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Gross Income PDF
Gross Income PDF
(A) General Definition. - Except when otherwise provided in this Title, gross income means all income
derived from whatever source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a
profession;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(11) Partner's distributive share from the net income of the general professional
partnership.
Q: Is a “kickback” an income?
A: Yes, because gross income includes any income from whatever source, whether legal or illegal.
Note: Again, for income to be taxable, we have to determine who the taxpayer is as well as the source
of income.
(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be
treated as gross income from sources within the Philippines: 1) Interests. - Interests derived from
sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of
residents, corporate or otherwise;
(b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such
foreign corporation for the three-year period ending with the close of its taxable year preceding
the declaration of such dividends or for such part of such period as the corporation has been in
existence) was derived from sources within the Philippines as determined under the provisions of
this Section; but only in an amount which bears the same ration to such dividends as the gross
income of the corporation for such period derived from sources within the Philippines bears to its
gross income from all sources.
(3) Services. - Compensation for labor or personal services performed in the Philippines;
(4) Rentals and royalties. - Rentals and royalties from property located in the Philippines or from any
interest in such property, including rentals or royalties for -
(5) Sale of Real Property. - gains, profits and income from the sale of real property located in the
Philippines; and
(6) Sale of Personal Property. - gains; profits and income from the sale of personal property, as
determined in Subsection (E) of this Section.
(C) Gross Income From Sources Without the Philippines. - The following items of gross
income shall be treated as income from sources without the Philippines:
(1) Interests other than those derived from sources within the Philippines as provided in
paragraph (1) of Subsection (A) of this Section;
(2) Dividends other than those derived from sources within the Philippines as provided in
paragraph (2) of Subsection (A) of this Section;
(3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties from property located without the Philippines or from any interest in
such property including rentals or royalties for the use of or for the privilege of using without the
Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands,
franchises and other like properties; and
(5) Gains, profits and income from the sale of real property located without the Philippines.
(E) Income From Sources Partly Within and Partly Without the Philippines:
Gains, profits and income from the sale of personal property produced (in whole or in part)
by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly from sources within and partly
from sources without the Philippines.
Gains, profits and income derived from the purchase of personal property within and its sale
without the Philippines, or from the purchase of personal property without and its sale within the
Philippines shall be treated as derived entirely form sources within the country in which sold: Provided,
however, That gain from the sale of shares of stock in a domestic corporation shall be treated as
derived entirely form sources within the Philippines regardless of where the said shares are sold. The
transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a
domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with
the Commissioner a bond conditioned upon the future payment by him of any income tax that may be
due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if
any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It
shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to
advise the transferee of this requirement.
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items
Q: Form of compensation
A; In cash or in kind, FMV is considered to determine the income
Note however that under R.A. 6975 (DILG Act of 1990), longevity pay, subsistence allowance,
and hazard pay granted to uniformed policemen and jail guards are exempt from tax. But, if
the recipient is an AFP personnel, all remunerations (monetary and non-monetary- are
taxable, except allowances for quarters, clothing and subsistence allowance.
This item (Compensation) should be included in the gross income subject to NIT, except: (1) those
received by taxpayers which are subject to the Gross Income Tax; and (2) those received by AEMOP
because their compensation are subject to FIT of 15%; however, with regard to Filipinos employed by
these companies (MOP), they may include this in their gross income, however, if they choose to pay by
way of the FIT of 15%, this item should not be included. TAKE NOTE, however, that the preferential tax
treatment, was in effect removed by the TRAIN Law (see amendment). Which means that the AEMOP
including their Filipino counterpart will now be subject to tax in the same manner as that of a RC, NRC
or RA under Sec. 24 A of the Code. In the proposed Sec. 25 F, the TRAIN Law removed the applicability
of FIT of 15% to RHQs, ROHQ, OBUs and PSC who will be registering with SEC beginning January 1, 2018.
With respect to those that are existing, while the law retained its entitlement to choose whether to be
taxed with 15% FIT or NIT, it was however VETOED by President Duterte.
Under Sec. 42, if the service is performed in the Philippines, the income shall be treated as sources
from within the Philippines. There is no other criterion used to determine source of income from sale of
services.
