Regular Income Taxation Exclusions and Inclusions To Gross Income

1
REGULAR INCOME TAXATION
REGULAR INCOME TAXATION SCHEME: CONCEPT STRUCTURE
EXEMPT/EXLCUSIONS Not reportable for

FROM GROSS INCOME taxation purposes
INCOME
Subjected to FIT or
CGT
TAXABLE
Not subjected to
Subject to RIT
FIT or CGT
NATURE OF PHILIPPINE INCOME TAX
 General in scope. It applies to almost all kind of income.

 National tax. Imposed by the National Authority.
 Direct tax. It is imposed upon the taxpayer and he cannot shift the burden to pay the same to others.
 Progressive for Individuals and Proportional for Corporations
 Net income taxation. The law allows deductions against gross income.
 Follows a creditable withholding tax system.
GROSS INCOME AS DEFINED UNDER THE TAX CODE
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.
[Synthesis] The definition of gross income under the Tax Code is so wide that it encompasses almost every kind of income. It even includes
income from gambling or other illegal activities, income from finding a treasure, and income from incidental transactions. To reiterate, the basic
requisites for an income to be taxable are: (1) there is an increase in the wealth of the taxpayer, (2) such increase in wealth is a realized
benefit, and (3) the income is not exempted by any law, treaty, or the Constitution.
Exclusions from Gross Income
[Note that Exclusions are those items of income that should not be reported as gross income for taxation purposes.]
1.) LIFE INSURANCE POLICIES
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a
single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments
shall be included in gross income.
(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.
CONCEPT STRUCTURE:
EXEMPT INCOME RATIONALE GROSS INCOME

Proceeds of life insurance policy paid to heirs Life is regarded by law as priceless. Interest, if stipulated
of beneficiaries upon death of insured Thus, to tax it means to put a limited
value on it.
Amounts received by Insured as a Return of There is no income to speak of since Cash surrender value (if any) over the
****
Do something today that your future self will thank you for.
Remember why you started, remember where you’re headed, think of how great it will be to get there, and KEEP GOING.
Always rooting for you, FUTURE CPA!
2
Premium (for prior payments made) what are received by the taxpayer are premiums paid
just return of payments he had made.
Gains in cases of assignment of policy
2.) GRATUITOUS TRANSFERS
The value of property acquired by gift, bequest, devise, or descent: 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.
CONCEPT STRUCTURE:

The value of property acquired by gift, bequest, They are not onerous transactions. No Income/Fruits from such properties
devise, or descent realized benefit.
3.) COMPENSATION FOR INJURIES OR SICKNESS
Compensation for Injuries or Sickness. Amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such
injuries or sickness.
CONCEPT STRUCTURE:

Amounts received as compensation for Recovery of lost capital. Health is Recovery of lost profits; in cases where
personal injuries and sickness plus regarded as a capital item. reimbursements pertain to lost profits/salaries.
damages on account of such injuries.
4.) EXEMPT ITEMS RELATED TO EMPLOYMENT
 RETIREMENT: CONCEPT STRUCTURE
RETIREMENT BENEFITS REQUISITES FOR EXEMPTION

WITH BIR-APPROVED PLAN 1.) First-time availment of the
exemption (whether in a plan of
the same or different employer)
2.) The retiring official or
employees must have been in the
service OF THE SAME
EMPLOYER for at least ten (10)
years.
3.) At least 50 years of age at the
time of retirement
4.) The retirement plan is
reasonable and must be approved
by the Bureau of Internal Revenue.
WITHOUT BIR-APPROVED PLAN 1.) The retiree must have
served the SAME
EMPLOYER for at least
5 years
2.) At least 60 years of age
(but not more than 65
years old) at the time of
retirement
3.) No private retirement
plan/retirement plan
under CBA/employment
contract.
 SEPARATION OR TERMINATION OF EMPLOYMENT

****
3
SEPARATION/ TERMINATION OF DUE TO CAUSES CONTROLLED BY THE TAXABLE TO THE EMPLOYEE

EMPLOYMENT EMPLOYEE
[Examples: (1) dismissal and (2) resignation]

DUE TO CAUSES BEYOND THE CONTROL EXEMPT FROM TAXATION
OF THE EMPLOYEE
[Examples: (1) death, (2) sickness, (3) other

physical disabilities, (4) redundancy, (5)
retrenchment, (6) cessation of business]
 13TH MONTH PAY AND OTHER BENEFITS. Gross benefits received by officials and employees of public and private entities: Provided,
however, That the total exclusion under this subparagraph shall not exceed Ninety thousand pesos (P90,000). This will be further
elaborated in the topic ‘Compensation Income’.
 DE-MINIMIS BENEFITS. De minimis benefits are benefits of relatively small values provided by the employers to the employee on top of
the basic compensation intended for the general welfare of the employees. Being of relatively small values, the same is not being
considered as a taxable compensation and as such, not subject to income tax and withholding tax on compensation. This will be further
elaborated in the topic ‘Compensation Income’.
 EMPLOYEE CONTRIBUTIONS TO:

(A) SSS
(B) GSIS
(C) HDMF
(D) PHIC
(E) Union Dues
(F) PERA Accounts
[Note: Regarding item (F), PERA investment income and distributions are likewise excluded from gross income.]
 BENEFITS RECEIVED FROM: (1) SSS under RA 8282 and (2) GSIS under RA 8291
 MINIMUM WAGE EARNERS. Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be exempt from the
payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and
hazard pay received by such minimum wage earners shall likewise be exempt from income tax. This will be further elaborated in the topic
‘Compensation Income’.
[Synthesis] The salaries of MWE’s shall be exempt from income taxation. Moreover, their HHON’s [as mnemonic] shall also be included as
exempt items:
(1) Holiday Pay

(2) Hazard Pay
(3) Overtime Pay
(4) Night-shift Differential Pay
5.) EXEMPT ITEMS RELATED TO INHERENT LIMITATIONS OF TAXATION
(A) INTERNATIONAL COMITY
(A.1) INCOME EXEMPT UNDER TREATY
(A.2) INCOME DERIVED BY FOREIGN GOVERNMENT. Income derived from investments in the Philippines in loans, stocks,
bonds, or other domestic securities, or from interest on deposits in banks in the Philippines by (i) FOREIGN GOVERNMENTS, (ii) FINANCING
INSTITUTIONS OWNED, CONTROLLED, OR ENJOYING REFINANCING FROM FOREIGN GOVERNMENTS, AND (iii) INTERNATIONAL
OR REGIONAL FINANCIAL INSTITUTIONS ESTABLISHED BY FOREIGN GOVERNMENTS.
(A.3) UNITED STATES VETERANS ADMINISTRATION (USVA). Payments 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 Veterans Administration.
****
4
(B) TERRITORIALITY
(B.1) SOCIAL SECURITY BENEFITS, RETIREMENT GRATUITIES, PENSIONS AND OTHER SIMILAR BENEFITS received by
resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government
agencies and other institutions, private or public.
(C) EXEMPTION OF GOVERNMENT FROM TAXATION
Note that government is generally exempt from taxation in respect to its governmental/ministerial functions. However, GOCC’s are taxable, as
a rule. Yet, there are GOCC’s which are exempt, as follows:
i.) SSS
ii.) GSIS
iii.) HDMF (Pag-ibig)
iv.) PHIC (Philhealth)
v.) Local Water Districts
CONCEPT STRUCTURE:
ENTITY TAX TREATMENT

