Professional Documents
Culture Documents
is accomplished
- Means the pertinent items of income
referred to in Sec 32 of the tax code Remuneration for services constitutes
- It includes all income from whatever compensation even if the relationship of
source (unless exempt from tax by law) employer and employee does not exist any longer
including but not limited to, the following at the time when payment is made between the
items: person in whose employ the services had been
1. Compensation for services in whatever performed and the individual who performed
form paid including fees, salaries, and them.
wages, commissions, and similar items
2. Gross Income derived from the conduct of Compensation income subject to tax is based on gross
trade or business or the exercise of a income less applicable exemptions. No business and
profession personal expenses are allowed as deductions from
3. Gains from dealings in property gross compensation income
4. Interests
5. Rents The rule on compensation income applies only to
6. Royalties resident citizens, resident aliens and non-resident
7. Dividends citizens and non-resident aliens engaged in business in
8. Annuities the Philippines. It does not apply to non-resident aliens
9. Prizes and winnings not engaged in business. Neither does it apply to
10. Pensions corporations, estate and trusts because compensation
11. Partners’ distributive share from the net presupposes personal service.
income of general professional partnership
Classification of Gross Compensation
Gross Compensation Income – means any Income
remuneration for rendering personal services. It is
obtained from an employer-employee relationship 1. Basic Salary or Wage
Salary refers to earnings received
between payor and recipient
periodically for a regular work other than
The basis upon which the remuneration is paid is manual labor, such as a monthly salary
immaterial in determining whether the of an employee
remuneration constitutes compensation. Thus, it
Wages are earnings received usually
may be paid on the basis of piecework, or
according to specified intervals of work, as
percentage of profits and may be paid hourly,
by the hour, day or week. E.g.
daily, weekly, monthly or annually.
carpenter’s daily wage
There is no determination of compensation until
Backwages are subject to income tax and
the service is rendered
the withholding tax on wages
Exception: the compensation income including
2. Honoraria are payments given in
overtime pay, holiday pay, night shift differential
recognition for services performed for
pay, and hazard pay, earned by Minimum Wage
which established practice discourages
Earners (MWE) who has no other returnable
charging a fixed fee. The honorarium of a
income are non-taxable and not subject to
guest lecturer is an example.
withholding tax on wages
3. Fixed or variable allowances
In general, fixed or variable transportation,
When does an employer-employee representation, COLA and other
relationship exist? allowances that are received by a public
officer or employee or officer or employee
Generally, an employer-employee relationship of a private entity in addition to the
exists when the person for whom services are regular compensation fixed for his position
rendered has the right to control and direct the or office, are compensation subject to
individual who performs the services, not only as withholding tax
to the result in accomplishing the work but also
Any amount paid specifically, either as to employees while they are on
advances or reimbursements for assignment or duty, it is not subject to
travelling, representation and other bona substantiation requirement or to income
fide ordinary and necessary expenses and withholding tax
incurred or reasonably expected to be
incurred by the employee in the
4. Commission is usually a percentage of
performance of his duties are not
total sales or on certain quota of sales
compensation subject to withholding tax,
volume attained as part of incentive such
if the following conditions are satisfied:
as sales commission
a. It is for ordinary and necessary
5. Fees are received by an employee for the
travelling and representation or
services rendered to the employer
entertainment expenses paid or
including a director’s fee of the company,
incurred by the employee in the
fees paid to the public officials, such as
pursuit of the employee in the pursuit
clerks of court or sheriffs for service
of the employer’s trade business or
rendered in the performance of their
profession
b. The employee is required to official duty over and above their
account/liquidate for the foregoing regular salaries.
expenses pursuant to substantiation
Legal fees paid by a union on behalf of its
requirements of Sec. 34 of the tax
president constitute compensation
code Marriage fees, baptismal offerings, sums
paid for conducting masses for the dead
The excess of actual expenses over advance
and other contributions received by a
made shall constitute taxable income if such
clergyman, evangelist, or religious worker
amount is not returned to the employer
for services rendered are considered
Latest Rulings on Allowances: compensation
a. Transportation and cell phone allowances 6. Tips and gratuities – paid directly to an
given to call center employees are not employee (by a customer of the employer)
taxable compensation which are not accounted for by the
1. Fixed monthly transportation employee to the employer are considered
allowance of P1500 for rank-and-file taxable income, but not subject to
employees and P3000 for supervisory withholding tax
employees precomputed on a daily 7. Hazard or Emergency pay – an
basis additional payment received due to
2. Mobile phone allowance of P1200 for workers’ exposure to danger or harm while
supervisors, managers, and directors working. This is normally night differential
who are expected to be on call 24 pay to arrive at gross salary.
