INCOME AND BUSINESS
TAXATION
(Midterm Period)
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INCOME CONCEPTS AND
EXCLUSIONS
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ACCOUNTING PERIODS
1. Calendar year - a period of 12 months beginning
January 1 and ending December 31 of every year;
and
2. Fiscal year – a period of 12 months ending on the
last day of any month other that December.
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ALLOCATION OF GROSS INCOME
 The Commissioner of Internal Revenue is authorized to
distribute, apportion, or allocate gross income between or
among organizations, trades or business if he sees it necessary
to prevent tax evasion or to clearly reflect the income of such
organizations controlled directly or indirectly by same interests.
 The purpose is to place a controlled taxpayer on a tax parity
with an uncontrolled taxpayer, by determining, according to the
standard of an uncontrolled taxpayer, the true taxable income
from the property and business of a controlled taxpayer.
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ROLE OF INCOME IN TAXATION
 Income serves as the base and like any tax base, it is
a means for assigning relative shares of the total tax
burden.
 Income is the title given to that collection of
attributes used to determine each individual’s or
organization’s share of the tax burden.
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LEGAL CONCEPT OF INCOME
All Income
Less: Exclusions
xxx
xxx
Gross Income
Less: Deductions
xxx
xxx
Taxable Income
xxx
(as judicial concept)
(income declared to be nontaxable by
Congress)
(a term used in the Code)
(subtraction items provided by
Congress)
(the tax base)
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STATUTORY CONCEPT OF INCOME
 The basic statutory authority on income is Section 31 of the Code, which
reads as follows:
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 item;
2. Gross income derived from the conduct of trade or business or from the
exercise of a profession;
3. Gains derived from dealings in property;
4. Interest;
5. Rents;
6. Royalties
7. Dividends
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STATUTORY CONCEPT OF INCOME
8. Annuities;
9. Prizes and winnings;
10.Pensions
11.Income from whatever source
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JUDICIAL CONCEPT OF INCOME
 Income in its broads, means all wealth, which flows into the
taxpayer other than a mere return of capital. It is the return in
money from one’s business, labor, or capital invested, e.g. gains,
profits, salary and wages.
 Income is also defined as the amount of money coming to a person
or corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent.
 Income may also be thought of as a flow of the fruits of one’s labor.
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JUDICIAL CONCEPT OF INCOME
 Capital is a fund property existing at one distinct point of time.
Income, on the other hand, denotes a flows of wealth during a
definite period of time. While capital is wealth, income is the
service of wealth.
 In the Madrigal case, the Supreme Court made an essential
distinction between capital and income. Capital is a fund, while
income is a flow; capital is wealth, while income is the service of
wealth; capital is a tree and income is a fruit.
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INCOME TAX DEFINED, BASE AND NATURE
 Income tax is a tax on all yearly profits arising from property,
profession, trade or business, or is a tax on a person’s income,
emoluments, profits and the like.
 Income tax is a generally regarded as an excise (privilege) tax. It is
not levied upon persons, property, funds, or profits as such but upon
the right of a person to receive income or profits.
 Income tax is based on income, either gross or net, realized in one
taxable year.
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GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 1 – is to identify the taxpaying party or “entity” to which the tax
computation formula applies.
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GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 2 – is to determine the taxpayer’s “gross income.”
Appreciation in market value is not generally regarded as income
for tax purposes unless realized through a sale or exchange.
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GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 3 – is to determine the expenses and certain other items that can
be deducted in computing the taxpayer’s “taxable income.”
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GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 4 – is to apply the appropriate tax rate to the taxpayer’s taxable
income to find the “tax due”.
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GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 5 – is to subtract any applicable “tax credit/payments” from the
taxpayer’s tax due in finding the tax payable.
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GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 6 – is to increase the tax by “penalties and interests”
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ITEMS OF GROSS INCOME
 Gross income as discussed in this chapter may be appropriately be
referred to as gross taxable income, in the case of corporation or gross
taxable/business professional income, income, in the case of individual
taxpayer engaged in trade, business or profession.
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1. COMPENSATION INCOME
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COMPENSATION INCOME
 Compensation Income – means all remuneration for services
performed by an employee for his employer under an employeremployee relationship, unless specifically excluded by the Code.
 The term used to designate the remuneration is immaterial. Thus,
salaries, wages, emoluments and honoraria, allowances,
commissions , fees including director’s fees, if the director, is at the
same time, an employee of the employer/corporation, taxable
bonuses and fringe benefits except those which are subject to the
fringe benefits tax, taxable pensions and retirement pay, and other
income of a similar nature constitute compensation income
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COMPENSATION INCOME
 The timing or the basis upon which the remuneration is paid is
immaterial in determining whether the remuneration constitutes
compensation. Thus, it may be paid on the basis of piece work, or
a percentage of profits; and may be paid hourly, daily weekly,
monthly or annually.
 If services are paid for in a medium other than money (e.g. stocks,
bonds and other forms of property), such is to be treated as
compensation in kind. The fair market value of the thing taken in
payment is the amount to be included as compensation.