GOVERNMENT (IN GENERAL) EXEMPT FROM TAXATION
GOCC’s (IN GENERAL) SUBJECT TO TAX
EXEMPT GOCCs (AS AN EXCEPTION TO THE RULE) EXEMPT FROM TAXATION
6.) EXEMPT GAINS ON SECURITIES & GOLD
(A) GAINS FROM THE SALE OF BONDS, DEBENTURES OR OTHER CERTIFICATE OF INDEBTEDNESS. Gains realized from
the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. [Note:
The original maturity should be more than 5 years to be exempt]
(B) GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUND. Gains realized by the investor upon redemption of shares of
stock in a mutual fund company.
(C) INCOME DERIVED FROM THE SALE OF GOLD PURSUANT TO REPUBLIC ACT NO. 7076. – Income derived from the
following transactions pursuant to Republic Act No. 7076, otherwise known as the “People’s Small-scale Mining Act of 1991”:
(1) The sale of gold to the Bangko Sentral ng Pilipinas by registered small-scale miners
(2) The sale of gold by registered small-scale miners to accredited traders for eventual sale to the Bangko Sentral ng Pilipinas.
7.) EXEMPT PRIZES
CONCEPT STRUCTURE:
ITEM REQUISITES FOR EXEMPTION

1.) PRIZES AND AWARDS MADE PRIMARILY IN (a) The recipient was selected without any action on his part to enter the
RECOGNITION OF RELIGIOUS, CHARITABLE, contest or proceeding; and
SCIENTIFIC, EDUCATIONAL, ARTISTIC, LITERARY, (b) The recipient is not required to render substantial future services as a
OR CIVIC ACHIEVEMENT. condition to receiving the prize or award.
2.) ALL PRIZES AND AWARDS GRANTED TO Must be sanctioned by their national sports associations.
ATHLETES IN LOCAL AND INTERNATIONAL
SPORTS COMPETITIONS AND TOURNAMENTS
WHETHER HELD IN THE PHILIPPINES OR
ABROAD
****
5
8.) OTHER ITEMS WHICH ARE EXCLUSIONS FROM GROSS INCOME
 COVID-19 benefits to our Health Care Workers: (1) Special Risk Allowance, (2) Actual Hazard Pay, and (3) Compensation to Health Care
Workers who contracted COVID-19 in line with their duties
 Those having Income Tax Holiday and Incentives
 Cooperatives and those Corporations exempted under Sec. 30 of the Tax Code
 Those which are subject to other tax schemes (CGT and FIT)
INCLUSIONS FROM GROSS INCOME
****
6
Income: is net of VAT but gross of withholding taxes.
(1) COMPENSATION FOR SERVICES IN WHATEVER FORM PAID, INCLUDING, BUT NOT LIMITED TO FEES, SALARIES, WAGES,
COMMISSIONS, AND SIMILAR ITEMS.
COMPENSATION INCOME
This type of income must arise from an employer-employee relationship. Under the Labor Standards, there is a test (four-fold test) to determine
whether there be employer-employee relationship; such that, if the contract is one for employment, the tax treatment should be in accordance
with the following rules:
1.) POWER TO SELECT EMPLOYEES

2.) POWER TO PAY WAGES OF EMPLOYEES
3.) POWER TO DISMISS EMPLOYEES
4.) POWER TO CONTROL OVER THE MEANS BY WHICH THE WORK SHOULD BE DONE
However, under the regulations, following are NOT EMPLOYEES (and therefore subject to the rules on gross income derived from
profession/trade/business and NOT from compensation income):
1.) Consultants
2.) Directors without management function (or who are not employees of the company)
3.) Talents and artists on TV shows or radio broadcasts
As such, (1) Fees paid to consultants, (2) Commission to independent sales agent, and (3) Tips and gratuities paid directly to the employee by
the customer which are not accounted for by the employee to the employer are NOT COMPENSATION INCOME (but may qualify as
professional, business, and other income, respectively).
TYPES OF EMPLOYEES:
TYPE IMPORTANCE:
AS TO FUNCTION 1.) MANAGERIAL/SUPERVISORY This is primarily important in the treatment of fringe benefits.
PERSONNEL Fringe benefits received by managerial/supervisory personnel
2.) RANK-AND-FILE EMPLOYEES shall be taxable under final taxation. Whereas, if such is received
by a rank-and-file employee, it shall be taxable at regular rates.
AS TO TAXABILITY 1.) MINIMUM WAGE EARNERS This is primarily important in the exemption of minimum wage
2.) REGULAR EMPLOYEES earners in their salaries and certain performance-based
compensation income.
COMPENSATION INCOME IN A NUTSHELL: CONCEPT STRUCTURE:
COMPENSATION INCOME EXEMPT/NON-TAXABLE COMPENSATION

INCOME
TAXABLE COMPENSATION INCOME REGULAR “fixed/regular in nature”
COMPENSATION*
SUPPLEMENTAL “performance-based in nature”
COMPENSATION INCOME**
*Regular Compensation Income. These are fixed remuneration every period such as (1) Basic Salary and (2) Fixed Allowances.
**Supplemental Compensation Income. These are performance-based remunerations such as:
(1) Overtime pay

(2) Hazard pay
(3) Night shift differential pay
(4) Holiday pay
(5) Commissions (as employees), emoluments and honoraria
(6) Gains on the exercise of stock options (Fair value less exercise price)
(7) Profit sharing and taxable bonuses
****
7
EXEMPT/NON-TAXABLE COMPENSATION INCOME
This includes the EMPLOYEE’s share in the contributions to:

 SSS
 GSIS
 PHILHEALTH
 HDMF (PAG-IBIG)
 UNION DUES
Note that for purposes of computing taxable compensation income, withholding taxes which may have been deducted against the salary of the
employee (and remitted by the employer to the government) shall be ADDED BACK and the same shall be used as a tax credit against the income
tax due.
1.) MANDATORY DEDUCTIONS: CONCEPT STRUCTURE
2.) EXEMPT RETIREMENT/TERMINATION BENEFITS
This has been previously discussed.
3.) BENEFITS RECEIVED UNDER USVA
This has been previously discussed.
4.) EXEMPT UNDER TREATIES
Employee benefits of aliens and/or non-permanent residents of the Philippines from foreign governments, embassies, or diplomatic missions,
and international organizations in the Philippines are exempt from income tax. However, Filipino employees of these foreign institutions are
TAXABLE (as a rule) unless there be confirmation of tax exemption filed by such Filipino employees before the ITAD of the BIR*.
CONCEPT STRUCTURE:
FOREIGN EMBASSY, MISSION, AND PHILIPPINE EMBASSY OR CONSULATE

