WEEK 4:CHAPTER 9

INCLUSIONS &
EXCLUSIONS TO
GROSS INCOME
GROSS INCOME

It includes all income from whatever source including, but not limited to,
the following items:
• Compensation for services
• Income from conduct of trade of business or exercise of profession
• Gains from dealings in property
• Interests
• Rents
• Royalties
• Dividends
• Annuities
• Prizes and winnings
• Pensions
• Partner’s distributive share from the net income of GPP
 COMPENSATION INCOME
• Any remunerations for rendering personal services
• Generally, compensation income is obtained from an employer-
employee relationship between payor and recipient
• Compensation income subject to income tax is based on gross
income less personal exemptions and premium payments on health /
hospitalization insurance, if any (personal and business expenses
are not deductible from compensation income)
• The following are considered compensation income:
– Salaries and wages
– Honoraria
– Fixed and variable allowances (allowances which are incurred in
relation with the employee’s performance of his duties or
provided for the convenience of the employer are tax exempt)
 COMPENSATION INCOME
• The following are considered compensation income (continuation):
– Commission
– Fees (including director’s fee of a corporation, in which he is also
an employee of the same corporation)
– Tips and gratuities either accounted (subject to withholding tax)
or not accounted (not subject to withholding tax) for by the
employee to the employer are considered taxable income
– Hazard, emergency and overtime pay
– Pension, retirement and separation pay (for tax exempt pension,
retirement and separation pay refer to exclusions from gross
income)
– Vacation and sick leave (except those exempt under de minimis
benefits – refer to exclusions from gross income)
GROSS INCOME FROM BUSINESS AND
PROFESSION

• Business means any commercial activity engaged in as a means of

livelihood or profit of an individual or group of individuals
• Profession is primarily an endeavor or work requiring specialized
training on the field of learning, art, or science engaged in as a
means of livelihood or profit of an individual or group of individuals
• Gross income from business and profession is computed as follows:
Gross sales / revenue P xxx
Less: Sales returns, discounts and allowances xxx
Net sales
xxx
Less: Cost of sales / services xxx
Gross income from business / profession P xxx
GROSS INCOME FROM RENTALS
• Rental income refers to earnings derived from leasing real estate as
well as personal property
• Rental income is generally determined by the gross receipts for the
year, earned and unearned (gross income from rentals becomes
taxable when it is earned or collected, whichever comes first)
• Prepaid rental becomes taxable when it is collected regardless when
already earned or not
• The following prepaid rents are not taxable on the year collected:
– Security deposits (income is realized on the period in which such
deposits is applied to the rent)
– Loan deposit
– Option money
 GAINS FROM DEALINGS IN
• The following dealings in property are subject to capital
PROPERTY
gains tax, hence not subject to normal income tax:
– Capital gains on sale of disposition of real
properties (located in the Philippines)
classified as capital assets by an individual
taxpayers
– Capital gains on sale of disposition of real
properties (located in the Philippines)
classified as capital assets by a domestic and
resident foreign corporation (non-resident
foreign corporation is subject to final tax at
30% based on the gain)
– Capital gains on sale of shares of stocks not
traded in the local stock exchange by an
individual and corporate taxpayers
• Gains on sale of shares of stocks traded in the local stock
INTEREST INCOME

