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INCOME TAXATION
SECOND SEMESTER, AY 2020-2021

MODULE 2

Maricon S. Jandusay
Teacher
 WELCOME TO………
MODULE 2 – Gross Income, Tax Tables and Rates

INTRODUCTION:

In this module, we will learn about gross income, tax tables and rates. To
foster economic growth and development governments need sustainable sources of
funding for social programs and public investments. Programs providing health, education,
infrastructure and other services are important to achieve the common goal of a
prosperous, functional and orderly society. And they require that governments raise
revenues. Taxation not only pays for public goods and services; it is also a key ingredient
in the social contract between citizens and the economy.

OBJECTIVES:

At the end of the lesson, you should be able to:

 Determine the exclusions from gross income

 Compute fringe benefit
 Apply some computation in income taxation based on the tax tables and rates.
ARE YOU READY? LET’S GO……………

Then let’s proceed

LESSON 1- General
LESSON 3: Gross Income
Principles of Income
Taxation
Gross Income.

(A) General Definition. — Except when otherwise provided in this Title, gross income
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 items;

(2) Gross income derived from the conduct of trade or business or 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) Pensions; and

(11) Partner’s distributive share from the net income of the general professional
partnership.

TASK 1
Differentiate gross income from taxable income.

(B) Exclusions from Gross Income. — The following items shall not be included
in gross income and shall be exempt from taxation under this Title:

(1) Life Insurance. — The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if
such amounts are held by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in gross income.

(2) Amount Received by Insured as Return of Premium. — The amount received by the
insured, as a return of premiums paid by him under life insurance, endowment, or annuity
contracts, either during the term or at the maturity of the term mentioned in the contract or
upon surrender of the contract.
(3) Gifts, Bequests, and Devises. — The value of property acquired by gift, bequest,
devise, or descent: Provided, however, That income from such property, as well as gift,
bequest, devise, or descent of income from any property, in cases of transfers of divided
interest, shall be included in gross income.

(4) Compensation for Injuries or Sickness. — Amounts received, through Accident or

Health Insurance or under Workmen’s Compensation Acts, 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.

(5) Income Exempt under Treaty. — Income of any kind, to the extent required by any
treaty obligation binding upon the Government of the Philippines.

(6) Retirement Benefits, Pensions, Gratuities, etc. —

(a) Retirement benefits received under Republic Act No. 7641 and those received by
officials and employees of private firms, whether individual or corporate, 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 ten
(10) years and is not less than fifty (50) years of age at the time of his retirement:
Provided, further, That the benefits granted under this subparagraph shall be availed of by
an official or employee only once. For purposes of this Subsection, the term ‘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, and wherein it is provided in said plan that at no time shall any
part of the corpus or income of the fund be used for, or be diverted to, any purpose other
than for the exclusive benefit of the said officials and employees.

(b) Any amount received by an official or employee or by his heirs from the employer
as a consequence of separation of such official or 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 official or employee.

(c) The provisions of any existing law to the contrary notwithstanding, social security
benefits, retirement gratuities, pensions and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other institutions, private or public.

(d) Payments of benefits due or to become due to any person residing in the
Philippines under the laws of the United States administered by the United States
Veterans Administration.

(e) Benefits received from or enjoyed under the Social Security System in accordance
with the provisions of Republic Act No. 8282.

(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement
gratuity received by government officials and employees.

(7) Miscellaneous Items. —

(a) Income Derived by Foreign Government. — 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 (i) foreign governments, (ii) financing institutions
owned, controlled, or enjoying refinancing from foreign governments, and (iii) international
or regional financial institutions established by foreign governments.

(b) Income Derived by the 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 Philippines or to any political
subdivision thereof.

(c) Prizes and Awards. — Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:

(i) The recipient was selected without any action on his part to enter the contest or
proceeding; and

(ii) The recipient is not required to render substantial future services as a condition to
receiving the prize or award.

(d) Prizes and Awards in Sports Competition. — All 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.
(e) 13th Month Pay and Other Benefits. — Gross benefits received by officials and
employees of public and private entities: Provided, however, That the total exclusion under
this subparagraph shall not exceed Ninety thousand pesos (P90,000)19 which shall cover:

(i) Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 6686;

(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as

amended by Memorandum Order No. 28, dated August 13, 1986;

(iii) Benefits received by officials and employees not covered by Presidential Decree
No. 851, as amended by

Memorandum Order No. 28, dated August 13, 1986; and

(iv) Other benefits such as productivity incentives and Christmas bonus.

(f) GSIS, SSS, Medicare and Other Contributions. — GSIS, SSS, Medicare and Pag-
Ibig contributions, and union dues of individuals.

(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. —
Gains realized from the sale or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five (5) years.

(h) Gains from Redemption of Shares in Mutual Fund. — Gains realized by the investor
upon redemption of shares of stock in a mutual fund company as defined in Section
22(BB) of this Code.