ORGANIZATION EMBASSY ABROAD
In the Philippines:
(a) Filipino Citizens TAXABLE (as a rule) * N/A

(b) Aliens EXEMPT (earned without by alien) N/A
Abroad:
(a) Filipino Citizens EXEMPT (earned without by a NRC) Taxable (Philippine embassy/consulate
deemed as extension of our territory)
(b) Aliens EXEMPT (earned without by alien) Exempt
5.) DE MINIMIS BENEFITS
Under RR 2-98, de minimis benefits are facilities or privileges given by an employer to its employees, provided such facilities or privileges are
of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or
efficiency of its employees.
TAX TREATMENT OF DE MINIMIS BENEFITS: CONCEPT STRUCTURE
****
8
EXEMPT FROM
Within the ceiling INCOME TAXATION
AND WITHHOLDING
De-minimis benefits Added to 'Other benefits

Rank-and-file Employee subject to the 90,000
LIMIT
In excess of the ceiling
and received by:
Managerial/Supervisory Subject to Fringe
Employee Benefits Tax (a final tax)
BENEFIT CEILING/LIMITATION SYNTHESIS

Monetized unused vacation leave credits of Not exceeding 10 days during the year Note that this item refers to monetized unused VACATION
PRIVATE EMPLOYEES LEAVES of PRIVATE EMPLOYEES
Monetized unused vacation leave and sick No limitation as to days Note that this item refers to BOTH VACATION AND SICK
credits of GOVERNMENT EMPLOYEES LEAVES of GOVERNMENT EMPLOYEES/OFFICIALS
AND OFFICIALS
Medical cash allowance to dependents of Maximum of 1,500 per semester or 250 per Note that this item refers to the medical cash allowance
employees month given to DEPENDENTS of employees
Rice subsidy Maximum of 2,000 pesos per month or 1 No further emphasis needed.
sack of 50-kg sack per month
Uniform and clothing allowance Maximum of 6,000 per year No further emphasis needed.
Actual yearly medical benefits Maximum of 10,000 per year Note that this item refers to the actual medical benefits
furnished to the employee himself.
Laundry allowance Maximum of 300 per month No further emphasis needed.
Employees achievement awards, e.g., for Maximum of 10,000 per year per employee The award must be for:
length of service or safety achievement, (1) Employees achievement (length of
which must be in the form of a tangible service/safety achievement)
personal property other than cash or gift (2) Non-cash or non-GC tangible property
certificate, with an annual monetary value (3) The value should not exceed the ceiling.
not exceeding P10,000 received by the (4) Under an established plan which should not
employee under an established written plan discriminate in favor of highly-paid employees
which does not discriminate in favor of
highly paid employees;
Gifts given during Christmas and major Maximum of 5,000 per employee per annum Note that this item is limited in the sense that it only refers
anniversary celebrations to gifts given during Christmas and major anniversary
celebrations.
Daily meal allowance for overtime work and Maximum of twenty-five percent (25%) of Note that this item refers to the meal allowance given to
night/graveyard shift the basic minimum wage employees during (1) OT work and (2) night/graveyard
shift. In addition, the basic minimum wage shall be on a
per-region basis.
Starting January 1, 2015, benefits received Maximum of 10,000 per employee per Note that this item, as also stated in the provision of the
by an employee by virtue of a collective taxable year law, is treated based on its monetary value/amount as a
bargaining agreement (CBA) and whole in the sense that if the value/amount is:
Productivity incentive schemes, provided, (a) 10,000 or less – it is treated as a de-minimis
that the total annual monetary value benefits
received from the two (2) items combined, (b) More than 10,000 – it is treated as other
do not exceed P10,000 per employee per benefits subject to the 90,000 ceiling
taxable year (RR 1-2015).
DE MINIMIS BENEFITS - CEILING: CONCEPT STRUCTURE
****
9
6.) 13th Month Pay and Other Benefits – those subject to the 90,000 limit: CONCEPT STRUCTURE
 13th Month Pay and Other Benefits include:

 13 month pay
 14th month pay, 15th month pay, etc.
 Christmas bonus of PRIVATE EMPLOYEES (in the nature of a non-performance-based pay)
 Productivity incentive bonus which is more than 10,000 in amount per employee per year
 Christmas gift of GOVERNMENT EMPLOYEES
 Additional compensation allowance (ACA) of government personnel
 Gifts received by PRIVATE EMPLOYEES other than those included as de-minimis benefits
 Other fringe benefits received by rank-and-file employees
 Excess de-minimis benefits of rank-and-file employees
As way of illustration, the CONCEPT STRUCTURE for the tax treatment for 13th month pay and other benefits shall be:
Exempt from income taxation

Within the 90,000 limit
and withholding
13th month pay and Other

Benefits Shall form part of taxable
compensation income under
Rank-and-file employee
'SUPPLEMENTAL
COMPENSATION INCOME'
In excess of the 90,000 limit
and received by a:
Managerial/supervisory Subject to the fringe benefit

employee tax (a final tax)
7.) SALARY OF MINIMUM WAGE EARNERS AND CERTAIN RELATED ITEMS: CONCEPT STRUCTURE
EXEMPT INCOME OF A MWE INCOME SUBJECT TO TAX BY A MWE

1.) Basic Minimum wage Note that receipt of MWE of other taxable income does not prevent him to enjoy
2.) COLA (cost-of-living allowance of MWEs) income tax exemption of his basic pay and certain compensation items.
[Note that COLA, in general, forms part of the compensation The MWE shall be subject to tax IN REGARD those ITEMS which are not
income of employees. However, in regard MWEs, the law declared by law as exempt:
considers this as part of the MINIMUM WAGE; thus, exempt.] (1) Other items of supplemental income
Certain performance-based items [Mnemonic: HHON]: (2) Those derived from profession/trade/business
1.) Hazard Pay
2.) Holiday Pay
3.) Overtime Pay
4.) Night-shift Differential Pay
8.) UNDER NECESSITY OR CONVENIENCE OF EMPLOYER
These items received by the employee are regarded by law not as compensation income, but merely ‘advances/benefits’ to the employees for
the furtherance of the business of the EMPLOYER; hence, exempt from income tax.
1.) Necessary travelling, transportation, representation, or entertainment expenses that are SUBJECT OF
LIQUIDATION/ACCOUNTING to the EMPLOYER.
****
10
[Worded otherwise, if the expense is NOT SUBJECT of LIQUIDATION/ACCOUNTING to the employer, then it shall be taxable to the
employee. In fact, tips and gratuities paid directly to the employee by the customer which are not accounted for by the employee to the
employer are CONSIDERED AS TAXABLE INCOME (as other income) BUT NOT SUBJECT TO WITHHOLDING.]
2.) RATA (representation and transportation allowance) of GOVERNMENT EMPLOYEES

3.) PERA
4.) Pre-computed business allowance. Reasonable amounts of reimbursements/advances for travelling and pre-computed business
allowances entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an
assignment or duty need not be regular subject to the requirement of substantiation and to withholding.
5.) Work-related mobile phone allowance
6.) Car incentives to employed on-call medical doctors
7.) Grant of housing privilege to employees working at distant places or remote facilities in compliance to labor safety standards
ADMINISTRATIVE REQUIREMENTS
WITHHOLDING TAX ON COMPENSATION
 The withholding agent is the EMPLOYER.

