ACYTAXN: Gross Income Taxation

Gross Income

Means all income derived from whatever sources, including but not limited to the following items:

a. Compensation for services

b. Gross income from trade or business

c. Gross income from exercise of profession

d. Gains derived from dealings in property

e. Interests

f. Rents

g. Royalties

h. Dividends

i. Annuities

j. Prizes and winnings

k. Pensions

l. Partner's distributive share from the net income of a GPP

Exclusions from Gross Income

The following items shall not be included in gross income and shall be exempt from income tax:

a. Proceeds of Life Insurance paid to the heirs or beneficiaries upon the death of the insured

b. Amount received by insured as return of premium

c. Value of property acquired by gift, bequest, devise, or descent

d. Compensation for injuries or sickness

e. Income exempt under treaty

f. Retirement benefits, pensions, gratuities, etc.

g. Income Derived by Foreign Government;

h. Income Derived by the Government or its Political Subdivisions;

i. Prizes and Awards made primarily in recognition of religious, charitable,

scientific, educational, aftistic, literary, or civic achievement;

j. Prizes and Awards in Sports Competition;

k. 13th month pay and other benefits;

l. GSIS, SSS, Medicare and Other Contributions;

m. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness

n. Gains from Redemption of Shares in Mutual Fund;

o. Income Derived from the Sale of Gold Pursuant to R.A, No. 7076

Compensation Income

Is income arising out of an employer-employee relationship, It encompassed all remuneration services performed by an employee for his employer whether paid in cash or in kind (RR2-98).

True

(True or False) Remuneration for services constitutes compensation income even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them.

Taxable Fringe Benefits - Rank & File

Fringe benefits that are subject to basic tax.

Taxable Fringe Benefits - Supervisory or Managerial

Fringe benefits that are subject to fringe benefit tax (final tax).

Tax Exempt Fringe Benefits

Fringe benefits that are provided as exempt under law.

Tax Exempt Fringe Benefits

Fringe benefits that are required by the nature of, or necessary to the trade, business or profession of the employer.

Tax Exempt Fringe Benefits

Fringe benefits that are in nature, for the convenience of the employer.

Tax Exempt De Minimis

De minimis benefits that conform to the ceiling. Are not included in the P90,000 threshold.

Taxable De Minimis

De Minimis in excess of the ceiling. (Only on excess over P90,000)

Tax Exempt 13th Month Pay and Other Benefits

Beginning Jan. 1, 2018 - Exempt up to P90,000.

Christmas Bonus

The first P5,000 is considered de minimis. The excess of P5,000 shall be subject to the P90,000.

Productivity Incentive Bonus

If not more than P10,000, considered as de minimis. If more than P10,000, the entire amount shall be included in the computation of "other benefits" subject to P90,000 limit.

Fixed or Variable Allowances

In general, in addition to the regular compensation, fixed for his position or office, is compensation subject to income tax and creditable withholding tax on compensation income.

Fixed or Variable Allowances

Includes the following: transportation allowance, representation allowance, communication allowance,living away from home allowance (LAFHA), and the like.

Pre-Computed Business Allowances

Reasonable amounts of reimbursements/advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirement of substantiation and to withholding (i.e, Per Diem).

Business Related Allowances Subject to Liquidation

Any amount paid specifically, either as advances or reimbursements for travelling, 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:

a. It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and

b. 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 Sec. 34 of the tax code.

Representation and Transportation Allowances (RATA)

Granted to certain officials and employees of the government are considered reimbursements for the expenses incurred in the performance one's duties rather than as additional compensation.

True

(True or False) Excess of RATA, if not returned to the employer, constitutes taxable compensation income of the employee.

Stipends of Resident Physicians

The stipends received by resident physicians during their intensive training in the residency program of a hospital and individuals engaged in the practice of profession or calling like doctors of medicine are subject to creditable - withholding tax (CWT) imposed under the Tax Code, as amended Lea Ruling No. DA (C-004)024-2010, Fenivany 4, 2010].

