October 2019 | i EXCLUSIONS FROM GROSS INCOME. i Atty. C. Llamado | | ! What are Exclusions? | | exclusions are income or receipts which are excluded frm gross income, i. these ere not included in the determination ofa taxpayer's gross income. Hence, these incomes or receipts are not 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 i The following items shall not be included in gross income and shall be exempt from income tax: (2) Proceeds of Life Insurance Upon Death of the Insured “The proceeds of life insurance policies paid to the heirs ot beneficariss 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 Jost instead of ds gain, profit, or income. Note: Interest payments made by the insurer constitutes income to the rezipient. (2) 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, oF at the in ‘or upon_surrender of the contract. Notes: i 2) The excess ofthe proceeds received over the premiums paid is included in ross income +) Ratticipating dividends distributed to life insurance policy holders are actually a return of overpaid premiums. They are therefore excluded from s70ss income of the insured.October 2019 (3) 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 shal! be subject to income tax. (4) Compensation for Injury or Sickness 8) Amounts received, through sccient or health insurance, or under Workmen's Compensation Acts, as compensation for personal injuries or sickness; plus ) The amounts of any damages received, whether by suit or agreement, on ascount of such injuries or sickness. ©) Damages representing compensation for personal injuries arising from libel, defamation, stander, breach of promuse 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 ox corrective damages. These are imposed by way of example or sorretion for the public pood. (5) Income Exempt Under 7reatles Income of any kind, t© the extent required by any treaty obligation or international agreement to be exempt from taxation by the Republic of the Philippines. (© Retirement Ren ‘Ana general ule, retirement benefits, pensions, separation pay are all taxable. Asexceptions, the following benefits and payments are EXEMPT from income tex: (a) Retirement benefits and/or pensions which are exempt from income tax; ement Under the Pay Law). In the absence of a benefits and/or pension amounts retirement plan for employees, received by officials and employees 2October 2019 employers are required to pay a ‘of private firms, whether individual retirement benefit equal to at least % | or corporate, shall be exempt from ‘month salary for every year of income tax when the requisites for service. ‘exemption in the Tax Code are complied with. ‘Requisies for exemption: ‘Requisiles for exemption: i) The employee has reached the age (1) There must be a reasonable of 60 or more, but not beyond 65;| private benefit plan maintained and by the employer, ji) The employee has served for at least § vears inthe same |@) ‘The retiring official or employee ‘establishment. has been in the service of the same employer for at least 10 years: 3) The retiring official or employee {s not less than 0 years of age at ‘the time of his retirement, (4) The benefits of exemption granted shall be availed of by an official or employee only once. (b) Separation Pav Duc to a Cause Bevood the Control of the Employee ‘Any amount received by an official or employee, or by 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, Q) Sickness, (3) Other physical dissbifty, o (4) For any cause beyond the control ofthe said official or employee, Note: Separation pay due to the abovementioned causes are exempt from ‘income tax regardless of age or length of service of the employee. ‘The exemption does not cover salaries, 13° month pay and other benefits in excess of P90,000, and other payments which are properly taxable to the employee. (©) Social security benefits, retirement gratuities, pensions and other similar benefits received by resident or, non ident citizens of the Philippines, or aliens who come to reside in the Philippines, from foreign agencies and other institutions private or public,October 2019 (@)Payment of benefits due or to become due to any person residing in the Philippines under the lave of the United States administered by the United ‘States Veteran Administration (©) Benefits received from or enjoyed under the Social Security System (SSS) in accordance withthe provisions of R.A. No. §282. (® Benefits received from the GSIS under R.A. No. 8291, including retirement gratuity received by government officials and employees. (G) Maternity benefits advanced by the employer to the employee. (7) 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. (b) Income Derived by the Philippine Government or its Political Subdivisions from the exercise