hours a day Hazard, overtime, night shift differential
b. Transportation and Night Shift Allowances and holiday pay of a minimum wage
granted to night shift employees and Meal earner is non-taxable as long as the MWE
and/or Out-of-Town Allowances granted to has no other reportable income
employees assigned to conduct field work
are not subject to FBT, income tax and 8. Retirement pay – it refers to a lump sum
withholding tax. payment received by an employee who
c. Taxi/transportation allowance of P100 per has served a company for a considerable
day given by BPO company servicing period of time and has decided to
global businesses 24 hours a day to withdraw from work into privacy.
employees who work overtime beyond
in general, retirement pay is taxable
10PM or whose work shift starts at 10 PM
except in the following instances:
onwards is exempt from tax
I. SSS or GSIS retirement pays
d. Where taxi/transportation allowance is
precomputed on a daily basis and is paid
II. Retirement pay due to old age if the official or the employee, at the time of
provided that the following separation, had rendered less than 10 years of
requisites are met: service and/or is below 50 years of age.
a. The retirement program is
approved by the BIR Any payment made by an employer to an
Commissioner employee on account of dismissal constitutes
b. It must be a reasonable benefit compensation regardless of whether the
plan. Its implementation must employer is legally bound by contract, statute or
be fair and equitable for the otherwise, to make such payment
benefit of all employees (from
president to labour) 10.Pension is a stated allowance paid
c. The retiree should have been regularly to a person on his retirement or
employed for 10 years in the to his dependents on his death, in
said company consideration of past services, meritorious
d. The retiree should have been work, age, loss or injury.
50 years old at the time of Pension pay is TAXABLE unless the law
retirement states otherwise, or unless the BIR
e. It should have been availed of approves the pension plan of a private
for the first time company.
16.Awards for Special Services – the The cancellation and forgiveness of indebtedness
amount received as an award for special may amount to a payment of income, gift, or
services of employee, or suggestions to capital transaction, depending upon the
employer resulting in the prevention of circumstances. The following rules shall then be
theft or robbery. Awards for past services observed:
and the like are also compensations
1. If a creditor merely desires to benefit a
17.Beneficial payments – such as where an debtor and without any consideration
employer pays the income tax owned by cancels the debt, the amount of the
an employee are additional compensation cancelled debt is a gift, not an income of
income debtor.
2. If a corporation to which a stockholder is
18.Other forms of Compensation – indebted forgives the debt, the transaction
received due to service rendered are has the effect of the payment of a
compensation paid in kind. It is to be dividend income to debtor
noted that compensation can be paid in 3. If however a debtor performs services for
kind but taxes are generally paid in a creditor, who, in consideration thereof
money. For example, an insurance cancels the debt, the debtor realizes
premium paid by employer for insurance income for his services to the extent of the
coverage where the heirs of employee are amount of debt cancelled
the beneficiaries is the employee’s
income Insurance Premiums as Compensation
Hence, if compensation is received in the form of For income tax paid by the employer in favour of
shares of stock, the fair market value of the the employee, the basis of tax is the amount of
shares of stock at the time the service is tax paid.
rendered is the basis of tax.
Convenience of the Employer’s Rule
Employee stock option
This tax rule provides that allowances in kind
A stock option is a privilege granted to some key furnished to the employee for and as a necessary
employees of a corporation to avail of the said incident to the performance of his duties are not
corporation’s share of stock in the future for a taxable. Examples are food and lodging benefit
certain price. by a household maid, driver, etc.
Living Quarters Gross Income from Business and Profession
The following rules govern the living quarters and Business – means any commercial activity
meals: engaged in as a means of livelihood or profit of
an individual or group of individuals. Examples
1. When living quarters are furnished in are trading, merchandising, manufacturing and
addition to cash salary, the rental value of other similar benefits
such quarters should be reported as
income Profession – primarily any endeavour or work
2. However, if living quarters or meals are requiring specialized training in the field of
furnished to an employee for the learning, art, or science engaged in as a means of
convenience of the employer, the value livelihood or profit of an individual or group of
thereof need not be included as part of individuals. In general, a practice or profession is
compensation income a service business.
