ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

TAX-902
TAXATION A. TAMAYO  E. BUEN  G. CAIGA  C. LIM  K. MANUEL

GROSS INCOME – EXCLUSIONS

1. Exclusions defined: The term “exclusions” refers to items that are not included in the determination of gross income
either because:
a) they represent return of capital or are not income, gain or profit; or
b) they are subject to another kind of internal revenue tax; or
c) they are income, gain, or profit that are expressly exempt from income tax under the constitution, tax treaty, Tax
Code, or general or special law.

2. Sec.32 (B) Exclusions from Gross Income – The following items shall not be included in gross income and shall be
exempt from taxation:
a. Exclusions from gross income
b. Used to be excluded but now
subject to final tax
1) Proceeds of life insurance;
2) Amount received by insured as returns of premium;
3) Gifts, bequests and devises;
4) Compensation for injuries or sickness;
5) Income exempt under treaty;
6) Retirement benefits, pensions, gratuities, etc.;
7) Miscellaneous items.
a) Income derived by foreign government;
b) Income derived by the government or its political subdivision;
c) Prizes and awards;
d) Prizes and awards in sports competition;
e) 13th month pay and other benefits;
f) GSIS, SSS, Philhealth and other contributions;
g) Gains from the sale of bonds, debenture or other certificate of indebtedness
with maturity of more than 5 years;
h) Gains from redemption of shares in mutual fund.
1) Interest on government securities (now subject to 20% final tax)
2) Income derived as informer’s reward to persons instrumental in the discovery
of violations of the NIRC and in the discovery and seizure of smuggled goods
(now subject to 10% final tax based on 10% of the revenues, surcharges or
fees recovered and/or fine or penalty imposed or P1,000,000 per case
whichever is lower.)

3. Exclusions from Gross Income Explained

a. Life Insurance
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.

b. Amount received by insured as return of premium

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.

If the amounts, when added to amounts received before the taxable year under
such contract, exceed the aggregate premium paid, whether or not paid during
the taxable year, then the excess shall be included in gross income

In the case of a transfer for a valuable consideration by assignment or otherwise,

of a life insurance, endowment or annuity contract or any interest therein, only
the actual value of such consideration and the amount of the premiums and the
sums subsequently paid by the transferee are exempt from taxation.

Participating dividends are not income to the insured. They are treated as return
of capital.
Exercise: (CPA Exam) Mr. J. Cruz insured his life with his estate as beneficiary. In 2018, after Mr. Cruz had paid P65,000 in
premiums, he assigned the policy to Mr. S. Santos for P60,000, and Mr. Santos collected the total proceeds of P200,000.
Mr. Santos, after the assignment, and before Mr. Cruz’s death, paid total premiums of P80,000.

Compute for the: a) exempted amount;

b) the taxable amount.

