Inclusions & Exclusions

from the Gross Income

 Gross Income
(Inclusions)

Under Section 32 (A), except when otherwise provided, gross income

means all income derived from WHATEVER SOURCE, including, but not
limited to the following items:
• The Tax Code imposes a tax on income from
whatever source, may it be coming from legal of
illegal source.

• Gross income shall include all types of income not

specifically enumerated under Sec. 32(A) of the Tax
Code
• Income derived by YouTubers, Vloggers, and Online
Sellers are not exempt or excluded from income
taxation.
1. Compensation Income 7. Dividend Income

2. Business Income 8. Annuity Income

3. Gains derived from 9. Prizes and Winnings

Dealings in Property

4. Interest Income 10. Pensions

5. Rental Income 11. Partner’s Share in

the Net Income of a GPP
6. Royalty Income
1. Compensation Income

Definition:
● Income arising out of employer-employee relationship.
● It encompassed all renumeration for services performed by an employee
for his employer whether paid in cash or in kind.
1. Compensation Income
Commissions on
Salaries and Wages Fringe Benefits
Insurance Premiums
Emoluments Fees Tips
Taxable Pensions and
Honoraria Marriage Fees
Retirement Pay
Taxable Bonuses Commission Baptismal Offerings
Sums paid for saying
Compensation for masses for the dead,
Allowances
Services and other income of
similar nature
Forms/Measurement of Compensation
● May be paid in money or in some medium other than money such as
stocks, bonds or other forms of property.

● If paid in CASH, the full amount received is the measure of compensation

income.

● If paid in MEDIUM OTHER THAN MONEY, the fair market value (FMV) of
the thing is the amount of compensation.
Forms/Measurement of Compensation
● If paid in KIND, such as STOCKS OF THE EMPLOYER, the FMV of the stock at
the time the services were rendered is the measure of compensation.

● Income Tax of the employee assumed or paid by the employer in

consideration of its services is considered as compensation income of the
latter.

Employee- An individual performing services under an employer-employee relationship. Employer-

employee relationship exists when the person for whom the services were performed has the
right to control and direct individual who performs the services.
Classification of Compensation Income
Regular Compensation

Includes:
• basic salary,
• fixed allowances for representation,
• transportation
• and others paid to an employee per payroll
period
Classification of Compensation Income
Supplemental Compensation
Includes:
• overtime pay,
• fees including director’s fees,
• commission, profit sharing,
• monetized vacation and sick leave,
• fringe benefits received by rank & file employees,
• hazard pay,
• taxable 13th month pay and other benefits,
• Other renumerations received from an employee-employer
relationship, with or without regard to payroll period
A. Compensation Income Received After Termination of Employee-
Employer Relationship
- Remuneration for services constitutes compensation income even if the
employee-employer relationship does not longer exist at the time when
payment is made.

B. Fringe Benefits and 13th Month Pay

C. Fixed or Variable Allowances

- In general, fixed or variable allowances which are received by a public
officer/employee or officer/employee of a private entity , in addition to
the regular compensation, fixed for his position or office, is compensation
subject to income tax and consequently, creditable withholding tax on
compensation income.
D. Advances and Reimbursements for Travelling and Entertainment
Expenses

- Reasonable amounts of reimbursements/advances for travelling and

entertainment expenses are paid to an employee while he is on an
assignment or duty, need not to be subjected to the requirement of
substantiation and to withholding.
Compensations are not subject to withholding if the ff. conditions are
satisfied:

■ It is for ordinary and necessary travelling and representation or

entertainment expenses paid in the pursuit of the trade, business
or profession;
■ The employee is required to liquidate for the expenses in
accordance with the specific requirements of substantiation for
each category of expenses pursuant to Sec. 34 of the Tax Code.
E. Premiums on Life Insurance
- It is taxable income to the employee, where the insured employee,
directly or indirectly is beneficiary under the policy.

F. Deductible Expense of the Employer

- Any amount given by the employer as benefits to its employees,
whether classified as de minimis benefits or fringe benefits.
G. Retirement Benefits, Separation Pay, Pension, etc.
- ( will be discussed under exclusions)

H. Tips and Gratuities

- Considered as taxable income subject to basic tax
- However, these are not subject to withholding since “Tips” are
accounted for by the employee to the employer
I. Vacation and Sick Leave Allowances
- These are amounts of “vacation allowances or sick leave credits”
which are paid to an employee treated as compensation income.
- Monetized value of unutilized vacation leave credit of ten (10) days or
less are not subject to income and withholding tax.

