FRANCISCO, CHARMAINE A.
(LM-3A)
INCOME TAXATION MIDTERM REVIEWER
Resident Citizen
A Resident Citizen is a Filipino who stayed
permanently in the Philippines or stayed outside the Philippines
for less than 183 days during the taxable year.
1987 Philippine Constitution
Article IV, Section 1
Non-Resident Citizen
1. A citizen of the Philippines who establishes to the satisfaction
of the Commissioner the fact of his physical presence abroad
with a definite intention to reside therein.
2. A citizen of the Philippines who works and leaves the
Philippines during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis.
3. A citizen of the Philippines who works and derives income
from abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable
year. At least 183 days; temporary employment.
4. A citizen who has been previously considered as non resident
citizen and who reside permanently in the Philippines shall
likewise be treated as a non-resident for the taxable year in
which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the
Philippines. Hybrid.
5. Receives compensation for services rendered abroad as a
seaman. He is a member of the complement of a vessel. The
vessel is engaged exclusively in international trade.
Resident Alien
A Resident Alien is one who has a residence in the
Philippines although he is not a Filipino citizen. He has no
definite period of stay in the Philippines. He is not a mere
transient or sojourner. His definite purpose for staying requires
an extended stay and to that end, he makes his home temporarily
in the Philippines.
Non-Resident Alien
The test to classify NRA is the length of stay in the
Philippines, whether he stays for more than 180 days or less.
NRA-ETB More than 180 days; 0-35% tax on Net
Income.
NRA-NETB 180 days or less; 25% final tax on gross
income.
Special Employees
Special Employees are alien individuals or Filipino
citizens who are subject to 15% tax based on their gross
compensation income when:
1. They are employed occupying managerial and/or technical
positions with regional or area headquarters of:
a. multinational corporations
b. petroleum service contractors and subcontractors, or
c.offshore banking units.
2. If the special taxpayer is an alien, all of his gross
compensation income received is subject to 15% final tax.
3. If the taxpayer is a Filipino citizen, he has the option to be
taxed at 15% final tax based on his gross compensation income
received or at a regular income tax rate (0%-35%) based on the
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net taxable compensation income if his gross annual taxable
compensation is at least Php 975,000 (whether or not actually
received)
Estates and Trusts
An Estate is composed of all properties, rights and
obligations including those properties, earnings or obligations
that have accrued thereto since the opening of the succession.
The estate is to be transferred from the decedent to his
successors. Its status is the same as that of the decedent prior to
death.
(Note) It will only be taxable when it is under
administration or settlement.
Estates and Trusts
A Trust is an obligation imposed or a right to
administer over a property given to a person for the benefit of
another.
1. When there is income is accumulated or held for future
distribution by the trustee;
2. Where it us up to the fiduciary whether there will be
distribution or not;
3.Where the income is collected by a guardian of an infant
which is to be held or distributed as the court may direct.
Corporations
The term ‘Corporation’ shall include:
a. Partnerships, no matter how created or organized;
b. Joint-stock companies;
c. Joint accounts (cuentas en participacion);
d. Association, or
e. Insurance companies.
but it does not include:
a. General Professional Partnerships and
b. a Joint Venture or Consortium
Corporations
Domestic Corporations are those created or organized
in the Philippines or under its law. Otherwise, foreign
corporation.
Resident Foreign Corporation applies to a foreign
corporation engaged in trade or business within the Philippines.
Non Resident Foreign Corporation applies to a
foreign corporation not engaged in trade or business within the
Philippines.
Income Tax
is a direct tax on all yearly profits arising from
property, professions, trades or offices or a tax on a person’s
income, emoluments, profits, and the like. It is:
 National;
 Direct;
 Excise; and
 General.
Income Tax Systems
FRANCISCO, CHARMAINE A. (LM-3A)
1. Schedular - The items are classified based on kind or
category of income and this is subject to different tax rates Criteria in Imposing Philippine Income Tax
based on the income classifications. 1. Citizenship or Nationality Principle - a citizen of the
Philippines is subject to Philippine Income Tax
2. Global - Lump all items of income and a a. On his worldwide income, if he resides in the
single/proportional/uniform income tax rate is imposed. Philippines, or
b. Only his Philippine-source income, if he qualifies as a non-
resident citizen; hence, his foreign-source income shall be
3. Mixed (Applicable in the Philippines) - It is schedular in the exempt.
sense that we lump different items of income per type or
category and it is global in the sense that we subject all the items 2. Residence or Domicile Principle - an alien is subject to
in this lump to one tax rate. income tax because of his residence in the Philippines. Thus, a
resident alien is liable to pay Philippine income tax only on his
Features of the Philippine Income Tax Law income from sources within the Philippines but is exempt from
tax on his income from sources outside the Philippines.
FEATURE INDIVIDUAL CORPORATE
Tax Schedular Global 3. Source of Income Principle - an alien is subject to Philippine
Treatment a. It classifies a. Generally income tax because he derives income from sources within the
income; provides for Philippines.
b. Provides for uniform rules; b.
different tax rules; Generally imposes Types of Philippine Income Tax
c. Imposes uniform tax rates;  Personal Income Tax on Individuals
different tax rates c. Does not  Regular Corporate Income Tax
generally classify  Minimum Corporate Income Tax
income.  Capital Gains Tax
 Tax on Passive Investment Income
 Fringe Benefits Tax
 Branch Profit Remittance Tax
FEATURE INDIVIDUAL CORPORATE  Improperly Accumulated Earnings Tax
Net Income a. RC; a. DC  Final Withholding Tax
Taxation b. NRC; b. RFC
c. RA; INCOME TAXATION
4. NRA ETB. INCOME TAX
- a tax on all yearly profits arising from property, profession,
trade or business, or as a tax on person’s income, emoluments,
FEATURE INDIVIDUAL CORPORATE profits and the like.
Gross Income - It is generally regarded as an excise tax. It is not levied upon
Taxation NRA NETB NRFC persons,property,funds or profits but upon the right of a person
to receive income or profits.

FEATURE INDIVIDUAL CORPORATE PURPOSES OF INCOME TAXATION

Situs a. Residence RA a. Residence RFC 1. To provide large amounts of revenues.
RC b. Place NRFC 2. To offset regressive sales and consumption taxes.
b. Place NRA NRC c. Nationality DC 3. Together with estate tax, to mitigate the evils arising from the
c. Citizenship RC inequalities in the distribution of income and wealth, which are
considered deterrents to social progress, by imposing a
Common Features progressive scheme of taxation.
1.Pay as you file system
a. Individuals - Upon filing of ITRs; WHAT ARE THE ELEMENTS OF THE IMPOSITION OF
b. Corporations - Upon filing of quarterly corporate ITRs and INCOME TAX?
final adjustment corporate returns; 1. There must be gain or profit;
2. That the gain or profit is realized or received,
2. Creditable Withholding Tax System actually or constructively.
a. Withholding agent - withholds tax and remits to the BIR; 3. It is not exempted by law or treaty from income tax. [CIR v.
b. Tax Withheld - Creditable against income tax due. CA 301 SCRA 152]