• The following interest income are subject to final withholding tax at

various rates:
– Interest income from depository banks
– Interest income from depository banks under foreign currency
depositary system (FCDS)
– Yield from deposit substitutes and trust funds
– Interest income received by a non-resident alien not engaged in
trade or business (NRA-NETB)
• Interest income from long-term deposits received by and individual
taxpayers other than a NRA-NETB are exempted from income tax
• Interest income from depository banks under FCDS by a non-
resident individual and corporations are also exempted from income
tax
ROYALTY INCOME
• Royalty income is a payment or portion of proceeds paid to the
owner of a right, such an oil right or a patent for the use of it, or a
portion of the proceeds from the work of an author or composer
• Royalties earned as a principal business activity is subject to normal
income tax
• Royalties (in general) received as a passive income is subject to final
withholding tax at 20% (except NRA-NETB – 25% and nonresident
foreign corporation – 30%)
• Royalties from books, literary works and musical composition by an
individual taxpayer is subject to 10% final withholding tax (except
NRA-NETB – 25%)
DIVIDEND INCOME
• Dividend income is a form of earnings derived from the distribution
made by a corporation out of its earnings or profits and payable to its
stockholders, whether in money or in other property
• Forms of dividend income:
– Cash dividend – it is a dividend paid in cash
– Property dividend – it is a dividend paid in a form of a property
other than cash
– Stock dividend – new shares of stock are issued to the
stockholders as payment of dividend
– Scrip dividend – a promissory note is issued to the stockholder
as payment of dividend
– Liquidating dividend – are return to stockholders investment
which arises from the distribution of assets by a corporation upon
its dissolution
DIVIDEND INCOME

Taxation on dividends:
• Cash, property and scrip dividends received from a domestic
corporation by:
– A resident or citizen individuals (10% final tax)
– A NRA-ETB (20% final tax)
– A NRA-NETB (25% final tax)
– A domestic or resident foreign corporation (exempt from income
tax)
– A nonresident foreign corporation (15% final tax if there is a
reciprocity; 30% if there is no reciprocity)
DIVIDEND INCOME
Taxation on dividends:
• Stock dividends are generally not subject to income tax because
they simply involve a transfer of the retained earnings to the paid-in
capital account of the corporation, except when all of the following
circumstances exist:
– There is an option that some stockholders could take cash or
property dividends instead of stock dividends
– Some stockholders exercised the option to take cash or property
dividend
– The exercise of option resulted in a change of the stockholder’s
proportionate share in the outstanding shares of the corporation
DIVIDEND INCOME
Taxation on dividends:
• The excess amount of liquidating dividends over cost of shares
surrendered is subject to capital gains tax on the same manner with
the tax on capital gains on sale or disposition of shares of stock not
traded in the local stock exchange:

Net capital gain not exceeding P100,000 5%

Net capital gain in excess of P100,000 10%
 PRIZES AND WINNINGS
• Prizes is a reward for a contest or a competition
• Winnings is a reward for an event that depends by chance
• Taxation on prizes and winnings:
– Prizes more than P10,000 and winnings regardless of the
amount by an individual taxpayer is subject to 20% final tax
(except NRA-NETB at 25%)
– Prizes amounting to P10,000 or less by individual taxpayers is
subject to normal income tax (except NRA-NETB at 25% final
tax)
– Prizes and winnings by corporations is subject to normal income
tax (except NRFC at 30% final tax)
• Winnings from lotto or Philippine Charity Sweepstakes Office is
exempted from income tax
PRIZES AND WINNINGS

• Tax informer’s rewards instrumental in the discovery of violations of

the National Internal Revenue Code and the discovery and seizure
of smuggled goods is subject to final withholding tax at 10%
MISCELLANEOUS ITEMS

The following items are also subject to income tax:

• Illegally obtained income and embezzled funds
• Bad debts recovery and tax refunds (the taxable on the amount
recovered from bad debts or tax refunded shall be to the extent of
tax benefit in the year when said losses / expenses were deducted
– tax benefit rule). The following tax refunds are not taxable since
they can not be deducted for the purpose of computing the income
tax liability of the payor:
– Philippine income tax
– Estate and donor’s tax
– Stock transaction tax (tax on sale of stocks traded in the stock
exchange)
– Special assessment tax
MISCELLANEOUS ITEMS
The following items are also subject to income tax:
• Annuities are installment payments received for life insurance sold
by insurance companies. Annuity received representing return on
premiums, such should not be subject to income tax, but if it
represents payment of interests, such should be subject to income
tax
• Cancellation of debt – if the creditor cancels the debt of a debtor:
– Without consideration, the amount of the cancelled debt is a gift,
not an income hence subject to donor’s tax and not income tax
– In exchange of performance of service, the amount of the
cancelled debt is treated as compensation (subject to income
tax)
– If the creditor is a corporation cancels the debt of a debtor who is
a stockholder of the same corporation, such cancellation of debt
is treated as payment of dividends (subject to tax on dividends)
 EXCLUSIONS FROM
GROSS INCOME
• Exclusions – refers to items or receipts not included in
the determination of the taxable income because the law
or treaty provides that they are tax exempt from income
tax
• Generally, exclusions from gross income are nontaxable
• Exclusions from gross income are not included in the
income tax return unless information regarding them is
specifically called for
NONTAXABLE COMPENSATION INCOME
AND OTHER BENEFITS
• Compensation received under employer’s convenience benefit rule
• Basic salaries including holiday, overtime, hazard and night
differential pays of a mimimum wage earner
• 13TH month pay, bonuses and similar bonuses and similar benefits
not exceeding P30,000 per year (P90,000 starting 01/01/2018)
• De mimimis benefits (discussed on the next slides)
• Retirement benefits under RA 7641 (discussed on the next slides)
• Any amount received by an employee or by his heirs from the
employer as a consequence of separation of such employee from
the service of the employer because of death, sickness or other
physical disability or for any cause beyond the control of the said
employee look page 254
• GSIS, SSS, Medicare (Philhealth) and Pag-ibig contributions and
uinion dues (both employee and employer’s share)
NONTAXABLE COMPENSATION INCOME
AND OTHER BENEFITS

• Social security benefits, retirement gratuities, pensions and other

similar benefits received by resident or nonresident citizens of the
Philippines or aliens who came to reside permanently in the
Philippines, from foreign government agencies and other institutions,
private or public
MINIMUM WAGE EARNERS

 Minimum wage earners (MWE) are employees who receives

compensation at statutory minimum wage rates.
 In general, basic salaries including holiday, overtime, hazard and
night differential pays of a mimimum wage earner are exempted from
income tax
 However, a MWE who receives additional compensation (such as
honoraria, commission, fringe benefits and other taxable allowances)
or whose benefits is in excess of the allowable statutory amount of
P90,000 shall not enjoy the privilege of being a MWE and, therefore,
his/her entire earnings shall be subject to income tax
 MWE who is engage in trade or business and earns business
income other than his/her compensation shall still enjoy the privilege
of being a MWE and, therefore, his/her compensation income is still
exempt from income tax
DE MINIMIS BENEFITS 2018
ONWARDS - TRAIN

• Monetized unused vacation leave credits of employees not exceeding

10 days during the year
• Monetized unused vacation and sick leave credits paid to government
officials and employees
• Medical cash allowance to dependents of employees not exceeding
P1500 per semester or P375 per month
• Rice subsidy of P2,000 or one (1) sack of 50 kg rice per month
amounting or not more than P1,500 granted by an employer to his
employee
• Uniforms and clothing allowance not exceeding P6,000 per annum
given to employees by the employer
• Acutal Medical Assistance/ Medical benefits given to the employees by
the employer, actual yearly benefits not exceeding P10,000 per annum
• Laundry allowance not exceeding P300 per month
• Gifts given during Christmas and major anniversary celebrations not
exceeding P10,000 per employee per annum for employees and other
guests
 DE MINIMIS BENEFITS
• Employee 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 P10,000 received by the employer under an established
written plan which does not discriminate in favor of highly paid
employees);
• Gifts given during Christmas and major anniversary P5,000 per annum
• Flowers, fruits, books or similar items given to employees under
special circumstances (e.g. on account of illness, marriage, birth of
baby, etc.); and
• Daily meal allowance for overtime work not exceeding 25% of the
basic minimum wage on a per region basis.
• Benefits received by an employee by virtue of collective bargaining
agreement (CBA) and productive incentive schemes provided that the
total annual monetary value received from both CBA and productivity
incentive schemes combined do not exceed P10,000 pert taxable year.
DE MINIMIS BENEFITS

