Amended Bsa Handout For Gross Income Part 1

HANDOUT 2: The Gross Income: Its Items
Concepts and Exclusions
Name of Faculty: Eugene O. Balindan, CPA / Instructor 1

Subject: BA 101 Income Taxation
Schedule for Instruction:
Course, Year & Section Schedule Time

BSA 2B TTH 9:30-11:00
BSA 2A TTH 11:00-12:30
Lesson/Topic: The Gross Income: Its Items, Concepts and Exclusions
Objectives:
• Enumerate the categories of income and the tax rates applicable per type of income.
• Discuss the classification of income taxpayers other than the individual.
• Identify and differentiate the categories of income.
• Determine the scope and different sources of gross income and the exclusion from
gross income.
• Correctly classify gains and losses from dealings in properties if taxable under income
taxation.
• Calculate correctly the amount of allowable interests, rents, royalties, and other passive
incomes.
A. ITEMS AND CONCEPT OF INCOME
Income, Taxable Income, and Income Tax defined
Income. All wealth flows into the taxpayer other than a mere return of capital. It
includes the forms of income specifically described as gains derived from the sale
or other disposition of capital.
For tax purposes, income is defined as the amount of money coming to a

person or corporation within the specified time, whether as payment for services,
interest, or profits from investments like earnings, whether lawful or not, express or
implied.
Taxable income refers to the pertinent items of gross income specified in the code,
less deductions, for any authorized for such types of income by the code or other
special laws.
Income tax. Referred to as a tax on all yearly profits arising from property,
professions, trades, or offices, or as a tax on a person's income, emoluments profits,
and the likes.
Classification of income tax
In the Philippines, our income tax is classified as:
A. A national tax
B. An excise tax
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C. A direct tax
D. A general tax
Classification of income taxpayers
Income taxpayers may be classified into:
A. Individual. A natural person, whether Filipino citizens or not and whether

resident or non-resident of the Philippines.
B. Corporation. Includes partnership no matter how created or organized, joint-

stock companies, joint accounts, associations, or insurance companies, but does
not include general professional partnerships and a joint venture or consortium
formed for the purpose of undertaking a construction project or engaging in
petroleum, geothermal, and other energy operations pursuant to an operating or
consortium agreement under a service contract with a government.
C. Estate. All property, rights, and obligations of a person which are not
extinguished by his death and also those which have accrued since the opening of
the succession. To be subject to income tax, an estate must be under the judicial
settlement; otherwise, it is not subject to income tax.
D. Trust. An arrangement created by will or an agreement under which property is

passed to another for conservation or investment with the income therefrom and
ultimately the corpus (principal) to be distributed in accordance with the directions
of the creator as expressed in the governing instrument.
A taxable trust is an irrevocable trust both as to corpus and income.
General definition
Gross income is income derived from whatever sources, which means all
income not expressly excluded or exempted from the class of taxable income,
irrespective of the voluntary action of the taxpayer in producing the income.it
includes but not limited to the following:
A. from dealing with property
B. Interests
C. Rents
D. Royalties Compensation from services in whatever form paid, including, but

not limited to fees, salaries, wages, commissions, and similar items
E. Gross income derived from the conduct of a trade or business or the exercise
of a profession
F. Gains derived
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G. Dividends
H. Annuities
I. Prizes and winnings
J. Pensions; and
K. Partner's distributive share from the net income of the general professional
partnership
Thus, income from illegal activities such as extortion, illegal gambling, bribery, graft
and corruption, kidnapping, racketeering, drug peddling, etc. Fall within the ambit of
"income from whatever source derived" subject to income tax.
Self- help income
These are self- help activities such as own repair of automobiles, own mowing
of lawns, performing of own household chores, and the likes are not subject to tax.
A carpenter might agree to repair a painter’s house in exchange for the

painter’s promise to paint the carpenter’s home. In this instance, where the parties
exchange services, each party realizes income equal to the value of the services he
receives. If each did his own work (i.e. the painter fixed his own house and the
carpenter paints his own home), neither would have to report any income (Philipps
vs. Kramer, supra).
Compensation paid in kind
Compensation may be paid in some medium other than money. Withholding

tax is deducted by the employer to the compensation of the employee. Thus, when
compensation is paid in some medium other than money, the following rules shall
apply:
A. If services are delivered in kind, the fair market value of the thing taken in
payment is the amount to be included as compensation income.
B. If services are rendered at a stipulated price, in the absence of evidence to

the contrary, such price will be presumed to be the fair market value of the
remuneration received.
C. If the corporation transfers to its employees its own stock as remuneration for
services rendered, the amount of such remuneration is the fair market value of the
stock at the time the services were rendered. (sec. 2.71.1. Rev. Reg. 2-98)
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Other taxable compensation income
A. Compensation paid in promissory note (taxable income) — refers to a

promissory note received in payment of services. It constitutes income to the extent
of their fair market value at the time of receipt.
NOTE: If the note is subjected to a discounting of notes, the fair market value is the
fair discounted value.
Illustration
In 2017, Daet received from Labo a promissory note with the face value of
P1,000,000 for services rendered. The note will mature after one year. At the time
of receipt in 2017 the note was sold to a bank at a discount of 18%. Labo paid the
note upon maturity in 2018.
a. How much income is subject to tax in 2017?
Face value P1,000,000