(i) Income Derived from the Sale of Gold Pursuant to Republic Act No. 7076. —
Income derived from the following transactions pursuant to Republic Act No. 7076,
otherwise known as the “People’s Small-scale Mining Act of 1991”:

(1) The sale of gold to the Bangko Sentral ng Pilipinas by registered small-scale
miners, as defined under Republic Act No. 7076, and accredited traders; and

(2) The sale of gold by registered small-scale miners to accredited traders for eventual
sale to the Bangko Sentral ng Pilipinas.20

19 As amended by Section 9 of the TRAIN. Previous ceiling was P82,000. The prerogative
of the Secretary of Finance to increase the ceiling was removed.

TASK 2
What are the differences between exclusions from gross income and deductions
Special Treatment of Fringe Benefit.

(A) Imposition of Tax. — Effective January 1, 2018 and onwards, a final tax of thirty-five
percent (35%)21 is hereby imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (except rank and file employees as defined herein)
by the employer, whether an individual or a corporation (unless the fringe benefit is
required by the nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage of the employer).
The tax herein imposed is payable by the employer which tax shall be paid in the same
manner as provided for under Section 57(A) of this Code. The grossed-up monetary value
of the fringe benefit shall be determined by dividing the actual monetary value of the fringe
benefit by sixty-five percent (65%) effective January 1, 2018 and onwards:22 Provided,
however, That fringe benefit furnished to employees and taxable under Subsections (B),
(C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat:
Provided, further, That the grossed-up value of the fringe benefit shall be determined by
dividing the actual monetary value of the fringe benefit by the difference between one
hundred percent (100%) and the applicable rates of income tax under Subsections (B),
(C), (D) and (E) of Section 25.

(B) Fringe Benefit Defined. — For purposes of this Section, the term ‘fringe benefit’
means any good, service or other benefit furnished or granted in cash or in kind by an
employer to an individual employee (except rank and file employees as defined herein)
such as, but not limited to, the following:

(1) Housing;
(2) Expense account;

(3) Vehicle of any kind;

(4) Household personnel, such as maid, driver and others;

(5) Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;

(6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;

(7) Expenses for foreign travel;

(8) Holiday and vacation expenses;

21 As amended by Section 10 of the TRAIN. Previous rate was 32%.

22 As amended by Section 10 of the TRAIN. Previous divisor was 68%.

(9) Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows.

(C) Fringe Benefits Not Taxable. — The following fringe benefits are not taxable under
this Section:

(1) Fringe benefits which are authorized and exempted from tax under special laws;

(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;

(3) Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and

(4) De minimis benefits as defined in the rules and regulations to be promulgated by

the Secretary of Finance, upon recommendation of the Commissioner.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of

the Commissioner, such rules and regulations as are necessary to carry out efficiently and
fairly the provisions of this Section, taking into account the peculiar nature and special
need of the trade, business or profession of the employer.
LESSON
LESSON 1- General
4: Tax Tables and Rates
Principles of Income Taxation
Final Withholding Tax (FWT) on Passive Income:

Corporate Income Tax:

FWT for Domestic Corporations:

Transfer Tax:

INCOME TAX RATES

For Individual Citizens and Resident Aliens Earning Purely Compensation Income and
Individuals Engaged in Business and Practice of Profession

A. Graduated Income Tax Rates under Section 24(A)(2) of the Tax Code of 1997, as
amended by Republic Act No. 10963 

Amount of Net Taxable Income Rate

Over But Not Over  
- P250,000 0%
P250,000 P400,000 20% of the excess over P250,000
P400,000 P800,000 P30,000 + 25% of the excess over P400,000
P800,000 P2,000,000 P130,000 + 30% of the excess over P800,000
P2,000,000 P8,000,000 P490,000 + 32% of the excess over P2,000,000
P8,000,000   P2,410,000 + 35% of the excess over P8,000,000
B. For Purely Self-Employed Individuals and/or Professionals Whose Gross
Sales/Receipts and Other Non-Operating Income Do Not Exceed the VAT
Threshold of P3,000,000, the tax shall be, at the taxpayer’s option:
1. 8% Income Tax on Gross Sales or Gross Receipts in Excess of P250,000 in
Lieu of the Graduated Income Tax Rates and the Percentage Tax; Or
2. Income Tax Based on the Graduated Income Tax Rates
C. For Individuals Earning Both Compensation Income and Income from Business
and/or Practice of Profession, their income taxes shall be:
1. For Income from Compensation: Based on Graduated Income Tax Rates; and
2. For Income from Business and/or Practice of Profession:
a. If the total Gross Sales/Receipts Do Not Exceed VAT Threshold of
P3,000,000, the Individual Taxpayer May Opt to Avail:
i. 8% Income Tax on Gross Sales/Receipts and Other Non-
Operating Income in Lieu of the Graduated Income Tax Rates
and the Percentage Tax; Or
ii. Income Tax Based on Graduated Income Tax Rates
b. If the total Gross Sales/Receipts Exceed VAT Threshold of
P3,000,000
i. Income Tax Based on Graduated Income Tax Rates
D.
1. On Certain Passive Income of Individual Citizens and Resident Aliens

