GAIN OR LOSS FROM SALE OR EXCHANGE OF PROPERTY

Sale or exchange of properties are classified into:

1. Sales resulting to Capital Gains (subject to “CGT”)

a) On the sale of domestic shares

b) On the sale of real property classified as capital assets

2. Tax-Free Exchanges – where No Gain nor Loss is Recognized

a) Tax-free exchanges pursuant to a corporate reorganization under Section 40(C)(2) of the Tax
Code (merger or consolidation)
b) Like-Kind Exchanges

3. Sales or Exchanges Where Gain, but Not Loss is Recognized

a) Exchanges not solely in kind pursuant to a corporate reorganization where boot is received
b) Transactions between related persons under Section 36(B) of the Tax Code
c) Illegal transactions

4. (a) Sale or Exchange of Ordinary Assets; and

(b) Sale or Exchange of Other Capital Assets (i.e. capital assets other than those
whose sale is subject to CGT)

– If the transaction is a sale, the gain or loss to be recognized is computed as follows:

Sale xxx
Less: Basis (xx)
Gain (Loss) xxx

– If the transaction is an exchange, the property received must be essentially different from the
property disposed of, otherwise no gain or loss is recognized. The gain or loss is computed as
follows:

FMV of the property received xxx

Less: Basis of property given (xx)
Gain (Loss) xxx

BASIS

a) If property was acquired by purchase, the basis of the property is the cost to the buyer

b) If the property was acquired by inheritance, the basis of the property is the FMV of the property at
the time of death of the decedent (step-up in basis)

1
 c) If the property was acquired by gift, the basis of the property is the basis in the hands of the donor.
Except that if such basis is greater than the FMV of the property at the time of the gift, then the basis
shall be such FMV for the purpose of determining the loss.

d) If the property was acquired for less than an adequate consideration, the basis of the property is the
amount paid

e) If property was acquired in a previous tax-free exchange where gain or loss is not recognized under
Section 40(C)(2), the basis is the substituted basis

Adjusted Basis

- after a property is acquired, its basis can be increased by improvements that materially add to its
value or life, and is decreased by accumulated depreciation

Formula:

Basis of property xxx

Plus: Improvements xxx
Less: Accumulated Depreciation (xx)
Adjusted Basis xxx

Use of Basis
Basis is used to determine:
a) Gain or loss in transactions involving ordinary assets
b) Gain or loss involving capital assets which are not subject to the CGT
c) Gain or loss in the sale of domestic shares not traded in stock exchange
d) Gain or loss in forced sale of an individual taxpayer of real property to government in the
exercise of the latters’ power of eminent domain; and
e) Gain or loss in the sale of real property classified as capital asset of a RFC or NRFC

CLASSIFICATION OF PROPERTIS FOR TAX PURPOSES

Ordinary Assets Capital Assets

a) Stock included in inventory; Asset which is not an ordinary asset:
b) Property primarily held for sale; (1) Personal or non-business property, or
c) Property used in business which is (2) Asset held merely for investment, or
capitalized (3) Property not used in business
d) Real property used in the trade,
business, or profession of the
taxpayer

How taxed? How taxed?

2
Gain is 100% included in the ITR. Subject to FTs:
Loss is 100% deducted in the ITR if 1) Capital gains tax on sale of
taxpayer itemizes deductions domestic shares;
2) Capital gains tax on sale of
real property located in the
Philippines classified as
capital assets
Gain/Loss (“G/L”) is
recognized, but only Net
Capital Gain is included in
the ITR:
1) If taxpayer is an individual:
ST1 G/L = 100% recognized
LT2 G/L = 50% recognized

2) If taxpayer is a corporation:

100% recognized whether ST

or LT

Other Rules:

3) Capital losses are allowed

only against capital gains

4) Any net capital loss (net

capital loss carry-over) of an
individual taxpayer can
be carried over to the next
succeeding year as a ST
NCL, but not to exceed the
net income for the year in
which the capital loss was
incurred.

Corporations are not

allowed any net capital
loss carry-over.

Other Transactions Resulting in Capital Gains or Losses Where There is NO SALE

1) When stocks or bonds held as capital assets become worthless, capital loss is recognized.

2) When bonds (held as capital assets) are retired.

3) Gains or losses from failure to exercise options (option gains or losses)

4) When the assets of a corporation are distributed in complete liquidation thereof (liquidating
dividend). Capital gain or loss to the shareholder is recognized.

1 Short-term – holding period of taxpayer is not more than 1 year.

2 Long-term – holding period of taxpayer is more than 1 year.
3
 5) Redemption of preferred shares.

6) Liquidation of partnership. Capital gain or loss is recognized to the partners.

Formula:
Amount received for his partnership interest
Less: His investment in the partnership
Less: His share in the undistributed partnership income
Gain or loss to Partner (subject to holding period qualification)

7) Gains or losses from short sales

“Short selling” is selling something one does not own in the future at a particular price in the hope
that the property goes down in value. For tax purposes, a short sale is deemed consummated upon
delivery of the property to cover the short sale.

WASH SALES LOSS

Requisites
1) Sale of securities at a loss; and
2) Identical securities were purchased within a 61-day period, beginning 30 days before the sale, and
ending 30 days after the sale.
3) The taxpayer is either (a) not a dealer in securities, or (b) if a dealer, the sale was not made in the
ordinary course of business.

Notes:
a) “Purchase” includes entering into a contract or option to acquire identical securities.
b) IF taxpayer is a dealer in securities and the sale was made in the ordinary course of business, the loss
on the sale id deductible in the ITR.
c) IF taxpayer is not a dealer in securities or is a dealer but the sale was not made in the ordinary
course of business, the loss on the wash sale is a capital loss, but is not deductible
against capital gains.

Formula for Non-Deductible Loss:

No. of Shares Acquired Within 61-day period x Loss = Non-deductible Loss

No. of Shares Sold

Formula for Tax Basis of Re-Acquired Shares:

Cost of Acquisition xxx

+ Wash Sale Loss (xx)
New Tax Basis/Cost xxx

4
TAX-FREE EXCHANGES OF PROPERTIES PURSUANT TO A MERGER OR CONSOLIDATION
(CORPORATE REORGANIZATION)

(1) If in pursuance of a plan of merger or consolidation:

(a) A corporation (transferor), which is a party to a merger or consolidation exchanges

property solely for stock3 in a corporation, which is a party to the merger or consolidation; or

(b) A shareholder (transferor), exchanges stock in a corporation, which is a party to the

merger or consolidation, solely for stock4 of another corporation also a party to the merger
or consolidation; or
(c) A security holder (transferor), of a corporation, which is a party to the merger or
consolidation, exchanges his securities in such corporation, solely for stock or securities5 in
another corporation, a party to the merger or consolidation; or

OR

(2) A person (transferor), transfers his property to a corporation in exchange for stock6, or unit of
participation in such a corporation of which, as a result of such exchange said person, alone, or
together with others, not exceeding four (4) persons7, gains control of said corporation (Sec. 40 (C)
(2), NIRC)

Tax Consequences:

(1) The transferor shall NOT recognize gain or loss (i.e., no CGT, no income tax, no CWT, no
donor’s tax, no VAT8); and
(2) The basis (cost) of the stock or securities received by the transferor shall be the same as
the basis of the stock, property, or securities transferred (substituted basis)

Example:

Marian bought 100 shares of X Corporation at P5 per share. Later X Corporation decided to merge with Y
Corporation. Pursuant to which Marian exchanged her 100 shares of X Corporation for 500 shares of Y
Corporation which had a FMV at that time of P7 per share.

