INCOME TAXATION

PRE-FINAL
LEARNING OBJECTIVE
Define gross income.
State the major sources of taxable income.
Describe the broad classification of gross
compensation income.
Describe the concept of income from business and
exercise of profession.
Compute accurately gross income.
List incomes that are exempt or excluded from gross
income.
WHAT ARE
Taxable Gross Income
As defined in the Tax Code means all income derived
from whatever source including but not limited to the
following items:

Compensation for services

Gross income from trade or business
Gains derived from dealing with properties
Interest
Rents
Royalties
Gross Income
Dividends
Annuities
Prizes and winnings
Pensions
Partner’s distributive share from net income of GPP
Compensation Income
In general, the term “compensation” means all
remunerations 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.

If service are paid for in a medium other than money

such is to be treated as compensation in kind.
Forms of Compensation
1. Compensation paid in kind. Paid in other medium
than cash such as stocks, bonds or other form of
property.

2. Living quarter and meals. However, if living

quarter or meals are furnished to an employee for
the convenience of the employer, the value thereof
need not be included as part of compensation
income.
Forms of Compensation
3. Facilities and privileges of a relatively small value otherwise
known as “de minimis benefits”

a. Monetized unused vacation leaves not more than 10 days during

the year

b. Monetized value of vacation and sick leave credits paid to

government officials and employee

c. Medical cash allowance of P1,500/semester or P250/month

d. Rice subsidy of P2,000 cash or 1 sack of 50Kg per month

Form of Compensation
e. Uniform and clothing allowance not to exceed P6,000/year

f. Actual medical allowances not to exceed P10,000/year

g. Laundry allowance not exceeding P300/month

h. Employee achievement awards not exceeding P10,000 per

employee

i. Gifts during Christmas, anniversary not exceeding P5,000/year

per employee
Form of Compensation
j. Daily meal allowance for overtime & night
shift/graveyard not exceeding 25% of basic minimum
wage

k. Benefits received by virtue of a collective bargaining

agreement not exceeding P10,000 per employee per
year
Form of Compensation
4. Tips and gratuities – which are not accounted for by the employee
to the employer are taxable income but not subject to withholding
tax

5. Pensions, retirement and separation pay - not subject to tax if:

Employee is separated due to death, sickness or disability beyond

the control of employee

Employer pays benefit to the heirs of employee due to such

separation
Form of Compensation
6. Fixed or variable transportation, representation and other
allowances

7. Vacation and sick leave allowances

8. Deduction made by employer from compensation of employee

9. Remuneration for services of an nonresident alien individual

or foreign entity

10. Compensation for services performed outside the

Philippines
Business Income
1. Manufacturing, Merchandising or Mining

Gross sales XXX

Less: Cost of good sold XXX
Gross profit from sales XXX
Add: Other income XXX
Gross Income XXX
Business Income
2. Farming

Cash Basis

Cash sales (value of mdse/livestocks) XXX

Sales of livestocks XXX
Less: Cost of sales XXX
Gross profit XXX
Miscellaneous income XXX
Gross income XXX
Business Income
Accrual Basis

Ending inventory XXX

Cash sales XXX
Sales of livestock XXX
Miscellaneous income XXX
Total XXX
Less: Beginning inventory XXX
Cost of livestock XXX XXX
Gross income XXX
Gains derived from dealings in property
Gross income derived from dealings in property includes
all income derived from the disposition of property –
real, personal, or mixed for money or for other
property (exchange) or for a combination of both,
which results in gain (or loss) because of the difference
between the taxpayer’s investment in what he disposed
of and the value in what he received.

The general rule is that, the entire amount of the gain

arising there from is a taxable gain.
Interest
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 a taxpayer

is taxable.

Interest includes those arising from indebtedness,

whether business or non-business, legal or illegal.
Rent
Rent is the amount paid for the use or enjoyment of a
thing or right. Gross income derived from rent comes
not only from real estate but also from the use of
personal property.

For income arising from rentals of property, a taxpayer

must report advance rental income received during the
taxable year as earned revenue including rental
actually earned but not yet collected (accrued rental
income).
Royalties
Gross income derived from royalties includes earning from
copyrights, trademarks, patents, and natural resources
under lease.

It involves not only the use of the property but also its
exhaustion.

Royalties for properties which produce coal, gas, oil, copper,

timber or other similar product shall form part of gross
income for purposes of computing the income tax liability
of the taxpayer under Section 24(A), 27 and 28.
Dividends
Dividends are distributed made by a corporation out of
its earning or profits and payable to its shareholders,
whether in money or in other property.
Dividends and tax treatment
1. Cash dividends – FT of 10%
2. Property dividend – FT of 10%
3. Stock dividend – not taxable unless it represent a
distribution of earning or profits
4. Scrip dividend – FT 10% (Promissory Note)
5. Liquidating dividend – return of capital/investment.
Excess of amount received vs. cost is taxable as
capital gains
6. Indirect dividend – other payment or rights received
by the taxpayer
Tax rate for dividend distribution
1. Resident/Non-resident/Resident alien – 10% final
tax
2. Non-resident alien engaged in trade/business – 20%
final tax
3. Non-resident alien not engaged in trade/business –
25% final tax
4. Domestic & resident foreign – Tax exempt
5. Non-resident foreign – 15% final tax
Annuities
Annuity policies sold by insurance companies, which
provide installment payment for life, or for a
guaranteed fixed period of time whichever is longer or
for life and guaranteed fixed period.

