Junior Philippine Institute of Accountants and Auditors – United

Income Taxation
OVERVIEW Classification Rule
1. Introduction to Regular Income Gross income is first classified into:
Taxation a. Compensation Income
2. Regular Income Taxation – Exclusions o Arises from an employer-employee
in Gross Income relationship; characterized by a
3. Regular Income Taxation – Inclusions power to retrench giving the
in Gross Income purchaser of the service a
terminate the arrangement when
INTRODUCTION TO REGULAR INCOME he is losing in business.
TAXATION b. Business or Professional Income
Characteristics of the Regular Income Tax o Arises from selling of goods or
1. General in coverage rendering of services for a profit;
2. A net income tax purchaser of the service has no
3. An annual tax power to retrench, the income
4. Creditable withholding tax realized thereon is a business
5. Progressive or proportional tax income.

General in coverage Globalization Rule

- The Regular Income Tax applies to all - The income of mixed income earner from
items of income except those that are both sources is simply globalized or
subject to final tax, capital gains tax, and totaled. A negative net income or net loss
special tax regimes. when deductions exceed gross income
Net Income Taxation from business or profession shall not be
- The regular tax is an imposition on offset against taxable compensation
residual profits or gains after deductions income because deductions are expenses
for expenses and personal exemptions of business or profession and are properly
allowable by law. deductible only against gross income
Annual Income Tax thereto whereas no expense is deductible
- The Regular Income Tax applies on yearly against taxable compensation income.
profits or gains.
Creditable Withholding Taxes Taxable Income of Corporate Income
- these are advanced taxes that must be Taxpayers
deducted against regular tax due in - The taxable income of corporations is
computing the Tax Still due to the computed in the same manner as pure
government. business or professional income earner.
Progressive of Proportional Tax
- NIRC imposes a progressive tax on the Types of Regular Income Tax
taxable income of individuals while it Individual Income Tax
imposes a flat or proportional tax of 30% Taxable income per Income tax rate
upon the taxable income of the year
Corporations. P 250,000 and below 0%
Above P250,000 to 20% of the excess over
Regular Income Tax Model P400,000 P250,000
Gross Income xxx Above P400,000 to P30,000 + 25% of the
Less: Allowable Deductions (xxx) P800,000 excess over P400,000
Net Taxable Income xxx Above P800,000 to P130,000 + of the excess
P2,000,000 over P800,000
Taxable Income of Individual Income Above P2,000,000 to P490,000 + 32% of the
Taxpayers P8,000,000 excess over P8,000,000
- The taxable income of individuals Above P8,000,000 P2,410,000 + 35% of the
taxpayers is computed using the excess over P8,000,000
classification and globalization rule.

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 Junior Philippine Institute of Accountants and Auditors – United
Income Taxation
Income Tax Returns REGULAR INCOME TAX: EXCLUSIONS FROM
Tax Return Individual Taxpayers GROSS INCOME
Form Exclusions from Gross Income
Form 1700 Purely employed taxpayer - Exclusions from Gross Income are income
Form 1701A Purely in business or which will not be subject to income tax.
profession using itemized, They are not included in gross income
OSD or opting to the 8% subject to regular tax, capital gains tax, or
optional income tax final tax.
Form 1701 Mixed income earners, A. Proceeds of life insurance
estates, and trusts B. Amount received by the insured as a return of
Corporate Taxpayers premium.
Form 1702-RT Corporations subject only to C. Gift, bequest, devise, or descent
the 30% regular income tax D. Compensation for injuries or sickness
Form 1702-MX Corporations subject to E. Income exempt under treaty
special or a combination of F. Retirement Benefits, Pensions, Gratuities, etc
tax rates G. Miscellaneous Items
Form 1702-EX Corporations that is exempt • Income in the Philippines of a foreign
with no tax due Government or Foreign Government-
Note for rounding rules: owned and controlled corporations
o .49 or less = dropped down • Income of the Government and its political
o .50 or more = round up subdivisions
• Prizes and awards in recognition of
Deadline for filing the Income Tax Return religious, charitable, scientific,
Annual: 15th day of the 4th month following the educational, artistic, literary, or civic
close of the taxable year of the taxpayer • achievements
• Prizes and awards in athletic sports
Quarterly: competitions
Quarterly Taxpayers • Contributions to GSIS, SSS, Philhealth, Pag-
Income Tax Individuals Corporations ibig and Union Dues
Returns • Contributions to Personal Equity
1 Quarter ITR
st May 15, same 60 days from Retirement Account (PERA)
year end of 1st • PERA investment income and PERA
Quarter distributions
2nd Quarter ITR August 15, 60 days from • 13th month pay and other benefits not
same year end of 2nd exceeding P90,000
Quarter • Gains from sale of bonds, debentures or
3rd Quarter ITR November 60 days from certificates of indebtedness with maturity
15, same end of 3rd of more than 5 years.
year Quarter • Gains from redemption of shares in mutual
fund.
Frequency of Reporting per Taxpayer Type
Taxpayer Frequency of Tax A. Proceeds of a Life Insurance Policy
Reporting - policies paid to the heirs or beneficiaries
Individuals upon the death of the insured, whether in
Pure Compensation Annual a single sum or otherwise is excluded in
Income Earner the computation of Gross Income.
Purely engaged in Quarterly & Annual Life
Business of - regarded as a capital item with infinite
Profession value. Hence the proceeds of life insurance
Mixed Income Earner Quarterly & Annual are a return of capital.
Corporations Quarterly & Annual