(a) What is the gain of Marian?

Fair market value of Y shares received (P7 x 500 shares) P 3,500

Less: Basis in X shares transferred (P5 x 100 shares) (500)
Gain P 3,000

3 Whether voting or non-voting

4 Whether voting or non-voting
5 Whether voting or non-voting

6 Voting

7 The 4 other persons must also be transferors of property

8 However, if the properties transferred by the transferor is used in business or held for sale or for lease, the transfer shall be subject to VAT (equivalent

to 12% of the FMV of the property transferred)

5
 However, this gain will not be recognized and therefore is not taxable.

(b) What will the basis of the Y shares of Marian?

The basis of the Y shares will be the same basis in her X shares = P1/share x 500 shares = P500

(c) If Marian sells all the 500 Y shares to Ivy for P20,000, what will be the tax consequence to Marian?

Selling price of Y shares P20,000

Less: Basis (P1 x Y 500 shares) (500)
Gain P19,500

Since the Y shares are not traded in the stock exchange and are capital assets, the P19,500 gain shall
be subject to the 15% CGT.

HOW EVER, if the “Transferor” receives not only stock or securities, but also money or
property, GAIN but NOT LOSS shall be recognized.

Note: The money and/or property received is called “boot.”

Tax Consequences:

(1) Gain recognized ≤ Money + FMV of Property Received

EXC: No gain is recognized if the transferor is a corporation and the boot is distributed in
accordance with plan of merger or consolidation.

(2) Basis of the shares received by the transferor shall be computed as follows:

Formula:

Cost (basis) of the stock or property transferred P xxx

Less: (a) Money received P xxx
(b) FMV of property received xxx (xxx)
Balance P xxx
Add: (a) Gain recognized on the exchange P xxx
xxx Xxx
Basis (Cost) of the stock received P xxx

6
 INSTALLMENT METHOD

Installment Method Defined

The installment method is a special method of accounting whereby income on installment sales of property
during the year is allowed to be reported in installments in proportion to the installment payments actually
received which the gross profit bears to the total contract price (Sec. 49 (A) NTRC).

The 3 Cases Where Income May be Reported in Installments:

(a) Sale of personal property by a dealer – Dealers in personal property who regularly sell or
otherwise dispose of personal property on the installment plan (Sec. 49 (A), NIRC).

(b) Casual sale of personal property – Persons who make a casual sale or casual disposition of
personal property subject to the following conditions:

(1) The selling price exceeds P1,000;

(2) The initial payment must not exceed 25% of the selling price; and
(3) The property sold is not kind which would be includible in the inventory if on hand at the close
of the taxable year (Sec. 49 (B), NIRC)

(c) Sale of real property – Persons who sell or otherwise dispose of real property on installment plan
are also allowed to use the installment method to report the gain on the sale subject to one
condition:

That the initial payment must not exceed 25% of the selling price (Sec. 49 (B) and (C), NIRC)

Important Installment Method Terms

(a) SELLING PRICE – The amount realized on the sale

Cash received P xxx

FMV of the property received xxx
Installment obligations of the buyer (evidence of indebtedness) xxx
Mortgage assumed by the buyer xxx
Selling price P xxx

(b) CONTRACT PRICE – The amount which the purchaser contracts to pay the seller. It includes:

Selling price P xxx

Less: Mortgage assumed by the buyer xxx
Balance xxx
Add: Excess of mortgage over cost xxx
Contract price P xxx

7
 Note: Mortgage assumed by the buyer, if any, is part of the selling price, but is not part of the
contract price.

(c) INITIAL PAYMENTS – Payments received in cash or property (other than evidence of
indebtedness of the purchaser) during the taxable year in which the sale is made.

Down payment P xxx

Installments received in year of sale xxx
Total xxx
Add: Excess of mortgage over cost xxx
Initial payments P xxx

Notes:
1) “Initial payments” means at least one (1) other payment in addition to the initial payment. If
there is no payment during the first year, the income may not be returned on the installment
basis;
2) Commissions and other selling expenses paid or incurred by the vendor are
not to be deducted or taken into account in determining the amount of the
“initial payments”, the “total contract price,” or the “selling price” (Sec. 175,
Rev. Reg. No. 2-1940)

Formula to Report Income under the Installment Method

Gross Profit x Installment = Income to be reported

Contract Price payments actually for the year
received

OR

Installment payment received x Gross Profit = Income to be reported

Contract Price for the year

Note: The installment method does not apply to deductions. Deductible items shall be deducted for the
taxable year in which the items are “paid or incurred” or “paid or accrued.”

Sale of Real Property (Capital Asset)

The sale of real property which is a capital asset is subject to final capital gains tax, whether the seller is an
individual, estate or trust, or a corporation.

8
Can the final tax be paid in installments?

Yes, the final tax can be paid in installments if the initial payments do not exceed 25% of the selling
price.

Formula to compute the final tax in installments:

In year of sale: Initial Payment x Final Tax

Contract Price

In subsequent years: Installments Received x Final Tax

Contract Price

Sale of Shares of Stock of a Domestic Company (Capital Asset)

When the shares are not traded through the stock exchange – the tax is based on the net capital gain
realized:
(a) If sold by an individual – Subject to 15% final tax
(b) If sold by a corporation – subject to 15% final tax if sold by a domestic corporation; or 5% / 10% if
sold by a foreign corporation.
(c) If the shares are not traded through the stock exchange and are sold in installments, can the final tax
be paid in installments?

Yes, if the initial payment is not more than 25% of the selling price.

9
 FRINGE BENEFITS TAX (“FBT”)

Fringe Benefit Subject to the Fringe Benefits Tax (“FBT”)

The term “fringe benefit” means any good, service, or benefit other than the regular salary and allowances
received by an employee, and which may be furnished or granted in cash or in kind by an employer to an
individual employee.

Coverage
Fringe benefits subject to FBT are those benefits given or furnished to managerial or supervisory employees,
and not to the rank and file.

General Rules in the Valuation of Fringe Benefits

(a) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the
amount granted or paid for.

(b) If the fringe benefit is granted or furnished by the employer in property and ownership is transferred
to the employee, then the value of the fringe benefit shall be equal to the fair market value (“FMV”)
of the property.

Note: The FMV of the property is the FMV determined by the BIR Commissioner or the FMV
determined by the Provincial or City Assessor, whichever is higher.

(c) If the fringe benefit is granted or furnished by the employer in property but the ownership is not
transferred to the employee (i.e., only the “usufruct” or the right to use the property is transferred),
the value of the fringe benefit is equal to the depreciation value of the property.

