Gross Incom Taxation

HANDOUT 2: The Gross Income: Its Items
Concepts and Exclusions
Name of Faculty: Eugene O. Balindan, CPA / Instructor 1

Subject: BA 101 Income Taxation
Lesson/Topic: The Gross Income: Its Items, Concepts and Exclusions
Objectives:
 Enumerate the categories of income and the tax rates applicable per type of income.
 Discuss the classification of income taxpayers other than the individual.
 Identify and differentiate the categories of income.
 Determine the scope and different sources of gross income and the exclusion from
gross income.
 Correctly classify gains and losses from dealings in properties if taxable under income
taxation.
 Calculate correctly the amount of allowable interests, rents, royalties, and other
passive incomes.
A. ITEMS AND CONCEPT OF INCOME
Income, Taxable Income, and Income Tax defined
Income. All wealth flows into the taxpayer other than a mere return of capital. It
includes the forms of income specifically described as gains derived from the sale
or other disposition of capital.
For tax purposes, income is defined as the amount of money coming to a

person or corporation within the specified time, whether as payment for services,
interest, or profits from investments like earnings, whether lawful or not, express or
implied.
Taxable income refers to the pertinent items of gross income specified in the
code, less deductions, for any authorized for such types of income by the code or
other special laws.
Income tax. Referred to as a tax on all yearly profits arising from property,
professions, trades, or offices, or as a tax on a person's income, emoluments
profits, and the likes.
Classification of income tax
In the Philippines, our income tax is classified as:
A. A national tax
B. An excise tax
C. A direct tax
D. A general tax
Classification of income taxpayers
Income taxpayers may be classified into:

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A. Individual. A natural person, whether Filipino citizens or not and whether

resident or non-resident of the Philippines.
B. Corporation. Includes partnership no matter how created or organized,

joint-stock companies, joint accounts, associations, or insurance companies, but
does not include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking a construction project or
engaging in petroleum, geothermal, and other energy operations pursuant to an
operating or consortium agreement under a service contract with a government.
C. Estate. All property, rights, and obligations of a person which are not
extinguished by his death and also those which have accrued since the opening of
the succession. To be subject to income tax, an estate must be under the judicial
settlement; otherwise, it is not subject to income tax.
D. Trust. An arrangement created by will or an agreement under which property is

passed to another for conservation or investment with the income therefrom and
ultimately the corpus (principal) to be distributed in accordance with the directions
of the creator as expressed in the governing instrument.
A taxable trust is an irrevocable trust both as to corpus and income.
General definition
Gross income is income derived from whatever sources, which means all
income not expressly excluded or exempted from the class of taxable income,
irrespective of the voluntary action of the taxpayer in producing the income.it
includes but not limited to the following:
a. from dealing with property
b. Interests
c. Rents
d. Royalties Compensation from services in whatever form paid, including, but

not limited to fees, salaries, wages, commissions, and similar items
e. Gross income derived from the conduct of a trade or business or the

exercise of a profession
f. Gains derived
g. Dividends
h. Annuities
i. Prizes and winnings
j. Pensions; and
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k. Partner's distributive share from the net income of the general professional
partnership
Thus, income from illegal activities such as extortion, illegal gambling, bribery,
graft and corruption, kidnapping, racketeering, drug peddling, etc. Fall within the
ambit of "income from whatever source derived" subject to income tax.
Self- help income
These are self- help activities such as own repair of automobiles, own
mowing of lawns, performing of own household chores, and the likes are not
subject to tax.
A carpenter might agree to repair a painter’s house in exchange for the

painter’s promise to paint the carpenter’s home. In this instance, where the parties
exchange services, each party realizes income equal to the value of the services
he receives. If each did his own work (i.e. the painter fixed his own house and the
carpenter paints his own home), neither would have to report any income (Philipps
vs. Kramer, supra).
Compensation paid in kind
Compensation may be paid in some medium other than money. Withholding

tax is deducted by the employer to the compensation of the employee. Thus, when
compensation is paid in some medium other than money, the following rules shall
apply:
a. If services are delivered in kind, the fair market value of the thing taken in
payment is the amount to be included as compensation income.
b. If services are rendered at a stipulated price, in the absence of evidence to

the contrary, such price will be presumed to be the fair market value of the
remuneration received.
c. If the corporation transfers to its employees its own stock as remuneration

for services rendered, the amount of such remuneration is the fair market value of
the stock at the time the services were rendered. (sec. 2.71.1. Rev. Reg. 2-98)
Other taxable compensation income
A. Compensation paid in promissory note (taxable income) — refers to a

promissory note received in payment of services. It constitutes income to the
extent of their fair market value at the time of receipt.
NOTE: If the note is subjected to a discounting of notes, the fair market value is
the fair discounted value.
Illustration
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In 2017, Daet received from Labo a promissory note with the face value of
P1,000,000 for services rendered. The note will mature after one year. At the time
of receipt in 2017 the note was sold to a bank at a discount of 18%. Labo paid the
note upon maturity in 2018.
a. How much income is subject to tax in 2017?
Face value P1,000,000

Less: Discount (P1,000,000x18%) 180,000
Taxable income 820,000
b. How much income is subject to tax in 2018?
Face value P1,000,000

Less: Amount already declared as income 820,000
Income subject to tax 180,000
B. Tips and gratuities (employee's taxable income but not subject to

withholding tax) — refers to tips and gratuities paid directly by a customer of an
employer to an employee which are not accounted for by the latter to the former. If
accounted for by the employee to the employer (i.e. included in the bill paid by the
customers), it is taxable income of the employee and subject to withholding tax.
C. Fixed or Variable Allowances — In general, fixed or variable allowances

in addition to the regular compensation, fixed for his position of office, is
compensation subject to income tax and creditable withholding tax on
compensation income (Section 2.78.1 (A) of RR 2-98 as amended by RR-10-
2008). Examples of fixed or variable allowances are transportation allowance,
representation allowance, communication allowance, living away from home
allowance (LAFHA), and the like.
However, any amount that is reasonably expected to be incurred by an

employee in the performance of his duties is not compensation if they are a.)
Ordinary and necessary expenses, b.) Paid or incurred in pursuit of trade,
business, or profession, and c.) Required to be liquidated for the foregoing
expenses.
NOTE: Any unreturned excess of advances is taxable income to the employee.
 Pre-computed business allowances

Reasonable amounts of reimbursements/advances for traveling and
entertainment expenses that are pre-computed on a daily basis and
are paid to an employee while he is on an assignment or duty need
not be subject to the requirement of substantiation and to withholding
(i.e., Per Diem).
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 Business-related allowances subject to liquidation