Less: Discount (P1,000,000x18%) 180,000
Taxable income 820,000
b. How much income is subject to tax in 2018?
Face value P1,000,000

Less: Amount already declared as income 820,000
Income subject to tax 180,000
B. Tips and gratuities (employee's taxable income but not subject to

withholding tax) — refers to tips and gratuities paid directly by a customer of an
employer to an employee which are not accounted for by the latter to the former. If
accounted for by the employee to the employer (i.e. included in the bill paid by the
customers), it is taxable income of the employee and subject to withholding tax.
C. Fixed or Variable Allowances — In general, fixed or variable allowances

in addition to the regular compensation, fixed for his position of office, is
compensation subject to income tax and creditable withholding tax on compensation
income (Section 2.78.1 (A) of RR 2-98 as amended by RR-10-2008). Examples of
fixed or variable allowances are transportation allowance, representation allowance,
communication allowance, living away from home allowance (LAFHA), and the like.
However, any amount that is reasonably expected to be incurred by an employee

in the performance of his duties is not compensation if they are a.) Ordinary and
necessary expenses, b.) Paid or incurred in pursuit of trade, business, or profession,
and c.) Required to be liquidated for the foregoing expenses.
NOTE: Any unreturned excess of advances is taxable income to the employee.
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• Pre-computed business allowances

Reasonable amounts of reimbursements/advances for traveling and
entertainment expenses that 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 especially, either as advances or reimbursements
for travel, 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:
o 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
o The employee is required to account/liquidate for the foregoing
expenses in accordance with the specific requirements of
substation for each category of expenses pursuant to Sec. 34
of the tax code.
• Representation and Transportation Allowances (RATA) & Personal
Economic Relief Allowances (PERA)
o RATA and PERA under General Appropriations Act granted to
certain government officials and employees are considered
reimbursements for the expenses incurred in the performance
of one's duties rather than as additional compensation,
therefore; income tax exempt.
o For private employees, it's generally taxable as part of their
gross compensation income. It doesn't matter if the allowance
is fixed or not. It is, however, exempt from tax if the following
conditions are present:
1.) The expenses are ordinary and necessary in the pursuit of trade,
business or profession.
2.) The employee is required to account/liquidate for the said expenses.
The excess of the actual payments over the advances are taxable if
they're not returned to the owner. Also, reasonable amounts of
reimbursements or advances computed daily and paid to the employee
while on assignment/duty don't need to be subjected to substantiation
requirements and withholding.
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• Stipends of Resident Physicians

o The stipends received by the resident physicians during their
intensive training in the residency program of a hospital and
individuals engaged in the practice of a profession or calling like
doctors of medicine are subject to creditable withholding tax
(CWT) imposed under the Tax Code, as amended {BIR Ruling
No. DA (C-004)024-2010, February 4, 2010}.
D. Vacation and sick leave allowances (taxable compensation income) —

refer to the salary of an employee on vacation or sick leave, which are paid,
notwithstanding his absence from work.
However, the monetized value of unutilized vacation leave credits of ten

days or less paid to private firm employees is not subject to income tax. At the
same time, the monetized value of unutilized vacation and sick leave credits paid
to government officials and employees are also exempted.
Illustration:
Mr. A is working in a private company. He decided to monetize his twenty-five days

unutilized vacation leave credits, and his salary per day is P 1,000.
Questions:
A. How much will be non-taxable and taxable?

B. If, in the given problem, Mr. A decided to change his mind, he will monetize the
unutilized sick leave credits (25 days), not the vacation leave credits. How much will be
non-taxable and taxable?
B. How much will be non-taxable and taxable if he is a government employee, and if he
will monetize the 15 days vacation leave credits and 10 days sick leave credits?
Answers:
A. Taxable monetization of unutilized vacation leave credits of a private employee
Vacation leave credits to be monetized 25
Vacation leave credits that are exempted (de minimis) 10
Leave credits that are taxable 15
Multiply by: His salary per day XP1,000
Taxable amount of monetized leave credit P15,000
Note: The taxable amount of monetized leave credits are included in the taxable gross
income. The non-taxable monetized leave credits are (10 days x P1,000)= P10,000.
B. Taxable monetization of unutilized sick leave credits of a private employee
All of the sick leave credits to be monetized are taxable because only the monetized ten
days or less vacation leave credits of a private employee/officer are not subject to tax. It
is considered as de minimis benefits.
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Sick leave credits to be monetized 25

