should be taxed accordingly.
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6. Gains Derived From Dealings in Property

Sale of 3 types of property which may give rise to taxable events:

Ordinary asset – 100% of the gain or loss shall be recognized in the ITR.
Capital asset – subject to final taxes (capital gains tax)
Other capital asset – holding period of the asset shall be taken into
consideration if the seller is an individual, and only the
net capital gain shall be included in the ITR.

(1) Sale of Tangible Assets

(2) Sale of Intangible Assets (ex. patents, copyrights, and goodwill)
(3) Corporate Sinking Fund
(4) Sale of Real Property

Gain from the sale of real properties classified as ordinary assets shall be
included in gross income in the ITR of the taxpayer.

Note: Real properties acquired by banks through foreclosure sales are

considered as their ordinary assets. However, banks shall not be
considered as habitually engaged in the real estate business for purposes
of determining the applicable rate of creditable withholding tax imposed
under Sec. 2.57.2 of Rev. Reg. No. 2-98, as amended.13

7. Interest Income

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

EXC: (1) Interest income from bank deposits or deposit substitutes in the
Philippines subject to FT (passive income)14;

(2) Interest income which are exempt from tax:

(i) Interest income from long-term deposit or investment in the
form of savings, trust funds, deposit substitutes, investment
management accounts;
(ii) Interest income earned from passive investments of foreign
governments, financing institutions owned by foreign
governments, and international financial institutions
established by foreign governments.

13
Rev. Reg. No. 7-2003.
14
Interest income on Philippine Government securities is subject to final tax on passive income as
such securities are considered deposit substitutes.

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8. Royalties

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

Royalties received by resident citizens and domestic corporations from sources

without the Philippines shall be included in the ITR.

9. Dividends

Dividends subject to FT: Cash or property dividends received by individuals and

NRFCs from domestic corporations.

Dividends included in gross income in the ITR:

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

domestic corporation from a foreign corporation.

2) Liquidating Dividend

Liquidating dividends represent distribution of all the property or assets of a

corporation in complete liquidation or dissolution.

The difference between what is received in liquidation and the cost or basis
of the stock is a capital gain or a capital loss.15 Where property is distributed
in liquidation, the amount received is the fair market value of such property.

Liquidating dividend ₱ xxxxx

Less: Cost of stock investment or other basis (xxxxx)
Capital gain or (Capital loss) ₱ xxxxx

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

If the shareholder is an individual and the stocks were held for more than
12 months, the capital gain is taxable only to the extent of 50% thereof.16

Dividends not subject to income tax

1) Intercorporate dividends from a domestic corporation to another domestic

corporation or an RFC.
2) Generally, stock dividends.

15
Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income
or a deductible loss, as the case may be (Sec. 73(A), NIRC).
16
Sec. 39(B), NIRC.
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10. Prizes and Winnings

Subject to FT: (a) Prizes over ₱10,000 and winnings17 derived within the
Philippines.
(b) Prizes received by an NRANETB and by an NRFC within the
Philippines.

Included in the ITR:

1) Prizes amounting to ₱10,000 or less received by a citizen, resident alien, or
NRAETB.
2) Prizes received by domestic corporations.
3) Prizes received by RFCs within the Philippines.
4) Prizes and winnings received by resident citizens from sources without the
Philippines.

11. Income From Other Sources

(1) Recovery of damages representing compensation for loss of profits or

income are includible in gross income

Note: Recoveries that are to compensate for damage to property, injury to

person, or loss of life are not taxable.

Included in Gross Income Not Taxable

1) Damages for lost profits 1) Damages to compensate for
2) Damages for lost income damage or injury to the person or
his property
2) Damages for lost capital
3) Moral damages
4) Exemplary damages
5) Punitive damages

(2) Recovery of Bad Debt Previously Deducted

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

Rules on Bad Debt Recovery:

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

17
Except PCSO and Lotto winnings of ₱10,000 or less of an individual citizen, resident alien, or
NRAETB, which are exempt.
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(b) Not Taxable – If the deduction of the bad debt did not result in an income
tax benefit to the taxpayer (i.e., where the result of the business operation
was a net loss even without the bad debt deduction), the bad debt recovered
is not taxable income but is treated as a mere recovery or return of capital.

(c) Income From Bad Debt Recovery – The recovered amount of the
previously deducted bad debt which resulted in an income tax benefit.

(3) Refund of Deductible Tax

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

Rules on Refund of Taxes Previously Deducted:

(a) Taxable – If the tax paid is a deductible tax. The refund or credit thereof
is taxable in the year of receipt.

(b) Not Taxable – If the tax paid is not a deductible tax. The refund or credit
thereof is not taxable.

(c) Income From Tax Refund – The refunded amount of the tax which was
previously deducted and which resulted to an income tax benefit .

Examples of deductible taxes are: OPT except the stock transaction tax under
Sec. 127 of the Tax Code, excise taxes, occupation or professional taxes, real
property taxes, FBT.

Examples of non-deductible taxes are income tax, donor’s tax, estate tax,
VAT, stock transaction tax under Section 127 of the Tax Code.

(4) Tournament Prizes

Included in the ITR: Cash prizes won by local players/participants in

tournaments are not passive income inasmuch as participating in such
tournaments is their profession and/or occupation.

Subject to FT: Cash prizes of foreign players/participants, shall be subject to

a final tax of 25%.

Exempt from income tax: Prizes and awards granted to athletes in local and
international sports competitions and tournaments whether held in the
Philippines or abroad, and sanctioned by their national sports associations.

(5) Forgiveness of Indebtedness

Included in the ITR: When a creditor cancels a debt as part of a business

transaction, or in consideration of personal services of the debtor, the
condoned debt is taxable income to the debtor.

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May 2022

Taxed as a dividend: But where the debtor is a stockholder of the corporation

which condoned the debt, the condonation is considered an indirect payment
of dividend.

Subject to donor’s tax: If a creditor merely desires to benefit a debtor, and

without any consideration therefor cancels the debt, the amount of the debt is
a gift from the creditor to the debtor.

(6) Income from Illegal Sources

All unlawful gains are taxable and includible in the ITR. However, actual
repayment of such illegal gains will give rise to a deduction.18

(7) Unutilized/Excess Campaign Funds

Unutilized/excess campaign funds, that is, campaign contributions net of

the candidate’s campaign expenditures, shall be considered as subject to
income tax. As such, the same must be included in the candidate’s gross
income as stated in his Income Tax Return (“ITR”) for the subject taxable
year.

Any candidate who fails to file with the COMELEC the appropriate Statement
of Expenditures required under the Omnibus Election Code, shall be
automatically precluded from claiming such expenditures as deductions from
his campaign contributions. As such, the entire amount of his campaign
contributions shall be considered as directly subject to income tax.

(8) Early Withdrawals from a Personal Equity and Retirement Account

(“PERA”) which do not qualify for exclusion from taxable gross income

(9) Gain in the Sale or Retirement by a Corporation of Its Own Bonds

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

(10) If bonds are issued by a corporation at a premium, the net amount of

such premium is gain or income which is prorated or amortized over the
life of the bond.

(11) Stock options granted to a supplier of goods or services.

(12) Gambling gains. Gambling gains, net of gambling losses, shall be taxable in
the ITR of the taxpayer.

18
James vs. United States, 366 US 213.

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