Rate of Tax and Tax Base

Tax rate = Final Tax of 35%

Tax base = Grossed up monetary value (“GUMV”) of the fringe benefit

GUMV = Monetary value of the fringe benefit ÷ 65%

Notes:
a) The final tax is imposed whether the employer is an individual, partnership, or corporation,
regardless of whether the employer is taxable or not, or the government or its
instrumentalities.

b) The fringe benefit tax is a tax of the employee. It is a tax on the income or benefit
received by the employee. However, for convenience, the tax is imposed on the

10
 employer. The employer is required by law to pay the tax for and in behalf of the
employee.

Filing of Return and Payment of Tax

The fringe benefit tax is a final income tax on the employee to be “withheld” by the employer. The
employer shall file a Quarterly Remittance Return of Final Income Taxes Withheld on Fringe Benefits Paid to
Employees Other Than Rank and File (BIR Form No. 1603Q) and pay the tax “withheld” on or before the alst
day of the month following the close of the calendar quarter which “withholding” was made.

With respect to employers enrolled with the Electronic Filing and Payment System (“eFPS”), the deadline for
e-filing BIR Form No. 1603Q and e-paying the tax due thereon shall be five (5) days later than the deadline
for manual filing.9

Note: No actual withholding of the tax can take place because the payments are generally made to
persons/entities (ex. Store, school, club, etc.) who are not the taxpayers subject to the fringe benefit tax.

Taxable FBs and Specific Valuation Guidelines

The guidelines for valuation of specific types of fringe benefits and the determination of the monetary value
of the fringe benefits are as follows:

(A) Housing Privilege

Case 1 – The employer leases (as lessee) residential property for the use of the
employee.

Value of the benefit – Rental paid by the employer under the lease
contract.

Monetary value of the benefit – 50% of the value of the benefit

Case 2 – The employer owns residential property which was assigned to an officer for
his use as residence.

Annual Value of the benefit – 5% of the FMV of the land and improvements as
determined by the BIR Commissioner or the

9 Despite the provisions of the Tax Code mandating the quarterly payment of the FBT, the BIR has obligated withholding agents/employers to remit the
FBT monthly by filing BIR Form No. 0619F every tenth (10th) day of the following month when the withholding was made, regardless of the amount
withheld. For employers using the eFPS facility, the due date is on the fifteenth (15th) day of the following month. Employers with zero remittance are
still required to use and file the same form.
Employers shall thus pay the FBT monthly by filing BIR Form No. 0619F for the first 2 months of the quarter.

The quarterly FBT remittance return (BIR Form No. 1603Q) shall reflect therein the total fringe benefits paid/given during the quarter and the
resulting FBT due for the quarter. Whatever FBTs were previously paid in the first 2 months shall be available as tax credits against the FBT due for
the quarter. The resulting amount payable shall be the FBT payable for cue last month of the quarter.
11
 Assessor, whichever is higher.

Monetary value of the benefit – 50% of the value of the benefit

Case 3 – The employer purchases residential property on the installment basis and
allows the employee to use the same as his residence.

Annual Value of the benefit – 5% of the acquisition cost exclusive of interest.

Monetary value of the benefit – 50% of the value of the benefit

Case 4 – The employer purchases residential property and transfers ownership thereof
in the name of the employee.

Value of the benefit – Employer’s acquisition cost or FMV, whichever is

higher. The FMV is the higher between the BIR
Commissioner’s value and the Assessor’s value.

Monetary value – The entire value of the benefit

Case 5 – The employer purchases residential property and transfers ownership thereof
to his employee for the latter’s residential use at a price less than the
employer’s acquisition cost.

Value of the benefit – The difference between the FMV of the BIR
Commissioner or the FMV of the Assessor,
whichever is higher, and the cost to the employee.

Monetary value of the benefit – Entire value of the benefit

Case 6 – Housing Benefits W hich Are Not Taxable – The following housing benefits provided
by the employer to its employees are not considered as taxable fringe benefits:

(a) Housing privilege of military officials of the Armed Forces of the Philippines consisting of
officials of the Philippine Army, Philippine Navy, and Philippine Air Force.

(b) A housing unit which is situated inside or adjacent to the premises of a business or factory. A
housing unit is considered adjacent to the premises of the business if it is located within the
maximum of fifty (50) meters from the perimeter of the business premises.

12
 (c) Temporary housing for an employee who stays in a housing unit for three (3) months or less.

(B) Expense Accounts

(1) Expenses incurred by the employee which are paid by his employer. In this case, the employee
receives an entertainment or representation allowance which is subject to liquidation.
(2) Expenses paid for by the employee but reimbursed by his employer. In this case, the employee
pays for the expense and gets reimbursement from the employer.

Note: The above expenses shall not be taxable provided:

(a) The expenditures are duly receipted for and in the name of the employer, and
(b) The expenditures are connected with the trade or business of the taxpayer, that is, they
are not personal expenses attributable to the employee.

(3) Personal expenses of the employee (like purchases of groceries for the personal consumption of
the employee and his family) paid for or reimbursed by the employer to the employee shall be
treated as taxable fringe benefits of the employee whether or not the same are duly receipted
for in the name of the employer

Note: Representation and transportation allowances which are fixed in amounts and are
regularly received by the employees as part of their monthly compensation income shall not be
treated as taxable fringe benefits.

Such allowances are taxable as compensation income subject to regular tax rates.

(C) Motor Vehicle of Any Kind

Case 1 – The employer purchases the motor vehicle in the name of the employee.

Value of the benefit – Acquisition cost

Monetary value of the benefit – Entire value of the benefit

Case 2 – The employer provides the employee with cash for the purchase of a motor
vehicle in the name of the employee.

Value of the benefit – Amount of cash received by the employee

Monetary value of the benefit – Entire value of the benefit

13
Case 3 – The employer shoulders a portion of the amount of the purchase price of the
motor vehicle in the name of the employee.

Value of the benefit – Amount of shouldered by the employer

Monetary value of the benefit – Entire value of the benefit

Case 4 – The employer purchases the car on installment in the name of the employee.

Value of the benefit – Acquisition cost (exclusive of interest) divided by five

(5) years

Monetary value of the benefit – Entire value of the benefit

Note: In Cases 1 to 4, the monetary value of the fringe benefit shall be the entire value of the benefit,
regardless of whether the motor vehicle is used by the employee partly for personal purposes and
partly for the benefit of the employer.

Case 5 – The employer owns and maintains a fleet of motor vehicles for the use of the
business and the employees.

Value of the benefit – Acquisition cost of all motor vehicles not normally
used for business purposes divided by 5 years

Monetary value of the benefit – 50% of the value of the benefit

Case 6 – The employer leases and maintains a fleet of motor vehicles for the use of
the business and the employees.

Value of the benefit – Amount of rental payments for motor vehicles not
normally used for business purposes

Monetary value of the benefit – 50% of the value of the benefit

Case 7

(a) The use of aircraft or helicopters owned and maintained by the employer shall not be subject
to the fringe benefits tax. The use shall be treated as a business use.

14
 (b) The use of a yacht, whether owned and maintained or leased by the employer shall be treated
as a taxable fringe benefit. The value of the benefit shall be measured based on the
depreciation of the yacht at an estimated useful life of 20 years.

(D) Household Expenses

The following personal expenses of the employee which are borne by the employer shall be treated as
taxable fringe benefits:

(1) Salaries of household help, personal driver of the employee, or other.