 Employers shall file BIR Form 1601-C on or before 10th day of the month following the month of withholding (except for December, on or before
January 15 of the next year)
 Employer shall furnish to the employee BIR Form 2316 on or before January 31 of the next year.
 Employer shall file BIR Form 1604-CF on or before January 31 of the next year
 Substituted filing system in lieu of BIR Form 1700 under certain conditions
SUBSTITUTED FILING SYSTEM
An individual taxpayer will no longer have to personally file his own Income Tax Return (BIR Form 1700) but instead the employer's Annual
Information Return on Income Taxes Withheld (BIR Form No. 1604-C) filed will be considered as the "substitute" ITR of the employee.
REQUISITES FOR INDIVIDUALS QUALIFIED FOR SUBSTITUTED FILING OF BIR FORM NO. 1700
 Receives purely compensation income regardless of amount;

 Compensation from only one employer in the Philippines for the calendar year;
 Income tax has been withheld correctly by the employer (tax due equals tax withheld);
 The Employee's spouse also complies with all the three conditions stated above;
 Employer files the BIR Form No. 1604-C; and
 The employer issues each employee BIR Form No. 2316 (latest version)
REQUISITES FOR INDIVIDUALS NOT QUALIFIED FOR SUBSTITUTED FILING OF BIR FORM NO. 1700
 Individuals with two or more employers concurrently and/or successively at any time during the taxable year.
 Employees whose income tax have not been withheld correctly resulting to collectible or refundable return.
 Individuals deriving other non-business, non-profession-related income in addition to compensation income not otherwise subject to final
tax.
 Individuals receiving purely compensation income from a single employer whose income tax has been correctly withheld but whose
spouse does not qualify tor substituted filing.
 Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income or compensation income and
other non-related business, non-profession-related income.
SUBMISSION OF BIR FORM NO. 2316
The employers are required to submit the duplicate original copy of BIR Form No. 2316 to the Revenue District Office where they are registered on or
before February 28.
EXEMPT FROM WITHHOLDING TAX ON COMPENSATION
The following are exempt from withholding tax on compensation:
 Remuneration received as an incident of employment (RA 7641; those with approved reasonable private retirement plan; Social Security
****
11
Act of 1954, as amended; GSIS Act of 1937, as amended; and etc.)

 Remuneration paid for agricultural labor;
 Remuneration for domestic services;
 Remuneration for casual labor not in the course of an employer's trade or business;
 Compensation for services by a citizen or a resident of the Philippines for a foreign government or international organization;
 Damages (Actual, moral, exemplary and nominal);
 Life insurance;
 Amounts received by the insured as a return of premium;
 Compensation for injuries or sickness;
 Income exempt under treaty
 13th Month pay and other benefits
 GSIS, SSS, Medicare and other contributions (employee's share only)
 Compensation income of minimum wage earners (MWEs) who work in the private sector and being paid the Statutory Minimum Wage
(SMW), as fixed by the Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages Productivity Commission (NWPC),
applicable to the place where he/she is assigned;
 Compensation income of employees in the public sector with compensation income of not more the SMW in the non-agricultural sector as
fixed by the RTWPB/NWPC applicable to the place where he/she is assigned.
 De Minimis benefits
 Fringe benefits given to employees other than rank and file and subjected to Fringe Benefit Tax (FBT);
 Personnel Economic Relief Allowance (PERA) given to government employees; and Representation and transportation allowance (RATA
granted to public officers and employees under the General Appropriations Act).
FRINGE BENEFITS TAXATION
NATURE AND SCOPE OF FRINGE BENEFITS TAXATION:

(A) Imposed on the income of the employee-taxpayer
(B) A final tax where the employer is the withholding agent to remit the tax to the government
(C) Based on a grossed-up value
(D) Limited in the sense that it only applies to MANAGERIAL AND SUPERVISORY EMPLOYEES (M/S Employees)
(E) A quarterly tax
STEPS IN COMPUTING FRING BENEFITS TAX:
1.) Computation of the Monetary Value. This is the value of the benefits realized by the M/S employee-taxpayer. This is net of the final tax.
For this purpose, there are general considerations for determining MONETARY VALUE:
BENEFITS PAID IN CASH General Rule: 100% of cash given
Exception: Cash paid for RESIDENTIAL

RENT
BENEFITS PAID IN KIND/PROPERTIES WHERE General Rule: 100% of the HIGHER
OWNERSHIP IS TRANSFERRED between:
(a) FAIR VALUE
(b) BOOK VALUE
BENEFITS PAID IN KIND/PROPERTIES WHERE General Rule: 50% of the: *For this purpose, depreciation value is
THERE IS TRANSFER OF USE (AND NOT computed by dividing the cost of the property
OWNERSHIP) by the related presumptive useful lives.
(1) Rental Value of the property; (a) PERSONAL PROPERTIES – 5 YEARS
(2) but if rental value is not determinable, (b) REAL PROPERTIES – 20 years
use Depreciation value.*
To make this more comprehensive, here is the concept structure related to monetary value:
****
12
BENEFIT, IN GENERAL MONETARY VALUE
Money Amount of cash furnished
Non-cash property with transfer of ownership FMV vs. BV, if applicable
Non-cash property, ownership is not transferred Depreciation value
Employer lends money free of interest Principal x 12%
Employer lends money at a rate lower than 12% Principal x (12% - Actual Rate)
HOUSING ALLOWANCES
HOUSING BENEFIT VALUATION
1. Employer leases a residential property for the Rental paid x 50%
use of the employee
2. Employer owns a residential property for the (FMV in the Real property declaration or Zonal value x 50%) / 20
use of the employee
3.Employer purchases residential property in installment for use (Acquisition cost exclusive of interest x 50%) / 20
employee
4. Employer purchases residential property and transfers ownership (Acquisition cost or Zonal value as determined by the CIR) X 100%
to employee
5. Employer purchases residential property and transfers ownership (FMV in the real property declaration or Zonal value as determined by the
to employee on a lesser amount CIR less cost to the employee) x 100%
MOTOR VEHICLE ALLOWANCES
****
13
MOTOR VEHICLE VALUATION
1) Employer owns and maintains a fleet of motor (Acquisition cost of vehicles not normally used for business x 50%) / 5
vehicles for the use of the business and
employees
2) Employer leases/maintains a fleet of motor Amount of rental payments not normally used for business purposes x 50%
vehicles for the use of the business and the
employees
3) Employer purchases vehicle in the name of the employee Acquisition cost x 100%
4) Employer provides employee with cash for the Cash received x 100%
purchase of the vehicle, and ownership is placed in the name of the

employee.
5) Employer purchases the vehicle on installment Acquisition cost exclusive of interest divided by 5 years
and ownership is placed in the name of the
employee.
6) Employer shoulders a portion of the amount of the purchase price Amount shouldered by employer X 100%
of vehicle and ownership is placed in the name of the employee
2.) Determine the rate to be used in computing fringe benefits tax: CONCEPT STRUCTURE
Rate to be used for Rank-and-file employees NOT APPLICABLE

