GROSS INCOME

(INCLUDES INCOME DERIVED FROM WHATEVER SOURCE)

• The Philippine income tax has the following features, except:
a). Comprehensive tax situs by using the nationality, residence, and source rules.
b). The individual income tax system is mainly progressive in nature.
c). Indirect rather than direct system.
d). Semi-global but semi-scheduler system.
If compensation is paid in kind (income is based on the fair market value of the thing
received)
1). If services are paid in property – income is the FMV of the thing taken in payment.
2). If services are rendered at a stipulated price – in the absence of evidence to the
contrary, such price will be presumed to be the FMV of the remuneration received.
3). If the corporation transfers to its employees its own stock as remuneration – the
amount of such remuneration is the FMV of the stock at the time the services were
rendered.
EXAMPLE:

On March 31, 2016, Ver received 100 shares of stock with a fair market value of P120 per
share as of March 31, 2016. The shares of stock were intended to pay the services
rendered by Ver on November 20, 2015, at which time the fair market value was P100 per
share. The par value per share is P50. The income of Ver is: P10,000 or P12,000
• If compensation is paid in promissory note
• Promissory notes received in payment of services constitute income to the extent of their fair
market value at the time of receipt. FMV is the fair discounted value.

Sample:
1). When services are paid for in non-interest bearing note, taxpayer:
a). Shall not report any income from the promissory note.
b). Shall defer reporting of the income until the note is paid upon maturity
c). Shall report as income the face value of the note plus interest at legal rate.
d). Shall report as income the fair market value of the promissory note at the time of receipt.
TAX INFORMER’S REWARD

• To whom? To persons instrumental in the discovery of violations of the provisions of the

internal revenue law.
• Who are not entitled? – Informers who are –
(a). Internal revenue official or employee, or
(b) Other public official or employee, or his
(c ) relative within the 6th degree of consanguinity

• How much? 10%, but not exceeding P1,000,000 (subject to 10% final tax) of the revenues,
surcharges or fees recovered and/or fine or penalty imposed and collected
• Taxable? Subject to a final withholding tax at a tax rate of 10% on rewards collected.
SAMPLE

1). Rewards given to persons instrumental in the discovery of violations of the National
Internal Revenue Code are subject to
a). Final tax of 10% on rewards collected.
b). Final tax of 10% of P1,000,000
c). Final tax of 10% of rewards collected or P1,000,000 whichever is higher.
d). Final tax of 10% of rewards collected or P1,000,000 whichever is lower.
2). Acting on the information given by Jude, the government seized and confiscated
smuggled goods with a market value of P300 million. Jude’s reward will be subject to a final
tax of
a). P30 million
b). 3 million
c). P300,000
d). 100,000
RECOVERY OF BAD DEBTS PREVIOUSLY DEDUCTED
(TAX BENEFIT RULE)
• Taxable – if deduction of bad debt in prior years resulted in tax benefit (reduction in tax
liability) to the taxpayer.
• Not taxable – of deduction of the bad debt did not result in tax benefit to the taxpayer
SAMPLE

• The taxpayer had the following net income/loss:

2016 Case 1 Case 2 Case 3
Before bad debt P70,000 P70,000 P70,000
Bad debt written off 40,000 80,000 85,000
After bad debt 30,000 (10,000) (15,000)
Recovered in 2017 40,000 30,000 85,000
QUESTION:

Compute the taxable amount in 2017 on the recovery of bad debt previously deducted is –
• Case 1, P40,000
• Case 2, P20,000
• Case 3, P70,000
• The following data were taken from the income statement of domestic corporation for the taxable year 2017:

Gross profit on sales P800,000

Less; Deductible expenses P440,000

Provision for bad debts 80,000 520,000

Net income before income tax 280,000

Additional information:

 Accounts written – off during the year and charged to allowance for bad debts – P50,000

 Recoveries on accounts receivable previously written off in 2016 and credited to allowance for bad debts.

Allowed as deduction by the BIR – P30,000

Disallowed by the BIR as deduction – P20,000

 Compute the taxable income of the corporation?