Salary per day x P1,000
Taxable monetized sick leave credits of a private employee P25,000
Note. The taxable amount of monetized leave credits are included in the taxable gross
income.
C. Taxable monetization of unutilized vacation and sick leave credits of a government
employee/officer
All of the monetized sick and vacation leave credits are not taxable and not be included
in the taxable gross income because they are considered as de minimis benefits.
• Maternity Leave Pay

o Under RA 11210, otherwise known as the 105-Day Expanded
Maternity Leave Law, and it joint implementing rules and
regulations and the RMC 105-2019, the maternity benefit of the
female employee shall pertain to the full payment of full salary,
wherein one of its components is the salary differential.
o Full pay or full salary 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.
o 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.
o The 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.
Forgiveness of indebtedness
If the creditor condones the indebtedness of the debtor, the following rules shall
apply:
A. On account of the debtor's services to the creditor, the same is taxable

income to the former.
B. If no services were rendered, but the creditor simply condones the debt, it is
a taxable gift.
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C. If the creditor is the corporation and the debtor is a stockholder, the

forgiveness of indebtedness has an effect on the payment of dividends.
D. If the creditor is a stockholder, and the debtor is the corporation, the

forgiveness of indebtedness shall be considered as an additional investment.
Remuneratory donations
They referred to those which remunerate past services which do not constitute
demandable debts. The motivating cause is gratitude, acknowledgment of a debt,
or a desire to compensate, not the liberality of the donor. They are deemed income
subject to income tax.
Example:
A saved the life of B, who met an accident. The latter, in a display of gratitude,
gave him cash of P500,000.
a. Is the P500,000 a taxable income? Yes, this is a case of a remuneratory

donation which is subject to income tax
b. Suppose without doing anything, and A received P500,000 from B due purely
to the liberally of the latter. Is the P500,000 a taxable income? No. The situation
does not concern remuneratory donation anymore. The cause of the gift is purely
the liberality of A. Hence, it is not considered as taxable income but taxable in
donor's tax.
Recovery of bad debts previously deducted
Recovery of bad debts previously allowed as a deduction in the preceding years

shall be included as part of the gross income in the test of recovery to the extent of
the income tax benefit of said deduction.
There was a tax benefit when taxpayers realized a tax deduction of income tax
due on account of said bad debt deduction from gross income.
Interest on the amount recovered is a taxable income and is not covered by a

tax benefit rule.
ILLUSTRATIVE CASE
Indicate the amount of taxable income or deductible loss in each of the following
independent cases
2017 Case 1 Case 2 Case
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Income/ loss before write off ₱60,000 ₱ (30,000) ₱60,000

Less: Bad debt written off 10,000 10,000 100,000
Net Income/ loss after bad debt 50,000 (40,000) (40,000)
2018
Bad debt recovered ₱10,000 ₱ 10,000 ₱100,000
ANSWER:
Case 1: taxable to the extent of ₱10,000. The deduction of bad debt resulted in a
tax benefit to the taxpayer.
Case 2: not taxable. There was no tax benefit to the taxpayer because when the
bad debt was claimed as a deduction, the taxpayer was already at a net loss. Thus,
it did not result in a reduction in the tax liability of the taxpayer.
Case 3: only the amount of ₱60,000 is taxable. The tax benefit to the taxpayer is
limited only to ₱60,000.
Refund of tax
A tax refund is taxable if the tax was previously deducted as an expense in

computing the tax during the previous year. It shall be included as part of the gross
income in the year of receipt to the extent of the income tax benefit of said deduction.
The general rule, the taxes paid or incurred within the taxable year in connection
with the taxpayer's profession, trade, or business, shall be allowed as deduction.
The following taxes are not deductible, namely; income tax, income tax paid
abroad if claimed as a tax credit, estate tax, donor's tax, special assessment and
stock transaction tax.
NOTE: If the tax is not deductible, the refund of which is not taxable.
ILLUSTRATIVE CASE
Eugene has the following data in 2017:

Taxable income before deduction of taxes ₱150,000
Taxes paid:
Income tax 12,000
Common carrier's tax 15,000
Local business tax 10,000
Donor's tax 6,000
These taxes paid were refunded to her in 2018.
How much is the taxable income in 2018 if income before tax refund is ₱200,000?
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ANSWER:
Taxable income before tax refund ₱200,000
Add: Common carrier's tax ₱15,000
Local business taxes 10,000 25,000
Taxable income ₱225,000
NOTE: The refund of the income tax and donor's tax are not taxable because they
are not deductible for purposes of computing the taxable income.
Refund of indirect tax
If the tax is an indirect tax, the proper party to question or seek a refund of
an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by
law, and who paid the same even if he shifts the burden thereof to another (Silkair
vs. CIR, G.R. Nos. 171383 & 172379, Nov. 14, 2008).
Illustration
B company purchased from Solane Gasoline Shop 1,000,000 liters of fuel

from January to December 2018. Such product is subject to excise tax (an indirect
tax), which is added to the price it paid to the gasoline shop.
If B company is exempt from excise tax, who is entitled to claim a refund on

the excise taxes erroneously paid to the government – B company or Solane
Gasoline Shop?
Answer: In the refund of indirect taxes, the statutory taxpayer (Solane