Any amount paid especially, either as advances or reimbursements
for travel, representation, and other bona fide ordinary and
necessary expenses incurred or reasonably expected to be incurred
by the employee in the performance of his duties are not
compensation subject to withholding, if the following conditions are
satisfied:
o It is for ordinary and necessary traveling and representation or
entertainment expenses paid or incurred by the employee in
the pursuit of the trade, business, or profession; and
o The employee is required to account/liquidate for the
foregoing expenses in accordance with the specific
requirements of substation for each category of expenses
pursuant to Sec. 34 of the tax code.
 Representation and Transportation Allowances (RATA) & Personal
Economic Relief Allowances (PERA)
o RATA and PERA under General Appropriations Act granted to
certain government officials and employees are considered
reimbursements for the expenses incurred in the performance
of one's duties rather than as additional compensation,
therefore; income tax exempt.
o For private employees, it's generally taxable as part of their
gross compensation income. It doesn't matter if the allowance
is fixed or not. It is, however, exempt from tax if the following
conditions are present:
1.) The expenses are ordinary and necessary in the pursuit of trade,
business or profession.
2.) The employee is required to account/liquidate for the said
expenses.
The excess of the actual payments over the advances are taxable if
they're not returned to the owner. Also, reasonable amounts of
reimbursements or advances computed daily and paid to the employee
while on assignment/duty don't need to be subjected to substantiation
requirements and withholding.
 Stipends of Resident Physicians

o The stipends received by the resident physicians during their
intensive training in the residency program of a hospital and
individuals engaged in the practice of a profession or calling
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like doctors of medicine are subject to creditable withholding

tax (CWT) imposed under the Tax Code, as amended {BIR
Ruling No. DA (C-004)024-2010, February 4, 2010}.
D. Vacation and sick leave allowances (taxable compensation income) —

refer to the salary of an employee on vacation or sick leave, which are paid,
notwithstanding his absence from work.
However, the monetized value of unutilized vacation leave credits of ten

days or less paid to private firm employees is not subject to income tax. At the
same time, the monetized value of unutilized vacation and sick leave credits
paid to government officials and employees are also exempted.
Illustration:
Mr. A is working in a private company. He decided to monetize his twenty-five

days unutilized vacation leave credits, and his salary per day is P 1,000.
Questions:
A. How much will be non-taxable and taxable?

B. If, in the given problem, Mr. A decided to change his mind, he will monetize the
unutilized sick leave credits (25 days), not the vacation leave credits. How much will
be non-taxable and taxable?
B. How much will be non-taxable and taxable if he is a government employee, and if he
will monetize the 15 days vacation leave credits and 10 days sick leave credits?
Answers:
A. Taxable monetization of unutilized vacation leave credits of a private employee
Vacation leave credits to be monetized 25
Vacation leave credits that are exempted (de minimis) 10
Leave credits that are taxable 15
Multiply by: His salary per day XP1,000
Taxable amount of monetized leave credit P15,000
Note: The taxable amount of monetized leave credits are included in the taxable gross
income. The non-taxable monetized leave credits are (10 days x P1,000)= P10,000.
B. Taxable monetization of unutilized sick leave credits of a private employee
All of the sick leave credits to be monetized are taxable because only the monetized ten
days or less vacation leave credits of a private employee/officer are not subject to tax. It
is considered as de minimis benefits.
Sick leave credits to be monetized 25
Salary per day x P1,000
Taxable monetized sick leave credits of a private employee P25,000
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Note. The taxable amount of monetized leave credits are included in the taxable gross
income.
C. Taxable monetization of unutilized vacation and sick leave credits of a government
employee/officer
All of the monetized sick and vacation leave credits are not taxable and not be included
in the taxable gross income because they are considered as de minimis benefits.
 Maternity Leave Pay

o Under RA 11210, otherwise known as the 105-Day Expanded
Maternity Leave Law, and it joint implementing rules and
regulations and the RMC 105-2019, the maternity benefit of
the female employee shall pertain to the full payment of full
salary, wherein one of its components is the salary differential.
o Full pay or full salary pertains to the actual remuneration or
earnings paid by an employer for services rendered on normal
working days and hours, including allowances provided for
under existing company policy or collective bargaining
agreement, if any.
o Salary differential refers to the difference that shall be
shouldered by the employer when the actual cash benefit
received from the Social Security System (SSS) is less than
the full pay or full salary of the female employee during the
duration of the maternity leave.
o The salary differential, being part of the "maternity benefit",
shall be treated under the same tax rules with the actual cash
benefit received from SSS, hence, exempt from income tax
and withholding tax on compensation income.
Forgiveness of indebtedness
If the creditor condones the indebtedness of the debtor, the following rules
shall apply:
A. On account of the debtor's services to the creditor, the same is taxable

income to the former.
B. If no services were rendered, but the creditor simply condones the debt, it is
a taxable gift.
C. If the creditor is the corporation and the debtor is a stockholder, the

forgiveness of indebtedness has an effect on the payment of dividends.
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D. If the creditor is a stockholder, and the debtor is the corporation, the

forgiveness of indebtedness shall be considered as an additional investment.
Remuneratory donations
They referred to those which remunerate past services which do not constitute
demandable debts. The motivating cause is gratitude, acknowledgment of a debt,
or a desire to compensate, not the liberality of the donor. They are deemed
income subject to income tax.
Example:
A saved the life of B, who met an accident. The latter, in a display of gratitude,
gave him cash of P500,000.
a. Is the P500,000 a taxable income? Yes, this is a case of a remuneratory

donation which is subject to income tax
b. Suppose without doing anything, and A received P500,000 from B due

purely to the liberally of the latter. Is the P500,000 a taxable income? No. The
situation does not concern remuneratory donation anymore. The cause of the gift
is purely the liberality of A. Hence, it is not considered as taxable income but
taxable in donor's tax.
Recovery of bad debts previously deducted
Recovery of bad debts previously allowed as a deduction in the preceding

years shall be included as part of the gross income in the test of recovery to the
extent of the income tax benefit of said deduction.
There was a tax benefit when taxpayers realized a tax deduction of income
tax due on account of said bad debt deduction from gross income.
Interest on the amount recovered is a taxable income and is not covered by a

tax benefit rule.
ILLUSTRATIVE CASE
Indicate the amount of taxable income or deductible loss in each of the following
independent cases
2017 Case 1 Case 2 Case
Income/ loss before write off ₱60,000 ₱ (30,000) ₱60,000
Less: Bad debt written off 10,000 10,000 100,000
Net Income/ loss after bad debt 50,000 (40,000) (40,000)
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2018
Bad debt recovered ₱10,000 ₱ 10,000 ₱100,000
ANSWER:
Case 1: taxable to the extent of ₱10,000. The deduction of bad debt resulted in a
tax benefit to the taxpayer.
Case 2: not taxable. There was no tax benefit to the taxpayer because when the
bad debt was claimed as a deduction, the taxpayer was already at a net loss.
Thus, it did not result in a reduction in the tax liability of the taxpayer.
Case 3: only the amount of ₱60,000 is taxable. The tax benefit to the taxpayer is
limited only to ₱60,000.
Refund of tax
A tax refund is taxable if the tax was previously deducted as an expense in

computing the tax during the previous year. It shall be included as part of the gross
income in the year of receipt to the extent of the income tax benefit of said
deduction.
The general rule, the taxes paid or incurred within the taxable year in
connection with the taxpayer's profession, trade, or business, shall be allowed as
deduction.
The following taxes are not deductible, namely; income tax, income tax paid
abroad if claimed as a tax credit, estate tax, donor's tax, special assessment and
stock transaction tax.
NOTE: If the tax is not deductible, the refund of which is not taxable.
ILLUSTRATIVE CASE
Eugene has the following data in 2017:

