CHAPTER 9:
REGULAR INCOME
TAXATION: INCLUSION IN
GROSS INCOME
CHAN, JOHN MARK
JUGANAS, HAZEL
MADAYAG, JOVIE ANN
ITEMS OF GROSS INCOME
1. Gross income subject to final tax
2. Gross income subject to capital gains tax
3. Gross income subject to regular tax
ITEMS OF GROSS INCOME
SUBJECT TO REGULAR TAX
1. Compensation for services in whatever form 7. Dividends
paid
8. Annuities
2. Gross Income from the conduct of trade,
9. Prizes and Winnings
business, or exercise of a profession
10. Pensions
3. Gains derived from dealings in properties
11. Partner’s distributive share from the net income of
4. Interest
general professional partnership
5. Rents
6. Royalties
1. COMPENSATION FOR SERVICES
IN WHATEVER FORM PAID
•Compensation for services in whatever form paid
Compensation Income- the types of employee benefits that
are subject to regular tax
2. GROSS INCOME FROM THE CONDUCT OF TRADE,
BUSINESS, OR EXERCISE OF A PROFESSION
Any trade or Business, Legal or Illegal, and whether Registered or not
Gross Income for such is determined as
follows:
Sales/Revenues/Receipts/Fees xx
Less: Cost of sales or services (xx)
Gross Income from Operations xx
2. GROSS INCOME FROM THE CONDUCT OF TRADE,
BUSINESS, OR EXERCISE OF A PROFESSION
The following business income is excluded in Gross income subject to regular Income Tax
1. Business Income exempt from income tax like
a. GI from a Barangay Micro-Business Enterprise (BMBE) under RA 9178
b. GI from enterprises enjoying tax holiday incentives under CREATE law which have not yet graduated
to their income tax holiday incentives
2. Business income subject to special tax such as:
a. Philippine Economic Zone Authority (PEZA)-registered enterprises subject to 5% GI tax
b. Tourism infrastructure and Enterprise Zone Authority(TIEZA)- registered enterprises subject to
5% GI tax
c. Income of self-employed and/or individuals who opted to be taxed under the 8% income tax
3. Business income subject to final tax when not subjected to final tax by the payor
a. Subcontractors of petroleum service contractors subject to 8% final tax
b. Business income of foreign currency deposits units and expanded FCDUs from Philippine
residents subject to 10% final tax
3. GAINS DERIVED FROM DEALINGS IN PROPERTIES
The gains or losses in dealing in ordinary assets,
and dealings in capital assets other than domestic
stocks and real properties are subject to regular
income tax
4. INTEREST INCOME
Examples: Exempted Interest Income from Regular
income tax
1. Interest Income from lending activities
to individuals and corporations by banks,
1. Interest Income earned by land
finance companies, and other lenders
owners in disposing their lands to
2. Interest Income from corporate bonds their tenants (Comprehensive
band promissory notes Agrarian Reform law)
3. Interest Income from bank deposits
abroad 2. Imputed Interest Income
ILLUSTRATION:
• Sapphire Bank has the following income in 2021:
Interest Income from loans P 3,000,000
Interest Income from deposits with other banks 400,000
Interest Income from notes rediscounting 100,000
Interest Income from Treasury notes 50,000
5. RENTS
Income arises from leasing properties of any kind
Special Considerations
1. Obligations of the lessor that are assumed by the lessee are additional rent income to the
lessor
2. Advance rentals are:
a. Items of GI upon receipt if:
i. Unrestricted
ii. Restricted to be applied in future years or upon the termination of the lease
b. Not an item of gross income if:
i. It constitutes a loan
ii. It is a security deposit to guarantee payment or rent subject to contingency
which may or may not happen
3. Leasehold improvements
ILLUSTRATION:
Under the Nabi Corporation’s standard lease contract, leases shall run for a
nonpredeterminable 12-month period for a monthly rental of P10,000. The
lessee shall pay three months rental in advance plus one month security
deposit. The rent for the last two months of the lease shall be taken from
the advance while the security deposit will be returned if there are no
damages sustained by the property during the lease term.
6. ROYALTIES
•Active royalty income and royalties
earned from sources outside the
Philippines are subject to regular
income tax.
ILLUSTRATION:
Mang Jolly has the following royalties:
Royalties from mining properties in the Philippines P550,000
Royalties from books published in the Philippines 200,000
Royalties from books published abroad 300,000
Royalties from franchise exercised abroad 400,000
7. DIVIDENDS
- It pertains to dividends declared by foreign
STOCK DIVIDEND
corporations.