3. Final Withholding Tax System WHAT IS INCOME?

a. Withholding agent - withholds tax and remits to the BIR; - Income in tax laws is “an amount of money coming to a
b. Tax Withheld - Final settlement of the tax liability on the person within a specified time whether as payment for services,
income covered. interest or profit form investment.” It means cash or its
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FRANCISCO, CHARMAINE A. (LM-3A)
equivalent. It is gain derived and severed from capital, from
labor or from both combined.
- Stock dividends issued by the corporation are considered
unrealized gain and cannot be subjected to income tax until that
gain has been realized. Before the realization, stock dividends
are nothing but a representation of an interest in the corporate
properties. As capital, it is not yet subject to income tax.
Capital is wealth or fund whereas income is profit or
gain or the flow of wealth. The determining factor for the
imposition of income tax is whether any gain or profit was
derived from a transaction, [Commissioner of Internal
Revenue v. CA 301 SCRA 152]
- Income in its broad sense, means all wealth which flows into
the taxpayer other than as a mere return of capital. [ Sec. 36, RR
2].
- CIR vs. BOAC, 143 SCRA 395
- JUDICIAL DEFINITION: gains derived from:
1. Capital
2. Labor
3. both labor and capital
Including gains derived from the sale or exchange of
capital assets.
Income and Capital
Capital is a fund or property existing at one distinct point of
time while income denotes a flow of wealth during a definite
period of time.The essential difference between capital and
income is that capital is a fund or property existing at one
distinct point of time; income is a flow of services rendered by
that capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such fund
through a period of time. Capital is wealth, income is the service
of wealth, [Madrigal v. Rafferty, 38 Phil 414]. Capital is the
tree, and income the fruits.
SOURCES OF INCOME
What produces income?
The term “source of income” is not necessarily a place but may
also be the property, activity or service that produced the
income. In the case of income derived from labor, it is the
place where the labor is performed; in the case of income
from the use of capital, it is the place where the capital is
employed; and in the case of profits from the sale or exchange
of capital assets, it is the place where the sale or transaction
occurs.
- CIR vs. BOAC, 143 SCRA 395
1. Sources within the Philippines;
2. Sources without (outside of) the Philippines;
3. Sources partly within and partly without the Philippines.
Taxable Income
The term “taxable income” means the pertinent items
of gross income specified in the NIRC, less deductions and/or
personal and additional exemptions, if any, authorized by such
types of income by the NIRC or other special laws.
Taxable income, however, does not include items
received which do not add to the taxpayer’s net worth or does
not redound to his benefit, such as amounts merely deposited
or entrusted to him.
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Requisites for income to be taxable
1. There must be gain or profit.- Gain must be realized or
received. This implies that not all economic gains constitute
taxable income. Thus, a mere increase in the value of property is
not income, but merely an unrealized increase in capital.
2. The gain must be realized or received. When is income
considered received or realized?
1. Actual receipt;
2. Constructive receipt.
Income constructively received
Income which is credited to the account of set apart for
a taxpayer which may be drawn upon by him at any time is
subject to tax for the year during which so credited or set apart,
although not then actually reduced to possession. To constitute
receipt in such a case, the income must be credited to the
taxpayer without any substantial limitation or restriction as to
the time or manner of payment of condition upon which payment
is to be made, [Sec. 52, RR 2].
Examples of constructive receipt
1. Interest coupons which have matured and are payable, but
have not been cashed.
2. Defaulted coupons are income for the year in which paid.
3. Partner’s distributive share in the profits of a general
partnership is regarded as received by the partner, although not
yet distributed.
3. The gain must not be excluded by law or treaty from
taxation.
When should income be recognized? Under the
Accrual basis method of accounting, income is reportable
when all the events have occurred that fix the taxpayer’s
right to receive the income, and the amount can be
determined with reasonable accuracy. Thus, it is the right to
receive income, and not the actual receipt that determines
when to include the amount in gross income.
Gleanable from this notion are the following requisites of
accrual method of accounting:
1. That the right to receive the amount must be valid,
unconditional and enforceable, i.e. not contingent upon future
time;
2. The amount must be reasonably susceptible of accurate
estimate; and
3. There must be a reasonable expectation that the amount will
be paid in due course.
TESTS TO DETERMINE REALIZATION OF INCOME
1. Severance test- As capital or investment is not subject to
tax, the gain or profit derived from the exchange or
transaction of said capital by the taxpayer for his separate
use, benefit and disposal is income subject to tax.
2. Substantial alteration of interest test- Income is earned
when there is a substantial alteration of the interest of a
taxpayer, i.e. increase in proportionate share of a
stockholder in a corporation.
FRANCISCO, CHARMAINE A. (LM-3A)
- Income to be subject to taxation, must be fully and
completely realized. Where there is no separation of gain or
profit, or separation of increase in value from capital, there
is no income subject to tax.
- Thus, stock dividends are not income subject to tax on the
part of the shareholder for he had the same proportionate
interest in the assets of the corporation as he had before, and the
stockholder was no richer and the corporation no poorer after
the declaration of the dividend.
- Moreover, if as a result of an exchange of stocks, the person
received something of value which are essentially and
fundamentally different from what he had before the exchange,
income is realized within the meaning of the revenue law.
However, the pre-existing proportionate interest of the
stockholder is substantially altered, the income is considered
derived to the extent of the benefit received.
3. Flow of wealth test- The essential difference between
capital and income is that capital is a fund whereas
income is the flow of wealth coming from such fund,
capital is the tree, income the fruit. Income is the flow of
wealth other than as a mere return of capital. Hence, any
proceeds from the use of capital, beyond the amount of the
capital is considered as income.
CONCEPT OF INCOME
NATURE AND CONCEPT
- Gross income means all income derived from whatever
source, including the following;
 Compensation for service paid in whatever form, including
fees, salaries, wages and commissions.
 Income derived from the conduct of trade or business or
the exercise of a profession.
 Gains derived from dealings in property
 Interest
 Rents
 Royalties
 Dividends
 Annuities
 Prizes and winnings
 Pensions
 Partner’s distributive share from the net income of the
general professional partnership.
Simply stated, income refers to the amount of money
or its equivalent representing gains or profit that flows into the
taxpayer from whatever sources other than those representing
return of capital.
GENERAL CLASSIFICATIONS OF INCOME
For tax purposes, income may be broadly classified as:
 Taxable income
 Non-taxable income
Taxable income refers to the earnings of a taxpayer
subject to the basic or normal tax with rates ranging from 5% to
32% or to final tax.
Non-taxable income refers to earnings of the
taxpayers that are excluded from gross income as provided in
the National Internal Revenue Code and other tax laws.
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Non-taxable income should never be included in the
computation of the gross taxable income.
TAXABLE INCOME
Taxable income refers to the income earned by the
taxpayer subject to tax.
Requisites for income to be taxable
 There must be profit or gain.
 The profit or gain must be realized.
 The gain or profit must not be excluded by law from
income taxation.
There must be profit or gain. The taxpayer must
benefit from the inflow of earnings either in the form of cash or
its equivalent.
For instance, the sale of merchandise with 10% markup
on cost represents income as far as the markup is concerned.
The return or inflow on cost, however, does not represent
income.
The profit or gain must be realized. There should be
a realization of benefits by the taxpayer either actual or
constructive. Realization implies receipt of benefits.
Constructive Realization of income occurs when the
income accruing to the taxpayer has been segregated already in
his favor and the taxpayer can use or withdraw it anytime.
For instance, the sale of merchandise to a customer on
account represents recognition of income already although there
is no actual collection on the sale made. Or, the interest earned
by a depositor on his savings deposit account represents income
constructively realized. Or, the interest earned by a depositor on
his savings deposit account represents income constructively
realized.
The gain or profit must not be excluded by law from
income taxation. Philippine income taxation allows exclusion
of some income as taxable.
For instance, retirement benefits received by an
individual from the Government Service Insurance System
(GSIS) are explicitly exempted by law from taxation. Section 35