Cost of Living Allowance (COLA) for MWEs

Is exempt from income tax. It actually forms part of the new wage rates or statutory minimum wage, Hence, it is covered by the income tax exemption of MWEs under RA 9504, as implemented by Revenue Regulations No, 10-08, which covers the statutory minimum wage (inclusive of COLA under NCR Wage Order No. NCR-16), including holiday pay, overtime pay, night shift differential pay and hazard pay.

Maternity Leave Pay

The maternity benefit of the female employee shall pertain to the full pay or full salary, wherein one of its components is the salary differential.

Full Pay or Full Salary - Maternity Leave Pay

Pertains to the actual remuneration or earnings paid by an employer for services rendered on normal working days and hours, including allowances provided for under existing company policy or collective bargaining agreement, if any.

Salary Differential

Refers to the difference that shall be shouldered by the employer when the actual cash benefit received from the Social Security System (SSS) is less than the full pay or full salary of the female employee during the duration of the maternity leave.

Salary Differential

Being part of the maternity benefit, shall be treated under the same tax rules with the actual cash benefit received from SSS, hence, exempt from income tax and withholding tax on compensation income.

Premiums on Life Insurance

A form of insurance, paid by the employer to the employee, is considered taxable income to the employee, where the insured employee, directly or indirectly is the beneficiary under the policy.

Tips and Gratuities

If paid directly to an employee: taxable income of the employee but not subject to withholding.

If accounted for by the employee to the employer (i.e., included in the bill paid by customers): taxable income of the employee and subject to withholding.

Retirement Pay

As a rule, is taxable, except those received by officials and employees of private firms, whether individual or corporate, under a reasonable private benefit plan maintained by the employer.

Requirements for Exemption of Tax for Retirement Benefits with Reasonable Private Benefit Plans

Such requirements include:

a. The retirement plan must be approved by the Bureau of Internal Revenue (BIR);

b. The retiring official or employee must have been in the service of the same employer for at least ten (10) years and;

c. Is not less than fifty (50) years of age at the time of retirement;

At Least Ten (10) Years of Service

The minimum number of years needed for an employee to be exempt for his retirement pay with a reasonable private benefit plan.

Not Less than Fifty (50) Years of Age at the Time of Retirement

The minimum age of an employee so that he can avail of the tax exemption for his retirement pay, with a reasonable private benefit plan.

Retirement Pay - Without a Reasonable Private Benefit Plan

An employee may receive tax-exempt retirement benefits who has reached the age of 60 years or more, but not more than 65 years, who has served at least 5 years in the establishment (BIR Ruling No. 495-14 dated December 11, 2014).

Within the Ages of 60 to 65 (But Not More than 65)

The age bracket wherein a retiring employee shall receive tax exemption on his retirement pay, in the absence of a reasonable private benefit plan.

At Least Five (5) Years of Service

The minimum required number of years a retiring employee must stay in service for the employer so that the former can receive tax exemption on his retirement pay, in the absence of a reasonable private benefit plan.

Equity Based Compensation

Covers all types of employee equity schemes that come in different forms such as stock options, restricted stock units, stock appreciation rights, and restricted share awards, which may or may not pertain to shares of stock of the grantor itself, but which have the common feature of being granted to existing employees of the grantor as a performance incentive for services rendered by the employees and are typically dependent on the performance, outstanding business achievements and, exemplary organizational, technical or business accomplishments.

Grant of Equity Based Compensation

A form of compensation grant that is not subject to tax. (Including capital gains tax - whether with or without an option price since there is no realized capital gain on the part of the employer-grantor - and documentary stamp tax).

Sale or Transfer of Equity Based Compensation

Is treated as a sale, barter, or exchange of stocks not listed on the stock exchange.

Sale or Transfer of Equity Based Compensation - With Consideration

A transaction that shall be subject to CGT.

Tax Basis for Equity Based Compensation (Subject to CGT)

Sales Price - Option Price

Tax Basis for Equity Based Compensation (Subject to CGT)

Sales Price (Equity Based Compensation does not have an option price).

Sale or Transfer of Equity Based Compensation - Without Consideration

The transfer shall be treated as a donation of shares of stock subject to donor's tax.