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COMPENSATION INCOME
Definition of Terms –
1. Payroll Period – means the period of services for which a
payment of compensation is ordinarily made to an employee
by his employer. It is immaterial that the compensation is not
always paid at regular intervals.
2. Employee – is an individual performing services under an
employer-employee relationship. The term covers all
employees, including officers and employees, whether
elected or appointed, of the Government of the Philippines’
political subdivision thereof or any agency or instrumentality.
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COMPENSATION INCOME
Definition of Terms –
 In general, an employer-employee relationship exists when the
person for whom services were performed has the right to control
and direct the individual who performs the services, not only as to
the result to be accomplished by the work but also to the details
and means by which the result is accomplished.
 In general, individuals who follow an independent trade, business,
or profession, in which they offer their services to the public, are
not employees.
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COMPENSATION INCOME
Definition of Terms –
No distinction is made between classes or grades of
employees. Thus superintendents, managers and others
belonging to similar levels are employees. An officer of a
corporation is an employee of the corporations. An individual
performing services for a corporation, both as an officer and
director, is an employee subject to withholding on
compensation, including director’s fees
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COMPENSATION INCOME
Definition of Terms –
3. Employer – any person for whom an individual performs or
performed any service, of whatever nature, under an employeremployee relationship.
 It is not necessary that the services be continuing at the time the
wages are paid in order that the status of employer may exist. A
person for whom an individual has performed past services and
from whom he is still receiving compensation is an employer
 The term “employer” is also defined as any person paying
compensation on behalf of a non-resident alien individual, foreign
partnership, or foreign corporation, who is not engaged in trade or
business within the Philippines.
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COMPENSATION INCOME
Definition of Terms –
4. Statutory Minimun Wage – refers to the rate fixed by the
Regional Tripartite Wage and Productivity Board, as defined
by the Bureau of Labor and Employment Statistics (BLES) of
the Department of Labor and Employment.
5. Minimum Wage Earner – refers to a worker in the private
sector paid the statutory minimum wage, or to an employee
in the public sector receiving compensation equivalent to
salary grade ten (10) and below.
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COMPENSATION INCOME
Forms of Compensation –
Amendments in Revenue Regulations have been incorporated in
this discussion. Compensation does not always come in the
forms of money or is always termed as such.
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FORMS OF COMPENSATION
1. Compensation paid in kind
2. Living quarters and meals
3. Facilities and privileges of a relatively small value (Fringe
Benefits)
4. Tips and gratuities
5. Pensions, retirement and separation pay
6. Fixed or variable transportation, representation and other
allowances
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FORMS OF COMPENSATION
7. Vacation and sick leave allowances
8. Deductions made by employer from compensation of
employee
9. Remuneration for services as employee of a non-resident
alien individual or foreign entity.
10.Compensation performed outside the Philippines.
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COMPENSATION INCOME
Forms of Compensation –
1. Compensation paid in kind – may be in some medium other
than money, as for example, stocks, bonds or other forms of
property. In this case, the fair market value of thing taken in
payment is the amount to be included as compensation
subject to withholding. Where compensation is paid in the
property other than the money, the employer shall make
necessary arrangements to ensure that the amount of the tax
required to be withheld is available for payment to the Bureau
of Internal Revenue.
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COMPENSATION INCOME
Forms of Compensation –
2. Living Quarters and Meals – if a person receives salary as
remuneration for services rendered, and in addition thereto,
living quarters or meals are provided, the value to such
person of the quarters and meals so furnished shall be added
to the remuneration paid for the purpose of determining the
amount of compensation subject to withholding. However, if
living quarters or meals are furnished to an employee for the
convenience of the employer, the value thereof need not be
included as part of compensation income.
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COMPENSATION INCOME
Forms of Compensation –
3. Facilities and privileges of relatively small value – ordinarily,
facilities and privileges, otherwise known as “de minimis
benefits,” furnished or offered by an employer to his
employees, are not considered as compensation subject to
income tax and consequently to withholding tax if such
facilities or privileges are of relatively small value are offered
or furnished by the employer merely as a means of promoting
the health, goodwill, contentment, or efficiency of his
employees.
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COMPENSATION INCOME
Forms of Compensation –
3. Facilities and privileges of relatively small value –
The following shall be considered “de minimis” benefits not subject
to income tax, hence, not subject to withholding tax on
compensation income of both managerial and rank and file
employees:
a. Monetized unused vacation leave credits of private employees not
exceeding ten (10) days during the year;
b. Monetized value of vacation and sick leave credits paid to government
officials and employees;
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COMPENSATION INCOME
Forms of Compensation –
3. Facilities and privileges of relatively small value –
c. Medical cash allowance to dependents of employees not exceeding
P1,500 per employee per semester or P250 per month;
d. Rice subsidy of P2,000 or one (1) sack of 50-kg, rice per month
amounting to not more than P2,000;
e. Uniforms and clothing allowance not exceeding P6,000 per annum;
f. Actual medical assistance, e.g. medical allowance to cover medical
and healthcare needs, annual medical/executive check up,
maternity assistance and routine consultations, not exceeding
P10,000 per annum;
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COMPENSATION INCOME
Forms of Compensation –
3. Facilities and privileges of relatively small value –
g. Laundry allowance not exceeding P300 per month;
h. Employees achievement awards, e.g. for length of service or safety
achievement, which must be in the form of a tangible personal property
other than cash or gift certificate with an annual monetary value not
exceeding P10,000 received by the employee under an established
written plan which does not discriminate in favor of highly paid
employees;
i. Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum; and
j. Daily meal allowance for overtime work and night/graveyard shift not
exceeding twenty-five (25%) of the basic minimum wage on a per region
basis.