Gasoline Shop) is the appropriate party who can claim the refund. In indirect
taxation, the purchaser and end-consumer ultimately bear the tax burden, but this
does not transform his status into a statutory taxpayer. B company should invoke
its tax exemption to Solane Gasoline Shop before buying the fuel.
Leasehold improvements
A lease contract is a consensual, bilateral, onerous, and commutative

contract by which one person binds himself to grant temporarily the use of a thing
or the rendering of some service to another who undertakes to pay some rent,
compensation, or price.
Improvements made by the lessee shall be treated as income of the lessor if

the improvements will be owned by the lessor (transfer of ownership) at the end of
the lease and or if the lessor is not required to pay the lessee the value of such
improvements.
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When the lessee makes a useful improvement to the leased premises, such as
the construction of fence or building, the following rules shall apply if said
improvements are relinquished to the lessor without demanding reimbursement of
its value:
1. The consideration for the use of property paid by the lessee is taxable income
to the lessor;
2. Taxes paid by the lessee on behalf of the lessor for business property are
additional rent and constitutes income taxable to the lessor;
3. When the lessee makes an improvement on leased premises and said

improvements would belong to the lessor upon the termination of the lease,
the lessor may at his option report income as follows:
A. Outright method— report as income the fair market value of the

improvements in the year of completion;
B. Spread–out method—spread over the remaining term of the lease the

book value of such improvements at the termination of the lease.
This method is computed as follows:
Cost of leasehold improvements ₱xx
Less: accumulated depreciation xx
Book value, end of lease xx
Divided by the remaining term of the lease xx
Annual income xx
4. Deduction of lessee— the lessee may claim depreciation of the

improvements over the remaining term of the lease or the life of the improvements,
whichever is shorter.
5. Premature termination of the lease— income to be reported by the lessor

shall be computed as follows:
Book value upon termination ₱xx
Less: amount already reported as income xx
Income in the year of pre-termination ₱xx
• Taxable Rent income of the lessor may in the form of:

A. Cash received at a stipulated price.
B. Obligations of the lessor to third persons paid or assumed by the
lessee in consideration of the contract of lease.
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C. Advance payment, which may be in the form of; prepaid rent

(reported in full in the year of receipt) and a security deposit that is
applied to rental.
• Non-taxable Rent Income of the lessor may in the form of:
A. Advance rentals representing option money
B. A security deposit to ensure faithful performance of certain
obligations of the lessee.
Rental Payments
Rent income shall be taxable on the year received, whether earned or

unearned, provided there is no restriction as to its use, and regardless of the method
of accounting employed.
• The security deposit shall be taxable if upon forfeiture in favor of the

lessor or upon application as rental payments.
Example:
A, lessor, leased a lot to B, lessee for 20 years beginning January 1, 2018,

subject to the following terms and conditions:
a. Lessee will pay a rental of P300,000 per month.
b. Lessee will pay the real estate tax on the land of P 100,000 a year.
c. Lessee will construct a building on the lot to be owned by the lessor when
the lease expires.
Cost of building completed, July 1, 2020 P28,000,000
Life of building 25 years
Required:
1. Compute the taxable income of A for 2020. Use spread-out method of determining
income on leasehold improvements.
2. Determine deductible expense of B for 2020.
3. Assume that due to the fault of the B, the lease was terminated on January 1,
2023. Compute the income of A for the year 2023.
4. Compute the income to be reported by A in 2020 using Outright Method.
Answer:
1. Income of lessor A in 2020 using spread out method.
Rent (300,000x12) P 3,600,000

Tax paid by lessee 100,000
Income on leasehold improvement:
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Cost P28,000,000
Less: Depreciation for 17.5 years
(28,000,000/25)x17.5 19,600,000
Book value, end of lease 8,400,000
Income from leasehold improvement
(8,400,000/17.5)x6/12 240,000
Total Income of the lessor A in 2020 using spread out method 3,940,000
2. Deductible Expense of lessee B for 2020

Rent P3,600,000
Tax 100,000
Depreciation-leasehold improvement
(28,000,000/17.5)x6/12 800,000
Deductible Expense of the lessee 4,500,000
3. Income of lessor A for the year 2023

Cost of Building P28,000,000
Less: Depreciation for 2.5 years (28,000,000/25)x2.5 2,800,000
Book value upon termination 25,200,000
Less: Income already reported
2020 240,000
2019 (8,400,000/17.5) 480,000
2020 (8,400,000/17.5) 480,000 1,200,000
Income of lessor A for the year 2023 24,000,000
4. Income of lessor in 2020 using outright method

Rent (P300,000x12) P3,600,000
Tax 100,000
Leasehold Improvement 28,000,000
Income of Lessor A in 2020 using outright method P31,700,000
Gross income from manufacturing, merchandising, or mining business
In manufacturing, merchandising, or mining business, "gross income" means

the total sales, less the cost of goods sold plus any income from investment, and
from incidental or outside operations or sources.
In determining the gross income, subtraction should not be made for

depreciation, depletion, selling expenses, or losses, or for items not ordinarily used
in computing the cost of goods sold.
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To compute for gross income and taxable income:

Sales ₱xx
Less: Sales returns and allowances xx
Net sales xx
Less: cost of sales xx
Gross profit xx
Add: Other income
Rent ₱xx
Gain on sale of capital assets xx xx
Gross income xx
Less: deductible expenses xx
Taxable income ₱xx
Gross Income from manufacturing, merchandising, or mining business
In manufacturing, merchandising, or mining business, "gross income" means

the total sales, less the cost of goods sold plus any income from investments and
from incidental or outside operations or sources (sec. 43, Regs. 2).
In determining the gross income, subtractions should not be made from

depreciation, depletion, selling expenses, or losses, or for items not ordinarily used
in computing the cost of goods sold (ibid.)
Gross income from farming
The term farm embraces the farm in the ordinary accept sense and includes
stock, dairy, poultry, fruit and truck farms, also plantations, ranches, and all lands
used for farming operations.
Farmers are individuals, partnerships, or corporations that cultivate, operate, or

manage farms for gain or profit either as owners or as tenants.
However, a person cultivating or operating a farm for recreation or pleasure,

the result of which is a continual loss from year to year are not regarded as farmers.
The following are the prescribed methods of reporting gross income from
farming:
1. Cash basis or receipts and disbursements basis— under this method, no

inventory is used to determine profits
2. Accrual basis— under this method, an inventory is used to determine profits
3. Crop basis— this method is used when a farmer is engaged in producing
crops that take more than a year to gather and dispose of from the time of
planting.
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Illustration
The following data pertains to B:
Beginning inventory:
Farm products P300,000
Livestock 250,000
Ending inventory
Farm products 200,000
Livestock 340,000
Sale of products raised in the farm 4,500,000
Sale of livestock 3,250,000
Gain on sale of farm equipment 400,000
Rent income of farm equipment 70,000
How much is the gross income of B if he is using:

A. Cash method
B. Accrual method
a. The taxpayer is using the cash method of accounting.

Sale of farm products P4,500,000
Total 7,750,000
Add: Other Income
Gain on sale of farm equipment P400,000
Rent income of farm equipment 70,000 470,000
Gross income 8,220,000
b. The taxpayer is using the accrual method of accounting

Ending Inventory
Farm Products P200,000
Livestock 340,000 540,000
Sale of farm products 4,500,000
Total 8,290,000
Less: Beginning inventory
Livestock 250,000 550,000
Net 7,740,000
Add: Other Income P400,000
Gain on sale of equipment 70,000 470,000
Gross Income 8,210,000
Situs of Dividend Income
1. Dividends from within:

a. Dividend income from Domestic Corporation
b. Dividend income from Foreign Corporation, IF at least 50% of gross

income for the three-year period ending with the close of its taxable year preceding
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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.
2. Dividends from without:
a. Dividend income from Foreign Corporation
b. 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 in existence) is less than 50%.
3. Partly within and partly without:
SOURCE OF DIVIDEND SOURCE OF INCOME

DOMESTIC CORPORATION Income is purely from the Philippine
sources.
FOREIGN CORPORATION If the ratio is;
RATIO: A. less than 50%: Income is treated as
Gross income – Philippines x Dividend entirely derived from sources outside of
Gross Income – World the Philippines.
B. Greater than or equal to 50%: Income
is derived partly from sources within and
partly without the Philippines.
Illustration A
A Corporation is a non-resident foreign corporation. In 2020, the said corporation

received a P500,000 dividend income from B, a foreign corporation. And the total
Business Expense for 2020;
Business Expense, Abroad, 2020 P 300,000

Business Expense, Philippines, 2020 P200,000
Total P500,000
The following are the gross income of A Corporation from 2017 to 2020;
Gross 2017 2018 2019 2020

Income
from:
Abroad P 300,000 P300,000 P300,000 P400,000
Philippines P100,000 P200,000 P300,000 P300,000
Total P400,000 P500,000 P600,000 P700,000
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Questions:
A. What is the ratio of gross income – Philippines from gross income – World?
B. For tax purposes, how much will be the dividend income that is derived partly
from sources within and partly without the Philippines?
C. For tax purposes, how much will be the dividend income that is entirely derived
from sources outside of the Philippines?
D. How much is the taxable dividend income?
E. How much is the tax payable for 2020?
Answers:
A. Ratio:
Gross income – Philippines x Dividend