of any goveramental function. (© 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. (@) Prizes and awards granted to athletes in local and internationat sports ‘competitions and toumaments whether held in the Philippines or abroad and sanctioned by their national sports association (©) 13" Mouth Pay and Other Benefis received by officals and employees of public and private entities as “13® month pay and other benefits” which shall include (2) The 13 month pay, and other incentives such as productivity incentives and Christmas bonus, and (2) The excess of the “de minimis” tinge benefits over their respective ceilings. Provided, however, that the total exclusion shail not exceed Ninety ‘Thousand Pesos (P90,000),October 2019 o ® @ 0 r or mi butions of employees to GSIS, SSS, Medicare (PHIC), and PAGLBIG, and union dues pf individuals. ~ [These are actually deductions, but are labelled as exclusions in the Tax 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 Memoral Plan premiums shall not be deductible, Gains from the sale, exchange or retirement of bonds, debentures, or other certificate of indebtedness with a maturity of more than S vears, Gains from Redemption of Shares in a Mutual Fund Income of non-residents from transactions with Domestic Depository Banks and OBUs Under the Expanded Foreign Currency Deposit System Personal Equity and Retirement Account (“PERA") PERA refers tothe voluntary retizement aocount ofan individual (called a “Coniributor”) established from his own Qualified PERA Contributions and/or Qualified Employer Contributions, for the purpose df being invested solely in qualified or eligible PERA investment products. 1) The Qualified Employer's Contribation shall be excluded from the employee's taxable gross income. ! 2) Investment iacome a Contributor ead from the invents of his PERA Assets shall be exempt from income taxes, provided: (@)that each specific investment product is approved by the concemed regulatory authority, and (b)that non-income taxes, if applicable, relating to the investment ‘income, shall be imposed. Such taxes shal include (a) percentage taxes; (b) WAT; (6) stock transaction tax under Section 127 (A) and (B) of the Tax Code, and (d) documentary stamp tax. 3) Qualified PERA Distros shal be ested from s70ss income (@) After the Contributor and/or hs employer has made the Qualified PERA Contributions and/or Quelified Employer’s Contributions forOctober 2019 at least five (5) years (which need not be consecutively made), after the Contributor reaches the age of fifty-five (55), or (4) Upon death of the Contributor, irrespective of the Contributor's age or the number of yearly contributions made atthe time of his death 4) Early Withdrawals in the following circumstances shall be excluded from gross income: (@) Withdrawal of PERA Assets fom the Administrator by reason of the suspension or revocation of the accreditation of the ‘Administrator, provided tht the entite PERA Assets are transferred to another Administrator within two (2) working days from receipt of the Contributor's advice on the chosen Administrator, (b) For payment of accident or illness-elated hospitalization in excess of thirty (30) days; or (©) For payment to a Contributor who has been subsequently rendered permanently and totally disabled as defined under the Employees ‘Compensation Law or Social Security System Law. (k) Representation and transportation allowances (“RATA”) granted under Section 34 of the General Appropriation Act fo certain officials and_employees of the goverament from the rank of Department Secretaries to Division Chiefs are not subject to income tax and to the ‘withholding tax. @® Personnel Economic Relief Allowance (“PERA") granted to all employees of tie_Natcnsl, Government, Local _Govemmment_Units, incluting. govemment owned or contsolied corporations, is considered remuneration/compensation for services performed by the employees in the performance of official dutics, hence, not taxable income. Capita! contributions to corporationy‘partnerships are not income of () the corposntion/partnership, and hence not subject tu income tax. (a) Project-related income from the development of socialized housing sites. The privete sector (ex. contractors) shall be exempt from payment of project-related income taxes (inchiding COT) on a per project basis on income realized from the development of socialized housing sites. Yield or income from any low-cost or sotialized housing-related asset- backed security. (©) Income from the commercilization of technologies developed by local inventors or researchers under R.A. No. 7459 during the first ten (10) ‘Years from the date ofthe first sale,! | Cuter 2019 | | (©) Proceeds which constitute a fund held in trust bythe taxpayer, and ‘Hie