Tax Basis for Equity Based Compensation (Subject to Donor's Tax)

FMV of the Option at the time of donation.

Tax Basis on the Exercise of Equity Based Compensation - Income Tax

Book Value or Fair Market Value of Shares (Whichever is Higher at the Time of the Exercise) - Price Fixed on the Grant Date.

Gain on the Exercise of Equity Based Compensation

Shall be considered as additional compensation subject to income tax (basic income tax or graduated tax rate) and consequently to withholding tax on compensation.

Tax Basis on the Exercise of Equity Based Compensation - Donor's Tax

Book Value or Fair Market Value of Shares (Whichever is Higher at the Time of the Exercise) - Price Fixed on the Grant Date. (In the event that the granted equity-based compensation is transferable to employee-grantee's successor/heirs in case of death of employee-grantee, and such successor/heirs exercised the same within the prescribed exercise period)

Rent

Is the amount paid for the use of enjoyment of a thing (real or personal) or right.

Taxable Rent Income of the Lessor

May be in the form of:

a. Cash received, at stipulated price.

b. Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the contract or lease.

c. Advance payment, which may be in the form of prepaid rent (reported in full in the year of receipt).

d. Security Deposit (Upon forfeiture in favor of the lessor or upon application as rental payments).

e. Leasehold Improvements (If the same will be owned by the lessor at the end of the lease and the lessor is not required to pay the lessee the value of such improvements).

Rental Income

Shall be taxable on the year received, whether earned or unearned, provided, there is no restriction as to its use, and regardless of method of accounting employed.

Security Deposit

In general, is not a taxable income. It shall be recognized as a liability of the lessor to the lessee. The lessor has the obligation to return the amount to the lessee upon the expiration of the lease term.

Taxable Security Deposit

Security deposit that is considered taxable income. Includes the following:

a. Security deposit that is forfeited in favor of the lessor.

b. Security deposit that is applied as rental payments

Leasehold Improvements

Improvements made by the lessee shall be treated as income of the lessor if:

a. The improvements will be owned by the lessor (transfer of ownership) at the end of the lease;

b. The lessor is not needed to pay the lessee the value of such improvements.

Outright or Lump-Sum Method

FMV of Improvement of Leasehold is considered income.

Spread-out or Annual Method

Annual Income from Leasehold Improvement = Book Value of Leasehold Improvement, End of Lease Term / Remaining Term of Lease

Taxable Income from Pre-Termination of Lease

FMV, Year or Pre-Termination - Income Already Recognized/Reported

Advance Rentals (Option Money) and Security Deposits to Insure Faithful Performance of Certain Obligations of the Lessee

These are the non-taxable rent income of the lessor.

Total Rental Income

Rental Payment + Expenses of the Lessor Assumed by the Lessee + Income from Leasehold Improvements

Cash and Property Dividends

Dividends that shall be taxable upon declaration.

Stock Dividends

General Rule: Not taxable because they are not realized income.

Exception: Constitutes income if it gives the shareholder an interest different from that which his former stockholdings represent.

Liquidating Dividends

Dividends that are exempt up to the extent of the cost of investment being a mere return of capital. However, anything in excess of the cost shall be considered income and therefore taxable.

True

(True or False) If the amount received by the stockholder in liquidation is less than the cost of investment, the loss in the transaction is deductible to the extent allowed for Capital losses.

Dividends from Within the Philippines

a. Dividend Income from Domestic Corporation

b. Dividend Income from Foreign Corporations: If at least 50% of gross income for the three (3) year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines.

Dividends from Without the Philippines

Dividend income from Foreign Corporation, if the ratio of the gross income Philippines over worldwide income for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been inexistence) is less than 50%.

Dividend Income Received by DC from NRFC

Considered as foreign sourced dividends.

Dividend Income Received by DC from RFC

The tax treatment of dividends received by a domestic corporation from RFC will depend on the sources of income of the RFC. Under Section 42(A)(2)(b) of the Tax Code, as amended, dividend from a foreign corporation shall be treated as income derived from sources WITHIN THE PHILIPPINES UNLESS less than 50% of the gross income of the foreign corporation for the three year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of the period as the corporation has been in existence) was derived from sources within the Philippines.

