REGULAR INCOME TAXATION
The Regular Income Tax Model
Gross Income – inclusions
Less: Allowable deductions
Taxable Income
P xxxx
xxxx
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Gross Income consists of the major topics
1. Exclusions of gross income – list of income exempt to regular income tax
2. Inclusions in gross income – list of income subject to regular income tax
3. Special topics – covers income that are either exclusion or inclusion depending on certain
circumstances, such as:
a. Fringe benefits
b. Dealings in properties
ALLOWABLE DEDUCTIONS
Are expenses of the conduct of business or exercise of profession. They are commonly known as
business expenses.
❖ EXCLUSIONS FROM GROSS INCOME
The term “exclusions” refer to items that are not included in the determination of gross income
either because:
• They represent return of capital or are not income, gain or profit;
• They are subject to another kind of internal revenue tax; or
• They are income, gain or profit that are expressly exempt from income tax under the
constitution, tax treaty, tax code, or a general or special law.
Note: Exclusions from gross income are not included in the amount of reportable gross income in
the income tax return. The amount of deductions is initially included in the amount of gross income
but is separately presented as deduction against gross income in the income tax return.
ITEMS THAT ARE NOT INCLUDED:
1. Proceeds of life insurance – paid to the heirs or beneficiaries upon the death of the
insured. BUT if such amounts are held by the insurer under an agreement to pay interest
thereon, the interest payments are included in gross income.
2. Return of insurance premium – amount received by the insured, as a return of premiums
paid by him, either during the term or at the maturity of the term mentioned in the contract
or upon surrender of the contract. BUT the excess over premiums paid (whether or not in
the current year) is included in the gross income.
3. Gift, bequest or devise – value of the property received is excluded BUT the income from
such property is included in gross income.
4. Compensation for personal injuries or sickness – amounts received, through accident
or health insurance or under Workmen’s Compensation Acts, plus the amount of damages
received, whether by suit or agreement, on account of such injuries or sickness.
5. Income exempt under Treaty – income of any kind, to the extent required by any treaty
obligation binding upon the government of the Philippines.
6. Retirement benefits, pension, gratuities, etc.
a. Those received under R.A. 7641 – The Mandatory Retirement Law (for private firms
without retirement trust fund)
b. Those received by employees of private employers in accordance with a reasonable
private benefit plan;
c. Those received as a result of involuntary separation – causes beyond the control of the
employee
d. Social security benefits, retirement gratuities, pensions, etc. from foreign government
agencies and other institutions, private or public benefits due to residents who are US
veterans
e. SSS benefits
f. GSIS benefits
Retirement benefits received under R.A.
No. 7641 and those received by officials
and employees of private firm.
Any amount received by an official or
employee as a consequence of separation
Retirement benefits pursuant to RA 4917
(Private Retirement Benefit Plan)
1. Retiring employee must not be less than 50
years old.
2. Must have been in the service for at least 10
years of the same employer.
3. Exemption must be availed only once.
4. The private benefit plan must be approved
by the BIR. (Reasonable private pension plan.)
Retirement benefits under RA 7641 (In the
Absence of Retirement Plan)
1. The retiring employee is 60 years old. (The
compulsory retirement age of an employee
under the Mandatory Retirement is 65 years
old.)
2. He must have served the company for at
least 5 years in said establishment.
Any amount received by an official or
employee or by his heirs from the employer as
a consequence of separation of such official or
employee from the service of the employer
because of death, sickness, or physical
disability or for any cause beyond the
Social security benefits, retirement
gratuities, pensions and other similar
benefits received from foreign government
agencies and other institutions, private or
public
Social Security System (SSS) Benefits
Government Service Insurance System
(GSIS) Benefits
United States Veterans Administration
Benefits
control of the said official or employee is not
included in the gross income
The provisions of any existing law to the
contrary notwithstanding, social security
benefits, retirement gratuities, pensions and
other similar benefits received from foreign
government agencies and other institutions,
private or public, received by resident or nonresident citizen of the Philippines or aliens who
come to reside permanently in the Philippines
are not included in the gross income
Benefits received from or enjoyed under the
Social Security System are not included in the
gross income
Benefits received from the GSIS including
retirement gratuity received by government
officials and employees are not included in the
gross income
Payment of benefits due or to become due
under United States Veterans Administration
are not included in the gross income
7. Miscellaneous Items
a. Passive income derived from investments in the Philippines in loans, stocks, bonds, or
other domestic securities, or from interest on deposits in banks in the Philippines by:
• Foreign governments
• Financing institutions owned, controlled, or enjoying refinancing from foreign
governments
• International or regional financial institutions established by foreign government
b.
Income derived from any public utility or from the exercise of any essential
governmental function by the Philippine Government or political subdivision thereof
c. Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:
• The recipient was selected without any action on his part to enter the contest or
proceeding; and
• The recipient is not required to render substantial future services as a condition
to receiving the prize or award.
d. 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
e. 13th Month Pay and other benefits of public and private entities – BUT total exclusion
under this item not to exceed P90,000.
f.
f. GSIS, SSS, Medicare, PAG-IBIG contributions, and union dues of individuals
(RMC 27-2011) Contributions to SSS, GSIS,
PHIC and HDMF in excess of mandatory
contributions are not exempt from withholding
tax on compensation.