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GROSS INCOME - EXCLUSIONS
c. Gifts, bequests and devises
Gifts, bequests and devices
d. Compensation for injuries or sickness
Compensation for injuries or
sickness
e. Income exempt under treaty
1) Income exempt under treaty
f. Retirement benefits
1) Retirement benefits received
under R.A No. 7641 and those
received by officials and
employees of private firms with
reasonable private pension plan
2) Retirement benefits under R.A.
7641 from private employers
without any retirement plans
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TAX-902
The value of property acquired by gift, bequest, devise, or descent.
Gifts, bequests and devises are subject to transfer taxes (estate tax or donor’s
tax.)
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
Alimony or an allowance based on a separation agreement is not taxable income.
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.
Recoveries of damages, representing compensation for personal injuries arising
from libel, defamation, slander, breach of promise to marry, alienation of
affection are not subject to income tax and shall not be included in gross
income.
Income of any kind to the extent required by any treaty obligation binding upon
the Government of the Philippines
Examples of income exempt under treaty:
1) Salaries of officials of the United Nations assigned in the Philippines if paid by
the United Nations and certified by the Secretary General of the United
Nations;
2) Salaries, allowances, fees, or wages received by citizens of the United States
of America working in consular offices in the Philippines are exempt from all
taxes;
3) Salaries of diplomatic officials and agents.
As a general rule, the provisions of the Philippine Tax Code (domestic law) shall
apply on the income, gain or profit of any person liable to income tax.
In case of conflict between the provisions of a tax treaty and domestic law, the
provisions of the tax treaty generally prevail over the provisions of the domestic
law.
Where the rate of tax imposed under the domestic law is lower than the rate
imposed under the tax treaty, the lower tax rate under the domestic law shall
prevail.
a) Retirement benefits received under Republic Act No. 7641 and those received
by officials and employees of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan maintained by the employer.
b) The retiring official or employee has been in the service of the same employer
for at least ten (10) years and is not less than fifty (50) years of age at the
time of his retirement.
c) The benefits granted shall be availed of by an official or employee only once.
D) The term 'reasonable private benefit plan' means:
(1) a pension, gratuity, stock bonus or profit-sharing plan maintained by an
employer for the benefit of some or all of his officials or employees,
(2) wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated, and
(3) wherein it is provided in said plan that at no time shall any part of the
corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.
In order to avail of the exemption of the retirement benefits under R.A. 7641
from private employers without any retirement plans, the retiring employee has
served at least five (5) years and is not less than sixty (60) years of age but not
more than sixty-five (65) declared as the compulsory retirement age, among
other conditions.
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GROSS INCOME - EXCLUSIONS
3) Any amount received by
an official or employee
as a consequence of
separation
4) Social security benefits,
retirement gratuities, pensions
and other similar benefits
received from foreign
government agencies and other
institutions, private or public
5) United States Veterans
Administration benefits
6) Social Security System (SSS)
benefits
7) Government Service Insurance
System (GSIS) benefits
g. Miscellaneous items
Income derived by Foreign
Governments
Income Derived by the
Government or its Political
Subdivisions
Prizes and awards
Prizes and Awards in
Sports Competition
13th month and other
benefits
GSIS, SSS, Medicare
(Philhealth) and other
contributions
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TAX-902
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 because of death, sickness or other physical disability or for any
cause beyond the control of the said official or employee.
The disease or illness should be of type which would affect the performance of
duties and endanger the life of the employee if he/she continues working. (RMO
No. 25-91)
The provisions of any existing law to the contrary notwithstanding, 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.
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.
Benefits received from or enjoyed under the Social Security System (SSS)
Benefits received from the GSIS including retirement gratuity received by
government officials and employees.
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.
Income derived from any public utility or from the exercise of any essential governmental
function accruing to the Government of the Philippines or to any political subdivision
thereof.
Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the contest or
proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
All 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.
Thirteenth month pay equivalent to the mandatory one (1) month basic salary of official
and employees of the government (whether national or local), including government-
owned or controlled corporations, and/or private offices received after the twelfth month
pay
Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift in
cash or in kind, and other benefits of similar nature actually received by officials and
employees of both government and private offices, including the Additional Compensation
Allowance (ACA) granted and paid to all officials and employees of the National Government
Agencies (NGAs) including State Universities and Colleges (SUCs), Government-Owned
and/or Controlled Corporations (GOCCs), Government Financial Institutions (GFIs) and
Local Government Units (LGUs).
The above stated exclusions shall cover benefits paid or accrued during the year,
provided that the total amount shall not exceed ninety thousand pesos (₱ 90,000),
The exclusion shall not apply to other compensation received by an employee under an
employer-employee relationship such as basic salary and other allowances.
The exclusion from gross income is not applicable to self-employed individuals and income
generated from business. (R.A. 10653 as implemented under RR 3-2015 dated March 9,
2015)
GSIS, SSS, Philhealth, Pag-ibig contributions and union dues of individuals
Any contribution in excess of the mandatory GSIS, SSS, Philhealth and Pag-IBIG or Home
Development Mutual Fund contributions are not excludible from gross income of the
individual taxpayer and, therefore, are subject to income tax and the consequently, to
withholding tax (RMC No. 27-2011).
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
GROSS INCOME - EXCLUSIONS TAX-902
Gains from the Sale of Gains realized from the sale or exchange or retirement of bonds, debentures or other
Bonds, Debentures or certificate of indebtedness with a maturity of more than five (5) years.
Other Certificate of
Indebtedness
Gains from Redemption of Gains realized by the investor upon redemption of shares of stock in a mutual fund
Shares in Mutual Fund company.