The portion of each annuity payment that represents

return of premium is not taxable while that portion
that represents interest is taxable.
Prizes and winnings
Contest awards or prizes for commercial or non-
commercial contest are generally taxable.

If the amount of prize is P10,000 or less taxable under

Section 24(A)
If the amount is above P10,000 subject to 20% final tax

PCSO & LOTTO – tax exempt up to P10,000 but subject

20% final tax if above P10,000
Pensions
Amount of money received in lump sum or on staggered
basis in consideration of services rendered.

Pension are being given after the individual reaches the

age of retirement.

It is taxable to the extent of the amount received except

if there is an approved pension plan by the BIR.
OTHER
 Taxable Income from other
source
1. Income from gambling, extortion, theft, bribes,
smuggling are taxable
2. Amount of debt of stockholder forgiven is like a
dividend subject to tax.
3. Bad debts previously charged off but later recovered.
4. Taxes paid and subsequently refunded
5. Tax informer reward
Exclusion from Gross Income
1. Life insurance – The proceeds of life insurance policies paid to
the heirs or beneficiaries upon death of the insured, whether in
a single sum or otherwise, but if the amount are held by the
insurer with agreement to pay interest thereon, the interest
payment shall be included in gross income.

2. Gifts, Bequest and Devises – The value of property acquired,

however the income from such property such as transfer of
dividend interest shall be included in gross income. DONOR’S TAX

3. Compensation for Injuries or Sickness – whether by suit or

agreement on account of injuries or sickness.
Exclusion from Gross Income
4. Income Exempt Under Treaty – income of any kind, to
the extent required by any treaty obligation binding
upon the Government of the Philippines.

5. Retirement Benefits, Pension, Gratuities, etc.

a. Retirement benefits received under RA7641 and those
received by official and employee of private firms,
whether individual or corporate in accordance with a
reasonable private benefit plan maintained by employer.
Provided the employee has been in service for at least 10
years and is not less than 50 years at time of retirement.
Exclusion from Gross Income
b. Any amount received by employee or his heirs as a
consequence of separation due to death, sickness or
other physical disability or any cause beyond the control
of said employee.

c. Social security benefits, retirement gratuities, pension

and other similar benefits received by citizen of the
Philippines either resident or non-resident and resident
alien from foreign government, private of public
institution.
Exclusion from Gross Income
d. Payment of benefits due to or become due to any person
residing in the Philippines under the laws of the United
States administered by the US Veterans administration.

e. Benefits received from or enjoyed under Social Security

System in accordance with the provision of RA8282.

f. Benefits received from GSIS under RA8291, including

retirement gratuity received by government
official/employees.
Exclusion from Gross Income
g. Investment income of contribution earned from
investment and reinvestment of personal equity and
retirement account (PERA) assets in the maximum
amount is exempt under RA9505 and Revenue
Regulations 17-2011.

6. Miscellaneous Items
Exclusion from Gross Income
a. Income Derived by Foreign Government from investment in the Philippines in
loans, stock, bonds and other domestic securities or from interest on deposit in
banks.

b. Income Derived by the Government or its Political Subdivision. Income from any
public utility or from the exercise of any essential government functions accruing
to the Government of the Philippines or to any political subdivision thereof.

c. Prized and Awards made primarily in recognition of religious, charitable,

scientific, educational, artistic, literacy or civic achievement if the recipient was
selected without actions to enter the contest and recipient is not required to
render substantial future service as condition in receiving the prize or award.
Exclusion from Gross Income
g. Gains from sales 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.

i. Holiday pay, overtime pay, night differential pay and hazard

pay received by minimum wage earners.

j. Campaign contribution to political candidate not for personal

expenditure but for the campaign. Unutilized campaign funds
shall be considered subject to income tax and must be declared
in ITR of the candidate.
Exclusion from Gross Income
d. Prize and awards in sport competition granted to
athletes in local and international sport competition in
the Philippines or abroad and sanctioned by their
national sports association.

e. 13th month pay and other benefits received by official

and employees up to ninety thousand pesos (P90,000)
only.

f. GSIS, SSS, Medicare, Pag-ibig and other contribution

and union dues of individual.
Sources of Income
1. Within the Philippines

2. Without the Philippines

3. Partly within and partly without

Determination of Source of Income
1. Compensation income - Place of performance

2. Merchandising business - Place of business

3. Manufacturing business

a. If produce in whole and sold within – Purely within

b. If produce in whole and sod without – Purely without
c. If produce in whole or in part
within and sold without - Partly within/partly without
d. If produce in whole or in part without
and sold within - Partly within/partly without
Determination of Source of Income
4. Mining - Place where mine is located
5. Farming -Place where farm is located
6. Interest income -Location of property
7. Rent income -Location of property
8. Royalties - Place where intangible is used
9. Gain on sale of property – Location of property
10. Gain on sales of personal
property purchases in one
and sold in another - Place of sale
Determination of Source of Income
11. Dividend from
a. Domestic corporation - within
b. Foreign corporation
1. Less than 50% - entirely foreign
2. 50% to 85% - proportionate
3. More than 85% -entirely within the Philippines

Proportionate = Phil. Gross Income x Dividend

Entire Gross Income received
Determination of Source of Income
12. Gain on sale of domestic share of stock - within

To get income purely within from income partly within and partly without

Net income x Value of property within = XXX

2 Value of property within & without
Add: Net income x Gross sales within = XXX
2 Gross sales within & without

Income Purely within XXX

Less: Expenses allocated to income within XXX
Ratable portion of unallocated expenses XXX XXX

Philippine gross income x Unallocated expenses

Total gross Income

Net Income within XXX

The End