(2) Similar expenses like payment for homeowners’ association dues, garbage dues, etc.

(E) Interest on Loans at Less Than Market Rate

(1) If the employer lends money to his employee free of interest or at a rate lower than 12%, such
interest forgone by the employer (difference of the interest assumed by the employee and the
rate of 12%) shall be treated as a taxable fringe benefit.
(2) The benchmark rate of 12% shall remain in effect until revised by a subsequent regulation.

(F) Social and Athletic Club Fees

Membership fees, dues, and other expenses borne by the employer for his employee, in social and
athletic clubs or other similar organization shall be treated as tangible fringe benefits of the employee
in full.

(G) Expenses for Foreign Travel

Not subject to FBT – reasonable expenses of Subject to FBT

the employee paid by the employer of the
purpose of attending business meetings or
foreign conventions:

(a) Inland travel expenses such as expenses for (a) 30% of the coast of first class airplane tickets;
food, beverage, and local transportation;

(b) The cost of lodging in a hotel or similar (b) Lodging cost in a hotel or similar
establishment amounting to an average of establishment in excess of US$300 per day;
US$300 or less per day;

(c) The cost of economy and business class (c) Travelling expenses paid by the employer for
airplane tickets; the travel of the family members of the
employee;

15
 (d) 70% of the cost of first class airplane tickets.
(d) When there is no documentary evidence
showing that the employee’s travel abroad
was in connection with business meetings or
conventions, the entire cost of the ticket,
including the cost of hotel accommodations
and other expenses incident thereto
shouldered by the employer, shall be treated
as taxable fringe benefits.

(H) Holiday and Vacation Expenses

Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable
fringe benefits.

(I) Educational Assistance

Subject to FBT Not Subject to FBT

Cost of education assistance to the employee
which is borne by the employer
IF:
(a) The education or study involved is directly
connected with the employer’s trade,
business, or profession; AND
(b) There is a written contract that the
employee is under obligation to remain in
the employ of the employer for a period of
time mutually agreed upon.

Cost of educational assistance extended by an When the assistance is provided through a

employer to the dependents of an employee competitive scheme under a scholarship program
of the company

(J) Cost of Insurance

Subject to FBT Not Subject to FBT

Cost of life or health insurance and other non-life
insurance premiums borne by the employer for
his employee
(a) Contributions of the employer for the benefit
of the employee pursuant to the provisions of
existing laws, such as contributions to the
Social Security System, the Government
Service Insurance System, and similar
contributions under the provisions of any
other existing law.

(b) The cost of premiums borne by the employer

for the group insurance of his employee.

16
 (K) Stock Options

Stock options granted by an employer to its employee(s) involving the employer’s own shares or the
shares of another corporation are considered compensation. The amount of such compensation shall
be the FMV of the stock options at the time the services were rendered.

If the grantee exercises the option in the future, additional income may be recognized the grantee
which shall give rise to the following tax consequences10:

When the option is granted by an employer (involving its own shares of stock or shares of another
corporation) to its rank-and-file employee, and the latter actually exercises the option by paying the
exercise price, additional taxable compensation shall be recognized by the employee and shall be
subjected to the creditable withholding tax on compensation. Such additional compensation shall be
equivalent to the difference of the higher of the book value or FMV of the underlying shares at the
time of the exercise of the option, and the exercise price.

However, if the employee exercising the option is a supervisory or managerial employee, such
additional compensation shall be treated as a fringe benefit subject to the final fringe benefit tax
(“FBT”) under Section 33 of the Tax Code (RMC 79-2014).

Tax Accounting for FB Expense and FB Tax

(a) The “fringe benefit expense” and “fringe benefit tax” shall constitute allowable deductions
from gross income of the employer.

Ex. The fringe benefit expense of P35,000 and fringe benefit tax of P18,846 are deductible from
gross income of the employer, and shall be taken up in the employer’s books of accounts as follows:

Debit – Fringe benefit expense 35,000

Debit – Fringe benefit tax expense 18,846
Credit – Cash 53,846

(b) If the basis of the computation of the fringe benefits (“FB”) tax is the depreciation value of the
property, only the FB tax shall constitute a deductible expense of the employer.

Provided, however, if the zonal value or FMV of the said property is greater than its cost subject to
depreciation, the excess amount shall be allowed as a deduction from the employer’s gross income
as a fringe benefit expense

10It goes without saying that the exercise of the option will result to additional income only if the stock is worth more than the exercise price on the
date the option is exercised. Otherwise, the option will not even be exercised, and no additional income will be realized.
17
Other Fringe Benefits Not Subject to Fringe Benefits Tax (Sec 33 (A), (C), NIRC)

(A) Fringe benefits which are authorized and exempted from income tax under the Tax Code or under
special law;

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

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

(D) If the grant of the fringe benefit is for the convenience or advantage of the employer.

(1) In the case of meals, they must be furnished on the business premises of the employer

(2) In the case of lodging, the lodging must be furnished on the business premises of the employer
and the employee must be required to accept such lodging as a condition of his employment in
order for the employee to properly perform the duties of his employment.

(E) “De minimis” Benefits

“De minimis” benefits which are exempt from the income tax on compensation as well as from the
fringe benefit tax shall be limited to facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or furnished by the employer merely as a
means of promoting the health, goodwill, contentment, or efficiency of his employees, such as the
following:

(1) Monetized unused vacation leave credits of employees (in the private sector) not exceeding
10 days during the year;

(2) Monetized value of vacation and sick leave credits paid to government officials and employees;

(3) Medical cash allowance to dependents of employees not exceeding P1,500 per semester or
P250 per month (or P3,000 per year);

(4) Rice subsidy of P2,000 or one (1) sack of 50 kg. of rice per month amounting to not more than
P2,000 (or P24,000 per year);

(5) Uniform and clothing allowance not exceeding P6,000 per annum;

(6) Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and routine consultations, not exceeding
P10,000 per annum;

(7) Laundry allowance of P300 per month (or P3,600 per year);

(8) Employee achievement awards, e.g. for length of service, loyalty, safety achievement, etc. To be
exempt:

18
 (a) The award must be in the form of tangible personal property other than cash or gift
certificates;

(b) The annual monetary value must not exceed P10,000; and

(c) The award must be given under an established written plan which does not discriminate in
favor of highly paid employees.

(9) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum;

(10) Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five
percent (25%) of the basic minimum wage on a per region basis;

(11) Benefits received by an employee by virtue of a collective bargaining agreement (“CBA”) and
productivity incentive schemes. Provided, the total annual monetary value received from both
the CBA and productivity incentive schemes combined, do not exceed Ten Thousand Pesos
(P10,000) per employee per taxable Year (Rev. Regs. No. 3-98, as amended by Rev. Regs. Nos.
5-2011 and 1-2015)

Notes:

a) The abovementioned eleven (11) items are not only exempt from the FBT but also from the
withholding tax on compensation income of managerial, supervisory and rank and file employees.

b) The amount of “de minimis” benefits conforming to the abovementioned prescribed ceilings shall
not be considered in determining the P90,000 ceiling of “13th month pay and other benefits”
excluded from gross income under Section 32 (B)(7)(e) of the Tax Code.