Taxable income before deduction of taxes ₱150,000
Taxes paid:
Income tax 12,000
Common carrier's tax 15,000
Local business tax 10,000
Donor's tax 6,000
These taxes paid were refunded to her in 2018.
How much is the taxable income in 2018 if income before tax refund is ₱200,000?
ANSWER:
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Taxable income before tax refund ₱200,000
Add: Common carrier's tax ₱15,000
Local business taxes 10,000 25,000
Taxable income ₱225,000
NOTE: The refund of the income tax and donor's tax are not taxable because they
are not deductible for purposes of computing the taxable income.
Refund of indirect tax
If the tax is an indirect tax, the proper party to question or seek a refund of
an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by
law, and who paid the same even if he shifts the burden thereof to another (Silkair
vs. CIR, G.R. Nos. 171383 & 172379, Nov. 14, 2008).
Illustration
B company purchased from Solane Gasoline Shop 1,000,000 liters of fuel

from January to December 2018. Such product is subject to excise tax (an indirect
tax), which is added to the price it paid to the gasoline shop.
If B company is exempt from excise tax, who is entitled to claim a refund on

the excise taxes erroneously paid to the government – B company or Solane
Gasoline Shop?
Answer: In the refund of indirect taxes, the statutory taxpayer (Solane

Gasoline Shop) is the appropriate party who can claim the refund. In indirect
taxation, the purchaser and end-consumer ultimately bear the tax burden, but this
does not transform his status into a statutory taxpayer. B company should invoke
its tax exemption to Solane Gasoline Shop before buying the fuel.
Leasehold improvements
A lease contract is a consensual, bilateral, onerous, and commutative

contract by which one person binds himself to grant temporarily the use of a thing
or the rendering of some service to another who undertakes to pay some rent,
compensation, or price.
Improvements made by the lessee shall be treated as income of the lessor

if the improvements will be owned by the lessor (transfer of ownership) at the end
of the lease and or if the lessor is not required to pay the lessee the value of such
improvements.
When the lessee makes a useful improvement to the leased premises, such as
the construction of fence or building, the following rules shall apply if said
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improvements are relinquished to the lessor without demanding reimbursement of

its value:
1. The consideration for the use of property paid by the lessee is taxable
income to the lessor;
2. Taxes paid by the lessee on behalf of the lessor for business property are
additional rent and constitutes income taxable to the lessor;
3. When the lessee makes an improvement on leased premises and said

improvements would belong to the lessor upon the termination of the lease,
the lessor may at his option report income as follows:
A. Outright method— report as income the fair market value of the

improvements in the year of completion;
B. Spread–out method—spread over the remaining term of the lease the

book value of such improvements at the termination of the lease.
This method is computed as follows:
Cost of leasehold improvements ₱xx
Less: accumulated depreciation xx
Book value, end of lease xx
Divided by the remaining term of the lease xx
Annual income xx
4. Deduction of lessee— the lessee may claim depreciation of the

improvements over the remaining term of the lease or the life of the improvements,
whichever is shorter.
5. Premature termination of the lease— income to be reported by the lessor

shall be computed as follows:
Book value upon termination ₱xx
Less: amount already reported as income xx
Income in the year of pre-termination ₱xx
 Taxable Rent income of the lessor may in the form of:

A. Cash received at a stipulated price.
B. Obligations of the lessor to third persons paid or assumed by the
lessee in consideration of the contract of lease.
C. Advance payment, which may be in the form of; prepaid rent
(reported in full in the year of receipt) and a security deposit that is
applied to rental.
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 Non-taxable Rent Income of the lessor may in the form of:

A. Advance rentals representing option money
B. A security deposit to ensure faithful performance of certain
obligations of the lessee.
Rental Payments
Rent income shall be taxable on the year received, whether earned or

unearned, provided there is no restriction as to its use, and regardless of the
method of accounting employed.
 The security deposit shall be taxable if upon forfeiture in favor of the

lessor or upon application as rental payments.
Example:
A, lessor, leased a lot to B, lessee for 20 years beginning January 1, 2018,

subject to the following terms and conditions:
a. Lessee will pay a rental of P300,000 per month.
b. Lessee will pay the real estate tax on the land of P 100,000 a year.
c. Lessee will construct a building on the lot to be owned by the lessor when
the lease expires.
Cost of building completed, July 1, 2020 P28,000,000
Life of building 25 years
Required:
1. Compute the taxable income of A for 2020. Use spread-out method of

determining income on leasehold improvements.
2. Determine deductible expense of B for 2020.
3. Assume that due to the fault of the B, the lease was terminated on January 1,
2023. Compute the income of A for the year 2023.
4. Compute the income to be reported by A in 2020 using Outright Method.
Answer:
1. Income of lessor A in 2020 using spread out method.
Rent (300,000x12) P 3,600,000

Tax paid by lessee 100,000
Income on leasehold improvement:
Cost P28,000,000
Less: Depreciation for 17.5 years
(28,000,000/25)x17.5 19,600,000
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Book value, end of lease 8,400,000

Income from leasehold improvement
(8,400,000/17.5)x6/12 240,000
Total Income of the lessor A in 2020 using spread out method 3,940,000
2. Deductible Expense of lessee B for 2020

Rent P3,600,000
Tax 100,000
Depreciation-leasehold improvement
(28,000,000/17.5)x6/12 800,000
Deductible Expense of the lessee 4,500,000
3. Income of lessor A for the year 2023

Cost of Building P28,000,000
Less: Depreciation for 2.5 years (28,000,000/25)x2.5 2,800,000
Book value upon termination 25,200,000
Less: Income already reported
2020 240,000
2019 (8,400,000/17.5) 480,000
2020 (8,400,000/17.5) 480,000 1,200,000
Income of lessor A for the year 2023 24,000,000
4. Income of lessor in 2020 using outright method

Rent (P300,000x12) P3,600,000
Tax 100,000
Leasehold Improvement 28,000,000
Income of Lessor A in 2020 using outright method P31,700,000
Gross income from manufacturing, merchandising, or mining business
In manufacturing, merchandising, or mining business, "gross income" means the

total sales, less the cost of goods sold plus any income from investment, and from
incidental or outside operations or sources.
In determining the gross income, subtraction should not be made for

depreciation, depletion, selling expenses, or losses, or for items not ordinarily used
in computing the cost of goods sold.
To compute for gross income and taxable income:

Sales ₱xx
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Less: Sales returns and allowances xx

Net sales xx
Less: cost of sales xx
Gross profit xx
Add: Other income
Rent ₱xx
Gain on sale of capital assets xx xx
Gross income xx
Less: deductible expenses xx
Taxable income ₱xx
Gross Income from manufacturing, merchandising, or mining business
In manufacturing, merchandising, or mining business, "gross income"

means the total sales, less the cost of goods sold plus any income from
investments and from incidental or outside operations or sources (sec. 43, Regs.
2).
In determining the gross income, subtractions should not be made from

depreciation, depletion, selling expenses, or losses, or for items not ordinarily used
in computing the cost of goods sold (ibid.)
Gross income from farming
The term farm embraces the farm in the ordinary accept sense and includes
stock, dairy, poultry, fruit and truck farms, also plantations, ranches, and all lands
used for farming operations.
Farmers are individuals, partnerships, or corporations that cultivate, operate, or

manage farms for gain or profit either as owners or as tenants.
However, a person cultivating or operating a farm for recreation or pleasure, the

result of which is a continual loss from year to year are not regarded as farmers.
The following are the prescribed methods of reporting gross income from
farming:
1. Cash basis or receipts and disbursements basis— under this method, no

inventory is used to determine profits
2. Accrual basis— under this method, an inventory is used to determine
profits
3. Crop basis— this method is used when a farmer is engaged in producing
crops that take more than a year to gather and dispose of from the time of
planting.
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Illustration
The following data pertains to B:
Beginning inventory:
Farm products P300,000
Livestock 250,000
Ending inventory
Farm products 200,000
Livestock 340,000
Sale of products raised in the farm 4,500,000
Sale of livestock 3,250,000
Gain on sale of farm equipment 400,000
Rent income of farm equipment 70,000
How much is the gross income of B if he is using:

A. Cash method
B. Accrual method
a. The taxpayer is using the cash method of accounting.

Sale of farm products P4,500,000
Total 7,750,000
Add: Other Income
Gain on sale of farm equipment P400,000
Rent income of farm equipment 70,000 470,000
Gross income 8,220,000
b. The taxpayer is using the accrual method of accounting

Ending Inventory
Farm Products P200,000
Livestock 340,000 540,000
Sale of farm products 4,500,000
Total 8,290,000
Less: Beginning inventory
Farm products P300,000
Livestock 250,000 550,000
Net 7,740,000
Add: Other Income P400,000
Gain on sale of equipment 70,000 470,000
Gross Income 8,210,000
Situs of Dividend Income
1. Dividends from within:

a. Dividend income from Domestic Corporation
b. Dividend income from Foreign Corporation, IF at least 50% of gross

income for the three-year period ending with the close of its taxable year preceding
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the declaration of such dividends (or for such part of such period as the
corporation has been in existence) was derived from sources within the
Philippines.
2. Dividends from without:
a. Dividend income from Foreign Corporation
b. Dividend income from Foreign Corporation, IF the ratio of the gross

income Philippines over worldwide income for the three-year period ending with
the close of its taxable year preceding the declaration of such dividends (or for
such part of such period as the corporation has been in existence) is less than
50%.
3. Partly within and partly without:
SOURCE OF DIVIDEND SOURCE OF INCOME

DOMESTIC CORPORATION Income is purely from the Philippine
sources.
FOREIGN CORPORATION If the ratio is;
RATIO: A. less than 50%: Income is treated as
Gross income – Philippines x Dividend entirely derived from sources outside of
Gross Income – World the Philippines.
B. Greater than or equal to 50%: Income
is derived partly from sources within and
partly without the Philippines.
Illustration A
A Corporation is a non-resident foreign corporation. In 2020, the said corporation

received a P500,000 dividend income from B, a foreign corporation. And the total
Business Expense for 2020;
Business Expense, Abroad, 2020 P 300,000

Business Expense, Philippines, 2020 P200,000
Total P500,000
The following are the gross income of A Corporation from 2017 to 2020;
Gross 2017 2018 2019 2020

Income
from:
Abroad P 300,000 P300,000 P300,000 P400,000
Philippines P100,000 P200,000 P300,000 P300,000
Total P400,000 P500,000 P600,000 P700,000
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Questions:
A. What is the ratio of gross income – Philippines from gross income – World?
B. For tax purposes, how much will be the dividend income that is derived partly
from sources within and partly without the Philippines?
C. For tax purposes, how much will be the dividend income that is entirely derived
from sources outside of the Philippines?
D. How much is the taxable dividend income?
E. How much is the tax payable for 2020?
Answers:
A. Ratio:
Gross income – Philippines x Dividend

Gross Income – World
Total Gross Income from Philippines and Abroad before the declaration of dividend
Philippines Abroad Total Gross Income - World
2017 P100,000 P300,000= P400,000
2018 P200,000 P300,000= P500,000
2019 P300,000 P300,000= P600,000
Total Income P600,000 P900,000 P1,500,000
Ratio= GI-PH/GI-WORLD
Ratio = P600,000 / P1,500,000
Ratio = 40%
B. Therefore, it less than 50% and the dividend income is treated as entirely derived
from sources outside of the Philippines
Answer for letter C & D: Based on the given problem, A corporation is a non-resident
foreign corporation on which it is taxable only on all income earned within the
Philippines and the dividend income is considered as entirely derived from sources
outside of the Philippines, therefore, the said dividend income is not included in the
gross income and not taxable within the Philippines.
E. Tax Payable if the taxpayer is a Resident foreign corporation (RFC) & Non-resident
foreign Corporation (NRFC)
RFC NRFC_
Gross Income, Philippines for the year 2020 P 300,000 P300,000
Dividend Income - -
Total Gross Income P300,000 P300,000
Less: Allowable Deduction
Business Expense, Philippines, 2020 P200,000 -
Taxable Net Income P100,000 P300,000
Tax Rate x 30% x 30%
Income Tax Payable-RFC / Final Withholding tax-NRFC P 30,000 P 30,000
Page 17 of 32
Note: If a corporation is a resident foreign corporation and a non-resident foreign

corporation, it is taxable only on income earned within the Philippines. The ratio of GI
-Philippines to GI – World is 40% it is less than 50% so the dividend income amounted
to P500,000 is treated as entirely derived from sources outside of the Philippines. The
NRFC tax payable is a final withholding tax which means it is the full and final payment
of income tax due from the recipient of the income. Moreover, the NRFC cannot avail
the allowable deductions (ex. Business expenses).
Illustration B
Assuming on the above problem with the same question, the following are the
gross income of A Corporation from 2017 to 2020;
Gross 2017 2018 2019 2020