Gross income from sources within the Philippines includes compensation for labor or personal
services performed within the Philippines, regardless of the residence of the payor, of the place in which
the contract for service was made, or of the place of billing or payment.
Q: A went to Hongkong for a holiday vacation. While in Hong Kong, he worked in a cafe where he
earned HK$1000. Is A liable to pay net income tax?
A: It depends on the status of A as a taxpayer. If A is a resident citizen, he is liable for the income he
earned in HK. However, if A is a non-resident citizen or an alien, he is not liable because the performance
of the service was made in HK.
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
This income is always included in the gross income since there is no instance that such income is
subject to FIT.
We have two categories here; (1) Professional Income; and (2) Income from the conduct of trade
or business.
With respect to personal property (other than shares of stocks), whether it is an ordinary or a capital
asset, the gain from dealings therefore is included in the gross income.
1. Shares of stocks of a Domestic Corporation (DC) held as capital asset not traded through the
Local Stocks Exchange:
Sec. 24 (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange.
- The provisions of Section 39(B) notwithstanding, a final tax at the rate of fifteen percent
(15%) is hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange. (As amended by Sec. 5, RA 10963)
Sec. 39 B relates to the holding period. See pp. 432 – 433 (Casasola)
2. Shares of stocks of a Domestic Corporation (DC) of held as capital asset traded through the Local
Stocks Exchange – is subject to a Stock Transaction Tax of 6/10 of 1%
Section 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded
through the Local Stock Exchange or through Initial Public Offering. -
(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the
Local Stock Exchange. - There shall be levied, assessed and collected on every sale,
barter, exchange, or other disposition of shares of stock listed and traded through the local
stock exchange other than the sale by a dealer in securities, a tax at the rate of six-tenths
of one percent (6/10 of 1%) of the gross selling price or gross value in money of the shares
of stock sold, bartered, exchanged or otherwise disposed which shall be paid by the seller
or transferor. (As amended by Sec. 39 of R.A. 10693)
3. Final Percentage Tax on sale or exchange of Shares of Stocks through IPO (Sec. 127 B):
Gross selling price or gross value in money in proportion of the shares of stocks sold
or exchanged to the total outstanding shares of stocks after the listing at the stock
exchange:
o Up to 25%: 4%
o Over 25% but not over 33 1/3%: 2%
o Over 33 1/3%: 1%1
1
See Ingles, p. 65
(see Dascil, p. 321)
4. Sale of Shares of Stocks Held as Ordinary Assets and the sale is made by a Dealer in Securities, the
resulting gain is considered as ordinary income subject to the NIT or 8% rate in the case of individual
and the normal corporate income tax rate of 30% in the case of corporations.2
5. Sale of Shares of Stocks in a foreign corporation, all gains are subject to NIT or 8% Rate.3
(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in trade of
the taxpayer or other property of a kind which would properly be included in the inventory of
the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business, or property used
in the trade or business, of a character which is subject to the allowance for depreciation
provided in Subsection (F) of Section 34; or real property used in trade or business of the
taxpayer.
The term “Capital asset” refers to all properties of a taxpayer other than ordinary assets.
Example: a. Stock and securities held by taxpayers other than dealers in securities;
b. Real properties not used in trade or business, such as the “principal
residence of an individual
Conversely, the term “Ordinary assets” refer to all properties of a taxpayer other than capital assets.
They are assets that are being used primarily for sale in the ordinary course of trade or business, such
as:
(1) Stock in trade of the taxpayer or other property of a kind which would properly be included
in the Invetory of the taxpayer if on hand at the close of the taxable year.
(2) Property held by the taxpayer primarily for Sale to customers in the ordinary course of his
trade or business.
(3) Property Used in the trade or business, of a character which is subject to the allowance for
depreciation provided in Subsection (F) of Section 34.
(4) Real property used in trade or business of the taxpayer. 4
2
See Casasola p. 209
3
Lumbera, Updates in Taxation (for 2019 Bar)
4
Calasanz vs. CIR, G.R. L-26284, October 8, 1986.
