Gross Income

Gross Income – is broadly defined as any inflow of wealth to the taxpayer from whatever source, legal or illegal, that
increases net worth. It includes income from employment, trade, business or exercise of profession, income from
properties, and other sources such as dealings in properties and other regular or casual transactions.
Elements of Gross Income
1. It is a return on capital that increases net worth.
- Return on Capital is income subject to income tax
- Return of Capital is not Taxable
Illustration
ABC Purchased goods for P300 and sold them for P500. The P500 consideration can be analyzed as follows:
Selling Price (total consideration received) P 500 Total Return
Cost (value of inventory forgone) 300 Return of Capital
Mark-up (gross income) P 200 Return on Capital
Capital Items deemed with infinite value
There are capital items that have infinite value and are incapable of pecuniary valuation. Anything received as
compensation for their loss is deemed a return of capital.
Examples:
1. Life (Life Insurance)
2. Health (Personal Injuries or Tortuous acts)
3. Human Reputation (Oral Defamation or slander)
2. It is a realized benefit.
The term realized means earned. It requires that there is a degree of undertaking or sacrifice from the taxpayer to be
entitled of the benefit.
Requisites of a realized benefit:
1. There must be an exchange transaction.
2. The transaction involves another entity.
3. It increases the net worth of the recipient.
3. It is not exempted by law, contract, or treaty.

Items of Gross Income Subject to Regular Tax

Gross Income includes, but is not limited to, the following items:
1. Compensation for services in whatever form paid
2. Gross Income from the conduct of trade, business, or exercise of a profession
-This includes income from any trade or business, legal or illegal, and whether registered or unregistered. Gross
Income from business or profession is determined as follows:
Sales/Revenues/Receipts/Fees P XXX,XXX
Less: Cost of Sales or Services XXX,XXX
Gross Income from Operations P XXX,XXX
3. Gains derived from dealings in properties
4. Interest
-This particularly refers to Interest Income Other than Passive Interest Income subject to final tax. A taxable Interest
Income must have been actually paid out of an agreement to pay interest.
Examples of interest income subject to regular income tax
1. Interest Income from lending activities to individuals and corporations by banks, finance companies, and other
lenders.
2. Interest Income from corporate bonds and promissory notes
3. Interest Income from bank deposits abroad
-Interest income or yield from local currency bank deposits, deposit substitutes, trust funds and similar arrangements
are subject to final tax as follows:

Local Currency Deposits

Recipient
On Interest Income Individuals Corporations
From Banks
-Short term deposits/certificates(Less than Five
Years) 20% Final Tax 20% Final Tax
 -Long term deposits/certificates(More than Five
Years) Exempt 20% Final Tax
From Non-Bank Institutions
-Short term deposits/certificates(Less than Five Regular Income Tax - Regular Income Tax -
Years) 20%/25% 20%/25%
-Long term deposits/certificates(More than Five Regular Income Tax - Regular Income Tax -
Years) 20%/25% 20%/25%
Note:
-The final tax on deposits applies only to those made with banks
-NRA-NETBs and NRFCs are subject to 25% general final tax on their interest income
5. Rents
6. Royalties
-Royalties earned from sources within the Philippines are generally subject to final income tax except when they are
active by nature, which means it will require continuing rendering of service. Active royalty income and royalties
earned from sources outside the Philippines are subject to regular income tax.
-Passive royalty income received from sources within the Philippines is subject to the following final tax rates:
Recipient
Sources of Passive Royalties Individuals Corporations
Books, literary works, and musical compositions 10% Final Tax 20% Final Tax
Other Sources 20% Final Tax 20% Final Tax
Note:
-the 10% preferential royalty final tax on books and literary works pertain to printed literatures. Royalties on books
sold on e-copies or CDs such as e-books are subject to the 20% final tax
-royalties on cinematographic films and similar works paid to NRA-ETBs, NRA-NETBs or NRFCs is subject to a
final tax of 25%
7. Dividends
-comprehensive summary of rules on dividends
Source of Dividends
Recipient taxpayer Domestic Corporation Foreign Corporation
Individuals
-Citizens and Residents 10% Final Tax Regular Tax
-NRA-ETB 20% Final Tax Regular Tax
-NRA-NETB 25% Final Tax 25% Final Tax
Corporations
-Domestic Corporation Exempt Regular Tax
-RFC Exempt Regular Tax
-NRFC 25% Final Tax 25% Final Tax

8. Annuities
-The excess of annuity payments received by the recipient over premium paid is taxable income in the year of receipt
9. Prizes and winnings
-summary rules of prizes and winnings: Individual Taxpayers

Earned from Sources

Prizes: Within Abroad
-P10,000 and Regular
below Regular Tax Tax
-more than 20% Final Regular
P10,000 Tax Tax

Earned from Sources

Winnings: Within Abroad
-PCSO winnings, exceeding P10,000 20% Final Tax N/A
 -PCSO winnings, not exceeding
P10,000 EXEMPT N/A
Regular
-Winnings from other sources 20% Final Tax Tax

-Summary rules of prizes and winnings: Corporate Taxpayers

Earned from Sources
Prizes/Winnings: Within Abroad
Regular
-Prizes regardless of amount Tax Regular Tax
20% Final
-PCSO winnings, exceeding P10,000 Tax N/A
-PCSO winnings, not exceeding
P10,000 EXEMPT N/A
Regular
-Winnings from other sources Tax Regular Tax

Exempt prizes
-Prizes received by a recipient without any effort on his part to join a contest Ex. Nobel Prize, Most Outstanding
Citizen, Most Benevolent Citizen of the Year, and Similar Awards.
-Prizes from sports competitions that are sanctioned by their respective national sport organizations
10. Pensions
-As a general rule, retirement benefits received by a retired employee are considered compensation income subject to
tax. This rule, however, is not without exceptions. Under Republic Act (RA) 4917, benefits granted to these employees
under a tax-qualified plan are exempt from tax if the retiring employees meet the following criteria:
-the retiring employee is at least 50 years of age and has served the employer for at least 10 years; and
-the employee has not previously availed of the privilege under a retirement benefit plan of the same or
another employer.
11. Partner’s distributive share from the net income of general professional partnership