SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME

1. Accounting method
o Cash basis taxpayer – collection as gross income
o Accrual basis taxpayer – revenue either collected or uncollected as gross income

2. Situs Rule
o Taxpayer taxable only on Philippine Income – only items of gross income subject to
regular tax from source w/in the PH are included in gross income
o Taxpayer taxable on global income – items of gross income subject to regular tax from
sources w/in and w/out the PH are included in gross income

3. Effects of Value Added on Reportable Income

o VAT taxpayers – if their sales or receipts exceeds 3M in the last consecutive 12 – month
period (12%)
o Non-VAT taxpayers –if their sales or receipts is below VAT threshold or designated by
law

Example: VAT taxpayers

A VAT-registered taxpayer charge 97,500 to a client for rental

The VAT taxpayer shall split the billing as follows:

Rent Income (97,500/112%) 87,054

Plus: Output VAT (97,500 x 12/112 10,446
Invoice Price 97,500

- Only rental income subject to income tax

- Output VAT must be recorded as liability
Example: Non-VAT taxpayers
A VAT-registered taxpayer charge 97,500 to a client for rental
- Non-VAT taxpayers are not subject to VAT
- The entire charge is gross income subject to income tax

4. Creditable Withholding tax

o Deducted by income payors against the gross income of taxpayer are not exclusions in
gross income
o Deductible against annual income tax due

5. Power of the CIR to redistribute income and deductions

o Authorization to distribute or allocate gross income or deductions in business to prevent
tax evasion and clear reflection of income of business.

The Arm’s Length Principle

 Uncontrolled pricing method determined by free market forces is preferred
 Failure to comply may expose the taxpayer to a transfer pricing adjustment (BIR re-computes)

It shall be applied to

1. Cross-border transactions between associated enterprises

2. Domestic transaction between associated enterprises

EXCLUSION FROM GROSS INCOME

 Income which not be subject to income tax

 Not included in gross income subject to regular tax, capital gains tax or final tax

Items that are NOT included in Gross Income and EXEMPT from taxation

a. Proceeds of life insurance policy

b. Amount received by the insured as a return of premium
c. Gift, bequest, devise or descent
d. Compensation for injuries
e. Income exempt under treaty
f. Retirement benefits, pensions, gratuities, etc.
g. Miscellaneous items