ANSWER:

• P340,000
RECEIPT OF TAX REFUND
(TAX BENEFIT RULE IS APPLIED)
• Panday paid the following taxes in 2016:
Income tax P12,000
Value added tax 15,000
Local business taxes 10,000
Donor’s tax 6,000
Real property tax 7,000
The value added tax, real property tax and P6,000 of the income tax were refunded in 2017.
if the business income in 2017 is P120,000, how much is taxable to Panday? P127,000
TAX REFUND

• If the tax, when paid, was not deducted from gross income (no tax benefit because it did not reduce the taxable income) such tax, when refunded, shall not
constitute taxable income. Convernsely, if the tax, when paid, was deducted from gross income (resulted in a tax benefit because it reduced the taxable income),
such tax, when refunded, shall constitute taxable income. (This is called “tax benefit rule” on tax refund)

• The list of nondeductible taxes provided in the law is, therefore, a list of tax refunds that are not taxable, namely:

a). Income tax (except fringe benefit tax)

b). Estate or donor’s tax

c). Special assessment

d). Stock transaction tax – a percentage tax

e). Income tax paid to a foreign country, if the taxpayer claimed a credit for such foreign income tax against the Philippine income tax.

• Value added tax refund is not income because value – added tax, when paid, is not recorded as an expense in the books of accounts, and, therefore did not
reduce a taxable income.

• Taxes, deductions when paid, that shall be income when refunded, shall include national and local taxes.
RECEIPT OF DIVIDEND BY A STOCKHOLDER

1). From domestic corporation

a). If received by:

Domestic - Not taxable

Resident foreign - Not taxable

Nonresident foreign – 30% FWT; 15% if there is tax sparing credit

Tax sparing credit – the 15% difference between the usual corporate income tax (30% - 15%) is allowed as a tax credit by the country where the recipient
corporation is domiciled.

b). If received by an individual, subject to:

Taxpayer FWT Rate

Resident or citizen 10%
NRA ETB 20%
NRA NETB 25%
• from foreign corporation by
Domestic 30% normal income tax
Foreign corporation Not taxable
Resident citizen Ordinary income
NRC, RA, NRA Not taxable
RECEIPT OF DIVIDENDS

• Cash dividend – Income is measured by the amount of cash received.

• Stock dividend – Not taxable, except when:
1. The recipient is other than a stockholder; or
2. A change in stockholder equity results by virtue of the stock dividend issuance.
- If taxable, the measure of income is the FMV of the stock received.`
SAMPLE

• Which of the following dividends is subject to a final withholding tax of P1,000?

a. Dividend worth P15,000 declared by a domestic corporation and received by another
domestic corporation. Exempt
b. Dividend worth P15,000 declared by a resident foreign corporation and received by a
resident alien. 1,500
c. Dividend worth P7,500 declared by a domestic corporation and received by a nonresident
alien engaged in trade or business in the Philippines. 1500
d. Dividend worth P4,000 declared by a domestic corporation and received by a nonresident
alien not engaged in trade or business. 1,000
• Compute the following taxes on the dividends given?
a. Dividend worth P15,000 declared by a domestic corporation and received by another
domestic corporation.
b. Dividend worth P15,000 declared by a resident foreign corporation and received by a
resident alien.
c. Dividend worth P7,500 declared by a domestic corporation and received by a nonresident
alien engaged in trade or business in the Philippines.
d. Dividend worth P4,000 declared by a domestic corporation and received by a nonresident
alien not engaged in trade or business.
PRIZES AND AWARDS

• General rule – taxable because it is a gain derived from labor,

• Exception: prizes and awards given primarily in recognition of charitable, educational,
scientific, artistic, religious, literary or civic achievements 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.
INCOME FROM LEASE AGREEMENTS

1). The following shall be reported as income by the lessor:

a). Rent
b). Obligations of the lessor to third persons ( such as taxes assumed and paid by the
lessee).
c). Advance rental – entire amount is taxable in the year the rental is received, whether on
the cash or accrual method of accounting, except:
i. The amount received is a loan.
ii. If the amount received is in the nature of a security deposit for the faithful compliance
by the lessee of the terms of the contract.
II. Leasehold improvement – When the lease contract provides that any improvement
thereon shall belong to the lessor when the lease expires, the lessor may at his option
report the income therefrom upon either of the following methods:
a. Output method – report as income the FMV of the improvements in the year of
completion.
b. Spread-out method – spread over the remaining term of the lease the book value
of the improvement at the termination of the lease, computed as follows:
Cost of leasehold improvements Pxx
Less: Depreciation for the remaining term of the lease xx
Book value, end of lease xx