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 Junior Philippine Institute of Accountants and Auditors – United
Income Taxation
B. Amount received by the insured as a
return of premium
- is a return of capital; hence, it is excluded
from gross income (on any insurance
contract).
C. Gift, bequest, devise, or descent
- The value of the property acquired by gift,
bequest, devise or decent shall be excluded
from the gross income provided, however,
that income from such property as well as
gift, bequest, devise or descent of income
from any property, in cases of transfers of
dividend interest, shall be included in
gross income.
D. Compensation for injuries or sickness
- Amounts received through accident 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 account
of such injuries or sickness.
E. Income exempt under treaty
- Income items that are excluded by
international agreement to which the
Philippine Government is a signatory are
excluded from income tax. It must be
recalled that treaty agreements override
provisions of our revenue tax laws in case
of conflict under the exemption doctrine of
international comity.
F. Retirement Benefits, Pensions,
Gratuities, etc
• Retirement Benefits under RA 7641
and those received by officials and
employees of Private Firms
o Requisites of Exemption
a. This is the first time availment
of retirement benefit exemption
b. The retiring official
employee has been in the
services of the same employer
for at least 10 years
c. The retiring employee is at least
fifty (50) years of age at the time
of retirement
d. The employer maintains a
reasonable private benefit plan
e. Approved by BIR
• Separation or Termination Pay
o Requisites
a. The separation or termination
must be due to job-threatening
sickness, deaths, or other
physical disability and
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b. Must be due to any cause
beyond the control of the
employee or official
• Social Security Benefits, Retirement
Gratuities, and other similar benefits
from foreign government agencies and
other institutions, private or public
▪ Received by resident or
non-resident citizens or
aliens who come to settle
permanently in the
Philippines
▪ United States Veterans Administration
(USVA)
▪ Administered benefits
under the laws of the United
States received by any
person residing in the
Philippines
• Social Security System (SSS) Benefits
• Government Service Insurance System
(GSIS) Benefits
▪ Under RA 8291
including retirement
gratuity received by
Government officials
and employees
G. Miscellaneous Items
• Income derived on investments in the
Philippines in loans, stocks, bonds, and
other domestic securities, or from
interest on deposits in banks in the
Philippines by:
a. Foreign Governments
b. Financing Institutions owned,
controlled, or enjoying refinancing
from foreign government.
c. International or Regional Financial
institutions established by foreign
or governments.
• Income derived by the government and
its political subdivisions from:
a. Any public utility
b. Exercise of essential Government
functions
• Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary
or civic achievements but only if:
a. The recipient was selected without
any action on his part to enter the
contest or proceeding; and
b. The recipient is not required to
render substantial future services
 Junior Philippine Institute of Accountants and Auditors – United
Income Taxation
as a condition to receiving the prize
or award
• Prizes and awards in sports
competitions granted to athletes
a. In local or international
competitions and tournament
b. Whether held in the Philippines or
abroad; and
c. Sanctioned by their national sports
associations
• Contributions for GSIS, SSS, Philhealth,
Pag-ibig and Union dues of individuals
- These pertain to the employee share in the
premium contributions to GSIS, SSS,
PHILHEALTH, Pag-Ibig and union dues.
• Contributions to personal equity
retirement account (PERA)
- Is a contributor’s voluntary retirement
account established from qualified
contributions of the contributor and or his
employer for the sole purpose of being
invested in qualified PERA investment
products. Each OFW is allowed to
contribute up to P200,000 per year to a
PERA account. Non-OFWs are allowed
P100,000 contributions per year.
• PERA investment income and PERA
distributions