The kind of property involved would determine the tax implication and income tax treatment of
the same.5
In contrast with dealing in personal property, the gains from dealings in real property are not always
included in the gross income. If the real property is ordinary, it should be included. On the other hand, if the
real property is capital, the gain therefrom is subject to FIT.
Take note of the rules on the sale or exchange of real property located in the Philippines:
1. If the seller or transferor is a real estate dealer, the real property sold is an ordinary asset, and the
gain, if any, is subject to the NIT.
A real estate dealer includes any person engaged in the business of buying, developing, selling,
exchanging real properties as principal and holding himself out as a full or part-time dealer in real
estate.
2. If the seller or transferor is not a real estate dealer, determine whether the real property sold or
transferred is (a) used in the taxpayer’s trade business or profession, or (b) treated as fixed asset used
in his trade, business or profession subject to depreciation
If YES, the real property shall be treated as ordinary asset, and the gain, if any, from the sale or transfer
thereof shall be subject to NIT.
If NO, the real property shall be treated as capital asset, and the gain, if any, shall be subject to FIT of
6%.
Dealing in property also includes just compensation for the expropriation of a real property.
Considering that there is a material gain not excluded by law arising from expropriation of property which
is realized out of a closed and completed transactions, gains derived therefrom are part of the gross
income which are taxable. Thus, the proceeds derived therefrom is subject to income tax as capital gain.
With respect to conditional sale of property, please take note of the doctrine laid down in the
CREBA case.
(4) Interests;
Q: What is an interest?
A: Interest is generally defined to be compensation allowed by law or fixed by the parties for the use
or forbearance of money or as damages for its detention.
5
Casasola, NIRC, p. 426
The interests from loans are always included in the gross income hence subject to NIT, except in
the case of (a) NRANETB where the rate applicable is 25% FIT, and b) NRFC where the rate applicable is
20%.
However, it is not the same for bank interest. It should first be determined whether the bank
interest is derived from sources within or without the Philippines. If the interest is derived within, the
bank interest is not included since it is subject to FIT, otherwise, the bank interest is included in the gross
income.
Bank interests are considered as passive income, hence, subject to FIT, thus, not to be included in
the TP’s gross income for purposes of NIT. This holds true if the TP is other than RC. Why? Because if the
interest was earned from a bank outside of the country and the TP is RC, then the interest has to be
included in the computation of his gross income subject to NIT, because as a RC he is taxable for all his
income derived from sources within and without.
To be considered passive, interest income should come from sources within the Philippines, the
bank from which the interest is derived should be located in the Philippines. The rate of twenty (20%) is
generally applicable. However, for the interest income received by an individual taxpayer, except a non-
resident individual, from a depositary bank under the EFCDS, a final tax of 7.5% is applicable.
Further, for interest income from long term deposit or investment, the same was amended by the
TRAIN law, as follows:
Deposit Substitutes
Deposit substitutes are defined as an alternative form of obtaining funds from the public (the
term ‘public’ means borrowing from [20] or more individual or corporate lenders at any one time), other
than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s
own account, for the purpose relending or purchasing of receivables and other obligations, or financing
their own needs or the needs of their agent or dealer. These instruments may include, but need not be
limited to, banker’s acceptances, promissory notes, repurchase agreements including reverse repurchase
agreements entered into by and between the BSP and any authorized agent bank, certificates of
assignment, or participation and similar instruments with recourse. 6
Under Section 24 B(1), 27(D)(1), and 28 (A) (7) of the 1997 NIRC, a FWT at the rate of 20% is
imposed on interest on any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements. Under the 1997 NIRC, Congress specifically
defined “public” to mean “twenty (20) or more individuals or corporate lenders at any one time.” Hence,
6
Q & A of 2005-2018 SC Decisions in Taxation, Gothic Publications, pp. 105-106
the number of lenders is determinative on whether a debt instrument should be considered a deposit
substitute and consequently subject to the 20% FWT. 7
The debt instruments that do not qualify as deposit substitute under the 1997 NIRC are subject
to the regular income tax. The phrase “all income derived from whatever source” in Chapter VI,
Computation of Gross Income, Section 32 (A) of the 1997 NIRC discloses a legislative policy to include all
incomes subject to specific tax rates is broad enough to include all passive incomes subject to specific tax
rates or final taxes.” Hence, interest income from deposit substitutes are necessarily part of taxable
income.” However, since these passive incomes are already subject to different rates and taxed finally at
source, they are no longer included in the computation of gross income, which determines the taxable
income.