J. Representation and Transportation Allowances (RATA)

- Are considered as reimbursements for the expenses rather than as
additional compensation
- Excess of RATA, if not returned to the employer, constitutes taxable
compensation income of the employee
K. Stipends of Resident Physicians
- Subject to creditable withholding tax (CWT)
- The amount subject to CWT shall include not only fees, but also per
diems, allowances, and any other form of income payments not
subject to withholding tax on compensation.

L. Cost of Living Allowances (COLA)

- COLA of minimum wage earners is exempt from income tax.

M. Income or Gain from the Exercise of Stock Option Plans

- Any income or gain derived by an employee from the exercise of stock
option is considered as additional compensation subject to income tax
and to withholding tax on compensation (WTC)
2. Business Income
Definition:
● Gross Income derived from the conduct of trade or business or the exercise
of profession.
● May arise from the sale of products or services.
● It is taxed at Progressive Rates on net business income, or income from the
practice of a profession (net income after deduction of certain specified
expenses and any excess of personal and additional execptions over
compensation income)
● In manufacturing, merchandising, or mining business, “gross income”
means total sales – cost of goods sold + any income from investments and
from incidental or outside operations or sources.
A. Bad Debt Recovery

- Recovery of bad debt written off in the books is a taxable income

provided that the write-off of the account resulted to a lower taxable
income at the time of write-off.

- As for the “Tax Benefit Rule”, the taxpayer is obliged to declare

taxable income if the tax benefit is enjoyed by the taxpayer. However,
if the taxpayer did not benefit from the deduction of the said debt
written off because it did not result to reduction of income tax, the
subsequent recovery shall be a mere return of capital and is not
taxable.
B. Tax refund
- “Tax Benefit Rule” also applies with respect to refund or credit for
taxes.
- Tax refunds are taxable if the tax was deducted from the gross
income.
- The ff. tax refunds are not taxable:
i. Income Tax (except fringe benefit tax)
ii. Estate Tax
iii. Donor’s Tax
iv. Special Assessment
v. Stock Transaction Tax
vi. Income Tax paid to a foreign country if the taxpayer claimed a
credit for such tax in the year it was paid.
C. Cancellation or Condonation of Debts

- Income can come in many forms, including the cancellation or

condonation of debts.
 Tax treatment of debts CANCELLED or CONDONED:
Applicable Tax Reason for the cancellation
Subject to basic If services were rendered by the debtor, in
income tax consideration of which the indebtedness was
cancelled by the creditor.
Subject to Donor’s If the creditor, without receiving any
Tax consideration from the debtor, and purely as
an act of liberality, cancels the indebtedness
Subject to 10% final If the debtor is a shareholder of a corporation
tax that cancels the indebtedness, such
cancellation constitutes indirect dividend.
3. Gains Derived from Dealings in Property
Definition:
● Gross Income derived from dealings (sale, barter or exchange) in property
includes all income derived from disposition of property (real or personal,
for sale or in exchange of other property, or both) which results in gain or
loss.

● The gain shall be TAXABLE GAIN and the loss shall be DEDUCTIBLE if
incurred in trade, profession, or business.
PROPERTY SOLD TYPE OF GAIN APPLICABLE TAX
Ordinary asset Ordinary gain Basic Tax (graduated
rate for individuals and
regular corporate
income tax rate for
corporate taxpayers.
Capital Asset
•Shares of stock of a Capital gain Capital gains tax
domestic corporation not
listed in the stock exchange
•Real property in the Capital Gain Capital gains tax
Philippines
•Other types of capital assets Capital Gain Basic tax
 4. Interest Income
Definition:
● Generally, interests are taxable income, unless exempted by law, whether or
not usurious.
INTEREST INCOME APPLICABLE TAX
Arising from indebtedness Basic Tax (graduated rate for
individuals and regular corporate
income tax rate for corporate
taxpayers.
Arising from: bank deposit
•Bank deposit, deposit substitute, 20%; 25% FWT
trust fun, mutual fund and other
similar arrangements
•Deposit under FCDU 15%
•Long term bank deposit or Exempt (for individual tax payers
investment other than NRANET)
5. Rental Income
Definition:
● Rent paid by the lessee for the lease of property is taxable income to the
lessor.
● RENT INCOME may be in the FORM of:
1) Cash, at stipulated price.
2) Obligations of the lessor to third persons paid or assumed by the lessee
in consideration of the contract of lease.
3) Advance payment, which may be:
❖ Prepaid rent
❖ A security deposit that is applied to rental is a taxable income of
the lessor.
Prepaid rent shall be reported as income in full in the year of receipt, regardless
of the accounting method used by the lessor.
A. Non-Taxable Rent