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COMPENSATION INCOME
Forms of Compensation –
3. Facilities and privileges of relatively small value –
 All other benefits given by employers which are not included in the above
enumeration shall not be considered as “de minimis” benefits, hence, shall be
subject to fringe benefits tax.
 The amount of “de minimis” benefits conforming to the ceiling above prescribed
shall not be considered in determining the P90,000 (eff. January 1, 2018) of
“other benefits” excluded from gross income under Section 32(b)(7)(e) of the
Code.
 However, if the employer pays more than the ceiling prescribed, the excess shall
be considered as part of “other benefits” and shall be taxable to the employee
receiving the benefits only if such excess is beyond the P90,000 ceiling.
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COMPENSATION INCOME
Forms of Compensation –
3. Facilities and privileges of relatively small value –
NOTE further that MWEs receiving “other benefits” exceeding the
P90,000 limit shall be taxable on the excess benefits as well as on his
salaries, wages and allowances, just like an employee receiving
compensation income beyond the SMW
Any amount given by the employer as benefits to its employees,
whether classified as “de minimis” benefits or fringe benefits, shall
constitute as deductible expense upon such employer.
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COMPENSATION INCOME
Illustration:
For taxable year 2018, DBA Corporation presented the following details for
its employee to be able to compute the tax to be collected for December
2018:
Mr. Tuazon, married with two qualified dependent children who received
the following compensation for the year:
Basic Monthly Salary
P45,000.00
Overtime Pay for November
5,000.00
Thirteenth Month Pay
45,000.00
Other Benefits
12,000.00
Withholding tax (Jan-Nov)
58,000
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COMPENSATION INCOME
Compensation
Basic Salary (P45,000 x 12)
Overtime (November)
Received for
the year
Non-Taxable
P540,000
P540,000
5,000
5,000
13th Month Pay
45,000
45,000
Other Benefits
12,000
12,000
P602,000
P57,000
Total
Taxable
P545,000
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COMPENSATION INCOME
Total Gross Compensation
Less: Basic Personal Exemption
Net Taxable Compensation
Tax Due
On P400,000
145,000 x 25%
Total
Less: Withholding Tax (Jan-Nov)
Tax to be collected in December 2018
P545,000
0
P545,000
P 30,000
36,250
P 66,250
58,000
P
8,250
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INCOME TAX TABLE
Not over P250,000…………………….…………………… 0%
Over P250,000 but not over P400,000…………… 20% of the excess over
P250,000
Over P400,000 but not over P800,000…………… P30,000+25% of the excess
over P400,000
Over P800,000 but not over P2M…….……..………P130,000+30% of the excess
over P800,000
Over P2M but not over P8M……………………………P490,000+32% of the
excess over P2M
Over P8M ………………………………………….……………P2,410,000+35% of the
excess over P8M
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CREDITABLE WITHHOLDING TAX RATE ON INCOME
PAYMENTS TO SELF-EMPLOYED INDIVIDUALS OF
PROFESSIONALS
Self-employed and professionals with annual gross sales or income
receipts not exceeding the VAT threshold of P3 Million have the
option to choose between these two tax rates:
1. Eight percent (8%) of gross sales or receipts and other income, in
excess of P250,000 instead of the graduated income tax rates and
percentage tax (no option to register for VAT); OR
2. Graduated income tax rates of 0% to 35% on net taxable income,
plus 3% percentage tax (No change in computation of Net Taxable
Business Income)
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CREDITABLE WITHHOLDING TAX RATE ON INCOME
PAYMENTS TO SELF-EMPLOYED INDIVIDUALS OF
PROFESSIONALS
The following income payments to self-employed individuals or
professionals shall be subject to eight percent (8%)
1. Professional fees, talent fees, commissions, etc. for services
rendered by individuals;
2. Income distribution to beneficiaries of estates and trusts;
3. Income payments to partners of general professional partnership;
4. Professional fees paid to medical practitioners; and
5. Commission of independent and/or exclusive sales representatives,
and marketing agents of companies.
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CREDITABLE WITHHOLDING TAX RATE ON INCOME
PAYMENTS TO SELF-EMPLOYED INDIVIDUALS OF
PROFESSIONALS
If annual gross sales or income is above P3 Million
However, the tax rule is simpler and more straightforward for selfemployed and professionals receiving annual gross sales or receipts
exceeding the P3 Million VAT threshold. If their gross income or
sales receipts total more than P3 million, they do not have a choice
and they must follow the graduated income tax rates (as shown in
the table) on the net taxable income, plus VAT.