Gross Income – World
Total Gross Income from Philippines and Abroad before the declaration of dividend
Philippines Abroad Total Gross Income - World
2017 P100,000 P300,000= P400,000
2018 P200,000 P300,000= P500,000
2019 P300,000 P300,000= P600,000
Total Income P600,000 P900,000 P1,500,000
Ratio= GI-PH/GI-WORLD
Ratio = P600,000 / P1,500,000
Ratio = 40%
B. Therefore, it less than 50% and the dividend income is treated as entirely derived from
sources outside of the Philippines
Answer for letter C & D: Based on the given problem, A corporation is a non-resident
foreign corporation on which it is taxable only on all income earned within the Philippines
and the dividend income is considered as entirely derived from sources outside of the
Philippines, therefore, the said dividend income is not included in the gross income and
not taxable within the Philippines.
E. Tax Payable if the taxpayer is a Resident foreign corporation (RFC) & Non-resident
foreign Corporation (NRFC)
RFC NRFC_
Gross Income, Philippines for the year 2020 P 300,000 P300,000
Dividend Income - -
Total Gross Income P300,000 P300,000
Less: Allowable Deduction
Business Expense, Philippines, 2020 P200,000 -
Taxable Net Income P100,000 P300,000
Tax Rate x 30% x 30%
Income Tax Payable-RFC / Final Withholding tax-NRFC P 30,000 P 30,000
Page 17 of 40
Note: If a corporation is a resident foreign corporation and a non-resident foreign

corporation, it is taxable only on income earned within the Philippines. The ratio of GI -
Philippines to GI – World is 40% it is less than 50% so the dividend income amounted to
P500,000 is treated as entirely derived from sources outside of the Philippines. The NRFC
tax payable is a final withholding tax which means it is the full and final payment of income
tax due from the recipient of the income. Moreover, the NRFC cannot avail the allowable
deductions (ex. Business expenses).
Illustration B
Assuming on the above problem with the same question, the following are the gross
income of A Corporation from 2017 to 2020;
Gross 2017 2018 2019 2020

Income
from:
Abroad P100,000 P200,000 P300,000 P400,000
Philippines P 300,000 P300,000 P300,000 P300,000
Total P300,000 P500,000 P600,000 P700,000
Answers:
A. Ratio:
Gross income – Philippines x Dividend

Gross Income – World
Total Gross Income from Philippines and Abroad before the declaration of dividend
Philippines Abroad Total Gross Income - World
2017 P300,000 P100,000= P400,000
2018 P300,000 P200,000= P500,000
2019 P300,000 P300,000= P600,000
Total Income P900,000 P600,000 P1,500,000
Ratio= GI-PH/GI-WORLD
Ratio = P900,000 / P1,500,000
Ratio = 60%
B. The ratio is greater than or equal to 50% so the dividend income is derived partly
from sources within and partly without the Philippines.
Dividend Income earned in the Philippines (60% x 500,000) = P300,000
Dividend Income earned in Abroad (40% x P500,000) = P200,000
C. The dividend income that is entirely derived from sources outside of the
Philippines (40% x P500,000) = P200,000
Page 18 of 40
D. The taxable dividend income is the dividend income earned in the Philippines
Ratio of Gross Income – Philippines to Gross Income – World 60%

Multiply by: The total Dividend Income xP500,000
Taxable Dividend income included in the Gross Income P300,000
E. Tax Payable if the taxpayer is a Resident Foreign Corporation (RFC) & Non-Resident
Foreign Corporation (NRFC)
RFC NRFC
Gross Income, Philippines for the year 2020 P 300,000 P300,000
Dividend Income within the PH (60%*P500,000) 300,000 300,000
Total Gross Income P600,000 600,000
Less: Allowable Deduction
Business Expense, Philippines, 2020 P200,000 -
Taxable Net Income P400,000 600,000
Tax Rate x 30% 30%
Income Tax Payable-RFC/FWT Payable P120,000 P180,000
Note: If a corporation is foreign corporation, it is taxable only on income earned within the
Philippines. The ratio of GI -Philippines to GI – World is 60%, it is greater than or equal
to 50%, so the dividend income amounted to P500,000 is derived partly from sources
within (60% of the dividend income) and partly without (40% of the dividend income) the
Philippines. Moreover, only 60% of the dividend income (P300,000) are treated as
dividend income derived from within the Philippines and must be included in the gross
income of A Corp. The said tax is a final withholding tax, which means it is the full and
final payment of income tax due from the recipient of the income if it is non-resident
foreign corporation (NRFC). Moreover, the NRFC cannot avail the allowable deductions
(ex. Business expenses).
Receipt of dividends
Dividends mean any distribution made by a corporation to its shareholders out

of its earnings or profits and payable to its shareholders, whether in money or in
other property.
The more common forms of dividends are:
1. A cash dividend is a form of dividend which is paid in cash to shareholders.