Note: Mutual fund company is an open-end and close-end investment company.

6) Exercises
a. Compute the tax-exempt and the taxable benefits: A rank and file employee of a GOCC received the following benefits
from his employer:
13th month pay P40,000
14th month pay 40,000
Christmas bonus 22,000
Loyalty award 15,000
Additional Compensation Allowance (ACA) 20,000
Total 13th month and other benefits P137,000
b. The following were received by a resident citizen employee, married, and with four (4) qualified dependent children for
the year 2021:
Salary, net of P20,000 withholding tax; P6,000 SSS contribution
(mandatory SSS contribution is P3,000); P2,000 union dues P600,000
13th month pay 50,000
14th month pay 50,000
How much was the taxable compensation income?
c. Based on the following current year data compute the tax-exempt 13th month and other benefits and contributions of an
employee:
Salary, gross of withholding tax P 480,000
Allowance 20,000
Thirteenth month pay 40,000
Christmas bonus 40,000
Reimbursement for transportation expenses 5,000
Payroll deductions:
SSS contributions (mandatory contribution is P4,000) 6,000
Philhealth contributions (mandatory contribution is P3,000) 5,000
Pag-IBIG contributions (mandatory contribution is P2,400) 3,400
Charitable contributions by the employee to the employer’s outreach program 5,000
Loan payment 20,000
h. Other tax-exempt items
1) Compensation income including holiday pay, overtime pay, night shift differential pay, and hazard pay earned by minimum
wage earner, who has no other reportable income
2) Salaries and stipends in dollars received by non-Filipino citizens serving as staff of the International Rice Research Institute
and the Ford Foundation
3) Allowances paid to military personnel
4) Compensation for casual employment like house helper/maid, not connected in the conduct of business of the employer
5) Interest on the price of land covered by Comprehensive Agrarian Reform Program (CARP)
6) Compensation of Statutory Minimum Wage Earner
7) Income generated from commercial sale of the invention for 10-year period which starts from the date of the first
commercial sale
8) Income of registered Barangay Micro Business Enterprise (BMBE) (total assets not more than P3,000,000 exclusive of the
land on which the particular business entity’s office, plant and equipment are situated)
9) Income of duly registered cooperatives dealing/transacting business with members only

i. Income of registered Barangay Micro Business Enterprise (BMBE)

Definition BMBE refers to any business entity or enterprise engaged in the production, processing or manufacturing of
products or commodities, including agro-processing, trading and services, whose total assets including those
arising from loans but exclusive of the land on which the particular business entity's office, plant and
equipment are situated, shall not be more than Three Million Pesos (P3,000,000.00).
Place of The Office of the Treasurer of each city or municipality shall register BMBEs and issue a Certificate of
registration Authority (CA) to enable the BMBE to avail of incentives under the Act.

Only one Certificate of Authority shall be issued for each BMBE and only by the Office of the Treasurer of the
city or municipality that has jurisdiction over the principal place of business of BMBE. (Section 3, IRR of
BMBE)
Who are Any person, natural or juridical, such as partnership, corporation, association and cooperative, having the
eligible to qualifications and none of the disqualifications shall be eligible to register as BMBEs. (Sec. 4, IRR of BMBE as
register amended)

“Services" shall exclude those rendered by any one, who is duly licensed by the government after having
passed a government licensure examination, in connection with the exercise of one's profession. (Section 2,
IRR of BMBE)

