CHAPTER 7: INTRODUCTION TO ​ Excluded from GI

GROSS INCOME (p. 361)

●​ VALUATION OF INCOME
GROSS INCOME (GI) -​ The amount of income recognized is
-​ In its broad sense, ALL INCOME, from generally the value received (actual)
whatever source, derived WITHIN OR or which the taxpayer has a right to
WITHOUT the Philippines, WHETHER receive (constructive)
LEGAL OR ILLEGAL (illegal income is
taxable) ​ *Service with stipulated price = price
​ *No price = FMV of what’s received

Receipt other than ●​ CLASSIFICATION OF INCOME

Mere return of capital
mere return of capital 1.​ As to source
●​ Collections of ●​ Interest paid on a.​ Compensation income
loan receivable loans receivable b.​ Professional income
●​ Liquidating ●​ Condonation of c.​ Business income
dividend - debt for d.​ Other income
(nibalik lang services
ang investment) rendered 2.​ As to territorial source
●​ A mere ●​ Excess of
increase in the selling price a.​ Income within the philippines
value of over the cost of b.​ Income without the philippines
property an asset sold c.​ Mixed income (w/in + w/out)
(merely
unrealized) 3.​ As to taxability (Taxable and Tax-exempt)
●​ Taxable
CAPITAL a.​ Ordinary or Regular income​
-​ Constitutes the investment which is the - subject to basic/normal tax
source of income. *reportable in the ITR
-​ Fund (Quarterly and Annually,
-​ Wealth Filing)
-​ Tree *subject to expanded
withholding tax, if applicable
INCOME *tax credits
A tax credit is an amount of money that
-​ All wealth which flows into a taxpayer,
taxpayers can subtract directly from the
OTHER THAN return of capital. taxes they owe to the government.
-​ imports something different from principal or Unlike a tax deduction, which reduces
the amount of taxable income, a tax
capital. credit reduces the actual tax liability on a
-​ Flow dollar-for-dollar basis.
-​ Service of wealth
-​ Fruit *catch-all or basket of other
income
●​ FORMS OF INCOME "Catch-all" or "basket income" refers to
income that doesn’t neatly fit into
-​ May be realized in any form, specific categories under tax laws. It is
whether in money, property, often used in the context of international
taxation, where certain types of income
services, indirect economic benefit.
are grouped into "baskets" for tax
-​ Includes gain on sale or disposition purposes.
of capital
​ Items indirectly benefiting taxpayers are
 b.​ Certain Passive incomes
*subject to FWT d.​ Special income subject to
*does not form part of special rates
GROSS INCOME - subject to special rates and
*withholding taxes rules (i.e., income of PEZA
constitutes final payment of and BOI registered
income tax companies subject to 5%
*payor (of the ?) is obliged to special corporate income tax
withhold and remit the as provided under the Tax
corresponding tax Code, Create Act)
*no need to include in the
ITR ●​ Tax Exempt income ​
*BIR will run after the a. By constitutional mandate
withholding agent b. By statute (general or special)
*applicable only to certain c. by international comity
passive income derived from ​
sources within the Ph TAXABLE INCOME
-​ Means the pertinent (relevant) items of GI
c.​ Capital gains subject to specified in the Tax Code, less deductions,
capital gains taxes, if any, authorized for such type of income by
specifically (2) the Tax Code or other special laws. (Sec. 31
●​ Gains on of Tax Code)
sale/exchange of -​ Does not include income excluded by law
shares of stock (non
listed in the LSE) of a ●​ REQUISITES FOR TAXABLE INCOME
domestic corp. 1.​ There must be gain
●​ Sale of real properties -​ Any form paid (money,
classified as capital property) except gifts
assets located in the 2.​ The gain must be realized OR
Philippines received (actual or constructive)
-​ Pwede actual or constructive
*the shares & assets receipt (example: held in
are in the trust)
Philippines/domestic 3.​ The gain must not be excluded by