Provided that, the excess of the “de minimis” benefits over their respective ceilings shall be
considered as part of “13th month pay and other benefits” and the employee receiving it will be
subject to tax only on the excess over the P90,000 ceiling.

c) Minimum wage earners (“MWEs”) receiving “13th month pay and other benefits” exceeding the
P90,000 limit shall be taxable on the excess benefits over P90,000.

Taxation of Fringe Benefits of NRANETB

A non-resident alien not engaged in trade or business in the Philippines who receives a fringe benefits is
subject to the fringe benefit tax as follows:

Rate - twenty-five percent (25%)

Tax Base - the grossed-up monetary value of the fringe benefit computed by dividing
the monetary value of the fringe benefit by seventy-five percent (75%).

19
 Valuation of FBs subject to FBT

FB Value of Benefit Monetary Value

of Benefit
(A) Housing Privilege
Case 1: ER lets EE use ER-leased property Rent paid by ER 50% of Value
Case 2: ER lets EE use ER-owned property 5% of FMV (higher of zonal 50% of Value
and assessor’s value)
Case 3: ER buys property in installment and lets the 5% of acquisition cost 50% of Value
EE use the same exclusive of interest
Case 4: Transfer to EE of ER’s property Higher of cost or FMV Value
Case 5: Transfer to EE of ER’s property at less than the Difference between the FMV Value
acquisition cost of ER and the cost of EE

(B) Expense Accounts

(1) Allowance subject to liquidation Amounts paid by ER Value
(2) Amounts reimbursed by ER Amounts reimbursed by ER Value

(C) Motor Vehicle

Case 1: ER buys vehicle in the name of EE Cost Value
Case 2: ER gives EE cash to buy vehicle Cash received Value
Case 3: ER shoulders portion of cost Amount shouldered by ER Value
Case 4: ER purchases vehicle on installment in the 20% of acquisition cost Value
name of EE (exclusive of interest)
Case 5: ER lets EE use ER-owned vehicle 20% of acquisition cost 50% of Value
Case 6: ER lets EE use ER-leased vehicle Rentals paid for vehicle 50% of Value
Case 7: ER lets EE use ER-owned yacht 5% of acquisition cost Value

(D) Household Expenses

(1) Salaries of household help, driver, etc. Amount of salaries paid Value
(2) Payment for other similar expenses like Amount paid Value
association dues, garbage dues, etc.

(E) Less than Marker Rate Interest on Loans Difference between 12% and Value
the interest charged

(F) Social and Athletic Club Fees Amounts paid by ER for EE Value

(G) Expenses for Foreign Travel

(1) No documentary evidence that the foreign travel Amounts shouldered by ER Value
was in connection with business meeting or
convention
(2) There is documentary evidence that the foreign
travel was in connection with business meeting
or convention:

i. 30% of cost of first class ticket;

20
 ii. Excess of lodging cost over $300/day Amounts paid by ER Value
iii. Travelling expenses for the travel of EE’s
family

(H) Holiday and Vacation Expenses Amounts borne by ER Value

(I) Educational Assistance

(1) Education of EE UNLESS education is Amount paid by ER Value
connected with the ER’s business and EE is
obligated to remain in the employ of the ER for a
certain period of time
(2) Education of EE’s dependents UNLESS Amount pay by ER Value
assistance is provided through a competitive
scheme under a scholarship program of the ER

(J) Cost of Insurance borne by ER for the EE Premiums or contributions Value

UNLESS the contribution is pursuant to existing paid by ER
law (ex. SSS, GSIS, PhilHealth), or if the ER

(K) Stock Options: Upon exercise of the stock Higher of book value or FMV Value
option of the shares less the
exercise price

21
 GROSS INCOME

EXCLUSIONS FROM GROSS INCOME

What are Exclusions?

Exclusions are income or receipts which are excluded from gross income, i.e. these are not included in the
determination of a taxpayer's gross income.

Hence, these incomes or receipts are hot subject to income tax. However, despite their non-inclusion from
gross income, such income items may be subject to taxes other than the income tax.

Exclusions Under the Tax Code

The following items shall not be included in gross income and shall be exempt from income tax:

A. Proceeds of Life Insurance Upon Death of the Insured

The proceeds of life insurance policies paid to the heirs or beneficiaries upon death of the insured shall
be exempt from income tax. The proceeds of life insurance are treated more as an indemnity for the life
lost instead of as gain, profit, or income.

Note: Interest payments made by the insurer constitutes income to the recipient.

B. Amount Received by Insured as Return of Premium

The amount received by the insured, as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, either during the term, or at the maturity of the term mentioned in the
contract, or upon surrender of the contract.

Notes:
a) The excess of the proceeds received over the premiums paid is included in gross income
b) Participating dividends distributed to life insurance policy holders are actually a return of overpaid
premiums. They are therefore excluded from gross income of the insured.

C. Gifts, Bequests, and Devices

The value of property acquired by gift, bequest, devise or descent are exempt from income
taxation.

Note: The income from the lease, sale, exchange, investment, or other disposition of such property shall
be subject to income tax.

22
D. Compensation for Injury or Sickness

a) Amounts received, through accident or health insurance, or under Workmen’s Compensation Acts,
as compensation for personal injuries or sickness; Plus

b) The amounts of any damages received, whether by suit or agreement, on account of such injuries or
sickness.

c) Damages representing compensation for personal injuries arising from libel, defamation, slander,
breach of promise to marry, or alienation of affection.

- Includes moral damages. Moral damages include physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury.

- Includes exemplary or corrective damages. These are imposed by way of example

or correction for the public good.

E. Income Exempt Under Treaties

Income of any kind, to the extent required by any treaty obligation or international agreement to be
exempt from taxation by the Republic of the Philippines.

F. Retirement Benefits, Pensions, Gratuities, Separation Pay W hich Are Exempt From
Income Tax

As a general rule, retirement benefits, pensions, separation pay are all taxable.

As exceptions, the following benefits and payments are EXEMPT from income tax:

a) Retirement benefits and/or pensions which are exempt from income tax:

Under RA No. 7641 (Retirement Pay Law). In
the absence of a retirement plan for employees,
employers are required to pay a retirement
benefit equal to at least ½ month salary for every
year of service.
Under the Tax Code, retirement benefits
and/or pension amounts received by officials
and employees of private firms, whether
individual or corporate, shall be exempt from
income tax when the requisites for exemption in
the Tax Code are complied with.

Requisites for exemption: Requisites for exemption:

i. The employee has reached the age of
60 or more, but not beyond 65;
and
ii. The employee has served for at least 5
years in the same establishment.
i. There must be a reasonable private
benefit plan maintained by the
employer;
ii. The retiring official or employee has
been in the service of the same

23
 employer for at least 10 years;
iii. The retiring official or employee is not
less than 50 years of age at the time
of his retirement;
iv. The benefits of exemption granted shall
be availed of by an official or employee
only once.

b) Separation pay due to a cause beyond the control of the employee

Any amount received by an official or employee, or his heirs, from the employer as a consequence of
separation of such official or employee from the service of the employer due to:

(1) Death;
(2) Sickness;
(3) Other physical disability; or
(4) For any cause beyond the control of the said official or employee.