Income
from:
Abroad P100,000 P200,000 P300,000 P400,000
Philippines P 300,000 P300,000 P300,000 P300,000
Total P300,000 P500,000 P600,000 P700,000
Answers:
A. Ratio:
Gross income – Philippines x Dividend

Gross Income – World
Total Gross Income from Philippines and Abroad before the declaration of dividend
Philippines Abroad Total Gross Income - World
2017 P300,000 P100,000= P400,000
2018 P300,000 P200,000= P500,000
2019 P300,000 P300,000= P600,000
Total Income P900,000 P600,000 P1,500,000
Ratio= GI-PH/GI-WORLD
Ratio = P900,000 / P1,500,000
Ratio = 60%
B. The ratio is greater than or equal to 50% so the dividend income is derived
partly from sources within and partly without the Philippines.
Dividend Income earned in the Philippines (60% x 500,000) = P300,000
Dividend Income earned in Abroad (40% x P500,000) = P200,000
C. The dividend income that is entirely derived from sources outside of the
Philippines (40% x P500,000) = P200,000
D. The taxable dividend income is the dividend income earned in the Philippines
Page 18 of 32
Ratio of Gross Income – Philippines to Gross Income – World 60%

Multiply by: The total Dividend Income xP500,000
Taxable Dividend income included in the Gross Income P300,000
E. Tax Payable if the taxpayer is a Resident Foreign Corporation (RFC) & Non-Resident
Foreign Corporation (NRFC)
RFC NRFC
Gross Income, Philippines for the year 2020 P 300,000 P300,000
Dividend Income within the PH (60%*P500,000) 300,000 300,000

Total Gross Income P600,000 600,000
Less: Allowable Deduction
Business Expense, Philippines, 2020 P200,000 -
Taxable Net Income P400,000 600,000
Tax Rate x 30% 30%
Income Tax Payable-RFC/FWT Payable P120,000 P180,000
Note: If a corporation is foreign corporation, it is taxable only on income earned within

the Philippines. The ratio of GI -Philippines to GI – World is 60%, it is greater than or
equal to 50%, so the dividend income amounted to P500,000 is derived partly from
sources within (60% of the dividend income) and partly without (40% of the dividend
income) the Philippines. Moreover, only 60% of the dividend income (P300,000) are
treated as dividend income derived from within the Philippines and must be included in
the gross income of A Corp. The said tax is a final withholding tax, which means it is the
full and final payment of income tax due from the recipient of the income if it is non-
resident foreign corporation (NRFC). Moreover, the NRFC cannot avail the allowable
deductions (ex. Business expenses).
Receipt of dividends
Dividends mean any distribution made by a corporation to its shareholders out of

its earnings or profits and payable to its shareholders, whether in money or in
other property.
The more common forms of dividends are:
1. A cash dividend is a form of dividend which is paid in cash to shareholders.

The income is measured by the amount of cash received. Cash dividends
shall be taxable upon declaration.
2. The stock dividend is a distribution by a corporation to its shareholders of

the corporation's own stock. A stock dividend representing the transfer of
the surplus to the capital account shall not be subject to tax, and distribution
of stock dividend is not taxable because they are not realized income
unless:
A. These shares are later redeemed for consideration by the

corporation or otherwise conveyed by the stockholder to the extent
of such consideration.
Page 19 of 32
B. The receipt is other than a stockholder; or
C. A change in the stockholders' equity results by virtue of the stock

dividend issuance. A stock dividend constitutes income if it gives
shareholder an interest different from that which is former
stockholdings represented.
When a stockholder receives a stock dividend, which is a taxable income,

the measure of income is the fair market value of the stock received.
Illustration
A, B, C, D, and E are the stockholders of ABCDE Corp. Each of them
owns 10,000 shares of stock. During the year, the total corporation declared
10% common stock dividend.
A. Are the stock dividends taxable to the shareholders?
No. The stock dividends received are not taxable income because
generally, stock dividends are not taxable. Moreover, the proportionate
share of the shareholders in the nest assets of the corporation remained
unchanged.
Consequently, the receipt of these dividends shall be recorded in the
books of accounts by a memorandum entry only.
To illustrate:
Case 1: No change in the proportionate interest of the stockholders.
Stockholder Before Dividend Stock Dividend After Dividend

Shares Proportionate 10% Shares Proportionate
Share Share
A 10,000 20% 1,000 11,000 20%
B 10,000 20% 1,000 11,000 20%
C 10,000 20% 1,000 11,000 20%
D 10,000 20% 1,000 11,000 20%
E 10,000 20% 1,000 11,000 20%
Total 50,000 100% 500 55,000 100%
B. How about if the corporation gave the stockholders an option to choose

between property dividends and stock dividends and A, C, and E chose to be paid
in property dividends?
The stock dividends would be taxable income to B and D because the

receipt of the stock dividends resulted in a change in the proportionate interest of
the shareholders.
To illustrate:
Case 2: There is a change in the proportionate interest of the stockholders.
Page 20 of 32
Stockholder Before Dividend Stock Dividend After Dividend

Shares Proportionate 10% Shares Proportionate
Share Share
A 10,000 20% - 10,000 19.23%
B 10,000 20% 1,000 11,000 21.15%
C 10,000 20% - 10,000 19.23%
D 10,000 20% 1,000 11,000 21.15%
E 10,000 20% - 10,000 19.23%
Total 50,000 100% 200 52,000 99.99%*
*The difference of 0.01% is the result of the rounding off of figures.
3. Property dividend— it is a dividend paid in shares of stock of another

corporation or other property of the corporation. The measure of income on
property dividend is the fair market value of the property received at the
time of receipt or distribution. Property dividends shall be taxable upon
declaration.
A distribution of treasury stock is taxable as a distribution of property
dividends.
4. Liquidating dividends are exempt up to the extent of the cost if investment
being a mere return of capital. However, anything in excess of the cost shall
be considered income and, therefore, taxable.
If the amount received by the stockholder in liquidation is less than the cost
of investments, the loss in the transaction is deductible to the extent allowed
for capital losses.
Intercorporate dividends
There is an intercorporate dividend when a dividend is declared by one

corporation and received by another corporation, which is a stockholder to the
former.
In case there is an intercorporate dividend, the following rules shall apply for
taxation purposes.
A. Dividends received by a domestic corporation from another domestic

corporation shall not be subject to tax.
B. Dividends received by a resident foreign corporation from a domestic

corporation shall not be subject to tax.
C. A final withholding tax at a rate of fifteen percent (15%) shall be imposed on

cash and/or property dividends received from a domestic corporation, are subject
to 15% tax provided that the 15% (30%-15%) difference between the usual
corporate income tax is allowed as a tax credit by the country where the recipient
corporation is domiciled (this is known as tax sparing credit).
Page 21 of 32
D. Dividends received by a domestic corporation from a foreign corporation shall