law from taxation
​ ​ ​ Other summary:
●​ Sale of shares of
nonlisted DC = CGT DOCTRINE OF CONSTRUCTIVE RECEIPT
●​ Sale of real properties -​ It is not the actual receipt but the right to
in the PH = CGT receive that determines when to include an
●​ Sale of shares of DC amount in the GI
listed in the Local -​ It must be:
stock exchange = a.​ unconditional,
exempt from income b.​ valid, and
tax but subject to c.​ enforceable
business tax
●​ Other capital gains =
Basic tax
 -​ The doctrine of constructive receipt -​ It is imposed on the right or privilege
complements the doctrine of actual receipt of a person to receive or earn an
as a test of realization of income income
4.​ DIRECT TAX
IMPORTANCE OF CONSTRUCTIVE RECEIPT -​ It is payable by the person upon
-​ It prevents a cash-basis taxpayer from whom it is directly imposed by law. It
deliberately turning his back on income and cannot be shifted or passed on to
thereby selecting the year in which he others.
reports it. 5.​ PROGRESSIVE TAX
-​ Would open the door to tax avoidance, and -​ It is based upon one’s ability to pay.
possibly tax evasion. The rate of income tax increases as
​ the tax base decreases.
When is an amount constructively received? When
it is set aside and made available to a taxpayer INCOME TAX SYSTEMS
without substantial restrictions. 1.​ SCHEDULAR TAX SYSTEM VS GLOBAL
TAX SYSTEM
THERE IS CONSTRUCTIVE RECEIPT OF
INCOME p. 357 Schedular Tax System
1.​ Payment is credited to payee’s account, OR -​ The various types/items of income
2.​ Payment is set aside for the payee, or (compensation;
otherwise made available so the payee may business/professional income) are
draw upon it at any time, or so the payee classified accordingly and are
could have drawn upon it during the taxable accorded different tax treatments, in
year if notice of intention to withdraw had accordance with schedules
been given without substantial limitations characterized by graduated tax
rates.
NO CONSTRUCTIVE RECEIPT OF INCOME -​ Allowable deductions shall likewise
WHEN: vary for each type of income
1.​ Constructive receipt is subject to substantial
limitations ​ Global Tax System
2.​ Payor does not have funds necessary to -​ Income received by a taxpayer are
make payment grouped together, without any
3.​ The amount is not available to the distinction as to the type or nature of
taxpayer/payee. the income, and after deducting
therefrom expenses and other
CHARACTERISTICS OF PHILIPPINE INCOME allowable deductions, are subject to
TAX tax at a fixed rate.
1.​ NATIONAL TAX -​ ddd
-​ It is imposed and collected by the
national government throughout the TAX TREATMENT - SCHEDULAR VS GLOBAL
country
SCHEDULAR GLOBAL
2.​ GENERAL TAX
-​ It is levied without specific or a Tax Treatment: Income tax Uniform tax
predetermined purpose. Hence, the rules varies treatment or
revenue from income tax may be and made to rules
appropriated for general purposes. depend on the
kind or
3.​ EXCISE TAX
category of
 taxable (except
income of the NRAN
taxpayer ETB)
●​ Corpor
CHARACTERI ate
STICS taxpay
●​ Catego ●​ Does ers
1.​ Classifi ries or not (except
cation classifi “gener )
of es ally”
income categor Advantages Minimizes Just, fair, and
ize or source of graft reasonable
classify and corruption
●​ Impose income due to Equitable relief
2.​ Tax s minimization of
rates differen ●​ Impose margin of More revenue
t tax s discretion to the
treatme uniform exercised by government
nt and tax revenue
3.​ Applica rates rates district officers Minimizes tax
bility evasion
Simplified tax (subject to
●​ Individ system counter
ual ●​ NFRC, checking by
taxpay NRAN the BIR)
ers ETB
INDIVIDUALS - Scheduler + net income
APPROACH IN THE PHILIPPINES NRANETB - Global + GI
-​ Partly SCHEDULAR (individuals) partly CORPORATIONS - Global + NI
global (CORPORATIONS) NRFC - Global + GI