(B) of the Tax Code , as amended, provides the list of income
excluded from taxation; hence, will not form part of the gross
income of the taxpayer.
Classification of Taxable Income
The Tax Code does not expressly classify taxable
income. However, in order to facilitate discussion, the following
broad classifications may be made:
 Compensation income.
 Business income and income from exercise of profession
 Gains from dealings in property
 Passive income
 Other taxable income
FRANCISCO, CHARMAINE A. (LM-3A)
Compensation income
Compensation income means all remuneration for
services performed by an employee for his employer under the
employee- employer relationship, unless expressly excluded by
the Tax Code.
Otherwise stated, income earned when there is an
employee- employer relationship is classified as compensation
income.
Employee refers to an individual performing service
under an employer- employee relationship. The term covers all
employees, including those in the government service.
Employer means any person for whom an individual
performs or performed service of whatever nature under an
employer- employee relationship. It is not necessary that the
services be continuing at the time the wages are paid in order
that the status of employer may exist. Thus, for purposes of
withholding tax, a person for whom an individual has performed
past services and from whom he is still receiving compensation
is an employer.
In general, the relationship of the employer and
employee exists when the person for whom services were
performed has the right to control and the individual who
performs the services, not only as to the result to be
accomplished by the work but also as to the details and means
by which the result is accomplished.
An employee is subject to the will and control of the
employer not only as to what shall be done, but also as how it
shall be done. In this connection, it is not necessary that the
employer actually directs or controls the manner in which the
services are performed. It is sufficient that he has the right to do
so.
The right to dismiss an employee is also an important
factor indicating that the person possessing that right is an
employer. Other factors or characteristics of an employer, which
may not be necessarily present in every case, included
furnishing the tools and workplace to the individual who
performs the services.
The name by which 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
tax under Section 33 of the Tax Code, as amended; taxable
pensions and retirement pay; and other incomes of a similar
nature constitute compensation income.
INCOME
Taxable
 Compensation
 Business Income
 Gains from property
 Passive Income
 Other Taxable Income
 Life Insurance Proceeds
 Return of Premiums
 Gifts, Bequests, Devises
 Compensation for Injuries
 Retirement Benefits
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 Other Non-taxable
Non-Taxable
 Compensation
 Business Income
 Gains from property
 Passive Income
 Other Taxable Income
The basis upon which the remuneration is paid is
immaterial in determining whether the remuneration constitutes
compensation. Thus, it may be paid on piecework basis, or a
percentage of profits; and may be paid hourly, daily, weekly,
monthly, annually.
Remuneration for services constitutes compensation
even if the employer- employee relationship no longer exists at
the time of employment.
Composition of Gross Compensation Income
The following are included as part of gross
compensation income:
 Salary, wage or fee
 Commission
 Honoraria
 Allowances
 Thirteenth month pay and other benefits
 Holiday pay, overtime pay, night shift differential and
hazard/emergency pay
 Separation pay
 Retirement pay
 Sick leave and vacation leave pay
 Fringe benefits
Salary, wage or fee
Salary generally is an earning paid on regular
intervals; wage is paid on an hourly or daily basis; and fee
implies payment to an individual who is of authority, such as
director’s fee, legal fee, accountant’s fee or fee for conduct of
religious ceremony (marriage, baptismal, mass).
Fees paid to directors who are employees of the
company shall be considered as compensation income subject to
withholding tax on wages.
If the director is not an employee of the company, the
fee shall not be considered as compensation income because of
the absence of employer- employee relationship. Rather, the
fee shall fall under the classification of gross income derived
from the conduct of trade or business or exercise of
profession. Such fee shall be subject to creditable withholding
tax of either 5% or 10%.
Tax-Exempt Compensation
Revenue regulation 10-2008 exempts the following
compensation income from tax in addition to compensations
exempted by the Tax Code, as amended and other rules and
regulations:
 Compensation income of minimum wage earners in the
private sector and being paid the statutory minimum wage;
and
FRANCISCO, CHARMAINE A. (LM-3A)
 Compensation income of employees in the public sector
with salary of not more than the statutory minimum wage
in the non-agricultural private sector.
In addition, the following types of compensation
income, all-inclusive, earned by minimum wage earners are also
exempted from income tax:
 Holiday pay
 Night shift differential pay
 Overtime pay
 Hazard pay
However, minimum wage earners receiving other
income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in
addition to compensation income shall be subject to tax on
their entire income.
Also, a minimum wage earners shall be subject to
income taxation if he receives additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of
the allowable statutory amount of P30,000, taxable
allowances and other taxable incomes other the statutory
minimum wages.
Commission
Payments made based on a certain percentage of
output, like salesman’s commission or underwriter’s
commission.
Commission is taxable even if the employee receiving
the compensation is classified as a minimum wage earner.
Honoraria
Honoraria are earnings derived from services usually
undertaken by individuals considered experts in a particular
field. An example is honoraria given to special lecturers.
This type of compensation income is taxable whether
the taxpayer is classified as a minimum wages earner receiving
statutory minimum wage or not.
Allowances
An allowance may either be fixed or variable. It is
considered fixed when it is attached to the position or office and
variable when it changes accordingly as influenced by certain
factors like number of visits, distance of travel, frequencies of
seminars.
In general, fixed or variable transportation,
representation and other allowances received by a public
officer or employee of a private entity, in addition to the
regular compensation subject to withholding tax.
Any amount paid specially, either as advance or
reimbursement for traveling, representation and other bona
fide ordinary and necessary expenses incurred or reasonably
expected to be incurred by the employee in the performance
of his duties is not compensation subject to withholding tax,
if the following conditions are satisfied:
 It is ordinary and necessary traveling and representation or
entertainment expense paid or incurred by the employee on
the pursuit of trade, business or profession.
 The employee is required to account for liquidate the
foregoing expenses in accordance with specific
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requirements of substation for each category of expenses
pursuant to Sec. 34 of the Tax Code. The excess of actual
expenses over advances made shall constitute taxable
income if such amount is not returned to the employer.
Reasonable amounts of reimbursements/advances for
traveling and entertainment expenses which are per-
computed on a daily basis and are paid to an employee
while he is on an assignment or duty need not be subject to
the requirement of substantiation and to withholding tax.
The most common types of allowance received by an
employee are:
a. Cost of living allowance (COLA). Cost of living
allowance of government officials and employees,
however, is not taxable. It does not form part of the basic
salary.
b. Representation and traveling allowance (RATA).
Representation and traveling allowance received
regularly by an employee shall form part of taxable
compensation income.
Representation and traveling allowance granted to
public officers and employees under the General Appropriation
Act which constitutes reimbursement for expenses incurred in
the performance of government personnel’s official duties is not
subject to income tax.
Representation and traveling allowance subject to
liquidation is non-taxable.
c. Personnel Economic Relief Allowance (PERA). This
type of allowance is non-taxable if received by government
officials and employees.
Thirteenth month pay and Other Benefits
Thirteenth month pay is equivalent to the mandatory
one month basic salary of officials and employees of the
government, national or local, including government-owned or
controlled corporations, and or private offices received after the
12th month pay.
The 13th month pay is computed by dividing the total
basic salary during the year by 12months.
Other benefits include Christmas bonus, productivity
incentive bonus, loyalty award, and gifts in cash or in kind
actually received by officials and employees of both government
and private offices.
The 13th month pay shall cover benefits paid or
accrued during the year, provided that the total amount shall
not exceed P90,000, which may be increased through the rules
and regulations issued by the Secretary of Finance, upon the
recommendation of the BIR Commissioner, after considering,
among others, the effect on the same of the inflation rate at the
end of the taxable year.
Otherwise stated, any amount in excess of P90,000 is