Passive Income Tax Rate

1. Interest from currency deposits, trust funds and deposit substitutes 20%
2. Royalties (on books as well as literary & musical compositions) 10%
    - In general 20%
3. Prizes (P10,000 or less ) Graduated
Income Tax
Rates
    - Over P10,000 20%
4. Winnings (except from PCSO and Lotto amounting to P10,000 or less ) 20%
-   From PCSO and Lotto amounting to P10,000 or less exempt
5. Interest Income from a Depository Bank under the Expanded Foreign 15%
Currency Deposit System
6. Cash and/or Property Dividends received by an individual from a domestic  10%
corporation/ joint stock company/ insurance or mutual fund companies/
Regional Operating Headquarter of multinational companies
7. Share of an individual in the distributable net income after tax of a 10%
partnership (except GPPs)/ association, a joint account, a joint venture or
consortium taxable as corporation of which he is a member or co-venture
8. Capital gains from sale, exchange or other disposition of real property 6%
located in the Philippines, classified as capital asset
9. Net Capital gains from sale of shares of stock not traded in the stock 15% 
exchange
 10. Interest Income from long-term deposit or investment in the form of savings, Exempt
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be imposed on the
entire income from the proceeds of the long-term deposit based on the
remaining maturity thereof:
Holding Period
- Four (4) years to less than five (5) years 5%
- Three (3) years to less than four (4) years 12%
- Less than three (3) years 20%

E. For Non-Resident Aliens Not Engaged in Trade or Business 

A. Tax Rate in General – on taxable income from all sources within the same manner as
Philippines individual
citizen and
resident alien
individual
B. Certain Passive Income Tax Rates
1. Interest from currency deposits, trust funds and deposit substitutes 20%
2. Royalties (on books as well as literary & musical compositions) 10%
    - In general 20%
3. Prizes (P10,000 or less ) Graduated
Income Tax
Rates
    - Over P10,000 20%
4. Winnings (except from PCSO and Lotto) 20%
   -  From PCSO and Lotto exempt
5. Cash and/or Property Dividends received from a domestic corporation/ joint 20%
stock company/ insurance/ mutual fund companies/ Regional Operating
Headquarter of multinational companies
6. Share of a non-resident alien individual in the distributable net income after 20%
tax of a partnership (except GPPs) of which he is a partner or from an
association, a joint account, a joint venture or consortium taxable as
corporation of which he is a member or co-venture
7. Interest Income from long-term deposit or investment in the form of savings, Exempt
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be imposed on the
entire income from the proceeds of the long-term deposit based on the
remaining maturity thereof:
Holding Period
  - Four (4) years to less than five (5) years 5%
  - Three (3) years to less than four (4) years 12%
  - Less than three (3) years 20%
8. Capital from the sale, exchange or other disposition of real property located 6%
in the Philippines classified as capital asset
9. Net Capital gains from sale of shares of stock not traded in the Stock  
Exchange
   - Not over P100,000 5%
   - Any amount in excess of P100,000 10%

F. For Non-resident Aliens Not Engaged in Trade or Business 

1. Gross amount of income derived from all sources within the Philippines 25%
 2. Capital gains from the exchange or other disposition of real property located in the 6%
Philippines
3. Net Capital gains from the sale of shares of stock not traded in the Stock Exchange  
- Not  Over  P100,000 5%
- Any amount in excess of P100,000 10%

G. For Alien Individuals Employed by Regional Headquarters (RHQ) or Area

Headquarters and Regional Operating Headquarters (ROH) of Multinational
Companies, Offshore Banking Units (OBUs), Petroleum Service Contractor and
Subcontractor  

On the gross income consisting of salaries, wages, annuities, compensation, Graduated

remuneration and other emoluments, such as honoraria and emoluments Income Tax
derived from the Philippines Rates

H. For General Professional Partnerships 

Net Income of the Partnerships 0%

I. For Domestic Corporations 

Rates of Tax on Certain Passive Income of Corporations Tax Rate

1. Interest from currency deposits, trust funds, deposit substitutes and similar 20%
arrangements received by domestic corporations
2. Royalties from sources within the Philippines 20%
3. Interest Income from a Depository Bank under Expanded Foreign Currency 15%
Deposit System
4. Cash and Property Dividends received by a domestic corporation from 0%
another domestic corporation
5. Capital gains from the sale, exchange or other disposition of lands and/or 6%
building
6. Net Capital gains from sale of shares of stock not traded in the stock 15% 
exchange