be subject to a regular corporate income tax of 30%; and
E. Dividends received by a foreign corporation from another foreign corporation

shall not be subject to tax.
Summary of Rules on Taxability of Dividends

Dividends issued by Dividends received by Income tax treatment
1. Domestic Corporation Domestic Corporation Not Taxable
Resident foreign Not Taxable
corporation
Non-resident foreign General rule: 30% Final
corporation withholding tax
Exception: 15% if there is
tax sparing credit
2. Resident foreign Domestic Corporation 30% Normal Income tax
corporation Foreign corporation Not taxable
3. Non-resident foreign Domestic Corporation 30% Normal Income Tax
corporation Foreign Corporation Not taxable
Tax Informer's reward
An amount equivalent to ten percent (10%), but not exceeding to ₱1,000,000, of

the revenues, surcharges or fees recovered and/or fine or penalty imposed and
collected shall be given a reward to persons instrumental in the discovery of violations
of the provisions of the internal revenue laws.
However, the following are disqualified to avail of the informer's reward:
1. A BIR official or employee or any other incumbent public official or employee
2. Relative within the sixth (6 th) civil degree of consanguinity of a BIR official or
employee, or other public official or employee; and
3. Though already retired or otherwise separated from service, BIR officials or
employees or other public officials who acquired the information in the course of the
performance of their duties during their incumbency.
A final withholding tax at a rate of ten percent (10%) shall be imposed on rewards
collected from persons who give definite and sworn information leading to the discovery
of frauds, revenues, and fees, or discovery and the seizure of smuggled goods, or
which resulted to the conviction of the guilty party, or the imposition of fine or penalty, or
a compromise has been reached.
B. EXCLUSIONS FROM GROSS INCOME

EXCLUSIONS- income received or earned but not taxable as income
EXCLUSIONS DEDUCTIONS
Not taken into account in determining Subtracted from gross income
Page 22 of 32
gross income
The following are excluded from gross income:
1. PROCEEDS OF LIFE INSURANCE

 Proceeds of life insurance policies paid to the heirs/beneficiaries upon the
death of the insuprizesred are excluded
 If such amounts are held by the insurer under an agreement to pay
interest, the interest payments shall be included in the gross income.
 It is considered as an indemnity rather than as gain or profit.
 When the insured outlives the policy, the ( proceeds – the total amount of
premiums paid ) should be included in the GI
 Amounts received in excess of the face amount of the policy are taxable
as interest.
 Premium on life insurance covering the life of an employee paid by the
employer is taxable income to the employee, where the insured employee,
directly, or indirectly is the beneficiary under the policy.
Illustration
Elijah is the beneficiary of a 300,000 insurance policy on the life of his father.
Upon her father’s death, she choose to receive 125,000 per year for 3 years
instead of the lump sum. How much taxable income must Elijah report?
Answer:
Elijah must report 75,000 [(125,000 x 3) – 300,000] as taxable income. The
300,000 she received is tax free, while the P75,000 is taxable as interest.
2. RETURN OF THE PREMIUMS

 The amount received as a return of the premiums paid by him under
life insurance, endowment, or annuity contracts, received either during
the term or at the maturity of the terms or upon surrender of the
contract are excluded from gross income.
 Return of the premiums paid amounts to a return of capital.
 The insurance premium is the agreed price for assuming and carrying
the risk. The amount of the proceeds received is greater than the
aggregate payments; the excess is included in the gross income only if
the insured outlives the policy.
Illustration 7-2
Karen took out a 2,000,000 life insurance policy with Lopez Life Insurance.
After the 20th year, she received the face value of the insurance. A total of
1,300,000 is her total premiums paid. Is the 2,000,000 taxable?
Answer:
Since Karen outlived the policy only the portion of proceeds received by the
insured is subject to tax. Only the 700,000 is taxable. (2,000,000 Page–23 of 32
1,300,000 = 700,000)
3. GIFTS, BEQUEST, AND DEVISES
EXCLUDED FROM GROSS INCOME MUST BE IN CONSIDERATION OF

PURE LIBERTY TO BE EXCLUDED
GIFTS DESCENT BEQUESTS DEVISE
A voluntary transfer of Also referred to as The act of giving The transmission
property from one person succession the personal of real property
to another without any property, by will. by virtue of a will.
consideration or
compensation therefor.
It depends on the intent "Title by Legatee- person Devisee- person

of the donor. It must be descent" the title to whom gifts of to whom gifts of a
for donation purposes; by which one personal property particular real
if it is for business, it is person, on the are given by virtue property are
taxable as income. death of another, of a will. given by a virtue
acquires the of a will.
estate of the latter
as his heir at law
 If there are services performed, it is subject to income tax

 If it is excluded, the transfers are subject to donor's tax or estate tax.
 BUT, income from such property is included in the gross income.
Illustration
Raoul inherited an estate from his mother who died in 2019 worth P1,000,000.
During the year, the properties earned an income of P 200,000 and Raoul, the
only heir, received P100,000 from the income of the estate. How much is the
estate income subject to tax? And how much must Raoul include in his gross
income in 2019?
Answer:
The income of the estate subject to income tax is P200,000, the earnings of his
mother’s estate while the amount of income that must be included in Raoul’s
gross income is P100,000, the income that he actually received. However, if the
property is already legally transferred on him, the total income to be included on
his gross income is the entire income earned by the estate, P200,000. The
estate inherited is not subject to income tax but subject to estate tax.
4. COMPENSATION FOR PERSONAL INJURIES OR SICKNESS

 The amount received through accident or health insurance or under the
Workmen's Compensation Act, as compensation for personal injuries or
sickness plus amounts of any damages received on account of injuries or
sickness are excluded
 "personal injury or sickness" = physical injury and nonphysical injury
(personal embarrassment, injury to personal reputation, mental pain, and
suffering).
Illustration
Jenny was injured in a car accident. The other driver’s insurance company
paid him 30,000 to cover medical expenses and a compensatory amount Pageof24 of 32
another 25,000 for pain and suffering. How much is taxable?
Answer:
The 30,000 given to cover medical expenses are physical damages while the
5. INCOME EXEMPT UNDER TREATY

 To the extent required by any treaty obligation binding upon the
Government of the Philippines shall be exempt.
 Based on the principle of reciprocity and amity among nations.
6. RETIREMENT BENEFITS, PENSIONS, GRATUITIES, ETC.