Book value, end of lease = Annual income

Remaining term of lease
III). Deductions on lessee
a. The lessee using accrual method of accounting shall claim as deduction the amount
corresponding to the rent expense for the year regardless of whether advances have been paid
or not.
b. Taxes paid by the lessee to or for the lessor, and other obligations of the lessor paid by
the lessee under a lease contract, constitute additional deductible rent expense for the lessee.
c. The lessee may claim depreciation of the improvements over the remaining term of the
lease or the life of the improvements, whichever is shorter.
IV. Premature termination of lease – Income to be reported by the lessor shall be
computed as follows:

Book value upon termination Pxx

Less: Amount already reported as income xx
Income in the year of termination xx
ASSIGNMENT

• PJ leased a land to Boy (engaged in business) for a period of 11 years starting January 1, 2013 at an annual
rental of P120,000. Observing the provisions of the contract, Boy constructed a building which shall become
the property of PJ at the expiration of the lease. The construction was completed on January 1, 2016 at a cost
of P1,000,000 with an estimated useful life of 20 years. It is also stipulated in the contract that the lessee will
pay the P2,500 annual real property tax on the land effective 2014.
Required:
a). Assuming that on January 1, 2013, Boy paid PJ the entire lease contract for 2 years, how much income to
be reported by PJ in 2013?
b). How much income is to be reported by PJ in 2016 under the outright method?
c). How much income is to be reported by PJ in 2016 under the spread out method?
d). How much is the deductible expense of Boy in 2016?
EXCLUSIONS FROM GROSS INCOME
(EXEMPT FROM INCOME TAX)
1. Which of the following is not an income?
a). Gain from labor
b). Gain from capital
c). Return of capital
d). Gain derived from a sale of asset.
• Ann bought a residential house and lot in 2013 for P1,200,000 in 2017, curious as to
how much her property then cost, she asked a real estate appraiser to appraise its value.
The appraiser reported that the value of her property has increased to P5,000,000. Ann
should report gross income in her income tax return for the year of 2017 of
a. P5,000,000 c. P3,800,000
b. P1,200,000 d. None
• A tax exemption is defined as
a. An item or amount which the law allow to be deducted from gross income in order to
arrive at net income.
b. The grant of immunity to particular persona or corporations from a tax which others
within the same taxing district are obliged to pay.
c. An immunity from civil, criminal and administrative liabilities resulting from non-payment of
past tax obligations.
d. A deduction from income tax due of any amount paid to a foreign country subject to
limitation.
a). Deduction
b). Tax exemption
c). Amnesty
d). Tax credit
1). LIFE INSURANCE

• Proceeds of life insurance policies paid to beneficiaries upon the death of the insured,
unless the policy is sold or assigned in which case the proceeds, less the capital invested
by the assignee/claimant shall be taxable.
• If the proceeds upon the death are held by the insurer under an agreement to pay
interest thereon, the interest payments shall be included in gross income.
• Sample: Proceeds of insurance taken by a corporation on the life of an executive to indemnify
if against loss in case of his death is
a. Exempt from income tax
b. Part of taxable income
c. Subject to final tax
d. Partly exempt, partly taxable
2. Amount received by insured as return of premium – return of the premiums paid by the
insured under life insurance endowment or annuity contracts, either during the term or at
the maturity of the term mentioned in the contract or upon surrender of the contract.
• Sample
Cora insured her life with an insurance company. Under the contract, she will pay a monthly premium
of P2,000 for ten years. In case of death before the 10th year, her beneficiary will receive an indemnity in
the amount of P150,000. If she is still living on the 10th year, she will receive P500,000.
a. If Cora dies on the 5th year, her beneficiary will report an income of
b. Suppose Cora dies on the 5th year and her beneficiary was offered to receive the P150,000 in cash
or to receive it in installment of P20,000 for ten monthly installment payments and the beneficiary chose
the 2nd option, she will report an income of
c. If Cora survives the policy and is able to receive the P500,000, she will report an income of
Answer
a. None
b. P50,000
c. P260,000
3). GIFTS, BEQUEST AND DEVISES

• The value of the property acquired by gift, bequest, devise or descent. However, the income
from such property shall be included in gross income.