The interest income earned from bonds is not synonymous with the “gains” contemplated under
Section 32(B)(7)(g) of the 1997 NIRC, which exempts gains derived from trading, redemption, or
retirement of long-term securities from ordinary income tax. The term “gain” as used in Section
32(B)(7)(g) does not include interest, which represents forbearance for the use of money. Gains from sale
or exchange or retirement of bonds or other certificate of indebtedness fall within the general category
of “gains derived from dealings in property” under Section 32(A)(3), while interests from bonds or other
certificate of indebtedness falls within the category of “interests” under Section 32(B)(7)(g) refers to: (1)
gain realized from the trading of the bonds before their maturity date, which is the difference between
the selling price of the bonds in the secondary market and the price at which the bond were purchased
by the seller; (2) gain realized by the last holder of the bonds when the bonds are redeemed at maturity,
which is the difference between the proceeds from the retirement of the bonds and the price at which
such last holder acquired the bonds. For the discounted instruments, like the zero-coupon bonds, the
trading gain shall be the excess of the selling price over the book value or accrued value (original issue
price plus accumulated discount from the time of purchase up to the time of sale) of the instruments.
Tax Consequence if the Issuance, Endorsement, or Acceptance of Debt Instruments for the Borrower’s
Own Account Does Not Qualify as “Deposit Substitutes”
If the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account
does not qualify as “Deposit Substitutes,” the income derived therefrom shall not be subject to FWT, but
to the following:
1) Ordinary income tax at the schedular rate imposed under Section 24(A)(1)(c) of the Tax Code
(NIT), if the bondholder is an individual citizen or a Resident Alien (RA);
2) 20% tax if the bondholder is a Nonresident Alien Engaged in Trade or Business (NRAETB)
within the Philippines under Section 25(A)(2) of the Tax Code;
7
Banco de Oro, et al vs. Republic of the Philippines, et al. G.R. No. 198756, January 13, 2015.
3) 25% tax imposed under Section 25(B) of the Tax Code, if the bondholder is a Nonresident
Alien Engaged in Trade or Business (NRANETB) within the Philippines;
4) Corporate Income Tax of 30% (NIT) or 2% Minimum Corporate Income Tax (MCIT) imposed
under Section 27 (A) and 27 (E) , and 28 (A) (1) and (2), respectively of the Tax Code, for
Domestic (DC) and Foreign Corporations (FC);
5) 30% Final Withholding Tax (FWT), for Nonresident Foreign Corporation (NRFC); and
6) Such other rate that may be imposed under the appropriate tax treaty to which the
Philippines is a signatory. (See BIR Ruling No. 008-05, July 28, 2005; BIR Ruling Nos. 017-2002
& 026-2002)8
(5) Rents;
This income is always included in the gross income because there is no FIT imposed on income from
rentals.
Rental Income
The amount paid for the use or lease or enjoyment of property (whether real property or personal
property) is rental income to the owner of the property. Any additional amount paid, directly or indirectly, by
the lessee in consideration for the said lease is considered rental. Therefore, if taxes are being paid by the
lessee on leased property, the same shall form part of rental income of the lessor. If the rented property is
being used in business, said rental income shall be subject to the EWT of 5% to be withheld by the lessee.
Failure on the part of the lessee to withhold and remit the said withholding tax shall not entitle him to claim
the rental expense as deduction from his gross income.9
(6) Royalties;
Royalty generally means payments of any kind received as a consideration for the use of, or the right
to use, any copyright of literary, artistic, or scientific work including cinematograph films, or films or tapes used
for radio or TV broadcasting, any patent, TM, design or model, plan, secret formula or process, or for use of,
or the right to use, industrial commercial or scientific equipment, or for information concerning industrial,
commercial or scientific experiments.