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FRINGE BENEFITS SUBJECT TO FINAL TAX
 Fringe benefit subject to the fringe benefit tax is not among the
items of gross income for purposes of computing the income tax
liability under Section 24 (A) of an individual employee.
 Fringe benefit is subject to a final withholding tax.
 Fringe benefit tax is imposed on the grossed-up monetary value of
the fringe benefit furnished, granted or paid by the employer to
managerial and supervisory employees.
 Generally, the amount of taxable fringe benefit and the fringe
benefit tax constitute allowable deductions from the gross income
of the employer.
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FRINGE BENEFITS SUBJECT TO FINAL TAX
 Rank and File Employees – means all employees who are holding
neither managerial or supervisory position.
 Managerial Employees – is one who is vested with powers or
prerogatives to lay down and execute management policies and/or to
hire, transfer, suspend, lay-off, recall, discharge, assign or discipline
employees.
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FRINGE BENEFITS SUBJECT TO FINAL TAX
a. Generally, the fringe benefit tax shall be withheld by the employer
is:
34% effective Jan. 1, 1998
33% effective Jan. 1, 1999
32% effective Jan. 1, 2000
grossed-up monetary value is the amount of the fringe benefit
divided by 68%
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FRINGE BENEFITS SUBJECT TO FINAL TAX
Illustration:
Mr. Juancho is manager of Malayan, Inc. In 2012, his employer rewarded
him with a pre-owned Mitsubishi Lancer purchased for P408,000 cash
registered under Mr. Juancho’s name.
 The fringe benefit tax the employer is liable to pay is computed as
follows:
Acquisition cost
P408,000
Divide by
68%
Grossed up monetary value
P600,000
Multiply by
32%
Fringe benefit tax
P192,000
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FRINGE BENEFITS SUBJECT TO FINAL TAX
b. Fringe benefit received by a non-resident alien individual not
engaged in trade or business in the Philippines is subject to a
fringe benefit tax of 25% based on the grossed up monetary value
of the fringe benefit.
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FRINGE BENEFITS SUBJECT TO FINAL TAX
Illustration:
In 2012, Mrs. Violeta, a non-resident alien NETRB in the Philippines and
employed as chief executive officer in a domestic corporation, was
provided by her employer with a maid and personal driver who stay with
her in her household. Annual salaries of the maid and driver were
P48,000 and P87,000 respectively.
 The fringe benefit tax the employer is liable to pay is computed as
follows:
Salaries
P135,000
Divide by
75%
Grossed up monetary value
P180,000
Multiply by
25%
Fringe benefit tax
P 45,000
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FRINGE BENEFITS SUBJECT TO FINAL TAX
c. A fringe benefit tax of 15% is imposed on the grossed up monetary
value of the fringe benefit of the following individuals:
1. An alien individual employed by regional or are headquarters of
multinational company or by regional operating headquarters of a
multinational company.
2. An alien individual employed by an offshore banking unit of a foreign bank
established in the Philippines
3. An alien individual employed by a foreign service contractor or by a foreign
service subcontractor engaged in petroleum operations in the Philippines.
4. Any of their Filipino individual employees who are employed and occupying
the same position as those occupied or held by the alien employees.
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FRINGE BENEFITS SUBJECT TO FINAL TAX
c. A fringe benefit tax of 15% is imposed on the grossed up monetary
value of the fringe benefit of the following individuals:
 The grossed up monetary value is computed by dividing the
monetary value of the fringe benefits by 85%.
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FRINGE BENEFITS SUBJECT TO FINAL TAX
d. Employees in special economic zones, including Clark Special
Economic Zone and Subic Special Economic and Free Trade Zone are
taxed at the normal rate (32%) or at special rates (25% and 15%), as
the case maybe.
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FRINGE BENEFITS NOT SUBJECT TO FINAL TAX
a. Fringe benefit which are authorized and exempted from income tax
under the Code or under any special law.
b. Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans.
c. Benefits given to the rank and file, whether granted under a collective
bargaining agreement or not.
d. De minimis benefits
e. If the grant of fringe benefits to the employee is required by the
nature of, or necessary to the trade, business or profession of the
employer.
f. If the grant of the fringe benefit is for the convenience of the
employer.
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4. TIPS AND GRATUITIES
 Tips and gratuities. Tips or gratuities paid directly to an
employee by a customer or the employer which are not
accounted for by the employee to the employer are considered
as taxable income but not subject to withholding.
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5. PENSIONS, RETIREMENT AND SEPARATION PAY
 Pensions, retirement and separation pay constitute
compensation subject to withholding.
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6. FIXED OR VARIABLE TRANSPORTATION,
REPRESENTATION AND OTHER ALLOWANCES
a. In general, fixed or variable transportation, representation and
other allowances which are received by a public officer or
employee of a private entity, in addition to the regular
compensation fixed for his position or office, is compensation
subject to withholding.
