Gross Income

Gross Income Defined

• Gross income as defined in the Tax Code means all income derived from whatever source
including but not limited to the following items:
1. Compensation for services, in whatever form paid, including but not limited to fees, salaries,
wages, commissions and similar item; including pensions and retiring allowances except those
exempt by law;
2. Gross income derived from the conduct of trade or business or form the exercise of a profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Partner’s distributive share from the net income of a general professional partnership.
Compensation for Services
• In general, the term compensation means all remuneration for
services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by the
Code. The term used to designate the remuneration is immaterial.
Thus, salaries wages, emoluments and honoraria, allowances,
commission (e.g. transportation, representation, entertainment and
the like); fees including director’s fee, if the director is, at the same
time, an employee of the employer/corporation; taxable bonuses and
fringe benefits except those which are subject to the fringe benefit
tax; taxable pensions and retirement pay; and other income of a
similar nature constitute compensation income.
Forms of Compensation
1. Cash;
• Property – the FMV of the thing taken in payment;
• Employer’s stock – the FMV of the share at the time of the services
were rendered;
• Stock options - FMV of the stock options at the time the service were
rendered by the employee;
2. Living Quarters and Meals
If living quarters and meals are for the convenience of the employer,
the value shall not be included on the compensation income of the
employee.
Forms of Compensation
3. Facilities and privileges of a relatively small value
• Also known as “de minimis” benefits
• Means of promoting the health, goodwill, contentment or efficiency
• Includes
• Life insurance premiums paid by the employer where the insured employee is
the beneficiary;
• Facilities or privileges provided by the employer; or
• Allowances
Forms of Compensation
• The following shall be considered de minimis benefits NOT subject to
income tax:
• a. Monetized unused vacation leave credits of private employees not
exceeding 10 days during the year;
• b. Monetized value of value of vacation and sick leave paid to government
officials and employees;
• c. Medical cash allowance to dependents of employees not exceeding 1,500
per semester or 250 per month;
Forms of Compensation
• d. Rice subsidy of 2,000 or one sack of 50kg rice per month amounting to not
more than 2,000;
• e. Uniform and clothing allowance not exceeding 6,000 per annum;
• f. Actual medical assistance e.g. medical allowance to cover medical and
healthcare needs, annual medical/executive check-up, maternity assistance
and routine consultations, not exceeding 10,000 per annum;
• g. Laundry allowance not exceeding 300 per month;
• h. Employees achievement awards, e.g. for length of service or safety
achievement, which must be in the form of a tangible personal property other
than cash or gift certificate with an annual monetary value not exceeding
10,000 received by employee under an established written plan which does
not discriminate in favor of highly paid employees;
Forms of Compensation
• i. Gifts given during Christmas and major anniversary celebrations not
exceeding 5,000 per employee per annum;
• j. Daily meal allowance for overtime work and night/graveyard shift not
exceeding 25% of the basic minimum wage on a per region basis; and
• k. Benefits received by an employee by virtue of a collective bargaining
agreement and productivity incentive schemes provided that the total annual
monetary value received from both CBA and productivity incentive schemes
combined do not exceed 10,000 per employee per taxable year.
Forms of Compensation
4. Tips and Gratuities
Tips or gratuities paid directly to an employee (by a customer of the
employer) which are not accounted for by the employee to the
employer are considered taxable income, but not subject to
withholding tax.
Forms of Compensation
5. Pension, retirement and separation pay
Separation pay is included in gross income of separated employee,
except if separation is caused by something not of the employee’s
making.
Any payment made by an employer to an employee on account of
dismissal that is, involuntary separation from their service of the
employer, constitute wages, regardless of whether the employer is
legally bound by contract, statute, or otherwise to make such payment.
Forms of Compensation
6. Fixed or variable transportation, representation and other
allowances
• Representation and transportation allowances (RATA) and Personnel
Economic Relief Allowance (PERA) on govt employees shall not be
subject to income tax.
• Advances or reimbursement of travelling, representation and other
bona fide expenses incurred in the performance of his/her duty are
not subject to withholding.
Forms of Compensation
7. Vacation and sick leave allowances
Amounts of “vacation allowances and sick leave credits” which are paid
to an employee constitute compensation. Thus, the salaries of an
employee on vacation or on sick leave, which are paid not withstanding
his absence from work, constitute compensation. However, the
monetized unused vacation leave credits of private employees not
exceeding ten (10) days during the year and monetized value of
vacation and sick leave credits paid to government officials and
employees are not subject to income tax and to the withholding tax.