2.​ GROSS INCOME TAXATION VS. NET Only the Individuals follow the Schedular tax
INCOME TAXATION system

GROSS NET INCOME

INCOME TAXATION
TAXATION

Deductions No deductions Allows

and or exemptions deductions/ex
exemptions allowed emptions
●​ (Ie. ●​ (Ex.
Income Return
subject able
to final income
taxes) )

Tax base Gross income Net income

Applicability ●​ NRAN ●​ Individ

ETB ual
●​ NRFC taxpay
ers
CHAPTER 8: INCLUSIONS & EXCLUSIONS rendered, typically for work outside of a
FROM THE GROSS INCOME (p. 373) regular job or for which payment isn't
customarily given.
d.​ Taxable bonuses
GROSS INCOME (INCLUSIONS)
e.​ Allowances (such as transportation,
●​ Sec. 32(A) of the Tax code provides that,
representation, and entertainment,and the
except when otherwise provided, ff:
like)
f.​ Fringe benefit
[CGGIRRDAPPP)
g.​ Fees (including directors’ fees if the director
1.​ Compensations for services
is at the same time an employee of the
2.​ GI derived from trade, business, profession
employer)
Business income
h.​ Taxable pensions & retirement pay
3.​ Gains derived from dealings of property
i.​ Commission​
4.​ Interest
j.​ Other contributions received by a
5.​ Rents
clergyman, evangelists, or religious worker
6.​ Royalties
for services rendered
7.​ Dividends
8.​ Annuities
●​ FORMS & MEASUREMENT OF
9.​ Prizes and winnings
COMPENSATION
10.​Pensions
Form : Any
11.​Partner’s distributive share from the net
Measurement :
income of the general professional
1.​ paid in cash - full amount received
partnerships
2.​ other than money - FMV
3.​ paid in kind, such as stocks of the
I. COMPENSATION INCOME
employer - FMV of stock at the time
-​ is income arising out of employer-employee
the services were rendered
-​ the term or label by which it is designated
and the basis upon which the remuneration
●​ CLASSIFICATION OF COMPENSATION
is paid is immaterial. (may be paid on the
INCOME
basis of piece-work, or percentage of
1.​ Regular compensation
profits, paid hourly, daily, weekly, monthly, or
-​ includes:
annually)
a.​ basic salary
b.​ fixed allowances for
Applicability: INDIVIDUALS except
representation,
NRANETB
transportation and
Not applicable to:
c.​ others paid to an
●​ NRA-NETB (exception) &
employee per payroll
●​ Corporations, estate, trust are also
period
not covered
2.​ Supplemental compensation
-​ Includes payments to an
Compensation income includes but is not
employee in addition to the
limited to:
regular compensation (way
a.​ Salaries & wages
labot sa gi sign sa contract)
b.​ Emoluments
-​ a form of compensation for employment,
EMPLOYEE
services, or holding office.
c.​ honoraria (ex. Guest speakers) -​ Individual performing services under an
-​ It's a payment given as a token of employer-employee relationship
appreciation or reward for services
 EMPLOYER-EMPLOYEE RELATIONSHIP
-​ exists when the person for whom the ●​ TAX TREATMENT OF EQUITY
services were performed has the right to BASED COMPENSATION
control and direct the individual who 1.​ Grant of Equity Based
performs the services, not only as to the Compensation - Not subject
result to be accomplished, but also as to the to tax
details and means by which such results are a.​ CGT -when no
accomplished. realized capital gain
-​ no distinction is made between classes or on the part of the
grades of employees. (superintendents, employer-grantor,
managers, officers) whether w/ or w/out
option price
COMPENSATION INCOME RECEIVED b.​ DST (Documentary
AFTER TERMINATION OF Stamp Tax)
EMPLOYEE-EMPLOYER RELATIONSHIP​
​ Remuneration for services constitutes 2.​ Sale or Transfer of Equity
compensation income even if the Based Compensation
relationship of employer and employee does - Treated as sale, barter, or
not exist any longer at the time when exchange of stocks not listed
payment is made between the person in on the stock exchange.
whose employ the services had been a.​ w/ consideration -
performed and the individual who performed subject to CGT.​
them
●​ Compensation income was earned when *if granted for a price
the rs was still not terminated. - the difference
between the sales
EQUITY BASED COMPENSATION​ price and the option
​ INCOME shall be subject to
-​ Covers all types of employee equity CGT
schemes that come in different forms such ​
as: SP - Option =
*stock options income subject to
*restricted stock units​ CGT
*stock appreciation rights
*restricted share awards, *if granted without
price
which may or may not pertain to shares of - the cost base of the
stock of the grantor itself, but which have option for purchases
the common feature of being granted to of computing the
existing employees of the grantor as a capital gains shall be
performance incentive for services rendered zero​
by the employees and are typically ​
dependent on the performance, outstanding SP ra dritso subject
business achievements and, exemplary sa CGT
organizational, technical, or business
accomplishments (so super na ang na b.​ w/out consideration -
ambag sa employee para ma gaan og transfer is treated as
shares as incentives). donation of shares of
 stock subject to c.​ BV, FMV, Par Value of the
donor’s tax. shares subject at the
exercise date/s
Basis: FMV of the d.​ Mode of settlement
option at the time or e.​ Taxes withheld on the
the donation exercise, if any

3.​ EXERCISE OF EQUITY >FRINGE BENEFITS & 13TH MONTH

BASED COMPENSATION PAY

a.​ Exercise by A.​ FRINGE BENEFIT (supplemental)