The income is measured by the amount of cash received. Cash dividends
shall be taxable upon declaration.
2. The stock dividend is a distribution by a corporation to its shareholders of the

corporation's own stock. A stock dividend representing the transfer of the
surplus to the capital account shall not be subject to tax, and distribution of
stock dividend is not taxable because they are not realized income unless:
A. These shares are later redeemed for consideration by the

corporation or otherwise conveyed by the stockholder to the extent
of such consideration.
B. The receipt is other than a stockholder; or
Page 19 of 40
C. A change in the stockholders' equity results by virtue of the stock

dividend issuance. A stock dividend constitutes income if it gives
shareholder an interest different from that which is former
stockholdings represented.
When a stockholder receives a stock dividend, which is a taxable income, the

measure of income is the fair market value of the stock received.
Illustration
A, B, C, D, and E are the stockholders of ABCDE Corp. Each of them
owns 10,000 shares of stock. During the year, the total corporation declared
10% common stock dividend.
A. Are the stock dividends taxable to the shareholders?
No. The stock dividends received are not taxable income because
generally, stock dividends are not taxable. Moreover, the proportionate share
of the shareholders in the nest assets of the corporation remained
unchanged.
Consequently, the receipt of these dividends shall be recorded in the
books of accounts by a memorandum entry only.
To illustrate:
Case 1: No change in the proportionate interest of the stockholders.
Stockholder Before Dividend Stock Dividend After Dividend

Shares Proportionate 10% Shares Proportionate
Share Share
A 10,000 20% 1,000 11,000 20%
B 10,000 20% 1,000 11,000 20%
C 10,000 20% 1,000 11,000 20%
D 10,000 20% 1,000 11,000 20%
E 10,000 20% 1,000 11,000 20%
Total 50,000 100% 500 55,000 100%
B. How about if the corporation gave the stockholders an option to choose between
property dividends and stock dividends and A, C, and E chose to be paid in property
dividends?
The stock dividends would be taxable income to B and D because the receipt
of the stock dividends resulted in a change in the proportionate interest of the
shareholders.
To illustrate:
Case 2: There is a change in the proportionate interest of the stockholders.
Page 20 of 40
Stockholder Before Dividend Stock Dividend After Dividend

Shares Proportionate 10% Shares Proportionate
Share Share
A 10,000 20% - 10,000 19.23%
B 10,000 20% 1,000 11,000 21.15%
C 10,000 20% - 10,000 19.23%
D 10,000 20% 1,000 11,000 21.15%
E 10,000 20% - 10,000 19.23%
Total 50,000 100% 200 52,000 99.99%*
*The difference of 0.01% is the result of the rounding off of figures.
3. Property dividend— it is a dividend paid in shares of stock of another

corporation or other property of the corporation. The measure of income on
property dividend is the fair market value of the property received at the time
of receipt or distribution. Property dividends shall be taxable upon
declaration.
A distribution of treasury stock is taxable as a distribution of property
dividends.
4. Liquidating dividends are exempt up to the extent of the cost if investment
being a mere return of capital. However, anything in excess of the cost shall
be considered income and, therefore, taxable.
If the amount received by the stockholder in liquidation is less than the cost
of investments, the loss in the transaction is deductible to the extent allowed
for capital losses.
Intercorporate dividends
There is an intercorporate dividend when a dividend is declared by one

corporation and received by another corporation, which is a stockholder to the
former.
In case there is an intercorporate dividend, the following rules shall apply for
taxation purposes.
A. Dividends received by a domestic corporation from another domestic

corporation shall not be subject to tax.
B. Dividends received by a resident foreign corporation from a domestic

corporation shall not be subject to tax.
C. A final withholding tax at a rate of fifteen percent (15%) shall be imposed on

cash and/or property dividends received from a domestic corporation, are subject to
15% tax provided that the 15% (30%-15%) difference between the usual corporate
income tax is allowed as a tax credit by the country where the recipient corporation
is domiciled (this is known as tax sparing credit).
D. Dividends received by a domestic corporation from a foreign corporation

shall be subject to a regular corporate income tax of 30%; and
Page 21 of 40
E. Dividends received by a foreign corporation from another foreign corporation

shall not be subject to tax.
Summary of Rules on Taxability of Dividends

Dividends issued by Dividends received by Income tax treatment
1. Domestic Corporation Domestic Corporation Not Taxable
Resident foreign Not Taxable
corporation
Non-resident foreign General rule: 30% Final
corporation withholding tax
Exception: 15% if there is
tax sparing credit
2. Resident foreign Domestic Corporation 30% Normal Income tax
corporation Foreign corporation Not taxable
3. Non-resident foreign Domestic Corporation 30% Normal Income Tax
corporation Foreign Corporation Not taxable
Tax Informer's reward
An amount equivalent to ten percent (10%), but not exceeding to ₱1,000,000, of

the revenues, surcharges or fees recovered and/or fine or penalty imposed and collected
shall be given a reward to persons instrumental in the discovery of violations of the
provisions of the internal revenue laws.
However, the following are disqualified to avail of the informer's reward:
1. A BIR official or employee or any other incumbent public official or employee
2. Relative within the sixth (6th) civil degree of consanguinity of a BIR official or employee,
or other public official or employee; and
3. Though already retired or otherwise separated from service, BIR officials or
employees or other public officials who acquired the information in the course of the
performance of their duties during their incumbency.
A final withholding tax at a rate of ten percent (10%) shall be imposed on rewards
collected from persons who give definite and sworn information leading to the discovery
of frauds, revenues, and fees, or discovery and the seizure of smuggled goods, or
which resulted to the conviction of the guilty party, or the imposition of fine or penalty, or
a compromise has been reached.
B. EXCLUSIONS FROM GROSS INCOME