The definition of royalties includes payments for the use of copyright over software.
Payments in consideration for the use of or the right to use a copyright relating to software are
generally royalties.
Royalty is a valuable property that can be developed and sold on a regular basis for a consideration.
Thus, any gain derived therefrom is considered an active business income subject to the normal income tax.
It is a special form of rental income for the use of intangible property.
However, when a person pays royalty to another for the use of its intellectual property, such as
copyrights, patents, trademarks, such royalty is a passive income of owner thereof subject to withholding tax.
8
Supra, Q & A xxx Gothic Publications, p. 107
9
Casasola, NIRC, p. 220
In other words, when only copyright rights are transferred, payments made in consideration
therefore are royalties. On the other hand, when copyright ownership is transferred, payments made in
consideration therefore are business income.10
What should be taken into account in determining whether royalties are to be included in the
computation of gross income are; (1) the source of income and (2) who is the taxpayer.
The royalty is subject to FIT if it is derived from sources within the Philippines. Otherwise, NIT applies,
hence to be included in the gross income of RC or DC.
If the TP is a NRANETB or NRFC, the royalty is not included since these TPs are liable by way of GIT.
The Royalties from property located in the Philippines or from any interest in such property are
considered to be sourced from the Philippines, to wit:
(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or
model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or
right;
(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific
equipment;
(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of
enabling the application or enjoyment of, any such property or right as is mentioned in paragraph
(a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is
mentioned in paragraph (c);
(e) The supply of services by a nonresident person or his employee in connection with the use of
property or rights belonging to, or the installation or operation of any brand, machinery or other
apparatus purchased from such nonresident person;
(f) Technical advice, assistance or services rendered in connection with technical management
or administration of any scientific, industrial or commercial undertaking, venture, project or scheme;
and
(ii) Films or video tapes for use in connection with television; and
10
Ibid, pp. 220-222
(iii) Tapes for use in connection with radio broadcasting.
The author of books is entitled to a royalty for every set of books sold. But if the author transfers
his copyright ownership to the bookstore, then the payments made is regarded as business income
subject to NIT.
Q: So, if the royalty for computer software is derived from sources within the Philippines by a
taxpayer other than the NRANETB or NRFC, what is the tax treatment?
A: It is subject to a FIT of 20%
Q: What if it was derived from sources outside of the Philippines, how will you now treat the royalty
received by the TP?
A: It would depend on who that TP is. If the TP is a RC or DC, then it is to be included in the items of
Gross Income, hence subject to NIT, because they are liable to income tax on worldwide income.
If the TP is other than a RC or DC, it is not subject to tax in the Philippines. Following the principle
of mobilia sequuntur persona, the situs of taxation of intangibles is the place where the residence
or domicile of the owner is located.
Q: What if the royalty was received by an author of a book here in the Philippines. What is the
applicable tax?
A: It is subject to a lower tax of 10%. Under Sec. 24 B, royalties on books, other literary works and
musical compositions are subject to a tax of 10%.
Q: Who are the taxpayers who are liable for the payment of FIT on royalties?
A: All TPs, except NRANETB and NRFC, unless a lower tax rate is allowed under an existing tax treaty.
Q: Can all the TPs avail of the lower rate of tax on royalty at 10%?
A: No. It is available only to an Individual Taxpayer for obvious reason.
(CASE for Royalties: Commissioner vs. S.C. Johnson and Son, Inc. and CTA, G.R. No. 127105, June 25, 1999.)
(7) Dividends;
In other words, a stock dividend constitutes income (hence, subject to tax) if it gives the shareholder
an interest different from that which his former stockholdings represented. A stock dividend does not
constitute income (hence, not subject to tax), if the new shares confer no different rights or interest
than did the old – the new certificates plus the old representing the same proportionate interest in
the net assets of the corporations as did the old.
Note: A dividend paid in stock of another corporation is not a stock dividend, even though the stock
distributed was acquired through the transfer by the corporation declaring the dividends of property
to the corporation the stock of which is distributed as a dividend. When a corporation declares a
dividend payable in stock of another corporation, setting aside the stock to be so distributed and
notifying the stockholders of its action, the income arising to the recipients of such stock is its market
value at the time the dividend becomes payable.