 Representation and Transportation Allowance (RATA) granted to public
officers and employees under the general appropriations act and
personnel economic relief allowance (PERA) which essentially constitute
reimbursement for expenses incurred in the performance of government
personnel’s official duties shall not be subject to income tax and
consequently to withholding tax.
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6. FIXED OR VARIABLE TRANSPORTATION,
REPRESENTATION AND OTHER ALLOWANCES
b. Any amount paid specifically, either as advances or reimbursement
for traveling, representation and other bona fide ordinary and
necessary expenses incurred or reasonably expected to be incurred
by the employee in the performance of his duties are not
compensation subject to withholding, if the following conditions are
satisfied:
 It is for ordinary and necessary traveling and representation or entertainment
expenses paid or incurred by the employee in the pursuit of the trade, business
or profession; and
 The employee is required to account/liquidate for the foregoing expenses in
accordance with the specific requirements of substantiation for each category
of expenses pursuant to Section 34 of the Code.
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7. VACATION AND SICK LEAVE ALLOWANCES
 Amounts of vacation allowances or sick leave credits” which
are paid to an employee constitute compensation.
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8. DEDUCTIONS MADE BY EMPLOYER
FROM COMPENSATION OF EMPLOYEE
 Any amount which is required by law to be deducted by the
employer from the compensation of an employee including the
withheld tax is considered as part the employee’s compensation
and is deemed to be paid to the employee as compensation at
the time the deduction is made
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9. REMUNERATION FOR SERVICES AS
EMPLOYEE OF A NONRESIDENT ALIEN
INDIVIDUAL OR FOREIGN ENTITY
 The term compensation includes remuneration for services
performed by an employee of a nonresident alien individual,
foreign partnership or foreign corporation, whether or not such
alien individual or foreign entity is engaged in trade or business
within the Philippines.
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10. COMPENSATION FOR SERVICES
PERFORMED OUTSIDE THE PHILIPPINES
 Remuneration for services performed outside the Philippines by a
resident citizen for a domestic or a resident foreign corporation or
partnership, or for a non-resident corporation or partnership, or
for a non-resident individual not engaged in trade or business in
the Philippines shall be treated as compensation subject to tax.
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11. INCOME FROM WHATEVER SOURCE
These include all other incomes not expressly exempt under the
laws.
1. Income derived from illegal sources, such as gambling, extortion,
theft, bribes, embezzlement, and smuggling are taxable.
2. Compensation from damages if it represents payment for loss of
expected profits. Compensatory damages constituting returns of
capital are not taxable. Examples are amounts received as moral
damages for libel, slander and breach of promise to marry. But
damages for recovery of lost profits are taxable such as damage
recovered in a patent infringement suit.
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11. INCOME FROM WHATEVER SOURCE
These include all other incomes not expressly exempt under the
laws.
3. The amount of the debt of a stockholder to a corporation when
forgiven.
4. Bad debts previously charged off but later recovered. According
to the tax benefit rule, recovery of accounts previously written off
constituted a receipt of a taxable income if in the year of
recognition of its being worthless, the write-off resulted in a tax
benefit, that is a reduction of taxable income
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2. BUSINESS INCOME
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2. Business Income
 Manufacturing, Merchandising and Mining –
gross income means total sales, less cost of goods
sold plus any income from investments and from
incidental or outside operations or sources.
Gross Sales
XXX
Less: Cost of Goods Sold
XXX
Gross Profit from Sales
XXX
Add: Other Income
XXX
Gross Income
XXX
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2. Business Income
 Farming – gross income from farming includes gains or
profit derived from the operations of farms, such as
stock, dairy, poultry, fruits and truck farms, plantations,
ranches, etc.
Cash basis Cash sales of livestock & farm products
Sales of livestock & other items purchased XXX
Less: Cost of sales
XXX
Gross Profit
Add: Miscellaneous Income
Gross Income
XXX
XXX
XXX
XXX
XXX
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2. Business Income
Farming –
Accrual basis Ending Inventory
Cash sales (or value of merchandise or other
property received) of livestock & farm products
Sales of livestock & other items purchased
Miscellaneous Income
Total
Less: Beginning Inventory
Cost of livestock and other items purchased
Gross Income
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
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2. Business Income
 Farming –
Crop year basis- this basis is used by farmers whose
crop take more than one year from planting up to
harvesting and disposing. The entire cost of
production is deducted from the gross income in the
year it was realized.
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3. GAINS DERIVED FROM DEALINGS IN
PROPERTY
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3. Gains Derived from Dealings in Property
 Gross income derived from dealings in property
includes all income derived from the disposition of
property—real, personal or mixed—for money (sale)
or for other property (exchange) or for a combination
of both, which results in gain (or loss) because of the
difference between the taxpayer’s investment in what
he disposed of and the value in what he received.
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of Property
1. Sale or Exchange of Ordinary Assets – gains and losses may arise
from disposition of real and personal property for money, in case of a
sale, or for property, in case of an exchange. As a general rule, the
entire amount of gain or loss shall be recognized such that a gain is
taxable while a loss is deductible.