a. Retirement benefits
 RA 7641 – Retirement Pay Law for Private Sector Employees
 Retirement – the bilateral act of the parties; voluntary agreement
b/w the employer and employees whereby the latter, after reaching
a certain age, agrees and/or consents to severe his employment
with the former
 If no age specified in the agreement, can retire at the age of 60 but
not beyond 65 (compulsory retirement)
 REQUISITES FOR RETIREMENT BENEFITS TO BE EXCLUDED
i. must have a reasonable private benefit plan maintained by the
employer and approved by the BIR (In the absence of
reasonable private benefit plan, an employee may receive tax-
exempt retirement benefits who has reached the age of 60
years or more, but not more than 65 years, who has served at
least 5 years in the establishment (BIR Ruling No.495-14 dated
December 11, 2014).
ii. at least ten years of service
iii. at least fifty (50) years of age at the time of his retirement; and
iv. should not have previously availed retirement benefits of the
same or another employee or that the benefits granted shall be
availed of by an official or employee only once.
 Retirement pay of government officials or employees

- The money value of the accrued leave credits or terminal
leaves given to a retiring government official or employee is
not subject to income tax.
Illustration
Hades an employee of Riegosteel Company retired from the company in 2019
at age 62 receiving a retirement pay of 300,000. He started working in the firm
in 2005. The company maintains a private pension plan, is the retirement
benefit received by Hades taxable to him?
Answer:
No, because all the requisites for exemption from income tax are present 1) a
private plan is maintained by the employer; 2) he retired at the age of 62 which
Page 25 of 32
is more than the required age of 50 years; 3) he worked with Riegosteel for
more than 10 years; and it’s his first time availing the retirement benefit.
b. Separation pay
 Received by an official or employee or by his heirs as a consequence
of separation from the service due to
i. Death, sickness, or other physical ability
ii. For any cause beyond the control of the official or employee
- Involuntariness on the part of the official or employee
- Separation from service must not be asked or initiated by
him
- The separation was not of his own making
- Shall be determined on the basis of prevailing facts and
circumstances
BEYOND THE CONTROL NOT BEYOND THE

CONTROL
 Termination due to  Termination of
the installation of employment due to
labor-saving devices willful disobedience
 Redundancy  Inefficiency
 Reenactment  Dishonesty
 Closure or cessation  Moral depravity
 Serious misconduct
 The amount received from involuntary separation remains exempt from

income tax even if the employee had rendered less than ten years of
service and/or below 50 years of age.
 The retirement benefit is not subject to income tax, although against

the will, is not involuntary because it is in accordance with a Collective
Bargaining Agreement (CBA)
Illustration
Kajik was dismissed from employment against his will due to retrenchment.
He received a separation pay of 180,000. Is this amount taxable to him?
Answer:
No, because separation pay is exempt from tax if the cause of separation
from service is death, sickness, physical disability, or any cause beyond the
control of the employee.
Page 26 of 32
RETIREMENT BENEFIT SEPARATION PAY

Received because of severance from Received due to termination of
employment after reaching a certain age employment for causes other
or a specified number of years in service than age or length of service
c. Social Security Benefits, etc.

 Social security benefits, retirement gratuities, pensions, and other
similar benefits received by residents or non-resident citizens or aliens
who permanently reside in the Philippines, from foreign government
agencies and other institutions, private or public, are exempt from
income tax.
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
 Payments or benefits due to any person residing in the Philippines
administered by the United States Veterans Administration (USVA) are
not taxable
e. SSS and GSIS benefits

 Benefits received from SSS – RA 8282 or GSIS- RA 8291, including
retirement gratuity received by government officials and employees,
shall be exempt from tax
7. INTEREST ON GOVERNMENT SECURITIES

a. Income derived by the foreign government
 Income derived from investments in the Philippines in loans, stocks,
bonds, or other domestic securities, or interest on deposits in banks in
the Philippines by the following is exempted;
 Foreign government
 Financing institutions owned, controlled, or enjoying
refinancing from foreign governments; and
 International or regional financial institutions are established by
foreign governments.
b. 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 subdivisions thereof
 However, all government-owned controlled corporations (GOOCs) are
exempted to income tax, except; Social Security System (SSS),
Government Social Insurance System (GSIS), Philippine Health
Page 27 of 32
Insurance Corporation (PHIC), Philippine Charity Sweepstakes Office

(PCSO), and Local Water Districts (RA 10026).
8. Prizes and awards
 Prizes and awards made primarily in recognition of religious,

charitable, scientific, educational, artistic, literary, or civic achievement
are excluded only if;
 The recipient was selected without any action on his part to
enter the contest or proceeding; and
 The recipient is not required to render substantial future
services as a condition of receiving the prize or award.
Illustration
Mr. A was selected as “Teacher of the Year” by the School Board. He received a
10,000 cash prize. The board selected the recipients based on the background of
each individual and educational achievement. Is the cash prize taxable to him?
Answer:
No, Mr. A was awarded without joining the contest and not required to render
substantial future services. Moreover, the prize given was in recognition of an
educational attainment.
9. Prizes and awards to athletes
 Granted to athletes in local or international tournaments and competitions,

whether held in the Philippines or abroad and sanctioned by their National
Sports Associations, are not subject to tax
Page 28 of 32
Illustration 7-8
Manny PacPac, a resident citizen, on which sanctioned by the National Sports
Association and won the championship trophy and receives 1,000,000 cash
prize from the association and 500,000 talent fee as an endorser of Funa
Shoes. Are those taxable or not?
Answer:
Only the 500,000 are taxable because he is a resident citizen (taxable within
and without the Philippines) but the 1,000,000 cash prize are not taxable
because the said event is sanctioned by the National Sports Association.
However, if it is not sanction by the said association, all income earned abroad
is taxable, although, he may avail the taxes he actually paid abroad as
allowable deduction in his income tax return or as a tax credit on which it can
be deducted in his tax payable (the said tax credit is lower between the actual
tax payments abroad and the computed tax payable as if those income are
10.GSIS, SSS, Medicare, Union dues of individuals and other contributions
 The exemption is limited only to the maximum amount mandated by

law to be contributed by the employee.
11. 13th-month pay and other benefits
 Equivalent to the mandatory 1-month basic salary of officials and

employees of the government
 Other benefits like Christmas bonus, productivity incentive bonus,
loyalty award, cash gifts
 The total amount should not exceed 90,000
Fringe Benefits means any good, service, or other benefit furnished or granted by
an employer in cash or in kind, in addition to basic salaries, to an individual
employee (except rank and file employees).
 Taxable fringe benefits received by:

o Rank & file employees: subject to basic tax
o Supervisory or managerial: subject to fringe benefits tax (a
final tax)
 Tax exempt fringe benefits
o Exempt under the law
o If the grant is required by the nature of, or necessary to the
trade, business, or profession of the employer.
o If the grant is for the convenience of the employer.
o De minimis benefits
 Conforming to the ceiling
 Tax exempt
Page 29 of 32
 Not included in the P90,000 threshold

 In excess of the ceiling
 Subject to tax (basic) only on the excess over
P90,000
"Other Benefits" include:

 Christmas gift and major anniversary celebrations (in excess of the
P5,000 under de minimis benefits)
 Christmas Bonus (RR 2-98 as amended by RR 3-2015)
 Productivity Incentive bonus (RR 2-98 as amended by RR 3-2015)
 Productivity Incentives Scheme under Collective Negotiation
Agreement (CNA) or Collective Bargaining Agreement (CBA) (if not
more than P10,000 it is considered as de minimis benefits which
exempt from income tax; more than P10,000, the entire amount is
part of "other benefits" with a total ceiling of P90,000)
 Loyalty awards (RR 2-98 as amended by RR 3-2015)
 Additional Compensation Allowances (ACA)
 Gift in cash or in kind and other benefits of similar nature actually
received by officials and employees of both government and private
employees. (RR 2-98 as amended by RR 3-2015).
Further, RR 3-2015 emphasized that this exclusion from gross
income is not applicable to:
 Self-employed individuals & Income generated from business.
Illustration 1
Pierre, a high rank employee of a private company receiving a monthly salary of 30,000, had the
following data:
Christmas bonus P25,000

Productivity bonus 5,500
Loyalty award 25,000
Cash gift 10,000
Anniversary gift 8,000
13th month pay 30,000
Clothing allowance 5,000
Monthly rice allowance 3,000
How much is taxable compensation income?
Answer: 380,500
Salary (30,000 x 12) 360,000

Add: Other benefits
Christmas bonus 25,000
Cash gift 10,000
Anniversary gift (8,000-5,000) 3,000
Clothing allowance (5,000-6,000) -
Monthly rice allowance{(3,000-2,000)*12} 12,000
Total 110,500
Page 30 of 32
12. Sales of bonds, debentures, and other certificates of indebtedness
 Gains from the sale, exchange, or retirement of bonds, debentures, or

other certificates of indebtedness with a maturity value of more than
five years.
13. Redemption of shares in a mutual fund
 Gains realized by the investor upon redemption of shares of stock in a

mutual fund company.
14. Minimum Wage Earner
Illustration 2
Pierre, a high rank employee of a private company receiving a monthly salary of 30,000, had the
following data:
Christmas bonus P25,000

Cash gift 10,000
Anniversary gift 8,000
Clothing allowance 5,000
 Minimum Wage Earner (MWE) – a worker in the private sector paid the
Statutory Minimum Wage
 Statutory Minimum Wage – the fixed rate by the Regional Tripartite
Wage and Productivity Board (RTWPB)
 Holiday pay, overtime pay, night shift differential pay and hazard pay
are covered by the exemption.
 If an employee receives other benefits exceeds 90,000, excess is
taxable.
 MWE with other income is subject to income tax on the non-
compensation income.
 Cost of Living Allowance (COLA) for MWEs
COLA of minimum wage earners is exempt from income tax. The
COLA forms part of the new wage rates or statutory minimum wage.
Page 31 of 32
Hence, it is covered by the income tax exemption of MWEs under

9504, as implemented by Revenue Regulations No. 10-08, which
covers the statutory minimum wage (inclusive of COLA under NCR
Wage Order No. NCR-16), including holiday pay, overtime pay, night
shift differential, and hazard pay.
15. OTHER EXCLUSION FROM GROSS INCOME

a. The Intercorporate dividend is dividends are declared by a domestic
corporation and received by domestic or resident foreign corporations.
b. In the convenience-of-the-employer rule, allowances (free meals and
lodging) are furnished by the employer for his own convenience.
c. The de minimis benefits are fringe benefits given by the employer, which
are of relatively small value.
d. In the long-term deposit and investments, the income received by
individuals from sources within on long-term deposit or investment in banks
with a maturity of five (5) years or more.
References:
Ampongan, CPA, Omar Erasmo G. (2020), Income Taxation
Banggawan, CPA, MBA, Rex B. (2019) Income Taxation, Laws, Principles and
Applications
Tabag, Enrico D. & Garcia Earl Jimson R. (2020), Income taxation
Valencia, E. & Roxas, G. (2007). Income Taxation. Baguio City: Valencia Educational
Supply.
Page 32 of 32

Gross Incom Taxation

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Gross Incom Taxation

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HANDOUT 2: The Gross Income: Its Items

Concepts and Exclusions

Name of Faculty: Eugene O. Balindan, CPA / Instructor 1

A. ITEMS AND CONCEPT OF INCOME

Income, Taxable Income, and Income Tax defined

For tax purposes, income is defined as the amount of money coming to a

Classification of income tax

In the Philippines, our income tax is classified as:

Classification of income taxpayers

Income taxpayers may be classified into:

A. Individual. A natural person, whether Filipino citizens or not and whether

B. Corporation. Includes partnership no matter how created or organized,

D. Trust. An arrangement created by will or an agreement under which property is

A taxable trust is an irrevocable trust both as to corpus and income.

a. from dealing with property

d. Royalties Compensation from services in whatever form paid, including, but

e. Gross income derived from the conduct of a trade or business or the

i. Prizes and winnings

Self- help income

A carpenter might agree to repair a painter’s house in exchange for the

Compensation paid in kind

Compensation may be paid in some medium other than money. Withholding

b. If services are rendered at a stipulated price, in the absence of evidence to

c. If the corporation transfers to its employees its own stock as remuneration

Other taxable compensation income

A. Compensation paid in promissory note (taxable income) — refers to a

a. How much income is subject to tax in 2017?

Face value P1,000,000

b. How much income is subject to tax in 2018?

Face value P1,000,000

B. Tips and gratuities (employee's taxable income but not subject to

C. Fixed or Variable Allowances — In general, fixed or variable allowances

However, any amount that is reasonably expected to be incurred by an

NOTE: Any unreturned excess of advances is taxable income to the employee.

 Pre-computed business allowances

 Business-related allowances subject to liquidation

 Stipends of Resident Physicians

like doctors of medicine are subject to creditable withholding

D. Vacation and sick leave allowances (taxable compensation income) —

However, the monetized value of unutilized vacation leave credits of ten

Mr. A is working in a private company. He decided to monetize his twenty-five

A. How much will be non-taxable and taxable?

 Maternity Leave Pay

A. On account of the debtor's services to the creditor, the same is taxable

C. If the creditor is the corporation and the debtor is a stockholder, the

D. If the creditor is a stockholder, and the debtor is the corporation, the

a. Is the P500,000 a taxable income? Yes, this is a case of a remuneratory

b. Suppose without doing anything, and A received P500,000 from B due

Recovery of bad debts previously deducted

Recovery of bad debts previously allowed as a deduction in the preceding

Interest on the amount recovered is a taxable income and is not covered by a

A tax refund is taxable if the tax was previously deducted as an expense in

Eugene has the following data in 2017:

Taxable income before tax refund ₱200,000

Add: Common carrier's tax ₱15,000

Local business taxes 10,000 25,000

Taxable income ₱225,000

Refund of indirect tax