seceded te he enenea te tnpeyee| | : (@ Income from the sale of gold pursuant to R.A. No.,7076 (the People’s ‘Small-Scale Mining Act of 1991)' i |G) Income from the sale of gold to the Bangko Sentral ng Pilipinas by registered small-scale miners’ and accredited traders, and (2) Income from the sale of gold by registered small-scale miners to accredited traders for eventual sale to the Bangko Sentral ng Pilipinas.” Sec. 32{B) (7) as inserted by RA. No, 11256, * Small-scale miners refer to Filipino citizens who, individually or inthe company of other Flpino Citizens, voluntarily form a cooperative duly licensed by the Department of Enviroament and Natural Resoures to engage, under te tems and conditions of a contact, inthe extraction of removal of minerals or or-bearing materials from the ground (Sec. 3(9), RA. No. 7076), 2 All gold sold to the BSP by accredited traders shall be presumed to have been purchasod by suid ‘nudes fom smallscale miners (Sec. 4, RA. No. L125 1October 2019 GROSS INCOME By: Atty. Llamado Concept of Gross Income Gross ineome means the total income of a taxpayer subject to tax. It includes the Bains, 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 souree, including (but ‘not limited to) the fottowing 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 a profession; (3)Parmner’s distributive share fom the net income of a general professional partnership, (4) Rents, L(S) Annuities (excess over premium paid); (©) Gains derived from dealings in property; Q) imerest income; (Royalties, (2) Dividends, (10)Prizes and wannings; Note: The above enumeration is mot exclusive, Gross income may also include other forms of income which are not even mentioned inthe 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 neme by which the remuneration for services is Gesignated is immaterial, Thos, salaries, wages, emoluments and honoraria, allowances, commissions (¢.g, transportation, representation, entertainment, and the like), fees, including dircetor’s fees, ifthe director is, atthe same time, an employee of the employerlcorpuration; taxable bonuses and fringe benefits,October 2019 except those which are subject tothe fringe benefits tax under Section 33 of the Tax Code; taxable pensions and retiement pay; and other income of a similar nature constitute compensation income, ‘A) Compensation income which may be in the following forms: 8) Cash ») Allowances ©) Property —the FMY of the thing taken in payment isthe 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. iveness of Note: Where the debtor is a stockholder of the corporation condoning the a condonation of the debt amounts to an indirect payment of dividend 8) Income tax of the employer assumed or paid by the employer, in consideration of the latter's services. hy Pensions and retiring allowances except those exempt by law §) Stock options ~ the FMV of the stock option atthe time the services mere rendered by the employes. B) Stock Options 1) The amount of compensation shall be the FMV of the stock options atthe 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 ofthe book value or FMV of the shares, less the exercise price. (@)IE 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) Ifthe employee isa supervisory or managerial employee, the additional income shall be treated asa fringe benefit subject tothe 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. © Fringe Benefits which may be in the form of (1) meals fumished or ‘subsidized by the employer, 2) living quarters, (3) life insurance premiums ppaid by the employer where the insured employee is the beneficiary; (4) facilities or privileges provided by the employer, or (5) allowances.October 2019 Fringe benefits are classified under the following categories, namely: Q ject to th Fringe benefits given to employees holding managerial or supervisory ‘positions, and which are listed in RR No. 3-98, as amended, ~ Fringe benefits given to rank and file employees = Fringe benefits given to employees holding managerial or supervisory ‘ermployees and which are not sted in RR No. 3-98, as amended ~ Fringe benefits given to employees for the convenience of the ‘emplover, 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. = “Deminimis” 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, pay shall be exempt from tax, 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 fes, baptismal offerings, sums paid for saying masses forthe dead, and other contributions received by a clergyman, evangelist, or religious ‘worker fr services rendered are onsidered compensation, Exception: Authorized fees paid to public officials, such as notaries public, clerks of court, sherifls, ete, for services rendered in the performance of their official duties, are not considered wages. 10