taxable. Thus, 13th month pay, cash gift and bonus not
exceeding P90,000 is not taxable nor subject to withholding
tax.
Holiday pay, overtime pay, night shift differential and
hazard/ emergency pay
Hazard pay shall mean the amount paid by the
employer to employees who were assigned to dangerous or
strife-torn areas, disease-infested places, or in distressed or
FRANCISCO, CHARMAINE A. (LM-3A)
isolated stations and camps, which expose them to great danger
of contagion or peril to life.
Holiday pay, overtime pay, night shift differential
pay and hazard pay are generally taxable.
However, holiday pay, overtime pay, night shift
differential pay and hazard pay earned by a minimum wage
earner paid on statutory minimum wage shall be exempted
from income tax.
Any hazard pay paid to minimum wage earners
that does not satisfy the criteria for a hazard pay is,
however, deemed subject to income tax.
Separation pay
Separation pay may be taxable or not taxable. It is
taxable if the separation is voluntary on the part of the
employee. Separation pay is not taxable on account of:
 Sickness of the employee
 Disability of the employee
 Death of the employee
 Reorganization of the company
 Bankruptcy of the company
The concept of “any cause beyond the control of the
employee” shall be the determining factor for separation pay to
be classified as non-taxable. It connotes involuntariness on the
part of the official or employee. The separation from the service
of the official or employee must not be asked for or initiated by
him. The separation was not of his own making.
Retirement pay
As a general rule, retirement pay is taxable.
The exceptions are the following:
a. Retirement pay from SSS or GSIS
b. Retirement pay from employer, provided the following
requirements are met:
1. The retirement plan of the company has been
approved by the BIR Commissioner;
2. The retiree should have been connected with the
company for at least 10 years;
3. The retiree should be at least 50 years old;
4. The retiree availed of the company’s retirement plan
for the first time; and
5. The retirement plan is fair and equitable to all
employees regardless of position.
Sick leave pay and vacation leave pay
The salary of an employee on vacation or sick leave,
which is paid to him notwithstanding his absence from work,
constitutes taxable compensation income.
However, the cash value of unused vacation leave
credits of 10 days or less, which was paid to the employee
during the year, is not subject to tax.
Fringe benefits
Fringe benefits means any goods, services or other
benefit granted in cash or in kind by an employer to an
employee in addition to his salary.
Fringe benefits may be subject to final or basic tax.
The guidelines are:
 If the recipient of the fringe benefit is a rank-and-file
employee, the amount is subject to basic tax; hence, it
becomes part of gross compensation income.
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 If the recipient is occupying a supervisory or managerial
position, the fringe benefits is subject to final tax.
The following are some forms of fringe benefits:
 Living quarters or meals
 Payment of income taxes
 Payment of insurance premium
 Share in company’s profit
 Bonus and award for exemplary performance
Living quarters or meals
If an employee receives a salary as remuneration for
services rendered, and in addition there to he is provided with
living quarters or meals, the value of such living quarters or
meals is considered part of the compensation income subject to
withholding tax. However, if living quarters or meals are
provide to an employee for the convenience of the employer, the
value thereof need not be included as part of the compensation
income.
As a general rule, living quarters and meals provided
to rank-and-file employees are taxable based on the rental value
of the living quarters and the value of the meals.
The following guidelines may be observed:
 The value of living quarters and meals for the exclusive
benefit of the employer is not taxable, provided such are
provided within the business premises of the employer.
 Living quarters and meal allowances provided to officials
of the Armed Forces of the Philippines are not taxable.
 In the event the employer is not benefited, the rental value
of the living quarters provided to the employee is an
additional compensation income of the employee, hence,
taxable.
 The living quarters and meals provided are expected to
yield better work performance.
Payment of income taxes
Income tax liabilities of an employee paid by the
employer are taxable. They are added to the compensation
income of the employee based on the amount paid.
However, if the employee whose income tax liabilities
are paid by the employer is holding a supervisory or
managerial position, the amount of taxes paid is subject to
fringe benefit tax.
Payment of insurance premium
The premium paid by an employer to cover the life
insurance of an employee may be taxable or not.
The basic guidelines to follow are:
 If the beneficiary of the life insurance policy is the
company, the premium paid is not taxable.
 If the beneficiary is a family member of the employee
(wife, child, brother/sister, parent), the premium paid
constitutes part of the employee’s gross compensation
income; hence, taxable, provided that the employee is
occupying a rank-and-file position. Otherwise, the
premium paid is subject to fringe benefit tax.
 The amount of premium paid is the basis of tax.
FRANCISCO, CHARMAINE A. (LM-3A)
 If the beneficiary is the company itself, the P50,000 annual
premium is not included as part of the gross compensation
income; hence, not taxable.
 If the beneficiary, however, is a family member of the
employee, the P50,000 annual insurance premium will be
treated as follows:
 The employee is classified as rank-and-file. The
P50,000 is added as part of his compensation income;
hence, taxable
 The employee is holding supervisory or managerial
position.
 The P50,000 will not form part of his gross
compensation income but rather subject to fringe
benefit tax.
Share in company’s profit
The collective bargaining agreement between the
employer and the employees sometimes includes a provision
that the company’s employee share in the profit earned during
the taxable year. The share of the employees in the profit
constitutes compensation; hence, it is taxable.
The basis of tax is the value or amount of what has
been received.
Bonus and awards for exemplary performance
In case special services of an employee are paid, the
amount paid will form part of the compensation income;
hence, bonus and awards are taxable.
The tax base is the monetary value of what has been
received.
Plaques, medals or certificates received as
recognition of the special services performed are not taxable.
Valuation of gross compensation income
The value of compensation income is directly
dependent upon the form of compensation or payment received
by the employee.
Payment of compensation may take the form of:
 Cash
 Non-cash
Non-cash payment may be in the form of:
 Property
 Services
 Debt cancellation
 Issuance of share of stocks
 Issuance of notes
Cash as payment of compensation
There is no problem involved if compensation is paid
in cash, since the basis of tax shall be the face value of the cash
received.
Property as payment of compensation
In case compensation is paid in property, the basis of
tax is the fair market value of the property at the time of
payment.
8
Services as payment of compensation
There are instances when services rendered are also
paid by services. The basis of tax computation in this case is the
fair value of the services rendered.
Debt cancellation as payment of compensation
Cancellation of debt of the employee may be equated
to the payment of compensation for services rendered.
However, mere cancellation of debt may result to:
 Recognition if income
 Giving of gift or donation
 Capital transaction
Cancellation of debt resulting to recognition of income
If the creditor/employer cancels the debt of a
debtor/employee in consideration of the services rendered by the
latter; the debtor/employee realizes income amounting to the
debt cancelled.
Cancellation of debt resulting to donation
If the creditor/employer simply cancels the debt of a
debtor/employee without any consideration, the amount of debt
cancelled is considered a gift or donation.
A gift or donation given for the benefit if the
recipient is subject to donor’s tax.
Cancellation of debt resulting to capital transaction
When a stockholders is indebted to his own company,
the cancellation of his debt by the board of directors without any
consideration is equivalent to payment of dividends.
This type of transaction will give rise to recognition of
income on the part of the stockholder.
Issuance of shares of stock as payment of compensation
When the company pays the services of its employees
with its own shares of stock, the basis of tax is the fair value of
the shares of stock at the services are rendered.
Issuance of notes as payment of compensation
Compensation paid through the issuance of notes is
computed at the fair market value of the notes for income tax
purposes.
Determining the fair market value of the notes will
largely depend on whether the note is:
 Interest bearing or
 Non-interest bearing
Interest bearing note
The market value of an interest bearing note is equal to
its face value.
Since the note is interest bearing, the interest income
earned shall not be treated as part of gross compensation
income.
Non-interest bearing note
For a non-interest bearing note, the basis of tax shall
be its value at the time it is received. In other words, the value
of the note shall be discounted to its present value.
FRANCISCO, CHARMAINE A. (LM-3A)
The difference between the face value of the note
and its discounted or present value is treated as interest