Sample: Which of the following is subject to income tax in 2018?

a. Agricultural land inherited
b. Cash received as gift
c. P8,000 lotto winnings in the Philippines
d. Income on inherited land
4. COMPENSATION FOR PERSONAL INJURIES OR
SICKNESS
• Amount received,, through Accident or Health insurance or under Workmen’s
Compensation Acts, plus damages received, whether by suit or agreement, on account of
such injuries or sickness.
a. Recovery of damages representing compensation for loss of profits or income are
taxable
b. Recoveries that are to compensate for damage to property are not taxable
• Which of the following is a taxable income?\
a. Income from qualified pension plan
b. Compensation for personal injuries
c. Moral damages
d. Interest on moral damages
• D
• Cruz is a passenger of a bus that met an accident. He survived but sustained serious physical injuries which required hospitalization for
three months. Following negotiations with the bus operator and its insurer, an agreement was reached under the following terms which
Cruz was paid the following amounts.
P500,000 Hospitalization expenses
250,000 Moral damages
300,000 For loss of income during the period of his treatment and
recuperation
50,000 Attorney’s fees
80,000 Cost of his laptop computer, cellphone and other goods of value that were lost as a result of the
accident
How much is taxable to Cruz?
• P300,000
5. Income exempt under treaty binding upon the Government of the Philippines
6. RETIREMENT BENEFITS

• received by officials and employees of private firms.

• Requisites:
a. There must be a reasonable private benefit plan maintained by the employer and
approved by BIR
b. The retiring official or employee has been in the service of the same employer for at
least 10 years;
c. Not less than 50 years of age at the time of retirement;
d. The benefit of this exemption may be availed of only once.
• Sample: In which of the following cases below would exempt the retiring employee to an
income tax on his retirement benefit?
Private Benefit Years in Service Retirement Age
Plan?
Case 1 Yes 12 40
Case 2 Yes 9 60
Case 3 No 15 65
Case 4 Yes 11 55
• Case 4 only
7. SEPARATION PAY

• received by officials or employees or his heirs from the employer due to:
a. Death, sickness, physical disability, or
b. Any cause beyond the control of the employee
• Job worked for a manufacturing firm. Due to business reverses, the firm offered voluntary retrenchment
program in order to reduce overhead expenses. Under the program, an employee who offered to
resign would be given separation pay equivalent to his three month’s basic salary for every year of
service. Job accepted the offer and received P400,000 as separation pay under the program.
After all the employees who accepted the offer were paid, the firm found its overhead still
excessive. Hence, if decided to expand the program. Various unprofitable departments were closed. As a
result, Ken was separated from the service. He also received P400,000 as separation pay.
a. Did job derive taxable income when he received this separation pay?
b. Did Ken derive taxable income when he received his separation pay?
• Answer,Yes
• Which of the following benefits/gratuity is taxable?
a. Lifetime monthly gratuity of P75,000 to a medal of valor awardee.
b. The terminal leave pay consisting of the accumulated vacation and sick leave credits of an
employee of the government.
c. Retirement benefit per Collective Bargaining Agreement although the early retirement is
against the will of the employee.
d. Separation or severance pay received in the form of residential lots as a consequence of
continued losses.
8. SOCIAL SECURITY BENEFITS

• retirement gratuities, pensions and similar benefits received from foreign government
agencies and other institutions, private or public.
9. BENEFITS RECEIVED FROM US VETERANS
ADMINISTRATION (USVA)
BENEFITS RECEIVED FROM SSS AND GSIS

• Problem: Which of the following is taxable?

a. Separation pay received by a 40 year old employee due to the retrenchment program of
the employer.
b. Retirement pay received from a benefit plan registered with the BIR where at the time
the employee retired he was 55 years of age, retiring from employment for the first time in his
life, and was employed with the employer from whom retiring for 6 years prior to retirement.
c. Social security benefit received by a balikbayan from employer abroad at the age of 45.
d. SSS and GSIS benefit
11. INCOME DERIVED BY FOREIGN GOVERNMENT

• Income derived from investment in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in banks in the Philippines by –
a. Foreign governments
b. Financing institutions owned by them
c. international or regional financing institutions established by foreign governments.
12. INCOME DERIVED BY THE GOVERNMENT OR
POLITICAL SUBDIVISIONS DERIVED FROM -
• Any public utility
• The exercise of any essential governmental functions
• Accruing to the Government of the Philippines or to any political subdivisions thereof.
13. PRIZES AND AWARDS IN SPORTS COMPETITION.