Forms of Compensation
8. Deductions made by employer from compensation of employee
9. Remuneration for services as employee of a nonresident alien
individual or foreign entity
10. Compensation for services performed outside the Philippines
11. Others
• Forgiveness of debt for services rendered to a creditor;
• Income tax of the employee assumed or paid by the employer, in
consideration of the latter’s services;
• Fees received by an employee for the performance of a service for
the employer, including director’s fees
Gross Income from Business
• In general, “gross income” means total sales less COGS, plus any
income from investments and from any incidental or outside
operations or sources
Gross Sales xxx
Less: Cost of Goods Sold xxx
Gross Profit from Sales xxx
Add: Other Income xxx
Gross Income xxx
Income from Long-term contracts
Long-term contracts refers to construction, installation, or building
contracts requiring a period longer than one (1) year of completion.
Income therefrom is reported under the percentage of completion
basis.
Gains Derived from Dealings in Property
• a. Sale of tangible assets
• b. Sale of intangible assets (patents, copyrights, goodwill, etc)
• c. Sale of real property
• Gain from the sale of real properties classified as ordinary assets shall
be included in gross income in the ITR of the taxpayer.
Interests
• Gross income derived from interest is only such interest as arising from
indebtedness, that is, compensation for the loan or forbearance of money, goods,
or credits. Unless exempted by law, interest received by the taxpayer is taxable.
Interest includes those arising from indebtedness, whether business or non-
business, legal or illegal.
• Exclusions: 1. Interest income from bank deposit or deposit substitutes in the
Philippines subject Final tax (passive income);
• 2. Interest income which are exempt from tax:
• i. Interest income from long-term deposit or investment in the form of savings,
trust fund, deposit substitutes, investment management accounts prescribed by
BSP;
• ii. Interest income earned from passive investment of foreign governments,
financing institutions owned by foreign governments, and international financial
institutions established by foreign governments.
Rents
• Rent paid by the lessee for the use or lease of property is taxable income to
the lessor.
• Rent income may be in the following forms:
• a. Cash, at stipulated price;
• b. Obligation of the lessor to third persons paid or assumed by the lessee in
consideration of the contract of lease. An example is the real estate tax on
the property leased assumed by the lessee.
• c. Advance payment which must be pre-paid rentals and not a loan to
lessor or option money for the property or security deposit for the faithful
performance of the lessee’s obligations. However, a security deposit that is
applied to rentals is taxable income to the lessor.
Royalties
• Royalties derived from sources within the Philippines are subject to a
final tax of 20%, except royalties on books, other literary works, and
musical compositions which shall be subject to a final tax of 10%.
• Royalties received by resident citizens and domestic corporations
from sources without the Philippines shall be included in the ITR.
Dividends
• Dividends subject to FT: Cash or property dividends received by individuals
and resident alien (10%), NRFC (15%)from domestic corporations.
• Generally, cash and/or property dividends received by a resident citizen or
domestic corporation from a foreign corporation are included in the gross
income in the ITR
• Liquidating Dividends represent contribution of all property or assets of
corporation in complete liquidation or dissolution.
The difference between the cost or other basis of the stock and the amount
received in liquidation of stock is a capital gain or a capital loss. Where
property is distributed in liquidation, the amount received is the fair market
value of such property.
Annuities
• Annuities paid under an annuity contract in excess of the
consideration paid are includible in gross income.
Prizes and Winnings
Prizes and winnings included in the ITR
• a. Prizes amounting to ₱10,000 or less received by a citizen, resident alien, or
NRAETB
• b. Prizes received by domestic corporation
• c. Prizes received by RFCs within the Philippines
• d. Prizes and winnings received by resident citizens from sources without the
Philippines
• Subject to FT:
• a. Prizes over ₱10,000
• b. Winnings derived within the Philippines, except PCSO winnings of 10,000 or
less of Citizens and RA and PSCO winnings of NRAETB regardless of amount.
• c. Prizes received by a NRANETB and by a NRFC within the Philippines
Partner’s distributive share of Partners in the
Income of a GPP
Income from other sources
• i. Income from Illegal Sources
• All unlawful gains are taxable and includible in the ITR. However,
actual repayment of such illegal gains will give rise to a deduction.