income.
Again, interest income is not considered part of
compensation income.
Business/Professional Income
Business income represents gain or profit derived from
the investment of money, goods, services or its equivalent.
Professional income refers to the earnings of
individuals from the exercise of their profession. For example, a
physician who provides medical services in his clinic, a certified
public accountant who offers accounting and auditing services,
and a lawyer who provides legal services are all professionals
with income from the exercise of their profession.
Gross income derived from business shall be
equivalent to gross sale less sales return, discounts and
allowances and cost of goods sold.
In the case of taxpayers engaged in the sale of services,
gross income means gross receipts less sales returns, allowances
and discounts.
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 trading or merchandising concern, cost of goods
sold shall include the voice cost of the goods sold, plus import
duties, freight in transporting goods to the place where they are
actually sold, including insurance while the goods are in transit
For manufacturing concern, cost of goods
manufactured and sold shall include all costs of production of
finished goods, such as raw materials to the factory or
warehouse.
Accounting Methods of Reporting Business Income
There is no prescribed method of reporting business
income. The taxpayer shall adopt an accounting method or
system of recording the business income that is best suited to his
purpose and will reflect the true results of operation.
The accounting methods of recognizing business
income are:
 Accrual basis
 Deferred payment method
 Cash basis
 Percentage of completion method
 Hybrid method
 Completed contract method
 Crop-year method
 Spread-out method
 Installment method
 Outright method
Accrual method
The income, profits and gains are included in the gross
taxable income when earned, whether received or not, and
expenses are included in the allowable deductions when
incurred whether paid or not.
The following income, however, should not be reported
under accrual basis even if it pertains to a future period:
9
 Deposit on rent without restriction. Unrestricted
deposit on rent shall be reported as income in the year
received.
 Income, gains or profits on installment basis. The
amount of income reported shall be based on a certain
percentage of the collection.
 Income collected on completed contract method. The
amount of income collected every year shall be
recognized upon the completion of the contract.
Cash basis
The income, profits and gains are reported as gross
income when received and expenses are deductible when paid.
The following individuals usually report their income
under the cash basis:
 Taxpayers who do not keep books of accounts and
other accounting records.
 Taxpayers who employ the cash receipts and
disbursement method
 Taxpayers with inadequate accounting records.
Hybrid method
The hybrid method is the combination of the accrual
and cash bases of reporting income and expenses. This is a
practice of reporting income on cash basis and recording
expenses on accrual basis, or the other way around.
Crop year basis
Farmers adopt the crop year basis of computing gross
income when the gestation period of the crop is more than one
year. Gestation period refers to the span of time from planting to
harvesting.
All operation and production expenses incurred are
deducted when an income is realized.
Installment method
The amount of income to be reported under the
installment method is a portion of the collection received during
the year.
The following may report their income under the
installment method:
 A taxpayer who regularly sells a personal property on
installment;
 A taxpayer who makes a casual sale of personal
property, other than inventory, on installment basis;
provided the selling price exceed P1,000 and the
initial payments do not exceed 25% of the selling
price.
 A taxpayer, who sells or dispose real property on
installment basis, provided the initial payments do not
exceed 25% of the selling price.
The taxpayer, however, has the option to report the
whole amount of gains or profits in the year of sale instead of
reporting on installment basis.
The formula below to compute the income using the
installment method may be used subject to the following
conditions:
 The property sold is without mortgage; or
FRANCISCO, CHARMAINE A. (LM-3A)
 With mortgage to be assumed by the buyer, but the Computing of Gross Business Income
mortgage does not exceed the cost to the seller. The basic rule is that the taxpayer shall adopt a method
However, if there is a mortgage assumed by the buyer of computing income that best suits his purpose, provided the
and the mortgage exceeds the cost to the seller, the following method employed reflects the true results of operation.
formulas may be used to compute for the income under the One factor that determines the mode of computing the
installment method. gross income of the business or profession is the nature of the
Gross profit is the excess of the selling price over cost business.
or adjusted value. Business entities are classified according to their nature
Initial payment represents the payment received in as follows:
cash or property other than the evidences on indebtedness of the  Merchandising
purchaser during the taxable period in which the sale or other  Farming
disposition is made.  Manufacturing
 Construction
Initial payment will include:  Service
 Down payment during the year of sale
 Additional payment made during the taxable year Merchandising.
 Excess of mortgage assumed by the buyer over the Business entity engaged in buying and selling goods or
cost to the seller products without changing the form or appearance of the
product.
Contract price may refer to the following: Example, Shoe Mart.
 The gross selling price Manufacturing.
 The gross selling price minus mortgage assumed by Business concerns engaged in buying and selling goods
the buyer; or by changing the form of the product through a certain process.
 The gross selling price minus mortgage assumed by Example, Coca Cola Bottling Company.
the buyer plus, as the case may be, the excess of the
mortgage assumed over the original cost of the Service.
property. Business establishment engaged in providing services
The property sold may be: to the customers.
 Without mortgage to be assumed by the buyer Example is the Philippine National Bank.
 With mortgage to be assumed, but the mortgage does
not exceed the cost to the seller; or Farming or agriculture.
 With mortgage to be assumed, but the mortgage Business entities engaged in agriculture, farm
exceeds the cost to the seller operation, or production of farm animals.
Example Dole Philippines.
Deferred Payment Method
The deferred payment method of recognizing income is Construction.
a variation of the installment method, since properties are sold Business concerns engaged in making roads, bridges,
also on installment basis, but the initial payment exceeds 25% buildings and other permanent structures.
of the selling price. If the initial payment, therefore, is not more Example, PhilRock Construction Company.
than 25% of the selling price, then the installment method shall
be used.
Usually, the amount of income recognize in the Farming or Agriculture.
deferred payment method is the difference between the selling A business entity engaged in farming may determine
price over the cost of the property. the gross income using the following methods:
 Cash basis
Percentage of Completion and Completed Contract Method  Accrual basis
These are two methods used in long-term construction  Crop Year basis
contract.
 The percentage of completion method reports income 1. Cash basis.
based on the progress of work. The cash basis of computing gross income shall be
 The completed contract method, on the other hand, used if the business entity does not maintain inventory or does
reports income only upon the completion of the not take into account the value of the inventory.
project.
2. Accrual basis.
Spread-out and Outright Methods Under the accrual basis, the gross income is computed
The spread-out and outright methods are used to by considering the value of the inventory.
report income earned from leasehold improvements where the
lessee introduced such improvements to become the property of 3. Crop year basis.
the lessor at the end of the lease term. The crop year basis of computing gross income is
usually adopted when the time to produce the crop or its
10
FRANCISCO, CHARMAINE A. (LM-3A)
gestation period is more than one year. Gestation period refers deposit
to the span of time from planting to harvesting of agricultural Substitutes, trust
products. Rubber production has five to eight years generation funds
period.
and similar
Construction Business arrangement
The gross income of a business entity engaged in the in the Philippines
construction of permanent structures like buildings, roads or 3 Interest income Exempted Exempted
bridges is computed using: from long term
 Completed contract method deposits as
 Percentage of completion method evidenced by
certificates
1. Completed contract method.
prescribed by
This method will only recognize income once the
project is fully completed. Bangko Sentral
ng
2. Percentage of completion method. Pilipinas with 5% 5%
The percentage of completion, as the title suggests, will maturity of 5
recognize income based on the percentage of the work years. 12% 12%
completed.
If long term 20% 20%
Gains from Dealings in Property deposit is
Gains from dealings in property arise from the sale or
preterminated
exchange of property, real or personal. The basic guideline is
that any gain on disposal or sell of asset is taxable and any loss before the 5 year,
th