Unless provided for the exclusive benefit of the Gross income from Business
employer, the rental value of living quarters is
compensation income to the employee to the 1. Manufacturing
extent of his reasonable needs, and the excess 2. Merchandising
3. Servicing
shall be considered as expenses of the
4. Farming
corporation. 5. Long-term contract
Meals Subsidized by Employer
The value of any board and lodging furnished by In case of manufacturing, merchandising or
an employer is ordinarily taxable to the employee mining business, Gross income shall mean gross
sales less sales returns, discounts and
The exclusion for meals is allowed only when
allowances, and cost of goods sold, plus any
meals are furnished or subsidized to an employee
income from investment and other incidental or
for the convenience of the employee and
outside operations or sources
incidental to the requirement of his work or
position In determining gross income, subtractions should
not be made for depreciation, depletion, selling
Remuneration for Casual Labor
expenses or losses or for items not ordinarily
1. Remuneration for casual labor not in the used in computing the cost of goods sold
course of an employer’s trade or business
In the case of taxpayers engaged in the sale of
is not considered compensation
service, gross income is based on gross receipts
The term casual labor includes labor less returns
which is occasional, incidental or regular.
The Cost of Sales
The expression not in the course of the
employer’s trade or business includes Cost of Goods Sold shall include all business
labor that does not promote or expenses directly incurred to produce the
advance the trade or business of the merchandise to bring them to their present
employer location and use. The cost of sale is deducted
2. Any remuneration paid for casual
from the net sales to calculate gross income from
labor( that is, labor which is occasional,
business. Cost of Sales of a business may be
accidental or irregular, but which is
classified as follows:
rendered in the course of the
employer’s trade or business) is 1. Cost of Goods Manufactured and Sold
considered compensation – it shall include all costs of finished goods
3. Any remuneration paid for casual labor that are sold such as raw materials used,
performed for a corporation is considered direct labor and manufacturing overhead,
as compensation freight cost, insurance premiums and
other costs incurred to bring the raw Rental income is generally determined by the
materials to the factory or warehouse gross receipts for the year, (earned and unearned
2. Cost of goods sold of trading or under accrual basis) because the nature of
merchandising concern – refers to the business involved is service.
invoice cost of goods sold, plus import
duties and freight incurred in transporting
the goods to the place where they are
1. Prepaid rental – if the advance payment
actually sold, including insurance while
is a prepaid rental received without
the goods are in transit
3. Cost of Service of Servicing Concern – restriction as to its use the entire
for minimum corporate income tax amount is taxable in the year it is
purposes, gross income from service received whether the lessor uses cash or
business is gross receipts less returns, accrual method of accounting
2. Security Deposit with Restriction – if
allowances, discounts and cost of services.
the advanced payment is a security
The Cost of Services shall include the
deposit which restricts the lessor as to its
direct costs and expenses necessarily
use, then such amount should be
incurred to provide the services required
excluded in the determination of rental
by the customers and clients which
include the following items: income
3. Security Deposit with an Acceleration
a. Salaries
b. Benefits of personnel, consultants Clause – if the advanced payment is a
and specialists directly rendering the loan deposit, or option money for the
service property or security deposit for the faithful
c. Cost of facilities directly utilized in compliance of the lessee of the lease
providing the service such as contract, such advance payment is not an
depreciation or rental of equipment income to the lessor. The income to the
used and cost of supplies lessor inures when the lessee violates the
d. In the case of banks, costs of services terms of the contract.
shall include interest expense.
Income from Leasehold Improvement – when
Telegraph and Cable Services of a foreign the lessee erected or built permanent
corporation – shall include income from services improvements on the leased property which will
within the Philippines only. Specifically, the become the property of the lessor upon the
income may be derived from the following: expiration of the lease, the value of the
improvements should be reported as income
1. Gross revenues derived from messages of the lessor using either outright method or
originating in the Philippines spread out method.