(8) Annuities;
Annuity referred to in Sec. 32 A are those which are not excluded from income tax under Section
32 B.
An annuity refers to annuity policies sold by insurance companies which provides instalment
payments for life, or for a guaranteed fixed period of time, whichever is longer. See Casasola pp. 230-231.
Take note that under Sec. 24B prizes and other winnings are subject to FIT of 20% if realized by
an individual taxpayer.
Q: What are the elements for a prize to constitute a passive income?
A: 1. Must be derived from sources within the Philippines
2. Must be more than ten thousand pesos (P10,000.00)
3. Must not be pursuant to a promotion or contest.
Section 126. Tax on Winnings. - Every person who wins in horse races shall pay a tax equivalent to
ten percent (10%) of his winnings or 'dividends', the tax to be based on the actual amount paid to him
for every winning ticket after deducting the cost of the ticket: Provided, That in the case of winnings
from double, forecast/quinella and trifecta bets, the tax shall be four percent (4%). In the case of
owners of winning race horses, the tax shall be ten percent (10%) of the prizes.
The tax herein prescribed shall be deducted from the 'dividends' corresponding to each winning ticket
or the 'prize' of each winning race horse owner and withheld by the operator, manager or person in
charge of the horse races before paying the dividends or prizes to the persons entitled thereto.
The operator, manager or person in charge of horse races shall, within twenty (20) days from the date
the tax was deducted and withheld in accordance with the second paragraph hereof, file a true and
correct return with the Commissioner in the manner or form to be prescribed by the Secretary of
Finance, and pay within the same period the total amount of tax so deducted and withheld.
(10) Pensions
Retirement Pay
The following are the retirement benefits which are exempt from tax”
R.A. 7641 pertains to the retirement benefits of private firms without retirement plan.
REQUISITES:
1. The retiring official or employee is at least 60 years old but not more than 65 years old
2. He must have served the company for at least 5 years.
3. The company has no retirement plan
4. He shall be entitled to retirement pay equivalent to at least ½ month salary for every year of
service, a fraction of at least 6 months being considered as one whole year.
R.A. 4917 (An Act Providing that Retirement Benefits of Employees of Private Firms Shall not be
Subject to Attachment, Levy, Execution or Any Tax Whatsoever) refers to the retirement pay of
private firms with retirement plan.
REQUISITES:
1. The retiring official or employee must not be less than 50 years of age
2. He must have been in the service for at least ten (10) years.
3. The exemption must be availed of only once
4. The private benefit plan must be approved by the BIR
(11) Partner's distributive share from the net income of the general professional partnership.
Q: What about the share from the net income of a partner in an ordinary partnership?
A: Under Sec. 24 B (2), the share of an individual in the distributable net income after tax of a
partnership (except GPP) of which he is a partner, or the share of an individual in the net income after tax
of an association, a joint account, or a joint venture or consortium, taxable as a corporation of which he
is a member or co-venturer, is subject to FIT.
Under the provision, the share of a partner in a GPP is exempt from the FIT. However, Sec. 26
adds that a partner in a GPP is liable for income tax for his share in his separate and individual capacity. Is
there a conflict between the two provisions? There is none. A GPP is exempt from corporate income
tax, because it meets the following requirements under Sec. 22B:
(a) It is formed for the sole purpose of exercising their common profession
(b) No part of income of which is derived from engaging in any trade or business.
It is the partnership which is exempt from corporate income tax, however, the share of each
partner is subject to income tax as provided in Sec. 26. The share of each is that income exempted under
Sec. 24B2. The income tax referred to in Sec. 26 is NIT, each partner shall be liable for NIT in their separate
and individual capacities; while under Sec. 24B2, the income tax referred to is FIT. Thus, there is no conflict
between the two provisions.
On the other hand, if the elements mentioned are not present, i.e., the partnership is engaged in
trade or business, the partnership shall be subject to Corporate income tax and the share of each partner
shall be deemed as a dividend subject to FIT under Sec. 24B2.