-Items of gross income subject to regular tax
generally includes Cash, Property, and script LIQUIDATING
DIVIDEND
dividends
ILLUSTRATION:
Lubao Company, a domestic corporation, received cash dividends from the
following:
Domestic corporations P400,000
Resident foreign corporations 200,000
Non-resident foreign corporations 300, 000
8. ANNUITIES
• The excess of annuity payments received by
the recipient over premium paid is taxable
income in the year of receipt.
ILLUSTRATION:
Andrew purchased an annuity contract for P100,000 which shall pay him
P10,000 annually until he dies.
9. PRIZES AND WINNINGS
• Prizes and winnings that are exempted from final tax are not items of gross income subject to regular income tax. The
taxable prizes and winnings of corporations are subject to regular income tax
Earned from sources
Within Abroad
Exempt prizes and winnings:
1. Prizes received without effort to join a Prizes:
contest P 10,000 and below Regular Tax Regular Tax
2. Prizes in athletic competitions More than P10,000 Final tax Regular Tax
sanctioned by their respective national PCSO Winnings Final tax N/A
sports associations ,Exceeding P10,000
3. Winnings from PCSO games, not PCSO Winnings , Exempt N/A
exceeding P10,000 in amount ,Exceeding P10,000
Winnings from other Final tax Regular Tax
sources
ILLUSTRATION:
The City of Baguio held its Panangbenga flower festival. During the
festivities, Mr. Sebastien, the proprietor of Mr. Fit Gym, won the P500,000
second prize in the flower float competition. John Hay Corporation won
the P600,000 first prize.
10. PENSIONS
• Pensions and retirement benefits
that fail to meet the exclusion criteria
are subject to regular tax
11. PARTNER’S DISTRIBUTIVE SHARE FROM THE NET INCOME
OF GENERAL PROFESSIONAL PARTNERSHIP
• The partners are the ones
subject to regular tax on their
share in the net income of the
general professional
partnership, not the general
professional partnership.
ILLUSTRATION:
Set and Seigfried practice their profession in a general
professional partnership and share profits 60:40. Their firm
reported the following:
The share of the partners in the net income of the
partnership shall be computed as follows:
Gross Receipts P2,000,000
Less: Professional Expenses 1,200,000 Total distribution to Set (60% x P820,000) P492,000
Total distribution to Segfried (40% x P820,000) 328,000
Net income from operations 800,000 Distributive net income 820,000
Interest from bank deposits 20,000
Distributive Net Income 820,000
BUSINESS PARTNERSHIP AND TAXABLE
JOINT VENTURE OR CO-OWNERSHIP
•If these entities are organized or constituted
abroad, the share from their profit is subject
to regular income tax for taxpayers taxable
on global income.
GENERAL CRITERIA FOR ITEMS OF
GROSS INCOME
1. Not subject to final tax, capital gains tax, and special tax
regime
2. Not excluded or exempted by law, treaty, or contract
from taxation
OTHER SOURCES OF GROSS INCOME
SUBJECT TO REGULAR INCOME TAX
1. Income distributions from taxable 3. Farming Income
estates or trusts a. Raise and Sell Operation
2. Share from the net income of b. Purchase and Sell Operation
other pass-through entities:
4. Recovery of Past deductions
a. Exempt joint ventures
5. Reimbursement of expenses
b. Exempt Co-ownership
6. Cancellation of indebtedness for a
consideration
OTHER SOURCES OF GROSS INCOME
SUBJECT TO REGULAR INCOME TAX
1. Income distributions from taxable 3. Farming Income
estates or trusts a. Raise and Sell Operation
2. Share from the net income of b. Purchase and Sell Operation
other pass-through entities:
4. Recovery of Past deductions
a. Exempt joint ventures
5. Reimbursement of expenses
b. Exempt Co-ownership
6. Cancellation of indebtedness for a
consideration
OTHER SOURCES OF GROSS INCOME
SUBJECT TO REGULAR INCOME TAX
1. Income distributions from taxable 3. Farming Income
estates or trusts a. Raise and Sell Operation
2. Share from the net income of b. Purchase and Sell Operation
other pass-through entities:
4. Recovery of Past deductions
a. Exempt joint ventures
5. Reimbursement of expenses
b. Exempt Co-ownership
6. Cancellation of indebtedness for a
consideration
OTHER SOURCES OF GROSS INCOME
SUBJECT TO REGULAR INCOME TAX
1. Income distributions from taxable 3. Farming Income