employers involving -​ any goods, service or other benefit
own shares of stock furnished or granted by an employer
to its employees in cash or kind, in addition to basic
salaries, to individual employees
* Subject to income 2 TYPES
tax (basic income tax) a.​ Managerial or supervisory
and consequently employee - subject to fringe
subject to withholding benefit tax
tax on compensation. b.​ Rank and file employees -
Gain - difference Subject to IT + CWT
between the book
value or FMV of B.​ FIXED OR VARIABLE ALLOWANCES
shares, whichever is -​ in general, subject to IT&WT
higher. received by employee or officer of
private entity
Subject to income
tax + CWT Examples: transportation allowance,
representation allowance,
b.​ Exercise that is communication allowance, living
transferable to away from home allowance(LAFHA)
employee-grantee’s
successors/heirs C.​ ADVANCES AND REIMBURSEMENTS
FOR TRAVELING AND ENTERTAINMENT
* Subject to donor’s EXPENSES (ARFTEE)
tax Not subject to withholding, if the following
conditions are satisfied:
●​ REPORTORIAL REQUIREMENT a.​ It is for ordinary and necessary
ON THE EXERCISE OF THE EBC traveling and representation of
During the exercise period, entertainment expenses incurred by
employer-grantor shall file a report the employee in the pursuit of trade,
on or before the 10th day of the business, or profession
month ff the month of exercise b.​ The employee is required to
stating therein the following: account/liquidate for the foregoing
a.​ Exercise Date expenses in accordance with the
b.​ Names, TINs, positions of specific requirements of
those who exercised the substantiation for each
option ​ Fixed/Regular
 > Vacation leave private company -
D. PREMIUMS ON LIFE INSURANCE de minimis rule
-​ Premiums on life insurance covering Monetization of 10 days or less = tax
the life of an employee paid by the exempt
employer is taxable to the employee, > Sick leave private company -
where the insured employee, directly subject to income tax
or indirectly is the beneficiary
Life Insurance - provides financial security to the DE MINIMIS BENEFIT
family in case of the unfortunate death of the -​ Facilities or privilege of relatively small
policyholder. value offered by the employer as a means
of promoting health, goodwill, contentment,
​ DEDUCTIBLE EXPENSE OF THE​ or efficiency of the employee.
​ EMPLOYER
​ ​ - any amount given as benefits by H. REPRESENTATION AND
​ ​ employer whether classified de TRANSPORTATION ALLOWANCES
​ ​ minimis benefits or fringe benefits (RATA)
-​ government officials and employees
E. RETIREMENT BENEFITS, -​ are considered reimbursements for
SEPARATION PAY, PENSION, ETC. the expenses incurred in the
-​ Retirement benefits, separation pay, performance one’s duties rather than
pension, cost of living allowances additional compensation
and other tax exempt income
received by employees from *Excess of RATA if not returned =
employers are discussed under subject to income tax
“exclusions from GI”
I.​ STIPENDS OF RESIDENT
F. TIPS AND GRATUITIES PHYSICIANS
a.​ Directly received by a customer not -​ Subject to creditable withholding tax
accounted for by the employee to (CWT)
the employer -​ Shall include not only fees, but also
-​ Subject to basic tax but not per diems, allowances, and any
subject to WT other form of income payments not
subject to withholding tax on
G. VACATION AND SICK LEAVE compensation
ALLOWANCES
-​ are amounts of “vacation allowances J. COST OF LIVING ALLOWANCE (COLA)
or sick leave credits” which are paid -​ COLA of minimum wage earners is
to an employee treated as exempt from income tax
compensation income -​ forms part of the new wage rates or
-​ Salary on VSLA notwithstanding statutory minimum wage.
absence constitutes compensation -​ including holiday pay, etc.
income
*monetized value of unutilized K. INCOME GAIN FROM THE EXERCISE OF
vacation leave credits of ten (10) STOCK OPTION PLANS
days or less - de minimis benefits -​ Subject to IT & WTC
(exempt)
II. BUSINESS INCOME Tax refunds shall be reported as​
-​ Income derived from the conduct of trade or ​ ​ income:​
business or the exercise of the profession ​ ​ *if cash method - shall be reported
-​ May arise from the sale of products and ​ ​ income in the year received
services. ​ ​ *if accrual basis - reported income
-​ Taxed at progressive rates on net income ​ ​ in the year the refund was ordered

A.​ BAD DEBT RECOVERY - BI C.​ CANCELLATION OR CONDONATION OF

DEBTS - BI
TAX BENEFIT RULE -​ For the benefit of the debtor
a.​ Taxpayer benefited when write-off
claimed as deductions (Tax Benefit ​ Treatment
Rule)
Applicable tax Reason for cancel
- subject to income tax
●​ Subject to Services were
b.​ Taxpayer did not benefit as it did not IT rendered by debtor,
result to reduction of income in consideration of
- mere return of capital which the
indebtedness was
cancelled by the
B.​ TAX REFUND - BI creditor
GR. Application of tax benefit rule (local
taxes, fringe benefit tax) ●​ Subject to If creditor, without
​ EXAMPLE: Donor’s T receiving any
1.​ Local taxes (mayor’s permit, consideration from
the debtor, and
barangay permit)
purely as an act of
2.​ Percentage taxes (except stock liberality
transaction taxes)
3.​ Fringe benefit tax ●​ Subject to If debtor is a
4.​ Income tax paid abroad (by RCs and 10% final shareholder of a
DCs only) classified by the taxpayer withholding corp that cancels
as OPEX tax indebtedness, such
cancellation
5.​ Excise taxes on sin products and
constitutes indirect
non-essential goods dividend
6.​ Custom duties
7.​ Documentary stamp taxes Not the result of
mutual agreement
​ EXC. The following tax refund are not but a decision of
​ Taxable (Not classified as OPEX) the court.
​ ​ 1. Income tax (except fringe ben)
​ ​ 2. Estate tax Note: to be taxable, the condonation should result
​ ​ 3. Donor’s tax in increase of assets on the part of the debtor.
​ ​ 4. Special assessment -​ Increase in assets ≠ decrease in liabilities
​ ​ 5. Stock transaction tax
​ ​ 6. Income tax paid to a foreign III. GAINS DERIVED FROM DEALINGS IN
​ ​ country (by RCs and DCs PROPERTY
​ ​ only) if taxpayer claimed a -​ Gains derived from dealings of property
​ ​ tax credit (sale, barter, or exchange) in property
include all income derived from the
 disposition of property (real or personal)
●​ Long term bank Individual EXEMPT
which results in gain or loss. deposit EXC: NRANETB