- Advance rentals representing option money for the property as well

as security deposits to insure faithful performance of certain
obligations of the lessee are not considered as income on the part of
the lessor.
B. Leasehold Improvement
- An improvement made to a leased asset

METHOD COMPUTATION
Outright or Lump-sum FMV upon completion of the
Method improvement
Spread-out or Annual Method Annual Income = BV, end of lease
term ÷ Remaining
Term of the lease
C. Pretermination of Lease
- If for any reason other than a bona fide purchase from the lessee by
the lessor, the lessee is terminated, the lessor realized additional
income for the year to the extent that the value of such improvement
exceeds the amount already reported as income on account of such
improvement.
- The additional income arising from the pre-termination is computed
as follows:
FMV upon pre-termination Pxxx
Income already recognized/ reported (xxx)
Income, year of pre-termination Pxxx
6. Royalty Income
Definition:
● Royalties in the nature of Passive Income are subject to Final Withholding
Tax
● However, if the royalty was generated in the active pursuit and
performance of the corporation’s primary purpose, it is considered as
ordinary business income subject to basic tax.
Service Fees Royalties
Has no propriety interest in Has propriety interest in the
the property that gives rise property that gives rise to
to the income the income
TAX TREATMENT OF ROYALTY INCOME
Subject to 10% final tax •Royalties on books, other literary works and
musical compositions from the sources within the
Philippines received by individual taxpayers other
than NRA-NETBs
Subject to 20% final tax •Royalties derived from sources within the
Philippines other than royalties subject to 10%
final tax
Subject to basic tax •Royalties generated in the active pursuit and
performance of the corporation’s primary purpose
•Royalties derived by RC and domestic
corporations from the sources without the
Philippines
7. Dividend Income
Definition:
● Dividends are payments made by a corporation to its shareholder
members. It is the portion of corporate profits paid out to stockholders,
direct or indirect.
● Direct and Indirect dividends are subject to tax.
● Examples of Indirect Dividends:
▪ Payment of property purchased from shareholders in excess of
its fair values.
▪ Payment to shareholders for services rendered in excess of the
fair value of such services.
▪ Cancellation by a corporation of indebtedness of a shareholder.
7. Dividend Income
TYPES OF DIVIDENDS:

a) Cash Dividends – usually taxable to the recepient in the year they are paid
b) Property Dividends – also known as dividends in kind
c) Liquidating Dividends – is generally not a dividend income; gain or loss is a
taxable income or deductible loss
d) Stock Dividends – taxable if it gives the shareholder an interest different
from former stock represented
8. Annuity Income
Definition:
● Refers to specified income payable at stated intervals for a fixed or a
contingent period.
● May be taxable and not taxable.

Return of Capital Excluded

Return on Capital Included
9. Prizes and Other Winnings
Definition:
● Prize is an award to be given to a person or a group of people to recognize
and reward actions or achievements.

● Winnings for tax purposes, should refer to rewards/income by virtue of

chance or bets.

● As a rule, prizes and winnings are taxable unless exempt.

10. Pensions
Definition:

● Pensions, in general, are subject to income tax, except pensions and

retirement benefits exempt under the law.
11. Partner’s Share in the Net Income of GPP
Definition:

● GPP is not subject to income tax

● However, partners shall be liable for income tax on their separate and
individual capacities.

● Each partner shall report gross income, his or her distributive share in the
net income of the GPP.
11. Partner’s Share in the Net Income of GPP
Partner’s share in the income of:
General Partnership (GP)
General Professional Partnership
(GPP)
• Treated as dividend income
• Subject to applicable FWT on
passive income
• Not included in the computation
of taxable income subject to tax,
thus not included in the partner’s
ITR
• Not treated as dividend income
• Subject to basic tax
• Included in the ITR of the
taxpayer
 Exclusions
from Gross Income

1. It is exempted by the fundamental law or by statute

2. It does not come within the definition of income
Nature of Exemptions from Taxation
● It is a grant of immunity to particular persons or corporations.

● May be revoked by the government unless the exemption is founded on a

contract which is protected from impairment.

● It is freedom from financial charge or burden to which others are

subjected.
 GROUNDS FOR GRANTING TAX EXEMPTIONS
1. Based on Contract, Law or Treaty
EXAMPLES:
Based on Law • Tax exemptions granted to cooperatives registered
under the Cooperative Development Authority
• Travel Tax exemption as provided for by Presidential
Decree (PD) 1183
Based on Treaty • Salaries of officials of the UN assigned in the
Philippines
• Salaries of diplomatic officials and agents
 GROUNDS FOR GRANTING TAX EXEMPTIONS
2. Based on Some Ground of Public Policy such as to Encourage Direct
Foreign Investments, Encourage New Industries, or Foster
Charitable Institutions, and the like.