Rate to be used IN GENERAL for M/S employees 35% of the Grossed-up monetary value
Rate to be used for NRA-NETB M/S employees 25% of the Grossed-up monetary value
3.) Compute the grossed-up monetary value by dividing the monetary value by the mathematical complement of the FBT rate as this amount is
the tax base of the fringe benefits tax.
Formula: (Monetary value / (100% - applicable FBT rate))
4.) Compute the Fringe benefits tax by multiplying the grossed-up monetary value by the applicable FBT rate.
Formula: (Grossed-up monetary value x FBT rate)
****
14
EXEMPT FROM FRINGE BENEFITS TAX
1) Fringe benefits given to rank and file employees (not subject to FBT but subject to basic income tax)
2) Housing benefits/privilege:
(a) of military officials of the Armed Forces of the Philippines (AFP)
(b) which is situated inside or adjacent (within 50 meters from the perimeter of the business premises) to the premises of a business or factory.
(c) Which are "temporary" for an employee or for a temporary housing unit of three (3) months or less.
3) Expenses incurred by the employee which are paid by the employer and expenses paid for by the employee but reimbursed by his employer, provided:
(a) The expenditures are duly receipted for and in the name of the employer; and
(b) It does not partake the nature of a personal expense attributable to the employee,
4) Allowances subject to liquidation (tax exempt allowances)
5) Representation and transportation allowances which are fixed in amounts and are regularly received by the employees as part of their monthly
compensation (exempt from FBT but part of compensation income subject to regular tax)
6) Foreign business travel expenses:

(a) Inland travel expenses (such as expenses for food, beverages and local transportation) during foreign travel.
(b) Lodging cost in a hotel (or similar establishments) amounting to an average of US$300 or less per day during foreign travel
(c) Cost of economy and business class airplane ticket for "foreign" travel.
(d) 70% of the cost of first-class airplane ticket for foreign travel
7) Domestic business travel expenses (within the Philippines) are generally assumed to be reasonable in amount – hence, exempt from FBT.
8) Educational assistance TO THE EMPLOYEE, provided:
(a) The education or study is directly connected with the employer's trade, business or profession; and
(b) There is a written contract between them that the employee is under obligation to remain in the employ of the employer for a period of time they have
mutually agreed upon
9) Educational assistance TO THE DEPENDENTS OF THE EMPLOYEE, provided that the assistance was provided through a competitive scheme under the
scholarship program of the Company.
10) Contributions of the employer for the benefit of the employee on the following:
(a) Pursuant to the provisions of existing law, such as under SSS and GSIS
(b) Similar contributions arising from provisions of any other existing law
(c) To retirement, insurance and hospitalization benefit plans
11) The cost of premiums borne by the employer for the group insurance of his employees.
12) The fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer (Necessity of Employer rule).
13) The fringe benefit is for the convenience or advantage of the employer (Convenience of the Employer rule).
14) Fringe benefits which are: authorized and exempted from income tax under the Tax Code or under any special law.
(2) GROSS INCOME DERIVED FROM THE CONDUCT OF TRADE OR BUSINESS OR THE EXERCISE OF A PROFESSION.
(A) GROSS INCOME FOR SELLER OF GOODS
GROSS INCOME = GROSS SALES LESS COST OF GOODS SOLD
The term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold . ‘Cost of goods sold' shall
include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
 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.
****
15
 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.
(B) GROSS INCOME FOR SELLER OF SERVICES
GROSS INCOME = GROSS RECEIPTS LESS COST OF SERVICES
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. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers
and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That
in the case of banks, 'cost of services' shall include interest expense.
(3) GAINS DERIVED FROM DEALINGS IN PROPERTY
DEALINGS IN PROPERTIES
ORDINARY ASSETS VS. CAPITAL ASSETS: CONCEPT STRUCTURE
TYPE OF ASSET DEFINITION TAX TREATMENT

ORDINARY ASSET Includes: Ordinary Gains – form part of gross income
(1) stock in trade of the taxpayer or subject to RIT
other property of a kind which
would properly be included in the
inventory of the taxpayer if on Ordinary Losses – form part of allowable
hand at the close of the taxable deductions against gross income
year or
(2) property held by the taxpayer
primarily for sale to customers in
the ordinary course of his trade
or business,
(3) or property used in the trade or
business, of a character which is
subject to the allowance for
depreciation provided in
Subsection (F) of Section 34; or
(4) real property used in trade or
business of the taxpayer.
CAPITAL ASSET Property held by the taxpayer (whether or General Rule: Capital gains and Capital
not connected with his trade or business) Losses
which is NOT an ordinary asset.
Exception: Those covered under Capital
Gains Taxation (real properties in the
Philippines and stocks sold directly to the
buyer)
TREAMENT OF GAINS AND LOSSES: CONCEPT STRUCTURE
TYPE OF GAIN/LOSS TAX TREATMENT

ORDINARY GAIN FORMS PART OF GROSS INCOME SUBJECT TO REGULAR
INCOME TAX (IN FULL)
ORDINARY LOSS FORMS PART OF ALLOWABLE DEDUCTIONS AGAINST GROSS
INCOME (IN FULL)
NET CAPITAL GAIN (EXCESS OF CAPITAL GAIN OVER FORMS PART OF GROSS INCOME SUBJECT TO REGULAR
CAPITAL LOSS) INCOME TAX
Note: Capital loss can only be deductible against available capital

gain (and should not be offset against ordinary gain)
NET CAPITAL LOSS (EXCESS OF CAPITAL LOSS OVER NOT AN ITEM OF DEDUCTION BUT MAY BE CARRIED OVER
****
16
CAPITAL GAIN) UNDER CERTAIN CIRCUMSTANCES
PECULIAR RULES IN DEALINGS IN PROPERTIES:
(A) THOSE AFFORDED TO INDIVIDUAL TAXPAYERS IN RELATION TO CAPITAL ASSETS

(a) The Rule on Holding Period
(b) The Rule on Net Capital Loss Carry-Over
CONCEPT STRUCTURE:
IF THE TAXPAYER IS AN INDIVIDUAL: CODAL PROVISION GIST OF THE RULE