incurred is deductible. the final tax shall

be:
Passive Income
The income is termed passive when the taxpayer 4 years – less than
earned the profit or gains without effort or labor exerted. 5 years
Ordinarily, passive income is subject to final tax;
hence, it shall not be included as part of the gross taxable 3 years – less than
income subject to basic or normal tax. 4 years
The final tax on passive income shall be withheld by
the payor who acts as the withholding tax agent and remits
the same to the Bureau of Internal Revenue. Less than 3 years
4 Interest income 7.5%
Non-
Resident under the Exempted
Resident
Citizen Expanded Foreign NRC-
Alien
Non- Currency Deposit Exempted
engaged in
Types of Income Resident System (FCDS)
trade or
Citizen a.
business in
Resident
the
Alien Royalty
Philippines
Income
a.

Interest
b.
Income
1 In general 20% 20%
b. 2 On books, 10% 10%
literary works,
musical works in
1 Interest Income 20% 20%
the Philippines
in the Philippines
a.
2 Yields or any 20% 20%
monetary
benefits from Prizes and

11
FRANCISCO, CHARMAINE A. (LM-3A)
Winnings
Income from Leasehold Improvement
Leasehold improvements are additions, improvements,
b. major renovation or complete new structure added to the
existing property in order to improve the present condition,
1 In general 20% 20% appearance or working capacity.
2 Prizes less than Subject to Subject to Methods of computing income from leasehold
Php 10,000 basic tax basic tax improvements:
 Outright method
3 From Philippine Exempted Exempted
 Spread-out method
Charity
Sweepstakes 1. Outright Method
Office and Lotto The basis of tax using the outright method is the fair
market value of the date such improvement has been completed
All incomes classified as passive income earned by notwithstanding the effective date of the contract.
resident citizens outside the Philippines shall be included as part No income on leasehold improvement shall be
of the gross income subject to the schedular tax rate recognized, therefore, unless the improvement has been
completed notwithstanding the consummation of the lease
Other Taxable Income contract.
Income earned that cannot be classified as 2. Spread-out Method
compensation, business income, earnings from dealings of The amount of income that shall be recognized under
properties or passive income shall be classified under this the spread-out method shall be the allocated portion pertaining
category. to each period or term realized.
Other income includes the following: The allocated portion pertaining to each period is equal
 Interest income to the book value of the improvement at the end of the lease
 Prizes and winnings term divided by the term of the lease.
 Rent income
 Recovery of accounts written off What are the appropriate tax procedures if the
 Dividend income contract of lease is terminated before the expiration of the
 Tax refund lease term?
 Annuities The following procedures are suggested to be
observed:
Interest Income  If the leasehold improvement is destroyed by fire, typhoon,
Interest income on bank deposit in the Philippines is earthquake or other similar events, the lessor is entitled to
subject to final tax 20%. However, interest income on bank deduct as loss the income one leasehold improvement
deposit earned outside the Philippines shall be part of the previously recognized regardless if an outright or spread-
gross taxable income subject to basic tax. out method is used.
Interest income other than those subject to final tax is  In case the leasehold improvement that has been destroyed
included as part of the gross income subject to basic normal by fire, typhoon, earthquake or other similar events has
tax. This type of interest income may include interest on loan salvage value or covered by an insurance contract, the
receivable or interest on long overdue accounts receivable. salvage value and the recoverable amount from the
insurance shall be deducted from the previously reported
Rent Income income to arrive at the amount of deductible loss.
Rent income arises from leasing out property, real or  If the lease term has been terminated by the lessor for a
personal. valid cause, the lessor, if using the spread-out method,
shall recognize additional income equal to the excess value
The amount of taxable rent income shall be the sum of of the improvement after deducting income previously
the following: recognized.
 Current rent or lease payment However, the lessor is using outright method,
 Advance rent payment or security deposit without additional income shall not be recognized anymore, since the
restriction; whole fair market value of the property has been recognized as
 Payment of the lessee to third parties like interest, taxes, income already on the date of leasehold completion.
loans insurance premium in behalf of the lessor; The loss on the leasehold improvement is actually
 Uncollected rent income earned already (accruals) at the equal to its book value at the occurrence of the fire.
end of the period; and Under the outright method, the lessor owns the
 Income from leasehold improvements. leasehold improvement already upon its completion and
Advance rent or security deposit without restriction provides the annual depreciation accordingly.
shall be reported as income in the period actually received The leasehold improvement is depreciated over the
regardless if the taxpayer uses an accrual or cash basis of term of the lease or the life of the improvement whichever is
accounting. shorter.
12
FRANCISCO, CHARMAINE A. (LM-3A)
Dividend Income
This is an income earned by a taxpayer from the
distribution of earnings or profits of a corporation. The
dividends are payable in money or in property.
The dividends that are not subject to final tax or not
expressly exempted from taxation shall be included in the
gross income of individual or corporate taxpayers.
Basic Guidelines on Dividends
To facilitate easy understanding of dividends, the
following categories are suggested:
 Dividends received from a domestic corporation
 Dividends earned from a resident foreign corporation
 Dividends received from a non-resident foreign
corporation
Dividend Received From a Domestic Corporation
A domestic corporation subject to tax declares and
distributes dividends and the recipient of the dividends is:
 A domestic or resident corporation. The dividend is tax-
exempt.
 A resident foreign corporation. The dividend received is
exempted from tax.
 A non-resident foreign corporation. Generally, the
dividend is subject to a tax rate 30% effective January 1,
2009. However, under the rule reciprocity, it is subject to a
final tax of 15%.
 A resident citizen, non-resident citizen, resident alien. The
dividend is subject to 10% final tax.
 A non-resident alien engaged in business or trade in the
Philippines. The dividend earned is subject to final tax of
20%.
 A non-resident alien not engaged in business or trade in the
Philippines. The dividend is subject to 25% final tax.
The dividend income from a domestic corporation is
deemed 100% from within the Philippines.
Dividend Earned from a Resident Foreign Corporation
The following tax procedure may be followed:
 Dividend received from a resident foreign corporation is
subject to tax based on the scheduler tax
 In case the problem is silent, dividend income earned is
deemed 100% earned from within the Philippines.
 In case the gross income of a resident foreign corporation
derived from the Philippines for three-year period
preceding the declaration of dividend is less than 50% of
the total gross income (within and without), the dividend is
deemed earned from outside the Philippines.
 In case the gross income of a resident foreign corporation
earned from the Philippines for three-year period preceding
the declaration of dividend is 50% or more of the total
gross income (world- within and without), the dividend
income is deemed earned partly within and partly outside
the Philippines.
13
Dividend Earned From a Non-Resident Foreign
Corporation
The dividend earned from a non-resident foreign
corporation shall be included in the computation of gross
taxable income and subject to the scheduler tax rate.
Forms of Dividend
 Cash
 Liquidating
 Property
 Scrip
 Stock
1. Cash Dividend
This is taxable subject to final tax based on the cash
received. Cash dividend is subject to final of 10%. If received,
however, by a domestic or resident foreign corporation, the
dividend is tax exempt.
2. Property Dividend
Property dividend is subject to final tax at the same rate
as that of cash dividend based on the fair market value of the
property at the time of dividend declaration.
3. Stock Dividend
The basic rule is that stock dividend is not taxable. The
company simply capitalized it earnings by transferring part of its
retained earnings to capital stock.
The following procedures may be followed:
a. Pure stock dividend is tax-exempt. Stock dividend is said
to be pure when the dividend declaration and payment is in
the form of shares of stock.
b. Stock dividend representing distribution of earnings is
taxable. Distribution of earnings occurs if the following
elements are present:
1) The stock holders have the option to receive
cash or property dividend instead of stock
dividend and some stockholders exercised that
option.
2) The option when exercised resulted to change in
the old proportionate interest of stockholders in
the corporation.
4. Liquidating Dividend
Liquidating dividend represents return of capital to the
stockholders, and is not taxable. In case, however, the amount
returned exceeded the cost of investment, the excess is subject
to final tax.
When the company is already distributing all its assets
because it is undergoing dissolution, the difference between the
amount received and the cost of investment is tested as either
capital gain or capital loss.
5. Scrip Dividend
Scrip dividend is a form of dividend payment made
through the issuance of a promissory note. Scrip dividend is
subject to final tax based on the fair market value of the note.
FRANCISCO, CHARMAINE A. (LM-3A)
Annuities
Annuity refers to the installment amount paid for life
insurance coverage by the insurance company.
The annuity received that represents is taxable, and
shall be included in the gross taxable income, while the amount
that represents return of premium is not taxable.