Note: Separation pay due to the above-mentioned causes are exempt from income tax regardless
of the age or length of service of the employee.

The exemption does not cover salaries, 13th month pay and other benefits in excess of
P90,000, and other payments which are properly taxable to the employee.

c) Social security benefits, retirement gratuities, pensions and other similar benefits received
by resident or non-resident citizens of the Philippines, or aliens who come to reside in the
Philippines, from foreign agencies and other institutions private or public.

d) Payment 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 Veteran Administration.

e) Benefits received from or enjoyed under the Social Security System (SSS) in accordance with
the provisions of Republic Act 8282.

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

g) Maternity benefits advanced by the employer to the employee are excluded from gross income,
and are therefore exempt from withholding tax.

G. Miscellaneous Items

a) Income derived by foreign governments, financing institutions owned or controlled

by foreign governments, and international or regional financial institutions
established by foreign governments from investments or deposits in the Philippines.

24
b) Income derived by the Philippine Government or its Political Subdivisions from the
exercise of any governmental function.

c) Prizes and awards primarily in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if:
(1) The recipient was selected without any action on his part to enter the contest or proceeding;
and
(2) The recipient is not required to render substantial future services as a condition to receiving
the prize or award.

d) Prizes and awards granted to athletes in local and international sports competitions and
tournaments whether in the Philippines or abroad and sanctioned by their national sports
association.

e) 13 th Month Pay and Other Benefits received by officials and employees of public and private
entities as “13th month pay and other benefits” which shall include:

(1) The 13th month pay, and other incentives such as productivity incentives and Christmas bonus;
and
(2) The excess of the de minimis fringe benefits over their respective ceilings.

Provided, however, that the total exclusion shall not exceed Ninety Thousand (P90,000)
Pesos (P82,000 before the TRAIN law).

f) Compulsory or mandatory contributions of employees to GSIS, SSS, Medicare (PHIC),

and PAG-IBIG, and union dues of individuals.

Note: Contributions in excess of the mandatory contributions are not deductible from gross income.
Moreover, GSIS Educational Plan, GSIS Optional Insurance, GSIS Unlimited Optional Insurance, and
GSIS Memorial Plan premiums shall not be deductible.

g) Gains from the sale, exchange or retirement of bonds, debentures, or other

certificates of indebtedness with a maturity of more that 5 years.

h) Gains from Redemption of Shares in Mutual Fund

i) Income of non-residents from transaction with Domestic Depository Banks and OBUs
Under the Expanded Foreign Currency Deposit System

j) Personal Equity and Retirement Account (“PERA”)

PERA refers to the voluntary retirement account of an individual (called a “Contributor”) established
from his own Qualified PERA Contributions and/or Qualified Employer Contributions, for the
purpose of being invested solely in qualified or eligible PERA investment products.

k) Representation and transportation allowances (“RATA”) granted under Section 34 of the

General Appropriation Act to certain officials and employees of the government from the

25
 rank of Department Secretaries to Division Chiefs are not subject to income tax and to the
withholding tax.

l) Personnel Economic Relief Allowance (“PERA”) granted to all employees of the National
Government, Local Government Units, including government owned or controlled corporations, is
considered remuneration/compensation for services performed by the employees in the
performance of official duties, hence, not taxable income.

m) Capital contributions to corporations/partnerships are not income of the

corporation/partnership, and hence not subject to income tax.

n) Project-related income from the development of socialized housing sites. The private
sector (ex. contractors) shall be exempt from payment of project-related income taxes (including
CGT) on a per project basis on income realized from the development of socialized housing sites.

Yield or income from any low-cost or socialized housing-related asset-backed

security.

o) Income from the commercialization of technologies developed by local inventors or

researchers under R. A. No. 7459 during the first ten (10) years from the date of the
first sale.

p) Proceeds which constitute a fund held in trust by the taxpayer, and which do not
redound to the benefit of the taxpayer.

GROSS INCOME

Concept of Gross Income

Gross income means the total income of a taxpayer subject to tax. It includes the gains, profits, and
income DERIVED FROM WHATEVER SOURCE, whether legal or illegal.

It does not include income excluded by law, or which are exempt from income tax.

Gross Income Defined

Gross income means all income derived from whatever source, including, but not limited to the
following items:
(1) Compensation for services;
- Including pensions and retiring allowances (except those exempt by law)
(2) Gross income derived from the conduct of trade or business or the exercise of profession;
(3) Partner’s distributive share from the net income of a general professional partnership;
(4) Rents
(5) Annuities (excess over premium paid);

26
 (6) Gains derived from dealings in property;
(7) Interest income;
(8) Royalties;
(9) Dividends;
(10) Prizes and winnings;

Note: The above enumeration is not exclusive. Gross income may also include other forms of income
which are not even mentioned in the list above. An example of this would be income from illegal
sources.

Items of Gross Income

1. Compensation For Services

Compensation for services, of whatever kind and in whatever form paid, forms part of gross income. The
name by which the remuneration for services is designated is immaterial. Thus, salaries, wages,
emoluments and honoraria, allowances, commissions (e g. transportation, representation, entertainment,
and the like); fees, including director’s fees, if the director is, at the same time, an employee of the
employer/corporation; taxable bonuses and fringe benefits, except those which are subject to the fringe
benefits tax under Section 33 of the Tax Code; taxable pensions and retirement pay; and other income
of a similar nature constitute compensation income.

(A) Compensation Income which may be in the following forms:

a) Cash
b) Allowances
c) Property – the FMV of the thing taken in payment is the amount of compensation
d) Employer’s stock – the FMV of the shares at the time the services were rendered.
e) Promissory notes – the fair discounted value of the note as of the time of receipt. The
employee shall also record additional income upon the recovery of the discount.
f) Forgiveness of debt for services rendered to ta creditor
Note: Where the debtor is a stockholder of the corporation condoning the debt, the
condonation of the debt amounts to an indirect payment of dividend.
g) Income tax of the employee assumed or paid by the employer, in consideration of the latter’s
services.
h) Pensions and retiring allowances – except those exempt by law
i) Stock options – the FMV of the stock option at the time the services were rendered by
the employee.

(B) Stock Options

1) The amount of compensation shall be the FMV of the stock options at the time the services
were rendered.

2) When the employee exercises the option by paying the exercise price (equity-settlement
option), it results in additional income. Such additional income shall equal the higher of the
book value or FMV of the shares, less the exercise price.

27
 (a) If the employee is a rank-and-file employee, the additional income shall be recognized
by the employee as taxable compensation and shall be subject to the CWT on
compensation.
(b) If the employee is a supervisory or managerial employee the additional income shall be
treated as a fringe benefit subject to the final FBT
3) When the grantor (the corporation) simply pays the difference between the FMV of the shares
and the exercise price (cash-settlement option), the same rules in (2) above apply.

(C) Fringe Benefits which may be in the form of (1) meals furnished or subsidized by the employer;
(2) living quarters; (3) life insurance premiums paid by the employer where the insured employee is
the beneficiary; (4) facilities or privileges provided by the employer; or allowances.