estates or trusts a. Raise and Sell Operation
2. Share from the net income of b. Purchase and Sell Operation
other pass-through entities:
4. Recovery of Past deductions
a. Exempt joint ventures
5. Reimbursement of expenses
b. Exempt Co-ownership
6. Cancellation of indebtedness for a
consideration
OTHER SOURCES OF GROSS INCOME
SUBJECT TO REGULAR INCOME TAX
1. Income distributions from taxable 3. Farming Income
estates or trusts a. Raise and Sell Operation
2. Share from the net income of b. Purchase and Sell Operation
other pass-through entities:
4. Recovery of Past deductions
a. Exempt joint ventures
5. Reimbursement of expenses
b. Exempt Co-ownership
6. Cancellation of indebtedness for a
consideration
OTHER SOURCES OF GROSS INCOME
SUBJECT TO REGULAR INCOME TAX
1. Income distributions from taxable 3. Farming Income
estates or trusts a. Raise and Sell Operation
2. Share from the net income of b. Purchase and Sell Operation
other pass-through entities:
4. Recovery of Past deductions
a. Exempt joint ventures
5. Reimbursement of expenses
b. Exempt Co-ownership
6. Cancellation of indebtedness for a
consideration
SPECIAL CONSIDERATIONS IN REPORTING
OF GROSS INCOME
1. Accounting Methods
2. Situs Rules
3. Effect of value added tax
4. Creditable withholding tax
5. Power of the CIR to redistribute income and expenses
SPECIAL CONSIDERATIONS IN REPORTING
OF GROSS INCOME
1. Accounting Methods
2. Situs Rules
3. Effect of value added tax
4. Creditable withholding tax
5. Power of the CIR to redistribute income and expenses
SPECIAL CONSIDERATIONS IN REPORTING
OF GROSS INCOME
1. Accounting Methods
2. Situs Rules
3. Effect of value added tax
4. Creditable withholding tax
5. Power of the CIR to redistribute income and expenses
SPECIAL CONSIDERATIONS IN REPORTING
OF GROSS INCOME
1. Accounting Methods
2. Situs Rules
3. Effect of value added tax
4. Creditable withholding tax
5. Power of the CIR to redistribute income and expenses
SPECIAL CONSIDERATIONS IN REPORTING
OF GROSS INCOME
1. Accounting Methods
2. Situs Rules
3. Effect of value added tax
4. Creditable withholding tax
5. Power of the CIR to redistribute income and expenses
ASSOCIATED ENTERPRISES
(RELATED PARTIES)
•Two or more enterprises are associated if one
participates directly or indirectly in the management,
control, or capital of the other; or if the same persons
participate directly or indirectly in the management,
control, or capital of the enterprises
TRANSFER PRICING GUIDELINE
•The BIR and the Department of Finance
promulgated Revenue Regulations No. 2
series of 2013 (RR2-2013) on transfer pricing
THE ARM’S LENGTH
PRINCIPLE
• An uncontrolled pricing method determined by free market forces is
preferred.
• It shall be applied to:
1. Cross-border transactions between associated enterprises
– taxpayer may enter “advance pricing agreement” with the BIR
2. Domestic transactions between associated enterprises
TRANSFER PRICING
1.
METHODS
Comparable uncontrolled price (CUP) Method
2. Resale Price Method (RPM)
3. Cost Plus Method (CPM)
4. Profit Split Method (PSM)
a. Residual profit split approach
b. Contribution profit split approach
5. Transactional net margin method (TNMM)
TRANSFER PRICING
1.
METHODS
Comparable uncontrolled price (CUP) Method
2. Resale Price Method (RPM)
3. Cost Plus Method (CPM)
4. Profit Split Method (PSM)
a. Residual profit split approach
b. Contribution profit split approach
5. Transactional net margin method (TNMM)
TRANSFER PRICING
1.
METHODS
Comparable uncontrolled price (CUP) Method
2. Resale Price Method (RPM)
3. Cost Plus Method (CPM)
4. Profit Split Method (PSM)
a. Residual profit split approach
b. Contribution profit split approach
5. Transactional net margin method (TNMM)
TRANSFER PRICING
1.
METHODS
Comparable uncontrolled price (CUP) Method
2. Resale Price Method (RPM)
3. Cost Plus Method (CPM)
4. Profit Split Method (PSM)
a. Residual profit split approach
b. Contribution profit split approach
5. Transactional net margin method (TNMM)
TRANSFER PRICING
1.
METHODS
Comparable uncontrolled price (CUP) Method
2. Resale Price Method (RPM)
3. Cost Plus Method (CPM)
4. Profit Split Method (PSM)
a. Residual profit split approach
b. Contribution profit split approach
5. Transactional net margin method (TNMM)