TYPE APPLICABLE V. RENTAL INCOME

PROPERTY SOLD
OF GAIN TAX -​ taxable income to the lessor.
Ordinary asset Ordinary Basic tax
gain RENT
Capital Asset -​ Amount paid for the use or enjoyment of a
thing (personal or real) or right
●​ Shares of Capital Capital gains -​ shall be recognized upon receipt, regardless
stock in DC gain tax (6%) of the accounting method (cash or accrual)
not listed in
​
the local
stock ●​ FORM OF RENT INCOME:
exchange 1.​ Cash, at stipulated price
2.​ Obligations of the lessor to third
●​ Real Capital Capital gains persons assumed by lessee
property in gain tax -​ Considered rental payments
the Ph -​ Expenses shouldered by
lessee
●​ Others Capital Basic tax
gain 3.​ Advance payment
a.​ Prepaid rent
-​ Shall be reported as
IV. INTEREST INCOME (PASSIVE INCOME)
“income in”
​ GR: Taxable income
b.​ Security deposit that is
​ EXC: by law
applied to rental
(nonrefundable)

Interest Income Applicable tax A.​ NON-TAXABLE RENT

-​ Advance rentals representing option
Arising from Basic tax - individuals
money for the property as well as
indebtedness
Regular corporate security deposits to insure faithful
income tax rate - performance of certain obligations of
corporate taxpayers the lessee are not considered
Arising from bank taxable
deposits
●​ Bank deposit, 20%; 25% FWT B.​ LEASEHOLD IMPROVEMENT - RI
deposit
-​ Improvement made to a leased
substitute,
mutual fund, asset.
and other
similar ​ GR:
arrangements ​ ​ Only taxable when improvemen​
​ ​ made pursuant to an agreement
●​ Deposit under 15% ​
FCDU Exempted:
​ EXC:
(foreign NRA
currency NRFC ​ ​ Even if there is an agreement, the
deposit unit ​ ​ lessor does not realize taxable gain
​ ​ from leasehold improvements turned ​
​ ​ over by the lessee if at the end of
​ ​ the lease where leasehold​ that the value of such improvement exceeds
​ ​ improvements are: the amount already reported as income on
a. fully depreciated AND account of such improvement
b. condition of said property is such
that necessary renovations ​ Computation:
and extraordinary repairs are ​ FMV upon termination​ Pxxx
necessary to restore the same ​ Income already recognized (xxx)
to useful condition (no flow of ​ Income, year of pre-termination​ xxx
wealth)
VI. ROYALTY INCOME
INCOME FROM IMPROVEMENTS -​ Share of the earnings as from invention,
REPORT METHOD book or play, paid to the inventor, writer, etc.
for the right to make, use or publish the
Note: Leasehold improvement shall be same
recognized as income only if the ownership
will be transferred to the lessor at the end of Royalty Income: Typically calculated as a percentage of
revenue or sales generated from the use of the intellectual
the lease term.
property.

2 REPORT METHODS
​ GR:
1.​ Outright or lump-sum method
​ ​ Subject to FWT (Passive income)
2.​ Spread-out method
​ EXC:
-​ spread over the life of the
​ ​ Royalty generated in the active
lease the estimated
​ ​ Pursuit and performance of the
depreciated value of such
​ ​ company's primary purpose​
buildings or improvements at
the termination of the lease
​ ​ - subject to basic tax
and report as income each
year
SERVICE FEES VS. ROYALTIES
-​ The question is whether the payee has
METHOD COMPUTATION proprietary interest in the property

Outright FMV upon completion of the

TAX TREATMENT OF ROYALTY INCOME
or Lump-sum improvement
Subject to Final W/IN PH
Spread-out Annual income Tax
or Annual = BV, end of lease ●​ 10% royalties on book, literary
Remaining term of the lease works, musical
compositions from sources
w/in the Ph received by
BV = Cost x Remaining life individual taxpayers other
after lease term over total than NRANETB
useful life of improvement ​
(fraction)
●​ 20% same source w/in Ph but
other than those covered
C. PRE TERMINATION OF LEASE
by the 10%
-​ If for any reason other than bona fide
purchase from the lessee by the lessor, the
lease is terminated, the lessor realized Subject to Basic W/OUT PH
additional income for the year to the extent tax
 active pursuit dividends from
Derived by citizens and RFC by RFC
domestic corporation
outside the Ph c.​ Shares of an
individual in the
distributable NI
VII. DIVIDEND INCOME after tax of a
-​ Payments made by corporations to its partnership
shareholder members. (other than
-​ May be direct or indirect GPP)​

DIRECT DIVIDEND INCOME d.​ Share of

individual in the
-​ Declared as distributions
NI after tax of
an association,
INDIRECT DIVIDEND INCOME (on the part of joint account,
shareholders) joint venture, or
●​ Payment of property purchased from consortium
shareholders in excess of its FV taxable as a
●​ Payment to shareholders for services corp for which
he is a
rendered in excess of the FV co-venturer
●​ Cancellation by a corporation of
indebtedness of a shareholder - FWT Inter-corporate
dividends received
TAX TREATMENT OF DIVIDEND INCOME from DC by DC
Exempt from tax