J. *Beginning on the 4th year immediately following the year in which such corporation
commenced its business operations, when the minimum corporate income tax is
greater than the tax computed using the normal income tax.
K. For Resident Foreign Corporation 

1) a. In General – on taxable income derived from sources within the 30%

Philippines
    b. Minimum Corporate Income Tax – on gross income 2%
    c. Improperly Accumulated Earnings – on improperly accumulated taxable 10%
income
2) International Carriers – on gross Philippine billings 2½%
3) Regional Operating Headquarters of Multinational Companies– on taxable 10%
income
4.) Regional or Area Headquarters of Multinational Companies exempt
5) Corporation Covered by Special Laws Rate specified
 under the
respective
special laws
6) Offshore Banking Units (OBUs) 10%
In general – Income derived by OBUs from foreign currency transactions with Exempt
non-residents, other OBUs, local commercial banks and branches of foreign
banks authorized by BSP
    On interest income derived from foreign currency loans granted to residents 10%
other than offshore banking units or local commercial banks, local branches of
foreign banks authorized by BSP to transact business with OBUs
7) Income derived under the Expanded Foreign Currency Deposit System  
   Interest income derived by a depository bank under the expanded foreign 7½%
currency deposit system.
   On Income derived by depository banks under the expanded foreign exempt
currency deposit systems from foreign currency transactions with non-
residents, OBUs in the Philippines, local commercial banks including branches
of foreign banks that may be authorized by BSP
    On interest income derived from foreign currency loans granted by 10%
depository banks under the expanded foreign currency deposit systems to
residents other than offshore banking units in the Philippines or other
depository banks under the expanded system
8.) Branch Profit Remittances – on total profits applied or earmarked for 15%
remittance without any deduction for the tax component thereof (except those
activities which are registered with the Philippines Economic Zone Authority)
9.) Interest from currency deposits, trust funds, deposit substitutes and similar 20%
arrangements
10. Royalties derived from sources within the Philippines 20%

POST ASSESSMENT

Required: Compute for the net tax due.

 Resident alien husband and wife with two dependent children.

 Salary and allowances of husband arising from employment: Salary of PHP
652,000, living allowances of PHP 100,000, and housing benefits (100%) of PHP
300,000.
 Teaching salary of wife: PHP 68,000.
 Gross dividend income from investment in shares of stock of a domestic corporation
of PHP 10,000.
 Interest of PHP 20,000 on peso bank account.
 Capital gain on sale of shares of PHP 5,000.
 Taxes withheld by employer of husband at PHP 118,000 and by employer of wife at
nil.
 Husband is occupying a managerial position in the company.
 Fringe benefits eto ung mga extra benefit na binibigay sa isang employee in
addition sa kanyang salary. Bakit nag bibigay ng fringe benefit ang isang company
or employer? Simple lang kasi ang fringe benefits ay isang tool para makaakit at
makapagpanatili ng isang empleyado. Syempre as an employee kung madami kang
benefits na nkukuha sa company na pinagtratrabahuhan mo maiisapan mo pa bang
umalis d ba hindi na. katulad din yan sa mga bf at gf nio di ba nag stastay ka kapag
nabebenefit ka not only financially, halimbawa ung bf or gf natutulungan ka s pag
sasagot ng module mo ohh di nakakakuha ka ng benefit s kanya. Yan ung isang
reason kaya ka nag stay sa isang relationship, kapag toxic na let go wag kang
magtitiis lalo na kung wla ka nmang benefits na nakukuha. Di na uso ang martir.

Eto naman yung types ng Fringe Benefits. Una is ung Employment Security, yan
ung mga technological adjustment pay, leave travel pay, overtime pay, leave for
maternity, leave for grievances( kapag may namatay na kapag anak pwede mo to
gamitin), holidays, cost of living bonus, and call back pay lay off. Yung next type
naman is yung Health protection. Under neto ay ung accident insurance, health
insurance, hospitalization, life insurance, medical care, sick benefits and sick leave.
Dun sa dati kong company na pinagtrabahuhan madaming ganito, may health card
kami (libre check up at pagpapalinis ng ngipin) tapos life insurance din kami nun
under philam life at saka medical reimbursement kung saan pwede mo I reimburse
ung mga nabili mong gamot hanggang 3000 yung pwede naming I reimburse nun.
Next na type eh ung old age and Retirement. Under nman nian ay ung deferred
income plans, pension, gratuity, provident fund, old age assistance, medical
benefits for retired employees, travelling concession to retired employees, jobs to
son/daughters of the deceased employee. And the last type ay ung Personnel
identification, participation and Stimulation yung included dto ay ung mga
anniversary awards, attendance bonus (kapag wala kang absent the whole year),
cooperative credit societies, educational facilities, housing, recreational programs,
stress counseling and safety measures.