Subject to 20% FWT

Prizes received by individuals (except NRA-NETB) from sources within

the Philippines exceeding P10,000.

Subject to 20% FWT

PCSO winnings exceeding P10,000.

Subject to 20% FWT

Other winnings from sources within the Philippines regardless of amount.

Subject to 25% FWT

Prizes and Other winnings including PCSO winnings received by NRAs-

NETB.

Subject to Basic Income Tax

Prizes and Other winnings derived by resident citizens and domestic corporations from sources without the Philippines.

Subject to Basic Income Tax

Prizes and winnings received by corporations

Subject to Basic Income Tax

Prizes received by individuals from sources within the Philippines amounting to P10,000 or less.

Exempt from Income Tax

PCSO winnings of not more than P10,000 if received by RC, NRC, RA and NRAETB

Exempt from Income Tax

Prizes and awards made primarily for:

a. Religious, Charitable

b. Scientific

c. Educational, artistic, literary

d. Civic achievement

Provided the recipient was:

a. Selected without any action on his part to enter the contest or proceeding (not constituting gains from labor).

b. Not required to render substantial future services as a condition to receive the prize/award.

Exempt from Income Tax

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 respective national sports association.

Exempt from Income Tax (Subject to OPT - Winnings Tax)

Winnings under Section 126 of the tax code (winnings on horse racing)

Gross Income from Whatever Source

The law imposes tax on income from whatever source which means that it includes income whether coming from legal or illegal sources.

Recovery of Bad Debts

In order to be considered as income, the following must be complied:

a. Bad debts were written off in the previous year/s.

b. Such bad debts were deducted in arriving at taxable income.

c. There is a resulting tax benefit on the deduction.

Refund of Taxes

The following are the requirements before the refund can be considered income:

a. There is payment of tax in the previous year/s.

b. The tax paid was deducted in arriving at the taxable income.

c. There is a resulting tax benefit on the deduction.

Forgiveness of Indebtedness - Compensation Income

A form of forgiveness of indebtedness, in which the debtor performs services to the creditor, that is considered as regular income.

Forgiveness of Indebtedness - Gift

A form of forgiveness of indebtedness, in which the creditor desires to benefit the debtor without any consideration, that is considered as a gift.

Forgiveness of Indebtedness - Dividend Income

A form of forgiveness of indebtedness, in which the creditor is a corporation and the debtor is a stockholder of such corporation, that is considered as dividend income.

Life Insurance

General rule: Exempt from tax since it is a mere reimbursement for the loss of life.

Exception: The following shall be taxable:

a. The beneficiary was chosen for a valuable consideration.

b. The interest earned on the insurance policy.

Return on Premium

The amount received by the insured, 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.

Return on Premium

Considered as exempt from tax.

Excess of the Return of Premium

Considered as taxable income.

Property Inherited or Received as Gift

Exempt from income tax.

Income from Property Inherited or Received as Gift

Considered as taxable income.

Compensation for Injuries or Sickness

Amounts received, through Accident or Health Insurance or under Workmen's Compensation Act, 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.

Income Exempt Under Treaty

Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines, shall be exempt.

True

(True or False) The retirement benefits, to be considered as tax exempt, should only be availed once.

Exempt from Income Tax

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:

a. Death

b. Sickness

c. Other physical disability or for any cause beyond the control of the said official or employee.

Exempt from Income Tax

Social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public.

Exempt from Income Tax

Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration.

Exempt from Income Tax

Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282.

Exempt from Income Tax

Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees.

Exempt from Income Tax

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:

a. Foreign governments

b. Financing institutions owned, controlled, or enjoying refinancing from foreign governments; and

c. International or regional financial institutions established by foreign governments.

Exempt from Income Tax

Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.

Exempt from Income Tax

Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement 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 as a condition to receiving the prize or award.

Exempt from Income Tax

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.