Note: The amount of “de minimis” benefits conforming to the ceiling as

prescribed shall not be considered in determining the P90,000
ceiling of “13th month and other benefits”. However, if the employer
pays more that the ceiling prescribed, the excess shall be taxable to
the employee only if such excess is beyond the P90,000 ceiling.
RETIREMENT BENEFITS UNDER R.A. NO.
7641

Retirement benefits received by an employee of private firms, whether

individual or corporate, with the following conditions satisfied:

• The retirement benefit plan must be in accordance with a reasonable

benefit plan
• The retiring employee has been in service of the same employer for
at least 10 years
• The retiring employee is not less than 50 years of age at the time of
retirement
• The retiring employee has not availed of similar benefits in the past
NONTAXABLE CLAIMS

• Amounts received through accident or health insurance, or under

Workmen’s Compensation Act, as compensation for personal injuries
or sickness, plus amounts of any damages received, whether by suit
or agreement, on account of such injuries or sickness (compensation
for lost profits are subject to income tax)
• Proceeds of life insurance policies paid to the heirs upon death of the
insured
• Amounts received by the insured as a return of the premiums paid
by him under life insurance, endowment or annuity contract (any
amount received in excess of the premium paid is taxable)
• Benefits received from or enjoyed under Social Security System
(SSS), including maternity benefits stipulated in R.A. No. 8282
• Benefits received from the GSIS, including retirement gratuity
received by government officials and employees
NONTAXABLE CLAIMS

• Payments of benefits due to any person residing in the Philippines

under laws of the United States administered by the United States
Veterans Administration (USVA)
NONTAXABLE WINNINGS AND PRIZES
• Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic
achievement, but only if the recipient was:
– Selected without any action on his part to enter the contest or
proceeding
– Is not required to render substantial future services as a condition
to receive such prize or award
• Prizes and awards granted to athletes in local and international
sports competitions and tournaments whether held in the Philippines
or abroad and sanctioned by their national sports associations
• Philippine Charity Sweepstakes winnings
• Philippine Lotto winnings
NONTAXABLE INVESTMENT INCOME

• Income derived from investments in the Philippines in loans, stocks,

bonds or other domestic securities, or from interest on deposits in
banks in the Philippines by:
– Foreign governments
– Financing institutions, owned, controlled or enjoying refinancing
from foreign governments
– International or regional financial institutions established by
foreign governments
• Gains realized from the sale or exchange or retirement of bonds,
debentures, or other certificate of indebtedness with a maturity of
more than 5 years
• Gains realized by the investor upon redemption of shares of stock of
a mutual fund company
NONTAXABLE INVESTMENT INCOME

• Interest on long-term deposits or investments in banks (with maturity

of 5 years or more) received by individuals (except nonresident
aliens not engaged in trade or business in the Philippines)
• Interest received by nonresident taxpayer (either individual or
corporate) from deposits with the depository banks under the
expanded foreign currency depository system
• Interest on the price of land covered by Comprehensive Agrarian
Reform Program (CARP)
• Intercorporate dividends by domestic or resident foreign corporation
from a domestic corporation
NONTAXABLE OTHER INCOME

• The value of the property by gifts, bequests and devises (income

from such property received as gifts, bequests and devises is
taxable)
• Income of any kind to the extent required by any treaty obligation
binding upon the Government of the Philippines (e.g. salaries of U.N.
offcials, Americans working on consular offices in the Philippines,
diplomatic officials and agents, non-Filipino employees of IRRI)
• Income derived from any public utility or from the exercise of any
essential governmental function accruing to the Government of the
Philippines or to any political subdivision thereof