Ordinary assets – refer to all real properties specifically excluded
from the definition of capital assets under Section 39 of the code,
namely:
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of Property
1. Sale or Exchange of Ordinary Assets –
Ordinary assets –
a. Stock in trade of a taxpayer or other real 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
b. Real property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business; or
c. Real property used in trade or business (i.e. buildings and/or
improvements) of a character which is subject to the allowance for
depreciation provided for under Section 34(F) of the code; or
d. Real property used in trade or business of the taxpayer
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of Property
1. Sale or Exchange of Ordinary Assets –
Ordinary gain – is the gain derived from the sale or exchange of
ordinary assets. It includes all gains other than capital gains such as
those derived from the performance of services, whether personal
or professional, and those accruing from business.
Ordinary loss – is the excess of expenses and losses over the income
of the taxpayer excluding capital gains and capital losses; or the loss
incurred from the sale or exchange of an ordinary asset.
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of Property
2. Transaction Resulting in Taxable Gains but Non-recognition of Losses –
a. Sales or exchanges between related parties;
b. Wash sales by non-dealers of securities and when not subject to the
stock transfer tax;
c. Exchanges not solely in kind in mergers and consolidation; and
d. Sales or exchanges that are not at arms length.
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of Property
3. Sale or Exchange of Capital Assets –
Capital assets – refer to all real properties held by a taxpayer,
whether or not connected with his trade or business, and which are
not included among the real properties considered as ordinary
assets under Section 39(A)(I) of the Code.
Capital gain – is the gain derived from the sale or exchange of
capital assets.
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of Property
3. Sale or Exchange of Capital Assets –
Capital loss – is the loss incurred from the sale or exchange of
capital assets.
Net capital gain – is the excess of the gains from sales or exchanges
of capital assets over the losses from such sales or exchanges.
Net capital loss – is the excess of the losses from sales or
exchanges of capital assets over the gains from such sales or
exchanges.
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of Property
3. Sale or Exchange of Capital Assets –
Capital assets –
a. As to individuals
i. On real property – sales, exchanges or other dispositions
of real property classified as capital assets, (including
pacto de retro sales and other forms of conditional sale),
by individuals, (including estates and trusts), shall be
taxed at the rate of 6% final tax, for each independent
transaction, based on the gross selling price or current
fair market value , whichever is higher, regardless of gain
or loss.
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of Property
3. Sale or Exchange of Capital Assets –
Capital assets –
a. As to individuals
ii. On personal property –
i. Stocks issued by a domestic corporation may either be
traded in the local stock exchange or not. When stocks
listed in the local stock exchange are sold, exchanged or
transferred through the same, a final one-half of one
percent (1/2 of 1%) stock transfer tax is imposed on the
gross selling price of the shares of stock.
ii. In any other case the holding period, loss limitation and loss
carry-over rules shall apply.
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of Property
3. Sale or Exchange of Capital Assets –
Capital assets –
a. As to individuals
ii. On personal property –
iii. Gross selling price is the total amount of money or its
equivalent which the purchaser pays the vendor to
receive the goods. If the stocks are not listed, the
capital gain is five percent (5%) for gains not over
P100,000 and ten percent (10%) rates would be
imposed for gains over P100,000.
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of Property
3. Sale or Exchange of Capital Assets –
Capital assets –
a. As to corporations
i. On real property – in the case of a domestic corporation, the
capital gains tax is imposed where the transaction involves the
sale, exchange, or disposition of lands and/or buildings which
are not actually used in the corporate business and are treated
as capital assets.
ii. On shares of stock listed in stock exchanges and sold through
the stock exchanges – a final tax of one-half of one percent
(1/2 of 1%) stock transfer is imposed on the selling price.
iii. All others – capital losses are deductible only from capital
gains.
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3. Gains Derived from Dealings in Property
 Income Tax Treatment of Sale or Exchange of
Property
4. Tax-Exempt Exchanges –
a. Exchange solely in kind in mergers and
consolidations; and
b. Exchanges of property for stocks resulting in a
change in corporate control (Section 40, NIRC)
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4. INTERESTS
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4. Interests
 Gross income derived from interest is only such interest
as arising from indebtedness, that is, compensation for
the loan or forbearance of money, goods, or credits.
Unless exempted by law, interests received by a
taxpayer is taxable. Interest includes those arising from
indebtedness, whether business or non-business, legal
or illegal.
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4. Interests
 Interests from deposits and yield or any other monetary
benefit from deposit substitutes and from trust funds
and similar arrangements are subject to 20% final tax
for domestic and resident foreign corporations, resident
and non-resident citizens and resident aliens.
 Non-resident foreign corporations are subject to the
normal tax rates (Section 28(B)(1)) while non-resident
aliens not engaged in trade or business in the
Philippines is taxed at 25% final tax.
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4. Interests
 For individuals, except non-resident aliens not engaged
in trade or business in the Philippines, interest income
from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit
substitutes, investment prescribed by the Bangko
Sentral ng Pilipinas (BSP) with a maturity period of not
less than five (5) years and in denominations of
P10,000 or other denominations as may be approved by
the BSP issued by banks shall be exempt from income
tax.