- The PERA account assets will be
distributed back to the contributor either
in lump sum, life pension, or in installment
upon reaching the age of 55 or to his heirs
or beneficiaries upon his or her death.
• 13th month pay and other benefits
received by officials and employees of
public or private entities not exceeding
P90,000
• Gains from sale of bonds, debentures,
or certificates of indebtedness with a
maturity of more than 5 years.
• Gains realized from redemption of
shares in mutual fund company by the
investor.
Other exempt income under the NIRC and
special laws
1. Minimum wage and certain benefits of
Minimum wage Earners
2. Income of Barangay Micro-Business
Enterprises Act (RA9178)
3. Income of Cooperatives (RA 9520)
4. Income of Non-Stock, Non-Profit Entities
5. Income of qualified employee trust fund
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Minimum Wage Earners
- An individual recipient of a minimum
wage as fixed by the Reginal Tripartite
Productivity Wage and Productivity Board
of the Department of Labor and
Employment.
- Exempt from income tax on the minimum
wage including holiday pay, overtime pay,
night shift differential pay, and hazard pay.
Barangay Micro-Business Enterprise (BMBE)
- processing or manufacturing of products
or commodities, including agro-
processing, trading and services, whose
total assets including those arising from
loans but exclusive of the land on which
the particular business entity’s office,
plant, and equipment are situated, do not
exceed P3,000,000.
Service
- excludes those rendered by licensed
professionals and partnership and
corporations engaged in consultancy,
advisory and similar services which are
essentially carried out through licensed
professionals.
Revocation of BMBE Registrations
1. Transfer of place of business
2. Value of assets exceed P3,000,000
3. Voluntary Surrender of the Certificate of
Authority
4. Death of the registered individual owner;
violation or non-compliance with the
provisions of RA 9178
5. Merger or Consolidation with an entity
which is not eligible to be a BMBE
6. Sale or transfer of the BMBE if a sole
proprietorship without prejudice to the
transferee apply6ing for registration
7. Submission of fake or falsified documents
8. Retirement from business, or
cessation/suspension of operations for
one year
9. Making false or omitting required
declarations or statements
Items of Gross Income subject to Regular Tax
- A broad category pertaining to all items of
income subject to taxation, namely:
1. Gross income subject to final tax
2. Gross income subject to capital gains tax
3. Gross income subject to regular tax
 Junior Philippine Institute of Accountants and Auditors – United
Income Taxation
Gross Income includes, but is not limited to, the
following items:
1. Compensation for Services in Whatever
form paid
2. Gross Income from the conduct of trade,
business, or exercise of a profession
3. Gains derived from dealings in properties
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and Winnings
10. Pensions
11. Partner’s distributive share from the net
income of GPP
Interest
- This particularly refers to interest other
than the passive interest income subject to
final tax. A taxable interest income must
have been actually paid out of an
agreement to pay interest.
Exempt Interest Income:
1. Interest income earned by landowners in
disposing their lands to their tenants
pursuant to the Comprehensive Agrarian
Reform Law
2. Imputed Interest Income
Rents
- arises from leasing properties of any kind.
It is a passive income but is not subject to
final tax under the NIRC
Special Considerations of Rent
1. Obligations of the lessor that are assumed
by the lessee are additional rental income
to the lessor
2. Advance Rentals are:
a. Item of Gross Income upon receipt if:
✓ Unrestricted or
✓ Restricted to be applied in
future years or upon the
termination of the lease
b. Not an item of Gross Income if:
✓ it constitutes a loan
✓ it is a security deposit to
guarantee payment or rent
subject to the contingency
which may or may not happen
3. Leasehold Improvement made by the
lessee on the leased property are
recognized by the lessor as income using
the spread-out method or outright method
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Royalties
- Royalties earned from sources within the
Philippines are generally subject to final