EXAMPLES:
• Tax holidays granted by Investment Promotion Agencies such as Bureau
of Investments (BOI) as provided under CREATE Act.
• Tax exemptions granted to companies incurring heavy losses due to
legitimate business reverses such as exemption from MCIT.
 GROUNDS FOR GRANTING TAX EXEMPTIONS
3. Based on Grounds of Reciprocity or To Lessen the Rigors of International
Double or Multiple Taxation

Some countries with tax treaties with the Philippines are as follows:
Australia Korea India
Austria Denmark Indonesia
Bahrain Malaysia United Kingdom
Brazil Finland United States
Canada Germany Thailand
China Hungary Poland
France Norway Vietnam
Netherlands Czech Republic Japan
Italy Spain Belgium
 Tax Exemption, Tax Amnesty, and Tax Condonation
Tax Exemption Tax Amnesty Tax Condonation
• Refers to a grant of • Is a general pardon or • Exists when the State
immunity to particular international desists or refrains from
persons or overlooking by the extracting, inflicting or
corporations. State of its authority to enforcing something as
impose penalties on well as to restore what
persons otherwise has already been
guilty of tax evasion. taken.
• Never favored nor • Should be sustained
presumed in law. only when expressed
in the law.
Nature of Power to Grant Tax Exemption
National Government
• It is inherent in the exercise of
the power to tax that the
sovereign State be free to select
subjects of taxation and to grant
exemptions.
• The legislative power to exempt
is as broad as its power to tax
unless restricted by the
Constitution.
Local Government
• Municipal corporations have no
inherent power to tax or to
grant exemptions.
• When power to impose a
particular tax is granted, they
also gain the power to grant
exemptions unless forbidden by
some provision of the
Constitution.
Items of Income Excluded from the Gross
Income
1. Life Insurance 5. Income Exempt
2. Amount Received by Under Treaty
the Insured as a Return
of Premium 6. Retirement,
Benefits, Pensions,
3. Gifts, Bequests, and Gratuities, etc.
Devices
4. Compensation for
7. Miscellaneous Items
Injuries or Sickness
1. Life Insurance
Definition:

● The Law explicitly provides that proceeds of life insurance policies paid to
heirs or beneficiaries upon the death of the insured are excluded from
gross income and is exempt from taxation.
● However, if such amounts are held by the insurer under an agreement to
pay interest thereon, the interest payments shall be included in gross
income.
2. Amount Received by the Insured as a Return of
Definition:
Premium
● The amount received by the insured either during the term or at the
maturity of the term mentioned in the contract or upon surrender of the
contract is not subject to income tax.
● However, if the amounts exceed the aggregate premium paid, whether or
not paid during the taxable year, then the excess shall be included in gross
income.
3. Gifts, Bequests, and Devices
Definition:
● The value of the property acquired by gift, bequest, device, or descent:
Provided that income from such property in cases of transfers of dividend
interest, shall be included in the gross income.
4. Compensation for Injuries
Definition:

● Amounts received as compensation for personal injuries or sickness, plus

the amounts of any damages received, whether by suit or agreement, on
account of such injuries or sickness are exempt from tax.
● Recoveries of damages, representing compensation for personal injuries
arising from libel, defamation, slander, breach of promise to marry,
alienation of affection are not subject to income tax and shall not be
included in gross income.
4. Compensation for Injuries
Taxable Damages Non-Taxable Damages
• Representing recovery of lost • Representing recovery of lost
income capital
• Compensation for unrealized • Actual damages for injuries
earnings suffered
• Interest on nontaxable damages • Moral damages for grief,
• Interest for nontaxable damages anxiety, etc.
• Exemplary damages
• Damages for loss earning
capacity
• Damages for loss of goods and
other belongings
5. Income Exempt Under Treaty
Definition:
● Income of any kind, to the extent required by any treaty obligation binding
upon the Government of the Philippines.
6. Retirement Benefits, Pensions, Gratuities, etc.
A. RETIREMENT BENEFITS
- RR 2-98 (as amended) provides that retirement pay as a rule, is
taxable, EXCEPT:
1. Retirement benefits received under Republic Act No. 7641;
2. Those received by officials and employees of private firms
whether individual or corporate, in accordance with a reasonable
private benefit plan maintained by the employer which meets the
following requirements:
✓ There must be a duly registered retirement plan. As contemplated under
Revenue Regulation 29-2020, there should be a Certificate of Qualification
as a Reasonable Employees’ Retirement Benefit Plan issued to the
Company.
✓ The retiring official of employee has been in the service of the same
employer for at least the (10) years;
✓ The official or employee must not be less than fifty (50) years of age at the
time of his retirement; and
✓ The retiring official or employee shall not have previously availed of the
privilege under the retirement benefit plan of the same or another
employer.
Retirement Benefit Under Bayanihan Act
Definition:

● Retirement Benefit under RA 11494, the Bayanihan to Recover as One Act

(also known as Bayanihan II, implemented by RR 29-2020).
● Retirement Benefits received by officials and employees of private firms,
whether individual or corporate, from June 5, 2020 to December 31, 2020,
provided:
Retirement Benefit Under Bayanihan Act
1. That the amount received is in accordance with the retirement plan
duly registered with the Bureau of Internal Revenue (BIR); provided
further
2. That any re-employment of such official or employee in the same firm
and its related parties within the succeeding twelve (12) month
period shall be considered as proof of non-retirement.
B. SEPARATION PAY
- Any amount received by an official or by his heirs from the employer
as a consequence of separation of such official or employee from the
service of the employer because of death, sickness or other physical
disability or for any cause beyond the control of the said official of
employee.
Separation Pay
• Involuntary • Tax exempt
• Voluntary • Part of taxable income
C. SOCIAL SECURITY BENEFITS AND OTHER BENEFITS

- 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 permanently in the
Philippines.
D. BENEFITS RECEIVED UNDER UNITED STATES VETERANS
ADMINISTRATION

- Payments of benefits due or to become due to any person residing in

the Philippines under the laws of the US administered by the US
Veterans Administration
E. SSS BENEFITS
- Benefits received from or enjoyed under the Social Security System in
accordance with the provisions of RA No. 8282.

F. GSIS BENEFITS
- Benefits received from the GSIS under RA No. 8291, including retirement
gratuity received by government officials and employees.
7. Miscellaneous Items
A. Income Derived by a Foreign Government
-Income derived from investments in the Philippines by
(i) foreign governments
(ii) financing institutions owned, controlled, or enjoying refinancing
from foreign governments
(iii) and international or regional financial institutions established by
foreign governments.
B. Income Derived by the Government or its Political Subdivisions

- Income derived from any public utility or from the exercise of any
essential governmental function accruing to the Government of the
Philippines or to any political subdivisions.
C. Prizes and Awards
-Prizes and awards made primarily in recognition of achievements but
only if:
i. The recipient was selected without any action on his part to
enter the contest
ii. The recipient is not required to render substantial future services
as a condition to receiving the prize or award.
D. Prizes and Awards in Sports Competition

- All prizes and awards granted to athletes in local and international

sports competitions and tournaments whether held locally or
internationally.
 E. 13th Month Pay and Other Benefits
- Gross benefits received by officials and officials of public and private
entities; provided that the exclusion under this item shall not exceed
P90,000 which shall cover:
I. Benefits received by officials and employees of the national and local
government pursuant to RA 6686 (An act Authorizing Annual Christmas Bonus
to National and Local Government Officials and Employees);
II. Benefits received by employees pursuant to PD 851 (13 th Month Pay Law) as
amended by Memorandum Order No. 28 dated August 13, 1966;
III. Benefits received by officials and employees not covered by PD 851 as
amended by Memorandum Order No. 28 dated August 13, 1986;
IV. Other benefits such as productivity and incentives and Christmas bonus.
F. GSIS, SSS, Medicare and Other Contributions, and Union Dues of
Individuals

G. Gains from Sale of Bonds Debentures, and other Certificate of

Indebtedness with maturity of more than five years

H. Gains from redemption of shares in mutual funds.

Tax Exempt Proceeds Under RA 11494
a) Retirement Benefit received by officials and employees of private firms,
whether individual or corporate, from June 5, 2020 to December 31, 2020;
b) Covid 19 Special Risk Allowance given to public and private health
workers
c) Actual Hazard Duty Pay given to HRH is a compensation given to
temporary Human Resource for Health (HRH) serving in the front line
during the state of emergency to Covid 19.
Tax Exempt Proceeds Under RA 11494
d) Compensation paid to private and public workers who have contracted
COVID-19 in the line of duty or dies while fighting COVID-19, amounting
to:
• One million pesos (P1,000,000.00) in case of death
• One hundred thousand pesos (P100,000.00) in case of severe or
critical sickness
• Fifteen thousand pesos (P15,000.00) in case of mild or moderate
sickness.
THANK YOU!