Fringe benefits are classified under the following categories, namely:

Those subject to the fringe benefits tax (“FBT”)

- Fringe benefits given to employees holding managerial or supervisory positions, and

which are listed in RR No. 3-98, as amended

Those included in gross income in the ITR

- Fringe benefits given to rank and file employees

- Fringe benefits given to employees holding managerial or supervisory employees and
which are not listed in RR No. 3-98, as amended

Those which are not taxable

- Fringe benefits given to employees for the convenience of the employee, or if incurred
by the employee in the pursuit of the trade, business, or profession of the employer and
is liquidated and accounted for by the employee.
- “De minimis” fringe benefits

(D) Salaries and Allowances During Leaves of Absence

(E) Separation Pay NOT Due to a Cause Beyond the Control of the Employee

General Rule: Separation pay is included in gross income of separated employee

Exception: If separation is caused by something not of the employee’s making. For example, if
separation is due to cessation of the business, or as a consequence of death, sickness,
other physical disability, or for any cause beyond his control, the separation shall be
exempt from tax.

28
 (F) Fees

Fees received by an employee for the performance of a service for the employer, including
director’s fees (including per diems and allowances), are regarded as compensation income.

Marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other
contributions received by a clergyman, evangelist, or religious worker for services rendered are
considered compensation.

Exception: Authorized fees paid to public officials, such as notaries public, clerks of court, sheriffs,
etc., for services rendered in the performance of their official duties, are not considered
wages.

(G) Dismissal Payment

Any payment made by an employer to an employee on account of dismissal, that is, involuntary
separation from the service of the employer, constitutes wages, regardless of whether the
employer is legally bound by contract statute, or otherwise to make such payment

(H) Tips and Gratuities

Tips or gratuities paid directly to an employee (by a customer of the employer) which are not
accounted for by the employee to the employer are considered taxable income, but not
subject to withholding tax.

2. Gross Income From Business

1) In general, “gross income” means total sales less COGS, plus any income from investments and
from any incidental or outside operations or sources.

Formula:

Gross Sales P xxx

Less: Cost of good sold xx)
Gross profit from sales P xxx
Add: Other Income P xxx
(a) Income from investment P xxx
(b) Income from incidental or outside
operations or sources xxx xxx
Gross Income P xxx

2) Income from Long-Term Contracts

29
 The term “long-term contracts” refers to construction, installation, or building contracts requiring a
period longer than one (1) year for completion.

Income therefrom is reported under the percentage of completion basis.

3) Gross Income From Farming

The income tax regulations prescribe three (3) methods of reporting the gross income from farming,
namely:

(a) Cash basis, or receipts and disbursements basis. Under this method, no inventory is used
to determine profits.

Formula –

Cash from sales of livestock and other products raised in the farm
+ Value of property received from sales
+ Profits/Gains from the sale of livestock or other items purchased
+ Gross income from all other sources
TOTAL gross income

(b) Accrual basis. Under this method, inventory is used to determine profits
Formula –
Sales xxx
Ending Inventory xxx
Less beginning inventory (xx)
Less purchases (xx) (xx)
Gross Income xxx

(c) Crop basis. This method of reporting income may be used by a farmer engaged in
producing crops which take more than (1) year from the time of planting to the time of
gathering and disposing of the crop.

In such cases, the entire cost of producing the crop must be taken as a deduction in the
year in which the gross income from the crop is realized.

4) Gross Income From Petroleum Operations

Gross income from petroleum operations means its total entitlement of the gross proceeds
from the sale at market price, during the taxable year, of petroleum produced under the service
contract, and such other income incidental to and arising from any one or more of the petroleum
operations of the contractor.

30
 Provided, the amount of Filipino participation incentive allowance received by a Philippine
corporation pursuant to an operating agreement under a petroleum service contract between a
service contractor and the Government under P.D. No. 87 shall not be included in the gross income
of the Philippine corporation.

3. Payments Made by a GPP to a Partner, and the Distributive Share of Partners in the Net
Income of a GPP

4. Rent or Lease Income

Reporting of Income by a Lessor

Rent paid by the lessee for the use or lease of property is taxable income to the lessor.

Rent income may be in the following forms:

(1) Cash, at the stipulated price;

(2) Obligations of the lessor to third persons paid or assumed by the lessee in
consideration of the contract of lease. An example is the real estate tax on the property leased
assumed by the lessee.

(3) Advance payment which must be pre-paid rentals and not (a) a loan to the lessor, or (b)
option money for the property, or (c) security deposit for the faithful performance of the
lessee’s obligations

However, a security deposit that is applied to rentals is taxable income to the lessor.

Pre-paid rent must be reported in full in the year of receipt, regardless of the
accounting method used by the lessor.

(4) Leasehold improvement

The contract of lease may provide that the lessee may make permanent improvements on the
lease property and said improvements will belong to the lessor upon termination of the lease.

Income and Deduction from Leasehold Improvement

(a) Income of Lessor

The lessor, in such a case, may, at his option, report income under any of the following
methods:

1) Outright method – lessor reports as income the FMV of the improvement in the year of
completion.

2) Spread-out method –

31
 The lessor shall spread over the remaining term of the lease the estimated depreciated
(book) value of such buildings or improvements at the termination of the lease, and
report as income for each remaining term of the lease an aliquot part thereof

Formula:

Cost of leasehold improvements P xxx

Less: Depreciation for remaining term of lease (xx)
Book value, end of lease P xxx

Book value end of lease = Income per year P xxx

Remaining term of lease

(b) Deduction of Lessee (Depreciation expense)

The lessee may claim depreciation of the improvements over the remaining term of the
lease or the life of the improvements, whichever is shorter.

(c) Computation of Income from Leasehold Improvement Arising from the Pre-
termination of Lease Contract

The lessor receives additional income for the year in which the lease is so terminated to the
extent that the value of such building when he became entitled to such possession exceeds
the amount already reported as income on account of the erection of such building.

Formula –

BV of Leasehold Improvement at termination of Lease P xxx

Less: Amounts of income previously recognized (xx)
Additional income in year of termination P xxx

(d) Loss of Lessor if Leasehold Improvement is Destroyed Before Termination of

Lease

If the building or other leasehold improvement is destroyed before the expiration of the
lease, the lessor is entitled to deduct as a loss for the year when such destruction takes
place the amount previously reported as income because of the erection of the
improvement, less any salvage value, to the extent that such loss was not compensated by
insurance.

32
5. Annuities and Life Insurance Policies

(a) Annuities – Annuities paid under an annuity contract in excess of the consideration paid are
includible in gross income

(b) Life Insurance Policies – Where insured outlives the term of the policy, amounts received by an
insured in excess of the premiums paid are included in gross income.

Note: Distributions on paid-up policies, which are made out of earnings of the insurance company
subject to tax, are in the nature of corporate dividends and should be taxed accordingly.

6. Gains Derived From Dealings in Property

Sale of 3 types of property which may give rise to taxable events:

Ordinary asset – 100% of the gain or loss shall be recognized in the ITR
Capital asset – subject to final taxes (capital gains tax)
Other capital asset – holding period of the asset shall be taken into consideration if the seller is
an individual, and only the net capital gain shall be included in the ITR.