(A) HOLDING PERIOD RULE In the case of a taxpayer, other than a In computing Capital Gains and Losses, an
corporation, only the following percentages INDIVIDUAL TAXPAYER should take into
of the gain or loss recognized upon the sale consideration the HOLDING PERIOD of the
or exchange of a capital asset shall be capital asset disposed of:
taken into account in computing net capital
gain, net capital loss, and net income. (a) If the capital asset is HELD for
NOT MORE THAN 12 MONTHS
(1) One hundred percent (100%) if the – the resulting gain or loss shall
capital asset has been held for not more be multiplied to 100%.
than twelve (12) months; and (b) If the capital asset is HELD for
MORE THAN 12 months – the
(2) Fifty percent (50%) if the capital asset resulting gain or loss shall be
has been held for more than twelve (12) multiplied to 50%.
months;
(B) NET CAPITAL LOSS CARRY- If any taxpayer, other than a corporation, The requisites for this rule be:
OVER RULE sustains in any taxable year a net capital (1) The taxpayer is an INDIVIDUAL
loss, such loss (in an amount not in excess (2) There is NET CAPITAL LOSS in
of the net income for such year) shall be the preceding year
treated in the succeeding taxable year as a (3) The amount to be carried over
loss from the sale or exchange of a capital should be the LOWEST among:
asset held for not more than twelve (12) (a) Actual Net Capital Loss
months. (b) Net income in the year the
net capital loss was
sustained
(c) Amount of Net Capital Gain
in the following year
(4) The Net Capital Loss Carry-Over
is for ONE YEAR ONLY.
It is to be emphasized that the foregoing rules are not applicable to CORPORATIONS.
(B) WASH SALES RULE/ 61-day Rule
Purpose of the law: To prohibit the claiming of unwarranted deductions by non-dealers through creation of fake losses.
Under RR 6-2008, it states:
Losses from Wash Sales of Shares of Stock. — The following rules shall apply with respect to losses from wash sales of shares of stock:
A taxpayer cannot deduct any loss claimed to have been sustained from the sale or other disposition of stock, if, within a period beginning
thirty (30) days before the date of such sale or disposition and ending thirty (30) days after such date (referred to in this section as the sixty-
one-day (61) period), he has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by
law), or has entered into a contract or option so to acquire, substantially identical stock. However, this prohibition does not apply in the case
of a dealer in stock if the sale or other disposition of stock is made in the ordinary course of the business of such dealer.
Where more than one loss is claimed to have been sustained within the taxable year from the sale or other disposition of stock or securities,
the provisions of this Section shall be applied to the losses in the order in which the stock the disposition of which resulted in the respective
losses were disposed of (beginning with the earliest disposition). If the order of disposition of stock disposed of at a loss on the same day
cannot be determined, the stock or securities will be considered to have been disposed of in the order in which they were originally acquired
(beginning with earliest acquisition).
****
17
Where the amount of stock or securities acquired within the sixty-one (61) day period is less than the amount of stock or securities sold or
otherwise disposed of, then the particular shares of stock or securities the loss from the sale or other disposition of which is not deductible
shall be those with which the stock or securities acquired are matched in accordance with this rule: The stock or securities sold will be
matched in accordance with the order of their acquisition (beginning with the earliest acquisition) with an equal number of the shares of
stock or securities sold or otherwise disposed of.
Where the amount of stock or securities acquired within the sixty-one day period is not less than the amount of stock or securities sold or
otherwise disposed of, then the particular shares of stock or securities the acquisition of which resulted in the non-deductibility of the loss
shall be those with which the stock or securities disposed of are matched in accordance with this rule: The stock or securities sold or
otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired in accordance with the order of
acquisition (beginning with the earliest acquisition) of the stock or securities acquired.
The acquisition of any share of stock or any security which results in the non-deductibility of a loss under the provisions of this Section shall
be disregarded in determining the deductibility of any other loss
As provided in Sec. 2 of these Regulations, the word “acquired” as used in this Section means acquired by purchase or by an exchange
upon which the entire amount of gain or loss was recognized by law, and comprehends cases where the taxpayer has entered into a
contract or option within the sixty-one-day period to acquire by purchase or by such an exchange the subject shares of stock.
Requisites: [Mnemonic: SABON]

(a) Substantially identical stocks or securities
(b) Acquisition of cover-up or replacement shares
(c) Before and After 30 days from the day of loss
(d) On the basis of quantity sold (this is important in pro-rating the ‘true’ and ‘fake’ deductions)
(e) Non-dealers only are prohibited under this rule
(C) TAX-FREE EXCHANGES (CREATE Law updated)
General Rule: As a general rule in dealings in properties, the entire amount of the gain or loss, as the case may be, shall be recognized.
Exception: However, if the transaction falls under these ‘tax-free exchanges’, no gain or loss may be recognized.
(1) No gain or loss shall be recognized on a corporation or on its stock or securities if such corporation is a party to a reorganization and
exchanges property in pursuance of a plan of reorganization solely for stock or securities in another corporation that is a party to the
reorganization. A reorganization is defined as:
(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party
to the merger or consolidation; or
(b) The acquisition by one corporation, in exchange solely for all or a part of its voting stock, or in exchange solely for all or part of
the voting stock of a corporation which is in control of the acquiring corporation, of stock of another corporation if, immediately after
the acquisition, the acquiring corporation has control of such other corporation whether or not such acquiring corporation had control
immediately before the acquisition; or
(c) The acquisition by one corporation, in exchange solely for all or a part of its voting stock or in exchange solely for all or part of
the voting stock of a corporation which is in control of the acquiring corporation, of substantially all of the properties of another
corporation. In determining whether the exchange is solely for stock, the assumption by the acquiring corporation of a liability of the
others shall be disregarded; or
(d) A recapitalization, which shall mean an arrangement whereby the stock and bonds of a corporation are readjusted as to amount,
income, or priority or an agreement of all stockholders and creditors to change and increase or decrease the capitalization or debts
of the corporation or both; or
(f) A reincorporation, which shall mean the formation of the same corporate business with the same assets and the same
stockholders surviving under a new charter.
(2) No gain or loss shall also be recognized if property is transferred to a corporation by a person, alone or together with others, not
exceeding four (4) persons, in exchange for stock or unit of participation in such a corporation of which as a result of such exchange
the transferor or transferors, collectively, gains or maintains control of said corporation: Provided, That stocks issued for services
shall not be considered as issued in return for property.
****
18
Sale or exchanges of property used for business for shares of stock covered under this Subsection shall not be subject to value-
added tax.
In all of the foregoing instances of exchange of property, prior Bureau of Internal Revenue confirmation or tax ruling shall not be
required for purposes of availing the tax exemption.
[Synthesis] It is to be emphasized that in cases of tax-free exchanges pursuant to the exchange solely for stock or securities in another
corporation, no gain or loss should be recognized.
The same is NOT TRUE where the exchange includes CONSIDERATION OTHER THAN STOCKS AND SECURITIES (cash and other
properties). The RESULTING GAINS, but not the losses, shall be recognized up to the extent of the value of the cash and other properties
received.
Under Sec. 40 (3) of the Tax Code, it states:
(3) Exchange Not Solely in Kind. -
(a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a security holder or a corporation
receives not only stock or securities permitted to be received without the recognition of gain or loss, but also money and/or property, the gain, if
any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and fair market value of such other property
received: Provided, That as to the shareholder, if the money and/or other property received has the effect of a distribution of a taxable dividend,
there shall be taxed as dividend to the shareholder an amount of the gain recognized not in excess of his proportionate share of the
undistributed earnings and profits of the corporation; the remainder, if any, of the gain recognized shall be treated as a capital gain.
(b) If, in connection with the exchange described in the above exceptions, the transferor corporation receives not only stock permitted to be
received without the recognition of gain or loss but also money and/or other property, then (i) if the corporation receiving such money and/or
other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recognized from the
exchange, but (ii) if the corporation receiving such other property and/or money does not distribute it in pursuance of the plan of merger or
consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in excess of the sum of such money
and the fair market value of such other property so received, which is not distributed.
COMPUTATION OF GAINS AND LOSSES IN DEALINGS IN PROPERTIES
General Formula:
Selling Price Xxx