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4. Interests
 However, should be holder of the certificate
preterminate the deposit or investment before the fifth
year, a tax shall be imposed on the entire income and
shall be deducted and withheld by the depository bank
the proceeds of the long-term deposit investment
certificate based on the remaining maturity thereof, as
follows:
4 yrs < 5 yrs
Final tax of 5%
3 yrs < 4 yrs
Final tax of 12%
< 3 yrs
Final tax of 20%
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5. Rents
 Rent – is the amount paid for the use or enjoyment of a
thing or right. Gross income derived from rent comes
not only from real estate but also from the use of
personal property.
 For income arising from rentals of property, a taxpayer
must report as part of gross income advance rentals
received during the taxable year, including rentals
actually earned but uncollected as of the end of such
period.
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6. Royalties
 Gross income derived from royalties includes earnings
from copyrights, trademarks, patents and natural
resources under lease. It involves not only the use of
the property but also to exhaustion.
 Royalties for properties which produce coal, gas, oil,
copper, timber or other similar product shall form part
of gross income for purposes of computing the
income tax liability of the taxpayer under Section
24(A), 27 and 28.
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7. Dividends
 Dividends are distributions made by a corporation
out of its earnings or profits accrued since March 1,
1913 and payable to its shareholders, whether in
money or in other property.
1. Cash Dividend – it is paid to shareholders or members in cash
and is taxable beginning:
January 1, 1998
6%
January 1, 1999
8%
January 1, 2000
10%
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7. Dividends
2. Property Dividend – it is paid in property of the corporation
such as bonds, securities or stock investments held by the
corporation paying the dividend and is taxable at the same rate
as cash dividend
January 1, 1998
6%
January 1, 1999
8%
January 1, 2000
10%
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7. Dividends
3. Stock Dividend – it is paid in stock and is not taxable unless it
represents a distribution of earnings or profits.
4. Scrip Dividend – it is issued in the form of promissory note and
is taxable at the same rate as cash dividend.
January 1, 1998
6%
January 1, 1999
8%
January 1, 2000
10%
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7. Dividends
5. Liquidating Dividend – in itself, liquidating dividend, does not
constitute income. But when a corporation distributes all its
assets in complete liquidation or dissolution, the transaction is
deemed a sale or exchange between the corporation and the
stockholder. As such, the difference between the amount
received from the corporation and the cost of the shares
surrendered by the stockholder is a taxable capital gain or
deductible capital loss to the extent of the capital gain.
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7. Dividends
6. Indirect Dividend – these are other payments or rights received by
the taxpayer which in reality, are dividends. Thus, if a corporation
to which the stockholder is indebted forgives his debt, the
transaction has the effect of payment of cash dividend
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7. Dividends
Tax Rates on Dividend Distribution
If a domestic corporation distributes dividends to:
a. Resident citizen, non-resident citizen and resident
alien –
1998 – 6% final tax
1999 – 8% final tax
2000 – 10% final tax
b. Non-resident alien engaged in business in the
Philippines – 20% final tax
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7. Dividends
Tax Rates on Dividend Distribution
If a domestic corporation distributes dividends to:
c. Non-resident alien not engaged in business in the
Philippines – 25% final tax
d. Domestic corporation and resident foreign
corporation – income tax exempt
e. Non-resident foreign corporation, under certain
conditions – 15% final tax
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7. Dividends
Taxable and Non-Taxable Stock Dividend
1. A non-taxable stock dividend does not constitute
income if the new certificates plus the old ones do
not change the proportionate interest of the
stockholder in the net assets of the corporation.
2. A taxable stock dividend constitutes income if it
gives the shareholder a greater proportionate
interest in the corporation after its distribution. If
a stockholder receives a taxable stock dividend, the
measure of income on his part is the fair market
value of the shares on the date the stockholder
received the shares.
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7. Dividends
Illustration:
1. Assume that H, I, J, K and L, stockholders, hold the
following number of shares of a domestic corporation: 800
(40%), 600 (30%), 200 (10%), 200 (10%) and 200 (10%),
respectively, or a total of 2,000 shares (100%). If the
corporation declares a 50% stock dividend, said dividend is
not taxable because the stockholder’s proportionate
interests or percentages of ownership did not change.
Thus,
H
1,200 shares
40%
I
900 shares
30%
J
300 shares
10%
K
300 shares
10%
L
300 shares
10%
3,000 shares
100%
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7. Dividends
Illustration:
2. If the 50% stock dividend is payable either in stock or
in cash and only H chose to be paid in stock, there is a
change in the percentage of ownership after the
distribution. In this case the stock dividends received
by H is taxable.
H
1,200 shares
50%
I
600 shares
25%
J
200 shares
8.3%
K
200 shares
8.3%
L
200 shares
8.3%
2,400 shares
99.9%
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8. Annuities
 This refer to annuity policies sold by insurance companies, which
provide installment payments for life, or for a guaranteed fixed
period of time whichever is longer or for life and guaranteed fixed
period. The portion of each annuity payment that represents return
of premium is not taxable while that portion that represents interest
is taxable.