• All prizes and awards granted to athletes in local and international sports competitions
and tournaments, whether held in the Philippines or abroad, and sanctioned by their
national sports associations.
• Sample: Hidilyn Diaz, a weightlifter is awarded a silver medal in Rio Olympics. As a
consequence, she received the following income: P5,000,000, cash prize from the
Philippine Government; P1,000,000 worth of house and lot donated by Lipovitan,
P400,000, talent fee as product indorser.
On the otherhand, Pacman, a professional boxer, won on a titled bout between
him and a Lucas Mathysse held in Kuala Lumpur, Malaysia. During the year, Pacman received
the following: P200 million as cash prize in the fight; P80 million from Pay Per View; P20
million talent fee as commercial model of Motolite Battery, Ricoa and Café Puro.
How much is taxable to Diaz? How much is exempt to Pacman?
ANSWER

• Diaz, 400,000 and None for Pacman

14. 13TH MONTH PAY AND OTHER BENEFITS

• Gross benefits received by officials and employees of public and private entities.
• Provided, however, That the total exclusion shall not exceed P82,000 (Train Law: P90,000) which shall
cover:
a. Benefits received by officials and employees of the national and local government pursuant to RA 6686
(Christmas bonus to government employees);
b. Benefits received by employees under PD 851 as amended by MO No. 28 (13th month pay law);
c. Other benefits such as productivity incentives and Christmas bonus.
d. The excess on the ceiling of the de minimis benefits given by the employer to his employees shall be
taxable if such excess is beyond the P82,000 (P90,000) ceiling.
• Sample: Which of the following items that reduce salaries of employees is not exempt
from income tax?
a. GSIS contributions
b. Philhealth and Pag – ibig contributions
c. Labor union dues
d.Withholding tax
Saldo had the following data from his employment in the
government in 2016:
Monthly salary P12,000 Philhealth contributions 1,200
Taxes withheld 8,000 SSS premiums 2,480
Additional compensation income 24,000 13th month pay 12,000
Pag-ibig contributions 1,200 Mid-year bonus 12,000
Union dues 2,400 Loyalty award 5,000
Required:
a). Compute the non-taxable compensation income if John is a rank and file employee.
b). Compute the taxable compensation income.
16). GAINS FROM THE SALE OF BONDS, DEBENTURES OR
OTHER CERTIFICATE OF INDEBTEDNESS

• Gains realized from sale or exchange or retirement of bonds, debentures or other

certificate of indebtedness with a maturity of more than 5 years.
17). GAINS REALIZED FROM REDEMPTION OF
SHARES IN MUTUAL FUND
• Gains realized from redemption of shares of stock in a mutual fund company.
18). COMPENSATION INCOME RECEIVED BY
MINIMUM WAGE EARNER (MWE)
• Compensation income received by Minimum Wage Earners (MWE) in the public and
private with compensation income of not more than the Statutory Minimum Wage
(SMW).
19). EXEMPTION: AN AMOUNT NOT EXCEEDING
P250,000
• Sample problems: Compute the 2018 income subject to tax.
a). Annual basic salary (minimum wage) P48,000
Overtime pay 12,000
Holiday pay 6,000
Night shift differential pay 3,000
Hazard pay 12,000
b). Annual basic salary (minimum wage) 60,000
PERA (reimbursement) 12,000
Commission 10,000
Other benefits 35,000
Holiday pay 6,000
Overtime pay 8,500
Hazard pay 6,000
c). Annual basic salary (minimum wage) 60,000
Holiday pay 1,500
Overtime pay 3,000
Income from profession (tax table) 360,000
Expenses from profession 80,000