• ii. Recovery of damages representing compensation for losses of
profits or income are included in gross income
• Recoveries that are to compensate for damages to property, injury to person,
or loss of life are not taxable.
• Not taxable: Damages to compensate for damage or injury to the person or
his property, Damages for lost capital, Moral damages, Exemplary damages,
Punitive damages
Income from other sources
• iii. Forgiveness of Indebtedness
• Included in the ITR: When a creditor cancels a debt as part of
business transaction, or in consideration of personal services of the
debtor, the condoned debt is taxable income to the debtor.
• Taxed as a dividend: But when the debtor is a stockholder of the
corporation which condoned the debt, the condonation is considered
an indirect payment of dividend.
• Subject to donor’s tax: If a creditor merely desires to benefit a debtor,
and without any consideration therefor cancels the debt, the amount
of the debit is a gift from the creditor to the debtor.
Income from other sources
• iv. Recovery of Bad Debt Previously Deducted
• The “Tax Benefit Rule” is the doctrine observed in the Philippines in bad
debt recoveries.
• a. Taxable – If the deduction of the bad debt in prior year resulted in an
income tax benefit to the taxpayer, the bad debt recovered is taxable
income in the year of recovery.
• b. Not Taxable – If the deduction of the bad debt did not result in an
income tax benefit to the taxpayer (where the result of the business
operation was a net loss even without the bad debt deduction), the bad
debt recovered is not taxable income but is treated as a mere recovery or
return of capital
• v. Refund of Deductible Tax
• The tax benefit doctrine also applies with respect to refund or credit
of taxes which were claimed and deducted in a previous year.
• a. Taxable – If the tax paid is deductible tax. The refund or credit
thereof is taxable in the year of receipt.
• b. Not Taxable – If the tax paid is not a deductible tax. The refund or
credit there is not taxable.
• vi. Tax informer’s reward
• vii. Tournament Prizes
• Included in the ITR: Cash prizes won by local players/participants in
tournament ae not passive income in as much as participating in such
tournament in their profession and/or occupation.
• Subject to FT: Cash prizes of foreign player/participants, shall be
subject to a final tax of 25%.
• Exempt from income tax: Prizes and awards granted to athletes in
local and international sports competitions and tournaments whether
held in the Philippines or abroad, and sanctioned by their national
sports association.
• vii. Unutilized/Excess Campaign Funds
• Unutilized/excess campaign funds, that is, campaign contribution net
of the candidate’s campaign expenditures, shall be considered as
subject to income tax. As such, the same must be included in the
candidate’s gross income as stated in his ITR for the subject taxable
year.
• Any candidate who fails to file with the COMELEC the appropriate
Statement of Expenditures required under the Omnibus Election
Code, shall be automatically precluded from claiming such
expenditures as deductions from his campaign contributions shall be
considered as directly subject to income tax.
Exclusion from Gross Income
• 1. Proceeds of Life Insurance Upon Death of the Insured
• The proceeds of life insurance policies paid to the heirs or
beneficiaries upon death of the insured shall be exempt from income
tax. The proceeds of life insurance are treated more as an indemnity
for the life lost instead of as gain, profit, or income.
2. Gifts, request, and devices
The value of property acquired by gift, bequest, devise or descent are
exempt from income taxation.
The income from the lease, sale, exchange, investment, or other
disposition of such property shall be subject to income tax.
3. Compensation for Injury or Sickness
Amount received, through accident or health insurance, or under
Workmen’s Compensation Acts, as compensation for personal unjuries
or sickness; plus the amounts of any damages received, whether by suit
or agreement, on account of such injuries or sickness.
4. Income exempt under treaties
5. Retirement Benefits, Pensions, Gratitude, Separation Pay Which
are Exempt from Income Tax
• As a general rule, retirement benefits, pensions, separation pay are all
taxable.
• As exceptions, the following benefits and payments are exempt from
income tax:
• i. Retirement benefits and/or pension which are exempt from income tax:
• Under RA No. 7641 (Retirement Pay Law), in the absences of a retirement plan for
employees, employers are required to pay a retirement benefit equal to at least ½ month
salary for every year of service.