Subject to basic tax a.​ Dividends from

FC TYPES OF DIVIDENDS (p. 393)
b.​ Share in NI in
GPP a)​ Cash Dividends - taxable
b)​ Property Dividends/ AKA Dividends in Kind
(even if
undistributed
- taxable
because the net c)​ Liquidating dividends
income of the -​ generally not considered dividend
partnership is
automatically income
allocated to the -​ Taxable income subject to ordinary
partners)
tax (see below)
-​ Considered sale or exchange of
a.​ cash/property property between the cooperation
Subject to Final tax
dividends and the shareholder
10%
received by ●​ When corp distributes its assets in
individuals from; complete liquidation - gain/loss that is
*domestic corp realized/sustained is taxable income or
*joint stock co,
deductible loss
*insurance or
mutual fund
*regional Measurement of G/L:
operating FMV of the assets received -
headquarters adjusted cost to the stockholders to their
respective shares = GAIN/LOSS on
b.​ Inter-corp liquidating dividend
 -​ taxable
Basis for determination of FMV of
patents and trademarks (for liquidating IX. PRIZES AND OTHER WINNINGS
dividends):
= average of the low and high values of the PRIZE
valuation of an independent professional -​ Award given to a person or a group of
firm people to recognize and reward actions or
achievements
FMV -​ Given to publicize noteworthy or exemplary
●​ valuation in recording the properties behavior
received in the books of -​ Provide incentives for improved outcomes
shareholder-company and competitive efforts.
●​ Basis for depreciation or
amortization WINNINGS
●​ Basis for determining gain or loss on -​ For tax purposes, should refer to rewards
the subsequent sale or disposition of income by virtue of chance or bets
the brands in the hands of the -​ GR: Taxable
shareholder-company
TAX TREATMENT - PRIZES AND WINNINGS
d)​ Stock dividends
Exempt from 1)​ GR. Prize and award
GR: not taxable (because it is not tax made primarily in
considered as income) recognition of
religious, charitable,
EXC: taxable if it gives the shareholder an scientific, educational,
interest different from that which his former artistics, literary; or
stock represented civic achievement
[Sec. 32(B)(7)(c)]
-​ The shares confer in a change in the
proportionate interests of the ●​ PROVIDED the
shareholders in the net assets of the recipient:
corp
-​ (ie. shareholders are given the a) Selected without
option to receive either cash or any action on his/her
part to enter the
property dividend instead of stock
contest or proceeding
dividend) (not constituting gains
from labor); and
VIII. ANNUITY INCOME
-​ Refers to the specified income payable at b) Not required to
stated intervals for a fixed or a contingent render substantial
period, often for the recipient’s life in future services as a
condition to receive
consideration of a stipulated premium paid
the prize/award
either in prior installment payments or in a
single payment The absence of both
the above makes the
Rule: prize taxable
*Amount received representing premium
-​ Return OF capital (nontaxable) 2)​ Granted to athletes in
local and international
*Amount received representing interest/ amounts sports competition and
over premium
 tournaments, whether = basic tax
held in or out the ph *NRANETB = 25%
and sanctioned by always
their respective sports
association. [Sec. Subject to 25% Prizes and other winnings
32(B)(7)(d)] Final tax (including PCSO/Lotto)
3)​ PCSO/Lotto winnings received by NRANETB
not exceeding P10,000
received by individual
X. PENSIONS
taxpayers
EXC: NRANETB GR: Subject to income tax
EXC: Pensions and retirement benefits
Subject to 1)​ Prizes and other under exempt under the law
basic tax winnings derived by ​ [SEC. 32(A)(10)]
RC and DC from
sources without the
XI. PARTNER’S SHARE IN THE NET INCOME OF
Philippines
2)​ Prizes and winning A GENERAL PROFESSIONAL PARTNERSHIP
received by (GPP) Sec. 32(A)(11)
corporations
3)​ Prizes received by -​ Sec. 26 of the Tax Code, as amended,
individuals from provides that a GPP is not subject to
sources w/in the income tax
PHilippines amounting
to P10,000 or less -​ Partners shall be liable for income tax on
EXC. NRANETB their separate and individual capacities.
(CREATE LAW) -​ Each shall report as GI, his/her distributive
share (actual or constructive) in the NI of
NO PCSO/Lotto the GPP
Winnings

Subject to 20% 1)​ Prizes received by PARTNERS SHARE IN INCOME OF:

Final tax individuals within the General ●​ Dividend income of
Philippines more than Partnership partners
P10,000 (GP) ●​ Subject to applicable
EXC: NRANETB FWT on passive income
2)​ PCSO/Lotto winnings ●​ Not included in
more than P10,000 by computation of taxable
individuals income to basic tax
EXC: NRANETB ●​ Not included in the
3)​ Other winnings from partner’s ITR
sources within the
Philippines regardless General ●​ Not dividend income
of amounts Professional ●​ Subject to Basic Tax
EXC: PCSO/Lotto Partnership ●​ Included in the ITR or in
the determination of the
Under FT when the partner's taxable income
prize amount w/in the
Ph or winnings earned
in PCSO exceed EXCLUSIONS FROM THE GROSS INCOME
P10,000 -​ Refer to flow of wealth to the taxpayers
which are not considered part of gross
*PCSO/Lotto less than income for purposes of computing the
10k = exempt taxpayers’ taxable income due to the ff:
*PRIZES less than 10k
Sec. 32(B)
 ●​ Tax exemptions granted to
1)​ Exempted by the fundamental law or by companies incurring heavy losses
statute
2)​ Does not come within the definition of 3.​ Based on grounds of reciprocity or to lessen
income the rigors of international double or multiple
taxation
EXCLUSION VS DEDUCTION
Exclusion = not taken into account in determining TAX EXEMPTION, TAX AMNESTY, AND TAX
gross income CONDONATION
Deductions = subtracted from the gross income Means of avoiding/minimizing burden of taxation

NATURE OF EXEMPTIONS FROM TAXATION TAX EXEMPTION

-​ Is a grant of immunity to particular persons -​ Grant of immunity
or corporations or to persons or -​ Not favored
corporations of a particular class from a tax
which persons and corporations generally TAX AMNESTY
within the same jurisdiction are obliged to -​ General pardon or intentional overlooking
pay. by the State of its authority to impose
-​ May be revoked by the government unless penalties on persons otherwise guilty of
exemption is founded on a contract evasion or violation of a revenue or tax law,
-​ Exemptions are not favored and are partakes of an absolute forgiveness or
construed strictly against the taxpayer waiver by the Government of its right to
collect what otherwise would be due it and,
3 GROUNDS FOR GRANTING TAX EXEMPTIONS in this sense, prejudicial thereto, particularly
1.​ Based on contract, law, or treaty to tax evaders who wish to relent and are
EXAMPLES: willing to reform are given a chance to do so
Based on law therefore become a part of society with a
●​ Tax exemptions granted to clean state
cooperatives registered under the -​ Not favored
Cooperative Development -​ Has limited capability as to cover a
Authority particular taxing period or transaction only
●​ Travel tax exemption provided for by
PD 1183 TAX CONDONATION/REMISSION
Based on treaty -​ When the State desists or refrains from
●​ Salaries of officials of the UN exacting, inflicting or enforcing something
assigned in the Ph as well as to restore what has already been
●​ Citizens of the United states working taken
on consular offices in the Philippines -​ Is equivalent to and is in the nature of a tax
●​ Salaries of diplomatic officials and exemption
agents
NATURE OF POWER TO GRANT TAX
2.​ Based on some ground of public policy such EXEMPTION
as to encourage direct foreign investments,
encourage new industries, or foster National Government
charitable institutions and the like -​ Has inherent power
EXAMPLES: -​ The legislative power to exempt is as broad
●​ Tax holidays granted by BOI (Bureau as its power to tax unless restricted by the
of Investments Constitution
 -​ Indemnification for damages shall
Local Government comprehend not only the value of
-​ No inherent power the loss suffered, but also the profits
-​ Can have the power to exempt the moment which the obligee failed to obtain
the power to impose is granted.
​ DAMAGES
ITEMS OF INCOME OR PROCEEDS EXCLUDED ​ - the pecuniary compensation, recompense,
FROM THE GROSS INCOME ​ or satisfaction of, or in recompense for, loss
​ or injury sustained.
1.​ LIFE INSURANCE
-​ GR: the proceeds of life insurance ​ ACTUAL OR COMPENSATORY DAMAGE
policies paid to the heirs or ​ - those awarded in satisfaction of loss or
beneficiaries upon the death of ​ injury sustained
insured, whether in a single sum or
otherwise ​ Examples of Taxable Damages:
●​ Representing recovery of lost income
-​ EXC: if amounts held by the insurer ●​ Compensation for unrealized earnings
under an agreement to pay interest ●​ Interest on nontaxable damages
thereon, the interest payments ●​ Interest for nontaxable damages
included in Gross Income
​ Examples of Non-taxable Damages
●​ Proceeds of life insurance as an result of ●​ Representing recovery of lost capital
the death of the insured is nontaxable ●​ Actual damages for injuries suffered
●​ If the insured outlive the policy, partly ●​ Moral damages for grief, anxiety, etc.
taxable (pertaining to the return on) ●​ Exemplary damages
●​ Damages for loss of earning capacity
2.​ AMOUNT RECEIVED BY THE INSURED ●​ Damages for loss of goods and other
AS A RETURN ON PREMIUM belongings