Tax Basis of the property disposed (Xxx)
Gain or Loss Xxx
What constitutes Selling Price?

(a) money received
(b) plus the fair market value of the property (other than money) received;
What constitutes Tax basis of the property?

(A) Acquired through purchase of a capital asset or a non- The COST of the asset
depreciable ordinary asset
(B) Acquired through purchase of a depreciable ordinary The DEPRECIATED COST of the asset
asset
(C) Acquired through exchange The FAIR VALUE of the asset
(D) Acquired through inheritance The FAIR VALUE of the asset at date of DEATH
(E) Acquired through gift/donation The LOWER between:
(a) The Tax Basis on the hands of the donor or the last
preceding owner who have acquired NOT THROUGH
GIFT
(b) The FAIR VALUE at date of GIFT
(F) Acquired for less than an adequate consideration in The AMOUNT PAID by the transferee for the property
money or money's worth, the basis of such property is
****
19
(G) Acquired by way of tax-free exchanges (A) If received pursuant to a share-for-share swap, the tax
basis be the TAX BASIS OF THE SHARES RECEIVED.
(B) If received pursuant to a share-swap with non-cash

consideration, the tax basis be the SUBSTITUTED
BASIS computed as:
AS TO THE TRANSFEROR:
Tax basis of the shares given - XXX
Add: Gain recognized* - XXX
Add: Amounts treated as dividends
of the shareholders - XXX
Less: Cash and Fair Value of other
Properties Received - (XXX)
Equals: SUBSTITUTED BASIS of the shares XXX
Received by the transferor
AS TO THE TRANSFEREE:
Original Basis in the hands of the Transferor - XXX
Add: Gain recognized by the transferor - XXX
Equals: Tax basis of share received by the - XXX
TRANSFEREE
*Gain to be recognized by the Transferor:
Selling price (cash plus FV of the properties received) - XXX
Cost of shares given (plus items given in consideration
of the exchange) - (XXX)
Initial gain subject to the test XXX
Test: The recognized gain (taxable) should be the lower between the:
(a) Initial gain computed above; and
(b) Amount of cash and FV of other properties received.
OTHER TAXABLE ITEMS IN DEALINGS IN PROPERTIES:
TRANSACTION TAX TREATMENT

Retirement of bonds, debentures, notes, or certificates and other As a rule, the gain or loss arising therefrom is subject to the rules on
evidence of indebtedness dealing with properties.
Short sale of properties: Sale by a speculator of securities borrowed As a rule, the gain or loss arising therefrom is subject to the rules on
in anticipation a decline in security value dealing with properties.
Failure to exercise a privilege or option to buy or sell property that is This is a capital loss deductible against capital gain.
a capital asset
Security becoming worthless As a rule, a capital loss. However, in cases of banks, the same is an
ordinary loss.
Liquidating dividends Capital gains or capital losses are subject to the rules on dealing
with properties.
The amount received in liquidation of a partnership is also deemed The excess of the amount received in liquidation of a partnership
in exchange of the partner's interest on the partnership. over the partner’s interest in the partnership shall be governed by:
(a) the rules in CGT: if the partnership is business partnership
(b) the rules in RIT: if the partnership is a general professional
partnership
Redemption of shares for cancellation or retirement by a corporation Considered exchange to an investor but not to the redeeming
corporation.
Voluntary buy back of shares to be held in treasury Considered exchange to the investor, but not to the corporate issuer
of the shares.
(4) INTERESTS
CONCEPT STRUCTURE:
****
20
Interest income subject to RIT may arise from:

 Loans and promissory notes
 Earned abroad (loans and even bank deposits located abroad)
 Basically those which are NOT the objects of interest income subjected to FIT/ Those not exempted by law
(5) RENTS
CONCEPT STRUCTURE:
GROSS INCOME TO THE LESSOR EXEMPT

 Obligations of the lessor which are assumed by the
lessee.
 Advanced rentals (upon receipt) if they are: Advanced rentals if they:
(A) UNRESTRICTED (A) Constitute a loan
(B) Even if restricted, it is applied in future (B) Contingent rent
years/termination of lease
 Income from Leasehold improvements through
either (1) Outright Method or (2) Spread-out
Method
(6) ROYALTIES
CONCEPT STRUCTURE:
TAXABLE TO REGULAR TAX TAXABLE TO FINAL TAX

Passive royalties earned abroad Passive royalties earned in the Philippines
Active royalties
(7) DIVIDENDS
CONCEPT STRUCTURE:
Individuals FINAL TAX
DOMESTIC Domestic/ Resident EXEMPT BEING INTER-

CORPORATION to: Corporations CORPORATE DIVIDENDS
GR: 25%
Non-resident Corporations
Xpn: Tax Sparing Rule
DIVIDENDS declared by: RESIDENT FOREIGN Resident Citizens/

REGULAR TAX
CORPORATION to: Domestic Corporations
Resident Citizens REGULAR TAX
NON-RESIDENT
FOREIGN GENERAL RULE: REGULAR TAX
CORPORATION to:
Domestic Corporation
Exception (under CREATE LAW):
*Conditional Exemption of Domestic Corporations on dividends received from Non-ResidentConditional Exemption of DC*
Foreign Corporations (under RR 5-2021)
Dividends received by a domestic corporation shall not be subject to tax under this Title: Provided,
(1) That the domestic corporation holds directly at least twenty percent (20%) of the outstanding shares of the foreign corporation [ in
value].
(2) Holding period be: for a minimum of two (2) years at the time of the dividend distribution. If the NRFC is less than 2 years old in
existence, then the holding period requirement should be that the DC must have held such shares continuously during the entire life
of NRFC.
(3) That for foreign-sourced dividends to be exempt, the funds from such dividends actually received or remitted into the Philippines are
reinvested in the business operations of the domestic corporation in the Philippines within the next taxable year from the time the
foreign-sourced dividends were received
(4) shall be limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic
subsidiaries, and infrastructure project.
****
21
(8) ANNUITIES
The taxable amount is the excess of cash surrender value of the policy over the premiums paid.
(9) PRIZES AND WINNINGS
CONCEPT STRUCTURE:
Prizes and Winnings are subject to RIT when:

 It is received by a CORPORATION (except PCSO winnings)
 Prizes amounting to 10k or less when received by an Individual
 Prizes & Winnings earned abroad
(10) PENSIONS
In general, pensions are taxable and subject to RIT. Please be guided of the exempt pensions which have been discussed previously.
(11) PARTNER'S DISTRIBUTIVE SHARE FROM THE NET INCOME OF THE GENERAL PROFESSIONAL PARTNERSHIP.
[Synthesis] It should be noted that partner’s share in partnerships (as a rule) is taxable under the FIT scheme. It is only when the partnership is
a GENERAL PROFESSIONAL PARTNERSHIP (which is merely a pass-through entity and not a taxable person under income taxation) that
the partner’s share in the net income becomes subject to RIT. The same treatment should be used in dealing with exempt joint ventures.
ENTITY TAXABLE PERSON? TAX TREATMENT

PARTNERSHIPS [in general] YES Treated as a corporation. Share in net
income means dividend subject to FIT.
GENERAL PROFESSIONAL PARTNERSHIP NO Treated as a pass-through entity only.
Share in net income is taxable to the
partners at RIT.
JOINT VENTURES [in general] YES Treated as a corporation. Share in net
income means dividend subject to FIT
EXEMPT JOINT VENTURES: NO Treated as a pass-through entity only.
(a) Joint venture or consortium formed Share in net income is taxable to the
for the purpose of undertaking venturers at RIT.
construction projects.
(b) Joint venture or consortium engaging
in petroleum, coal, geothermal and
other energy operations pursuant to
an operating consortium agreement
under a service contract with the
Government.
OTHER ITEMS REGARDED AS INCLUSIONS TO GROSS INCOME
 FORGIVENESS OF DEBT
CONSIDERATION TAX TREATMENT

Generosity of one party Not subject to income tax
With services rendered Gross income
In favor of a shareholder Subject to dividend tax rules
Forfeiture of dividends in exchange of debt forgiveness
 RECOVERY OF PAST DEDUCTIONS
CONCEPT STRUCTURE:
Accounts and other items which were written-off/expenses claimed as deductions in prior periods which have been subsequently
****
22
collected/refunded in the current year are taxable to the taxpayer [in the year of recovery]. This is otherwise known as the ‘tax benefit rule.’
For it to be taxable:
1. There was deduction in the prior year/s
2. Such deduction was effective in the sense that it reduced taxable income in the current year / future years and the taxpayer is
not exempt in the year deducted.
3. There is collection/refund in the current year.
 RECOVERY OF DAMAGES
CONCEPT STRUCTURE:
Compensatory Damages (mere return of capital lost) Exempt

Recovered Damages (recovery of lost profits/income) TAXABLE
 REIMBURSEMENT OF EXPENSES
These are TAXPAYER’s EXPENSES being reimbursed by the client/customer. However, if expenses are for the account of the client,
no income should be recognized by the taxpayer.
****

Regular Income Taxation Exclusions and Inclusions To Gross Income

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Regular Income Taxation Exclusions and Inclusions To Gross Income

Uploaded by

Copyright:

Available Formats

1

REGULAR INCOME TAXATION

REGULAR INCOME TAXATION SCHEME: CONCEPT STRUCTURE

EXEMPT/EXLCUSIONS Not reportable for

NATURE OF PHILIPPINE INCOME TAX

 General in scope. It applies to almost all kind of income.

GROSS INCOME AS DEFINED UNDER THE TAX CODE

SEC. 32. Gross Income. -

Exclusions from Gross Income

1.) LIFE INSURANCE POLICIES

EXEMPT INCOME RATIONALE GROSS INCOME

2.) GRATUITOUS TRANSFERS

EXEMPT INCOME RATIONALE GROSS INCOME

3.) COMPENSATION FOR INJURIES OR SICKNESS

EXEMPT INCOME RATIONALE GROSS INCOME

4.) EXEMPT ITEMS RELATED TO EMPLOYMENT

 RETIREMENT: CONCEPT STRUCTURE

RETIREMENT BENEFITS REQUISITES FOR EXEMPTION

 SEPARATION OR TERMINATION OF EMPLOYMENT

SEPARATION/ TERMINATION OF DUE TO CAUSES CONTROLLED BY THE TAXABLE TO THE EMPLOYEE

[Examples: (1) dismissal and (2) resignation]

[Examples: (1) death, (2) sickness, (3) other

 EMPLOYEE CONTRIBUTIONS TO:

(1) Holiday Pay

5.) EXEMPT ITEMS RELATED TO INHERENT LIMITATIONS OF TAXATION

(A) INTERNATIONAL COMITY

(A.1) INCOME EXEMPT UNDER TREATY

(C) EXEMPTION OF GOVERNMENT FROM TAXATION

iii.) HDMF (Pag-ibig)

iv.) PHIC (Philhealth)

v.) Local Water Districts

ENTITY TAX TREATMENT

EXEMPT GOCCs (AS AN EXCEPTION TO THE RULE) EXEMPT FROM TAXATION

6.) EXEMPT GAINS ON SECURITIES & GOLD

7.) EXEMPT PRIZES

ITEM REQUISITES FOR EXEMPTION

8.) OTHER ITEMS WHICH ARE EXCLUSIONS FROM GROSS INCOME

INCLUSIONS FROM GROSS INCOME

Income: is net of VAT but gross of withholding taxes.

1.) POWER TO SELECT EMPLOYEES

3.) Talents and artists on TV shows or radio broadcasts

COMPENSATION INCOME IN A NUTSHELL: CONCEPT STRUCTURE:

COMPENSATION INCOME EXEMPT/NON-TAXABLE COMPENSATION

**Supplemental Compensation Income. These are performance-based remunerations such as:

(1) Overtime pay

EXEMPT/NON-TAXABLE COMPENSATION INCOME

This includes the EMPLOYEE’s share in the contributions to:

2.) EXEMPT RETIREMENT/TERMINATION BENEFITS

This has been previously discussed.

3.) BENEFITS RECEIVED UNDER USVA

This has been previously discussed.

4.) EXEMPT UNDER TREATIES

FOREIGN EMBASSY, MISSION, AND PHILIPPINE EMBASSY OR CONSULATE

(a) Filipino Citizens TAXABLE (as a rule) * N/A

5.) DE MINIMIS BENEFITS

TAX TREATMENT OF DE MINIMIS BENEFITS: CONCEPT STRUCTURE

De-minimis benefits Added to 'Other benefits

BENEFIT CEILING/LIMITATION SYNTHESIS

Laundry allowance Maximum of 300 per month No further emphasis needed.

 13th Month Pay and Other Benefits include:

Exempt from income taxation

13th month pay and Other

Managerial/supervisory Subject to the fringe benefit