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Incentives 1) Exemption from income tax for income arising from the operations of the enterprise.
and benefits 2) Reduction of or exemption from local taxes, fees and charges
granted to 3) Exemption from the coverage of the Minimum Wage Law
BMBEs 4) Availment of credit services from government financing institutions
5) Availment of technology transfer, production, management training programs and marketing assistance
from government entities
6) Availment of Development Fund from GOCCs
7) Access to Trade and Investment Promotion
8) Access to One-Stop Business Registration Center
j. Integrative Cases
1. A resident citizen, widower, with a dependent minor brother, had the following data on income and expenses for 2018:
Gross sales P1,500,000
Cost of sales 1,000,000
Business expenses 200,000
Interest from savings deposit, BPI-Makati, Philippines 50,000
Prize in a literary contest he joined 100,000
Prize received for achievement in literature (did not join the contest) 10,000
Gain from sale of bonds (maturity is 6 years) 5,000
Separation pay from his former job (resigned) 250,000
Cash he inherited from his uncle 300,000
Proceeds of his wife’s life insurance (irrevocable beneficiary) 1,000,000
Amount received as return of premium (premium paid, P150,000) 200,000
Tax Informer’s Reward 500,000
Philippine Charity Sweepstakes winnings 10,000
Interest income from Government bonds 20,000
Winnings from illegal gambling 10,000
Question 1 - How much was the total amount of excluded or exempted income?
2 - How much was the total final tax from certain income?
3 – The taxpayer failed to indicate in his first quarter return the option to be taxed at 8%:
a) How much was the income tax due if he uses itemized deductions?
b) How much was the percentage tax, if any?
4 – The taxpayer indicated in his first quarter return that he was opting for the 8% income tax rate.
a) How much was the income tax due?
b) How much was the percentage tax, if any?
5 – The taxpayer opted for the optional standard deduction (OSD).
a) Can he avail of the 8% income tax rate?
b) How much was the income tax due?
c) How much is the percentage tax, if any?

2. A resident citizen, 50 years old, married, with three (3) qualified dependent children asks you to assist him in
computing his taxable net income for the year 2021. He presented to you his Statement of Income and Expenses for the
year ended 2021.

Gross professional income (subjected to 15% withholding tax) P10,000,000

Less: Cost of services 3,500,000
Gross income 6,500,000
Less: Professional expenses 3,000,000
Operating income 3,500,000
Add: Non-operating income
Retirement benefits received from his previous employer 250,000
Lump sum benefits received from SSS 200,000
Prize in a sports tournament sponsored by a group of businessmen
promoting health products 50,000
Yield from short-term bonds 20,000
Interest on long term deposits with maturity period of 5 years 30,000
Philippine Lotto winnings 500,000
Share in the net income of a business partnership 100,000 1,150,000
Net income P4,650,000

REQ: a. Compute the following:

1)Total amount excluded or exempted from income tax
2) Total final withholding taxes
b. Prepare reconciliation of net income per books against taxable income

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Answers:
1) Total amount excluded or exempted from income tax
Retirement benefits received from his previous employer that maintained P 250,000
Lump sum benefits received from SSS 200,000
Interest on long term deposits with maturity period of 5 years 30,000
Total P 480,000

2) Total final withholding taxes

Prize in a sports tournament sponsored by a group of businessmen promoting health products (50,000 x 20%) P10,000
Yield from short-term bonds (20,000 x 20%) 4,000
Philippine Lotto winnings (500,000 x 20%) 100,000
Share in the net income of a business partnership (100,000 x 10%) 10,000
Total P124,000

b. Prepare reconciliation of net income per books against taxable income

Net income per books P4,650,000
Add: Non-Deductible Expenses/Taxable Other Income -
Total 4,650,000
Less: A) Non-Taxable Income and Income Subject to Final Tax
Retirement benefits received from his previous employer that maintained 250,000
Lump sum benefits received from SSS 200,000
Interest on long term deposits with maturity period of 5 years 30,000
Prize in a sports tournament sponsored by a group of businessmen promoting health 50,000
products
Yield from short-term bonds 20,000
Philippine Lotto winnings 500,000
Share in net income of business partnership 100,000
B) Special/Other Allowable Deductions
Total 1,150,000
Net Taxable Income (Loss) P3,500,000

Alternative computation
Gross professional income (subjected to 15% withholding tax) P10,000,000
Less: Cost of services 3,500,000
Gross income 6,500,000
Less: Professional expenses 3,000,000
Operating income 3,500,000
Add: Non-operating income -
Taxable income P3,500,000

END

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