(1) Sale of Tangible Assets

(2) Sale of Intangible Assets (ex. patents, copyrights, and goodwill)
(3) Corporate Sinking Fund
(4) Sale of Real Property

Gain from the sale of real properties classified as ordinary assets shall be included in gross income
in the ITR of the taxpayer.

Note: Real properties acquired by banks through foreclosure sales are considered as their ordinary
assets. However, banks shall not be considered as habitually engaged in the real estate
business for purposes of determining the applicable rate of creditable withholding tax
imposed under Sec. 2.57.2 of Rev. Reg. No. 2-98, as amended (Rev. Reg. No. 7-2003).

7. Interest Income

Interest income, as a rule is taxable income included in the ITR.

EXC. (1) Interest income from bank deposits or deposit substitutes in the Philippines subject to FT
(passive income);
(2) Interest income which are exempt from tax:
i. Interest income from long-term deposit or investment in the form of savings, trust
funds, deposit substitutes, investment management accounts;
ii. Interest income earned from passive investments of foreign governments, financing
institutions owned by foreign governments, and international financial institutions
established by foreign governments.

33
 Note: Interest income on Government securities is subject to final tax on passive income as such
securities are considered deposit substitutes.

8. Royalties

Royalties derived from sources within the Philippines are subject to a final tax of 20% , except
royalties on books, other literary works, and musical compositions which shall be subject to a final tax of
10%.

Royalties received by resident citizens and domestic corporations from sources without the
Philippines shall be included in the ITR.

9. Dividends

Dividends subject to FT: Cash or property dividends received by individuals and NRFCs from
domestic corporations.

Dividends included in gross income in the ITR:

1) Generally, cash and/or property dividends received by a resident citizen or domestic corporation
from a foreign corporation.

2) Liquidating Dividend

Liquidating dividends represent distribution of all the property or assets of a corporation in

complete liquidation or dissolution.

The difference between the cost or other basis of the stock and the amount received in
liquidation of the stock is a capital gain or a capital loss. Where property is distributed in
liquidation, the amount received is the fair market value of such property.

Liquidating dividend P xxx

Less: Cost of stock investment or other basis (xx)
Capital gain or (Capital loss) P xxx

If the shareholder is a corporation, the capital gain is taxable in full.

If the shareholder is an individual and the stocks were held for more than 12 moths, the capital
gain is taxable only to the extent of 50% thereof (Sec. 39 (B), NIRC)

Dividends not subject to income tax

1) Intercorporate dividends from a domestic corporation to another domestic corporation or a RFC.

2) Generally, stock dividends.

34
10. Prizes and Winnings

Subject to FT: (a) Prizes over P10,000 and winnings11 derived within the Philippines.
(b) Prizes received by a NRANETB and by a NRFC within the Philippines.

Included in the ITR:

1) Prizes amounting to P10,000 or less received by a citizen, resident alien, or NRAETB
2) Prizes received by domestic corporations
3) Prized received by RFCs within the Philippines
4) Prizes and winnings received by resident citizens from sources without the Philippines

11. Income From Other Sources

(1) Recovery of damages representing compensation for loss of profits or income

are includible in gross income
Note: Recoveries that are to compensate for damage to property, injury to person, or loss of
life are not taxable.

Included in Gross Income Not Taxable

1) Damages for loss profits 1) Damages to compensate for damage or
2) Damages for lost income injury to the person or his property
2) Damages for lost capital
3) Moral damages
4) Exemplary damages
5) Punitive damages

(2) Recovery of Bad Debts Previously Deducted

The “Tax Benefit Rule” is the doctrine observed in the Philippines in bad debt recoveries.

Rules on Bad Debt Recovery:

(a) Taxable – if the deduction of the bad debt in prior year resulted in an income tax benefit to
the taxpayer, the bed debt recovered is taxable income in the year of recovery.

(b) Not Taxable – if the deduction of the bad debt did not result in an income tax benefit to
the taxpayer (i.e., where the result of the business operation was net loss even without the
bad debt deduction), the bad debt recovered is not taxable income but is treated as a
mere recovery or return or capital.

(c) Income From Bad Debt Recovery – the recovered amount of the previously deducted bad
debt which resulted in an income tax benefit.

11Except PCSO and Lotto winnings of P10,000 or less of an individual citizen or resident alien, and PCSO and Lotto winnings of a NRAETB
regardless of amount, which is EXEMPT.
35
(3) Refund of Deductible Tax

The tax benefit doctrine also applies with respect to refund or credit of taxes which were
claimed and deducted in a previous year.

Rules on Refund of Taxes Previously Deducted:

(a) Taxable – if the tax paid is a deductible tax. The refund or credit thereof is taxable in the
year of receipt.

(b) Not Taxable – if the tax paid is not a deductible tax. The refund or credit thereof is not
taxable.

(c) Income From Tax Refund – The refunded amount of the tax which was previously deducted
and which resulted to an income tax benefit.

Examples of deductible taxes are: percentage taxes (except VAT and stock transaction tax
under Sec. 127 the Tax Code), excise taxes, occupation or professional taxes, real property
taxes.

Examples of non-deductible taxes are income tax, donor’s tax, estate tax, VAT, stock
transaction tax under Section 127 of the Tax Code)

(4) Tournament Prizes

Included in the ITR: Cash prizes won by local players/participants in tournaments are not
passive income inasmuch as participating in such tournaments is their profession and/or
occupation.

Subject to FT: Cash prizes of foreign players/participants, shall be subject to a final tax of
25%.

Exempt from income tax: Prizes and awards granted to athletes in local and international
sports competitions and tournaments whether held in the Philippines or abroad, and
sanctioned by their national sports associations.

(5) Forgiveness of Indebtedness

Included in the ITR: When a creditor cancels the debt as part of a business transaction, or in
consideration of personal services of the debtor, the condoned debt is taxable income to the
debtor.

Taxed as a dividend: But where the debtor is a stockholder of the corporation which
condoned the debt, the condonation is considered an indirect payment of dividend.

36
 Subject to donor’s tax: If a creditor merely desires to benefit a debtor, and without any
consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the
debtor.

(6) Income from Illegal Sources

All unlawful gains are taxable and includible in the ITR. However, actual repayment of such
illegal gains will give rise to a deduction. (James vs. United States, 366 US 213)

(7) Unutilized/Excess Campaign Funds

Unutilized/excess campaign funds, that is, campaign contributions net of the

candidate’s campaign expenditures, shall be considered as subject to income tax. As
such, the same must be included in the candidate’s gross income as stated in his Income Tax
Return (“ITR”) for the subject taxable year.

Any candidate who fails to file with the COMELEC the appropriate Statement of Expenditures
required under the Omnibus Election Code, shall be automatically precluded from claiming
such expenditures as deductions from his campaign contributions. As such, the entire amount
of his campaign contributions shall be considered as directly subject to income tax.

(8) Early Withdrawals from a Personal Equity and Retirement Account (“PERA”)
which do not qualify for exclusion from taxable gross income

(9) Gain in the Sale or Retirement by a Corporation of Its Own Bonds

- Where the corporation is able to buy back its own bonds for less than the value of such
bonds as reflected in the corporation’s books.

(10) Stock options granted to a supplier of goods or services

37