Prizes and Winnings
The guidelines to be observed are:
1. Generally, prizes, awards and winnings that are not subject
to final tax shall be included in the gross taxable income.
2. If the amount of prizes or awards is P10,000 or less, it is
subject to basic or normal tax rate.
3. If the amount of winnings, prizes or awards is more than
P10, 000, it is subject to 20% final tax.
4. Winnings from Philippines Charity Sweepstake Office
(PCSO), such as winnings from lotto, are tax-exempt.
5. Prizes or awards to athletes in national and international
sports competition held in the Philippines or abroad and
governed by recognized sports associations are tax exempt.
6. Prizes and awards in recognition of religious, charitable,
educational, scientific, artistic or literary performance or
achievement are tax exempt, provided the recipient was
selected without action on his part and he is not required to
render substantial future service in view of the award.
Recovery of Bad Debts Written Off
The amount of bad debts previously written off but
later on recovered should be included in the gross taxable
income of the taxpayer in the year of recovery.
Of the bad debts recovered, how much should be
recognized as income in the period of collection or receipt?
Section 34(E) of the Tax Code indicates that the
amount of income to be recognized on bad debts recovery shall
be limited to the extent of the income tax benefit of bad debts
deduction.
In short, the amount to be recognized as taxable income
from recovery of bad debts written off is equal to the actual
amount recovered multiplied by the applicable tax rate at the
time of deduction of worthless debts.
Tax Refund
The basic rule is that tax paid and later on refunded
due to overpayment or erroneous computation, is taxable.
However, not all tax refunds are taxable. The
simple guiding principle will be as follows:
 If the tax paid is treated as deductible expenses, the tax
refund is considered income; hence, taxable.
 If the tax payment cannot be deducted or classified as
allowable deduction from gross income, the tax refund is
not taxable.
The following tax refunds are not taxable:
 Philippine income tax, except fringe benefit tax
 Estate or donor’s tax
 Stock transaction tax
 Income tax paid in a foreign country where the taxpayer
claimed it as a tax credit
 Income tax deficiency and special assessment
14
ALLOCATION OF UNIDENTIFIED GROSS INCOME
One of the major determinants in the correct
computation of income tax due is the proper classification of
income as to source, which may be from either within or
outside the Philippines.
Income that cannot be properly identified or classified
whether earned from within or outside the Philippines is
commonly called unidentified income. Unidentified income
posses no problem if the taxpayer is a resident citizen, since
such kind of taxpayer is taxable on income from within and
outside the Philippines.
However, for taxpayers that are taxable on income
from within the Philippines, such as resident aliens, non-
resident citizens, non-resident aliens engaged in business or
trade in the Philippines and resident foreign corporations,
unidentified income shall be allocated properly as to how
much is from within and from outside the Philippines. The
unidentified income, therefore, for the aforementioned
taxpayers is earned partly within and partly outside the
Philippines.
EXCLUSION FROM GROSS INCOME
Section 32(B) of the National Internal Revenue Code
lists the following items for exclusion from gross income:
 Life insurance
 Amount received by insured as return of premium
 Gifts, bequest and devises
 Compensation for injuries or sickness
 Income exempt under a treaty
 Retirement benefits, pensions, gratuities, etc
 Miscellaneous Items
LIFE INSURANCE
The proceeds of life insurance policies paid to the
heirs of beneficiaries upon the death of the insured, whether
in a single amount are held by the insurer under an
agreement to pay interest thereon, the interest payments
shall be included in the gross income.
Life insurance proceeds refer to the amount received
by the heir, beneficiary or the insured himself covering life
insurance policy on the prescribe date stated in the policy.
The following guidelines may be observed in handling
proceeds of life insurance:
1. As a general rule, proceeds of life insurance policies
received by the heirs or beneficiaries are not taxable.
2. If the proceeds of the life insurance policy are being held
by the insurer with the agreement that an interest is to be
paid thereon, the interest received shall be included in
gross taxable income.
3. If the insured received personally the proceeds of the life
insurance policy or outlived the policy, the proceeds are
partly taxable and partly not. The amounts corresponding
to the return of the premium are not taxable, while amounts
in excess of the premium are taxable.
4. The proceeds of a life insurance policy are subject to tax if
the beneficiary is the insured himself or his estate subject
to estate tax.
5. If the insured transfers the life insurance to another person
with considered and the proceeds upon the death of the
FRANCISCO, CHARMAINE A. (LM-3A)
insured are paid to the transferee, the proceeds are taxable
to the extent that they exceed the consideration made.
Amount received by insured as return of premium
The amount received by the insured, as return of
premium paid by him under life insurance, endowment, or
annuity contract, either during the term or at the maturity of the
term mentioned in the contract or upon surrender of the contract.
Premium on insurance policy refers to the amount
regularly paid (annual, semi-annual, quarterly or monthly) by
the insured or other than the insured to cover the life insurance,
annuity or endowment contract.
Usually, a life insurance policy carries cash surrender
value. The Cash surrender value refers to the amount that the
insurance company will pay in the event the insurance contract
is cancelled or surrendered before the date of maturity.
Generally, cash surrender value starts to accrue at the
end of the year.
As a general rule, the premium return on life
insurance policy is not taxable. However, if the amount
returned exceeded the total premium made, the excess is
taxable and shall be included as part of the gross taxable
income.
Gifts, Bequests and Devises
The value of property acquired by gift, bequests,
devise, or descent, provided, however, that income from any
property, in case of transfer of dividend interest, shall be
included in the gross income.
Gifts may include money or property with monetary
value given for free or without any consideration.
Bequest refers to property classified as personal
property transferred by one person to another by a will.
Devise refers to real property transferred under the
power of a will from one person to another.
As a general rule, gifts, bequests and devises are not
subject to income tax. Gifts are usually subject to donor’s tax,
while bequests and devices are subject to estate tax.
Gifts, bequests and devices received as payment for
services are taxable and should be included as part of gross
taxable income.
Compensation for injuries or sickness
Amounts received, through accident or health
insurance or under the Workmen’s Compensation Act, 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.
Generally, amounts representing compensation for
injuries and sickness including amounts of damages paid on
accounts of such injuries and sickness are not taxable.
Compensations for the following damages are not taxable:
 Moral damages for grief or anxiety
 Exemplary damages
 Actual and liquidated damages for injuriesDamage for loss
of earnings capacity and for loss of goods or belongings
The following compensations for injuries, however, are taxable:
 Damages for loss of earnings in property
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 Compensatory damages
 Payment of interest on non-taxable damages
Income Exempt under Treaty
Income earned by taxpayers, whether individual or
corporation, covered by any treaty binding upon the government
of the Philippines is tax exempt.
Retirement benefits, pensions, gratuities, etc.
The following retirement benefits shall not be included
in the gross income and shall be exempt from taxation:
 Retirement benefits received under Republic Act No. 7641
and those received by officials and employees of private
firms in accordance with a reasonable private benefit plan
maintained by the employer, provided that:
 The retiring official or employee has been in the
service of the same employer for at least 10 years;
 The retiring official or employee is not less than 50
years of age at the time of his retirement;
 The benefits granted shall be availed of by the retiring
official or employee only once.
Reasonable private benefit plan means 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, 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.
 Separation benefits received by an official or employee
from the employer due to sickness, death, or
physical/mental disability of the official or employee.
 Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of
Republic Act No. 8282.
 Benefits received from the GSIS under Republic Act No.
8291, including retirement gratuity received by
government officials and employees.
 Payment of benefits due or to become due to any person
residing in the Philippines under the laws of the Unites
States administered by the Unites States Veterans
Administration.
 Social security benefits, retirement gratuities, pensions and
other similar benefits received by resident or non-resident
citizens of the Philippines or aliens who come to reside
permanently in the Philippines from foreign government
agencies and other institutions, private or public.
Miscellaneous Items
Section 32 (B7) of the Tax Code lists the following
miscellaneous items to be excluded from gross income:
 Income derived by a foreign government
 Income derived by the government of the Philippines or its
political subdivisions
Prizes and awards
 Prizes and awards in sports competitions
 13th month pay and other benefits
 GSIS, SSS, Medicate and other contributions
 Gains from sale of bonds, debentures or other certificates
of indebtedness
FRANCISCO, CHARMAINE A. (LM-3A)
 Gains from redemption of shares in mutual funds