Assignment of Life Insurance, endowment, 5.​ INCOME EXEMPT UNDER TREATY

or annuity contract
-​ Only actual value of such 6.​ RETIREMENT BENEFITS, PENSIONS,
consideration and the amount of GRATUITIES, ETC
premiums and the sums
subsequently paid by the transferee a)​ RETIREMENT BENEFITS
are exempt from taxation GR: Taxable
EXC:
3.​ GIFTS, BEQUESTS, AND DEVISES i. Retirement benefits received under
●​ BEQUESTS RA No. 7641
-​ are gifts of personal property
made in a will ii. Those received by officials and
●​ DEVISES employees of private firms, whether
-​ are gift of real property made individual or corporate, in
in a will accordance with a reasonable
private benefit plan maintained by
4.​ COMPENSATION FOR INJURIES OR the employer which meets the
SICKNESS following requirements:
 ●​ There must be a duly age of 60-65 yrs, who has served at least
registered retirement plan. 5 years in the establishment
There should be a Certificate
of Qualification as a
Reasonable Employees’
Retirement Benefit Plan b)​ SEPARATION PAY
issued to the company -​ any amount received by an
●​ The retiring official or official or employee or by his
employee has been in heirs from the employer as a
service of the same employer consequence of separation
for at least 10 years of such official or employee
●​ He must not be less than 50 from the service of the
years of age at the time of employer because of death,
his retirement sickness or other physical
●​ He shall not have previously disability or for any cause
availed of the privilege under beyond the said official or
the retirement benefit plan of employee.
the same or different ​ ​ ​ * voluntary = taxable
employer *involuntary = non-taxable

The absences of any of the TAX SEPARATION PAY DUE TO

provisions makes the benefit RETRENCHMENT
taxable -​ Tax exemption does not cover the payment
of the separated employee’s salaries and
REASONABLE BENEFIT PLAN the payment of 13th month pay and others
-​ Means a pension, gratuity, stock bonus, or in excess of 90k
profit-sharing plan maintained by an
employer for the benefit of some or all of his c)​ SOCIAL SECURITY BENEFITS
officials or employees, wherein contributions AND OTHER BENEFITS
are made by such employer for the officials -​ Social security benefits,
or employees, or both, for the purpose of retirement gratuities,
distributing to such officials and employees pensions and other similar
the earnings and principal of the fund thus benefits received by RC,
accumulated, and wherein it is provided in NRC, or NRA from foreign
said plant that at no time shall any part of private or public institutions
the corpus or income of the fund be used
for, or be diverted to, any purpose other d)​ BENEFITS RECEIVED UNDER US
than for the exclusive benefit of the said VETERANS ADMINISTRATION
officials and employees -​ Payments of benefits due or
-​ Shall be availed only once to become due to any person
residing in the Ph under the
IN THE ABSENCE OF A REASONABLE laws of the US administered
RETIREMENT PLAN OR AN by VA
AGREEMENT
(CBA or other applicable employment e)​ SS BENEFITS
contract) -​ Benefits received from or
-​ An employee may receive tax-exempt enjoyed under the SSS in
Retirement benefits who has reached the
 accordance with the 6686 (Annual Christmas
provisions of RA no. 8282 bonus to National
government Officials and
f)​ GSIS BENEFITS Employees)
-​ Benefits received from the ●​ Benefits received by
GSIS under RA no. 8291, employees pursuant to PD
including retirement gratuity 851 (13th month pay law) as
received by government amended by Memorandum
officials and employees Order No. 28 dated Aug. 13,
1986
7. MISCELLANEOUS ITEMS ●​ Benefits received by officials
and employees not covered
a.​ INCOME DERIVED BY A FOREIGN by PD 851
GOVERNMENT ●​ Other benefits such as
-​ Income derived from investments in productivity and incentives
the Ph in loans, stocks, bonds or on Christmas Bonus
other domestic securities, or from
interest on deposits in banks in the f.​ GSIS, SSS, MEDICARE AND OTHER
Ph by CONTRIBUTIONS, AND UNION DUES OF
​ ​ INDIVIDUALS
​ ​ (i) foreign governments a)​ Mandatory/compulsory contributions
​ ​ (ii) financing institutions owned GR: exempt
​ ​ (iii) international institutions EXC: amount in excess of
​ ​ Established by foreign investment mandatory contributions shall be
subject to income tax
b.​ INCOME DERIVED BY THE
GOVERNMENT OR ITS POLITICAL b)​ Voluntary contributions
SUBDIVISIONS -​ taxable
-​ Income derived from any public
utility or from the exercise of any g.​ GAINS FROM SALE OF DEBENTURES,
essential governmental function AND OTHER CERTIFICATES OF
accruing to the government of the ph INDEBTEDNESS WITH MATURITY OF
or to any political subdivision thereof MORE THAN 5 YEARS

c.​ PRIZES AND AWARDS h.​ GAINS FROM REDEMPTION OF SHARES

IN MUTUAL FUNDS. GAINS REALIZED BY
d.​ PRIZES AND AWARDS IN SPORTS THE INVESTOR UPON REDEMPTION OF
COMPETITION SHARES OF STOCK IN A MUTUAL FUND
COMPANY AS DEFINED UNDER SEC
e.​ 13TH MONTH PAY AND OTHER 22(BB) OF THE TAX CODE AS FOLLOWS:
BENEFITS
-​ Provided that the exclusion under The term “mutual fund company shall mean
this item shall not exceed P90,000 an open-end and closed-end investment
(TRAIN LAW) company as defined under the Investment
●​ Benefits received by officials Company Act
and employees of the
national and local
government pursuant to RA