• Requisites for exemption: a) The employee has reached the age of 60 or more, but not
beyond 65; and b) the employee has served for at least 5 years in the same
establishment.
• Under the Tax Code, retirement benefits and/or pension amounts received by officials
and employees of private firms, whether individual or corporate shall be exempt from
income tax when the requisites from exemption in the Tax Code are complied with
• Requisites for exemption: a) There must be a reasonable private benefit plan maintained
by the employer; b) The retiring official or employee has been in the service of the same
employer for at least 10 years; c) The retiring official or employee is not less than 50
years of age at the time of his retirement; d) The benefits of exemption granted shall be
availed by an official or employee only once.
• ii. Separation pay due to a cause beyond the control of the employee
• Any amount received by an official or employee, by his heirs, from the
employer as a consequence of separation of such official or employee
from the service of the employer due to: 1) sickness; 2) death; 3)
Other physical disability; or 4) for any cause beyond the control of the
said official or employee.
• Separation pay due to the abovementioned causes are exempt from
income tax regardless of age or length of service of the employee.
• Iii. 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 in the Philippines, from
foreign agencies and other institutions private or public.
• iv. Payment of benefits due or to become due to any person residing in
the Philippines under the laws of United States administered by the
United States Veteran Administration.
• v. Benefits received from or enjoyed under the Social Security System
(SSS) in accordance with the provisions of Republic Act 8282.
• vi. Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by the government officials and
employees.
• vii,. Investment income of the contributor consisting of all income
earned from the investment of personal equity and retirement assets
• viii. Maternity benefits advanced by the employer to the employee are
excluded from gross income, and are therefore exempt from
withholding tax.
• g. Miscellaneous Items
• i. Income derived by foreign governments, financing institutions owned or
controlled by foreign governments, and international or regional
financial institutions established by foreign governments from
investments or deposits in the Philippines
• ii. Income Derived by the Philippine Government or its Political
Subdivisions from the exercise of any governmental functions.
• iii. Prizes and awards primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement but only if: 1)
the recipient was selected without any action on his part to enter the
contest or proceedings; and 2) The recipient is not required to render
substantial future services as a condition to receiving the price or award.
• iv. Prizes and awards granted to athletes in local or international
sports competition and tournaments held in the Philippines or
abroad and sanctioned by their international sports association.
• v. 13th month pay and other benefits received by officials and
employees of public and private entities 1) the 13th month pay, and
other incentives such as productivity incentives and Christmas Bonus
2) the excess of the de minimis fringe benefits over their respective
ceilings
Provided, however, that the total exclusion shall not exceed
₱90,000
• vi. Compulsory or mandatory contributions of employees to GSIS, SSS,
Medicare (PHIC), and PAGIBIG, and union dues of individuals
• Contributions in excess of the mandatory contributions are not deductible
from gross income.
• Moreover, GSIS Educational Plan, GSIS Optional Insurance, GSIS Unlimited
Optional Insurance, and GSIS Memorial Plan premiums shall not be
deductible.
• vii. Gain from the sale, exchange or retirement of bonds, debentures, or
other certificate of indebtedness with a maturity of more than 5 years.
• viii. Gain from redemption of shares in mutual fund
• ix. Income of non-residents from transactions with Domestic Depository Banks
and OBUs under the Expanded Foreign Currency Deposit System
• x. Representation and transportation allowances (RATA) granted under Section
34 of the General Appropriation Act to certain officials and employees of the
government from the rank of Department of Secretaries to Division Chiefs are
not subject to income tax and to the withholding tax
• xi. Personal Economic Relief Allowance (PERA) granted to all employees of the
National Government, Local Government Units including government owned or
controlled corporations, is considered remuneration/compensation for services
performed by the employees in the performance of official duties, hence, not
taxable income.
• xii. Capital contribution to corporation/partnerships are not income of the
corporation/partnerships, and hence not subject to income tax
•
• xiii. Project-related income from the development of socialized
housing sites. The private sector (contractors) shall be exempt from
payment of project-related income taxes (including CGT) on a per
project basis on income realized from the development of socialized
housing sites.
• xiv. Income from the commercialization of technologies developed
by local inventors or researchers under RA NO. 7459 during the first
10 years from the date of the first sale.
• xv. Proceeds which constitute a fund held in trust by the taxpayer,
and which do not redound to the benefit of the taxpayer.