Income derived by a foreign government in the Philippines

Income derived from investment in the Philippines in
loans, socks, bonds or other domestic securities, or from interest
on deposits in banks in the Philippines by:
 Foreign governments
 Financing institutions owned by or enjoying financing
from foreign governments
 International or regional financial institutions established
by foreign governments

Income derived by the Philippine government or its political

subdivisions
Income derived from any public utility or from the
exercise of any essential governmental function accruing to the
government of the government of the Philippines or to any
political subdivisions thereof are tax exempt.

Prizes and awards

Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic, literary, or
civic achievements, but only if:
 The recipient was selected without any action of his part to
enter the contest or proceedings; and
 The recipient is not required to render substantial future
service as a condition to receiving the prize or award.

13th Month Pay and Other Benefit

Gross benefits received by officials and employees of
public and private entities, provided, that the total exclusion
shall not exceed ₱90,000, which shall cover:
 Benefits received by officials and employees of the
national and local governments pursuant to Republic Act
No. 6686.
 Benefits received by employees pursuant to Presidential
Decree No. 851, as amended by Memorandum Order No.
28, dated August 13, 1986;
 Other benefits, such as productivity incentives and
Christmas bonus.

GSIS, SSS, Medicare, and Other Contributions

Contribution for GSIS, SSS, and Medicare, including
union dues of individuals, are excluded from gross taxable
compensation income. In other words, the amount of salary
should be net of such contributions.

Gains from sale of bonds, debentures or other certificates of

indebtedness
Gains from sale of these kinds of investments are tax
exempt, provided the investments have a maturity period of five
years of more.
Additional items to be excluded from the gross income:
 Income subject to final tax
 De minimis benefits
 Fringe benefits to supervisory/managerial employee

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