1. Only the mandatory or compulsory
contributions of employees to SSS, GSIS,
PHIC and HDMF are exempt from
income tax and consequently, from the
withholding tax on compensation.
2.The voluntary contributions in excess
of what the law requires as mandatory
contributions are taxable gross income
of the employee, hence, subject to
income tax and withholding tax on
compensation. The exemption from
withholding tax on compensation referred
to in Section 2.78.1(B)(12) of Revenue
Regulations (RR) No. 2-98 shall apply only
to mandatory/compulsory GSIS, SSS,
Medicare and Pag-ibig contributions. It
does not include voluntary contributions.
g. Gains from the sale or exchange or retirement of bonds, debentures or other certificate
of indebtedness with a maturity of more than five (5) years.
h. Gains realized by the investor upon redemption of shares of stock in a mutual fund
company as defined in Section 22 (BB).
❖ INCLUSIONS IN GROSS INCOME
GROSS INCOME
Except when otherwise provided in this Title, 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 items.
(2) Gross income derived from the conduct of trade or business or the exercise of a
profession; (3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional partnership.
1. Compensation for personal services
Gross compensation income means all remuneration for services performed by an
employee to his employer whether paid in cash or in kind, unless specifically
excluded under the Tax Code (e.g. salaries, wages, emoluments, honoraria, bonuses,
allowances, director’s fee)
All kinds of compensation for services rendered constitute gross income. They
include:
a. Salaries, wages and fees
b. Commission paid to salesman
c. Compensation for services on the basis of a percentage of profits
d. Commission on insurance premiums
e. Tips
f. Pensions or retiring allowances paid by private pensions or by the government
(except pension exempt from tax) and
g. Marriage fees, baptismal offering sum paid for saying masses for the dead, and
other contributions received by a clergyman, evangelist, or religious worker for
services rendered
Forms of compensation
a. Payment made in cash- taxable amount is the full amount received
b. Service paid for with something other than money - taxable amount is the
fair market value (FMV) of the consideration received
c. Services rendered at a stipulated price- In the absence of evidence to the
contrary, the stipulated price shall be presumed to be the fair market value
(FMV)
2. Gross income derived from the conduct of trade or business or the exercise of
a profession
Gross Sales/receipts
Less: sales returns and allowances/sales discount
Net Sales/receipts
Less: Cost of sales/services
Gross income from operation
Add: Other income: Other Incidental income
Gross Income
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3. Gains derived from dealings in property
Sale of Capital Assets Other than Real Property and Shares of Stock that are subject to a
special CGT rate.
The net capital gain realized from the sale of assets classified as capital assets shall be
subject to ordinary income tax.
Sale of 3 types of property which may give rise to taxable events:
Ordinary asset – 100% of the gain or loss shall be recognized in the ITR
Capital asset – subject to final taxes (capital gains tax)
Other capital asset - holding period of the asset shall be taken into consideration if the
seller is an individual, and only the net capital gain shall be included in the ITR.
HOLDING PERIOD RULE:
If the capital asset is held by an individual taxpayer for a period of:
• Not more than one year (short-term holding period)- 100% of the capital gain or
loss is recognized
• More than one year (long-term holding period) – 50% of the capital gain or loss
is recognized
For corporate taxpayers:
Regardless of the length of the holding period, 100% of the capital gain or capital
loss is recognized. THE HOLDING PERIOD RULE DOES NOT APPLY TO
CORPORATIONS.
4. Interest Income
This particularly refers to interest income other than passive interest income subject to final
tax. A taxable interest income must have been actually paid out of an agreement to pay
interest. It cannot be imputed.
Interest income, as a rule, is taxable included in the ITR
Exclude:
a. Interest income from bank deposits or deposit substitutes in the Philippines subject to
FT (passive income);
b. Interest income which are exempt from tax:
• Interest income from long-term deposits or investment in the form of savings,
trust funds, deposit substitutes, investment management accounts;
• Interest income earned from passive investments of foreign governments,
financing institutions owned by foreign governments, and international financial
institutions established by foreign governments.
5. Rent Income
Rent income arises from leasing properties of any kind. It is a passive income but is not
subject to final tax under the NIRC; hence, it is subject to regular income tax.
Aside from the periodic receipts of such, the following should be considered.
1. Obligations of the lessor that are assumed by the lessee are additional rental income to
the lessor.
2. Leasehold improvements made by the lessee on the leased property are recognized by
the lessor as income using the spread-out method or outright method.
3. On advance rentals
6. Royalties
Royalties earned from sources within the Philippines are generally subject to final income
tax except when they are active by nature. Active royalty income and royalties earned from
sources outside the Philippines are subject to regular income tax.
7. Dividends
These pertain to dividends declared by foreign corporations. It should be recalled that
dividends declared by domestic corporations are generally subject to 10% final tax if the
recipient is an individual taxpayer and exempt if the recipient is a domestic or a resident
foreign corporation. Cash, property, and script dividends from foreign corporations are
items of gross income subject to regular income tax.
8. Annuities
9. Prizes and winnings
a. Prizes and winnings from foreign sources received by individuals and corporations
b. Prizes and winnings from Philippine sources received by corporations
c. Prizes from Philippine sources received by individuals amounting to P10,000 or less.
10. Pensions
These pertain to pensions and retirement benefits that fail to meet the exclusion criteria and
hence subject to regular tax.
11. Partner's distributive share from the net income of the general professional
partnership.