2. Amount received by the company
collected abroad on collect messages a. Outright method – the income from leasehold
originating in the Philippines and improvement shall be recognized when the
deducting from such amounts paid or improvement is completed at its fair market
accrued for transmission of messages value
beyond the company’s own circuit b. Spread-out method – the estimated book
value of the leasehold improvement at the end
Amounts received by the foreign company in the of the lease is spread over the term of the
Philippines with respect to collect messages lease and is reported as income for each
originating outside the Philippines. year of the lease an aliquot part thereof
Rental Income – refers to earnings derived from
leasing real estate as well as personal property. Termination of the Contract of Lease
Aside from the regular amount of payment for
using the property, rental income also includes all Where there is an immovable improvement made
other obligations assumed to be paid by the by the lessee on the lease property and the
lessee to the third party in behalf of the lessor termination of the contract of lease is made
before the expiration of the lease term, the
following rules should regulate the trust by a person in behalf of another
circumstances: person
The general rule is that the entire amount of the However, should the holder of the certificate
gain or loss arising there from is a taxable gain or pre-terminate the deposit or investment
deductible loss. before the fifth year, a tax shall be imposed
on the entire income and shall be deducted
Passive Income and withheld by the depository bank from the
proceeds of the long term deposit or
A final tax is imposed upon gross passive income
investment certificate based on the remaining
of citizen and resident aliens
maturity thereof, as follows:
An income is considered passive if the taxpayer
Final tax of 5% ------------------- 4 years to less
merely waits for it to be realized. Examples of
than 5 years
passive income are:
Final tax of 12% ------------------3 years to less
1. Yield from deposit substitutes and than 4 years
trust fund Final tax 20% ---------------------less than 3 years
a. In general, royalty income includes those For income tax purposes, the form of dividend
which are derived from natural income shall determine its applicable
resources or products such as coal, gas, treatment. Dividends that are usually received
oil, copper, silver, gold, and other similar by a stockholder are as follows:
products. These kinds of royalty income
1. Cash dividend – the most common form
are subject to 20% final tax
b. Royalties on books, literary works and of dividend. It is valued and taxable to the
musical composition are royalty income extent of amount of money received by
subject to 10% final tax the stockholder
2. Property dividend – a dividend payable
4. Dividend income – is a form of earnings in property of an issuing corporation is a
derived from the distribution made by a property dividend. The property dividend
corporation out of its earnings or profits is usually valued and taxable to the extent
and payable to its stockholders, whether of the fair market value of the property
in money or in other property received at the time of declaration
a. Merchandise inventory, supplies,
Such earnings may be exempt from income etc.
tax, or subject to either final tax or on the b. Shares of stock of another
normal year-end tax of individuals or corporation
corporations c. Treasury stock of issuing
corporation if acquired at cost
Tax Rules on Dividend Income different from its par value
3. Stock Dividend – pure stock dividends is taxable. Such excess is a gain realized
are not subject to tax because they simply which is taxable.
involve a transfer of the retained earnings
to the paid-in capital account, except Distribution of liquidating dividends is to
when the following circumstances exists: be treated as a sale of stock. The
a. There is an option that some difference between the cost or other basis
stockholders could take cash or of the stock and the amount received in
property dividends instead of stock liquidation of the stock is a capital gain or
dividends a capital loss. The gain realized or loss
b. Some stockholders exercised the sustained by the stockholder is a taxable
option to take cash or property income or deductible loss, as the case
dividends may be. Consequently, the capital gain on
c. The exercise of option resulted in a liquidating dividend is not subject to final
change of the stockholder’s tax.
proportionate share in the outstanding
shares of the corporation 5. Prizes and winnings
When a written off receivable has been recovered Under the contract of life annuity, the debtor
in the succeeding year, the recovered amount binds himself to pay an annual pension or income
must be included in the gross income during the during the life of one or more determinate
taxable year of recovery. However, under the persons in consideration of a capital consisting of
doctrine of equitable benefit, the amount money or other property, whose ownership is
recovered is only taxable to the extent of the tax transferred to him at once with the burden of the
benefit in the year the account was written of income
a. Gambling
b. Kidnapping
c. Extortion
d. Smuggling to repay. If the embezzler reaps the fruit of his
e. Embezzlement crime without restriction as to disposition, he is in
receipt of income though it may be claimed he is
Illegal Obtained Income
not entitled to the money and may be adjudged
liable to restore its equivalent. When reported as
As a rule, illegal income is taxable. Income
obtained through illegal means is included in the income, actual repayment of embezzled fund will
give rise to deduction.
wrongdoer’s gross income even though he is
obligated to return it when discovered
Income Received by Error
The mere fact that a transaction is illegal does When income is received under a mistake of fact
not exempt it from income tax laws. Gains from
or law, the income is included in the gross
such transactions as gambling, extortion, taxable income of the recipient notwithstanding
swindling and the like are all taxable
the fact that the recipient may be required to
return the income item to the payor when the
Income that is not realized is not taxable,
even though its absence is due to an illegal error is discovered.
act. Moral turpitude is not a touchstone of
taxability