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9. Prizes and Winnings
 Contest awards or prizes for commercial or non-commercial
contests are generally taxable. Such payments constitute gains
derived from labor.
 If the amount of prize is P10,000 or less, it is taxable under Section
24(A). If it is above P10,000, a final tax of 20% applies. Philippine
Charity Sweepstakes Office (PCSO) and lotto winnings are tax
exempt.
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9. Prizes and Winnings
 Prizes and awards received in recognition of religious, charitable,
scientific, educational, artistic, literary or civic achievement are not
taxable if:
1. The recipient was selected without any action on his part to enter the
contest or proceedings; and
2. The recipient is not required to render substantial future services as a
condition to receiving the prize or award.
 Prizes and awards granted to athletes in local and international sports
competitions and tournaments held in the Philippines or abroad and
sanctioned by their national sports associations are exempt from
income tax. Prizes and awards in the nature of gifts are not taxable.
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10. Pensions
 Amount of money received in lump sum or on staggered basis in
consideration of services rendered. Pensions are being given after
the individual reaches the age of retirement. It is taxable to the
extent of the amount received except if there is an approved
pension plan by the Bureau of Internal Revenue.
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Income from Whatever Source
 These includes all other income not expressly exempt under the
laws.
1. Income derived from illegal sources such as gambling, extortion,
theft, bribes, embezzlement, and smuggling are taxable.
2. Compensation from damages if it represents payment for loss
expected profit. Compensatory damages constituting returns of
capital are not taxable. Damages for recovery of lost profits are
taxable such as damage recovered in a patent infringement suit.
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Income from Whatever Source
3. The amount of the debt of a stockholder to a corporation when
forgiven. This is in effect a payment of dividend.
4. Bad debts previously charged off but later recovered.
5. Taxes paid and subsequently refunded.
6. Tax informer’s reward to person instrumental in the discover of
violations of the NIRC and the discovery and seizure of smuggled
goods.
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Sources of Income
1. Within the Philippines
2. Without the Philippines
3. Partly within and partly without.
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Determination of Sources of Income
INCOME
SOURCES OF INCOME
1. Compensation income
Place of performance of service
2. Merchandising business
Place of business
3. Manufacturing business
a) if produced in whole in and sold within
Purely within
b) If produce in whole and sold without
Purely without
c) If produce in whole or in part within and sold
without
Partly within and partly without
d) If produce in whole or in part without and sold
within
Partly within and partly without
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Determination of Sources of Income
INCOME
SOURCES OF INCOME
4. Mining
Place where mine is located
5. Farming
Place where farm is located
6. Interest income
Location of property
7. Rent income
Location of property
8. Royalties
Place where intangible is used
9. Dividend from
a) Domestic corporation
Within
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Determination of Sources of Income
INCOME
SOURCES OF INCOME
10. Gain on sale of real property
Location of the property
11. Gain on sale of personal property purchased in
one country and sold in another
Place of sale
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EXCLUSIONS FROM GROSS INCOME
The following items shall not be included in the computation of gross
income and shall be exempt from income taxation.
1. Life Insurance
2. Gifts, Bequests and Devises
3. Compensation for Injuries or Sickness
4. Income Exempt Under Treaty
5. Retirement Benefits, Pensions, Gratuities, etc.
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EXCLUSIONS FROM GROSS INCOME
6. Miscellaneous Items
a.
b.
c.
d.
e.
Income derived by foreign government.
Income derived by the government or its political subdivisions.
Prizes and awards
Prizes and awards in sports competition
13th month and other benefits
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EXCLUSIONS FROM GROSS INCOME
6. Miscellaneous Items
f. GSIS, SSS, Medicare, Pag-ibig Contributions and Union Dues.
g. Gains from sale of bonds, debentures or other certificate of indebtedness
with maturity of more than 5 years
h. Gains from redemption of shares in mutual fund.
i. Holiday pay, overtime pay, night shift differential pay and hazard pay
received by minimum wage earners.
j. Campaign contributions, as a rule, are not included in the taxable income
of the candidate to whom they were given because such contributions
were given not for personal expenditure/enrichment of the candidate but
for the purpose of utilizing such contributions for the campaign.
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1. LIFE INSURANCE
 The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum
or otherwise, but if such amounts are held by the insurer under an
agreement to pay interest thereon, the interest payment shall be
included in gross income. Also excludible is the amount received by
the insure, as a return of premiums paid by him 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.
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2. GIFTS, BEQUESTS, AND DEVISES
 The value of the property acquired by gift, bequests, devise or
descent. 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 divided interest, shall be included in gross
income.
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3. COMPENSATION FOR INJURIES OR SICKNESS
 The value of the property acquired by gift, bequests, devise or
descent. 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 divided interest, shall be included in gross
income.
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4. INCOME EXEMPT UNDER TREATY
 Income of any kind, to the extent required
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