tax except when they are active by nature
Dividends
- These pertain to dividends declared by
foreign corporations.
Annuities
- The excess of annuity payments received
by the recipient over premium paid is
taxable income in the year of receipt
Prizes and Winnings
- Prizes and winnings that are exempted
from final tax are not items of gross
income subject to regular income tax
Pensions
- These pertain to pensions and retirement
benefits that fail to meet the exclusion
criteria and hence subject to regular tax
Partner’s distributive share from the net
income of the general professional
partnership
- It should be recalled that GPP are not
subject to income tax because they are
merely viewed as pass-through entities.
The partners are the ones subject to the
regular tax on their share in the net income
of the GPP.
General Criteria for items of Gross Income
- Under the NIRC, the regular income tax has
a catch-all provision for all income derived
from whatever sources that are:
a. Not subject to final tax, capital gains tax
and special tax regime, and
b. Not excluded or exempted by law,
treaty, or contract from taxation
Other sources of Gross Income subject to
Regular Income Tax
1. Income Distributions from taxable
estates and trusts
- Any income distribution received by an
heir or beneficiary from a taxable estate or
trust shall be included in his gross income
subject to regular tax, provided that such
income must not have been subjected to
final tax or cgt
2. Share from the net income of other
pass-through entities
- same treatment on recognition of share
in the net income of a general professional
partnership applies to the share from:
a. Exempt Joint Venture
b. Exempt Co-ownership
 Junior Philippine Institute of Accountants and Auditors – United
Income Taxation
3. Farming Income
- Farming operations can be classified as:
a. Raise and sell operation
- Proceeds on the sales of livestock or farm
products is included in gross income
subject to regular income tax.
- Animal raising expenses are presented as
items of deductions against gross income.
b. Purchase and sell operation
- The gross profit from the sale (sales cost of
purchase) is included in gross income
4. Recovery of Past Deductions
- Subsequently paid at an amount less than
the deduction claimed.
5. Reimbursement of Expenses
- Expenses of the taxpayer that are
reimbursed or paid by the customer or
client constitute additional income to the
taxpayer.
6. Cancellation of Indebtedness for
consideration
- May amount to gratuity or payment of
income.
The cancellation of debt:
a. In consideration of service or goods –
treated as income.
b. As an act of gratuity – treated as gift; not as
income.
c. As capital transaction such as forfeiting the
right to receive dividends in exchange of
the debt – treated as dividend income.
4. Creditable Withholding Tax
- Deducted by income payors against the
gross income of the taxpayer are not
exclusions in gross income.
- Added back to the reportable amount of
gross income
- Tax credits that are deductible against the
annual income tax due of the taxpayer
5. Power of the CIR to redistribute income
and expenses
- In the case of two or more organizations,
trades or business owned or controlled
directly or indirectly by the same interest,
the Commissioner is authorized to
distribute, apportion or allocate gross
income or deductions between or among
such organization, trade or business, if
they determined that such distribution,
apportionment or allocation is necessary
in order to prevent evasion of taxes or
clearly to reflect the income of any such
organization, trade or business.

Special Considerations in reporting Gross

Income
1. Accounting Methods
- It has a direct effect on the reportable
amount of gross income subject to regular
income tax.
2. Situs Rules
- Also affects the extent of income included
as items of gross income of the taxpayer.
3. Effect of Value Added Tax
a. VAT taxpayers – if their sales or
receipts exceeds P3,000,000 in the last
consecutive 12-month period
b. Non-VAT taxpayers – if their sales or
gorss receipts is below the VAT
threshold or are specifically
designated by the law to pay
percentage taxes
Note: every VAT taxpayer is mandatorily required
to charge 12% output tax on their sales or receipt.

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