EXCLUSIONS- income received or earned but not taxable as income
EXCLUSIONS DEDUCTIONS
Not taken into account in determining Subtracted from gross income
gross income
Page 22 of 40
The following are excluded from gross income:
1. PROCEEDS OF LIFE INSURANCE

• Proceeds of life insurance policies paid to the heirs/beneficiaries upon the
death of the insuprizesred are excluded
• If such amounts are held by the insurer under an agreement to pay
interest, the interest payments shall be included in the gross income.
• It is considered as an indemnity rather than as gain or profit.
• When the insured outlives the policy, the ( proceeds – the total amount of
premiums paid ) should be included in the GI
• Amounts received in excess of the face amount of the policy are taxable
as interest.
• Premium on life insurance covering the life of an employee paid by the
employer is taxable income to the employee, where the insured employee,
directly, or indirectly is the beneficiary under the policy.
Illustration
Elijah is the beneficiary of a 300,000 insurance policy on the life of his father.
Upon her father’s death, she choose to receive 125,000 per year for 3 years
instead of the lump sum. How much taxable income must Elijah report?
Answer:
Elijah must report 75,000 [(125,000 x 3) – 300,000] as taxable income. The
300,000 she received is tax free, while the P75,000 is taxable as interest.
2. RETURN OF THE PREMIUMS

• The amount received as a return of the premiums paid by him under
life insurance, endowment, or annuity contracts, received either during
the term or at the maturity of the terms or upon surrender of the
contract are excluded from gross income.
• Return of the premiums paid amounts to a return of capital.
• The insurance premium is the agreed price for assuming and carrying
the risk. The amount of the proceeds received is greater than the
aggregate payments; the excess is included in the gross income only if
the insured outlives the policy.
Illustration 7-2
Karen took out a 2,000,000 life insurance policy with Lopez Life Insurance.
After the 20th year, she received the face value of the insurance. A total of
1,300,000 is her total premiums paid. Is the 2,000,000 taxable?
Answer:
Since Karen outlived the policy only the portion of proceeds received by the
insured is subject to tax. Only the 700,000 is taxable. (2,000,000 – 1,300,000
= 700,000)
Page 23 of 40
3. GIFTS, BEQUEST, AND DEVISES
EXCLUDED FROM GROSS INCOME MUST BE IN CONSIDERATION OF

PURE LIBERTY TO BE EXCLUDED
GIFTS DESCENT BEQUESTS DEVISE
A voluntary transfer of Also referred to as The act of giving The transmission
property from one person succession the personal of real property
to another without any property, by will. by virtue of a will.
consideration or
compensation therefor.
It depends on the intent "Title by descent" Legatee- person Devisee- person

of the donor. It must be the title by which to whom gifts of to whom gifts of a
for donation purposes; one person, on personal property particular real
if it is for business, it is the death of are given by virtue property are
taxable as income. another, acquires of a will. given by a virtue
the estate of the of a will.
latter as his heir at
law
• If there are services performed, it is subject to income tax

• If it is excluded, the transfers are subject to donor's tax or estate tax.
• BUT, income from such property is included in the gross income.
Illustration
Raoul inherited an estate from his mother who died in 2019 worth P1,000,000.
During the year, the properties earned an income of P 200,000 and Raoul, the
only heir, received P100,000 from the income of the estate. How much is the
estate income subject to tax? And how much must Raoul include in his gross
income in 2019?
Answer:
The income of the estate subject to income tax is P200,000, the earnings of his
mother’s estate while the amount of income that must be included in Raoul’s
gross income is P100,000, the income that he actually received. However, if the
property is already legally transferred on him, the total income to be included on
his gross income is the entire income earned by the estate, P200,000. The estate
inherited is not subject to income tax but subject to estate tax.
4. COMPENSATION FOR PERSONAL INJURIES OR SICKNESS

• The amount received through accident or health insurance or under the
Workmen's Compensation Act, as compensation for personal injuries or
sickness plus amounts of any damages received on account of injuries or
sickness are excluded
Page 24 of 40
• "personal injury or sickness" = physical injury and nonphysical injury

(personal embarrassment, injury to personal reputation, mental pain, and
suffering).
Illustration
Jenny was injured in a car accident. The other driver’s insurance company
paid him 30,000 to cover medical expenses and a compensatory amount of
another 25,000 for pain and suffering. How much is taxable?
Answer:
The 30,000 given to cover medical expenses are physical damages while the
compensatory amount of 25,000 constitutes nonphysical damages. Both
damages are not subject to tax.
5. INCOME EXEMPT UNDER TREATY

• To the extent required by any treaty obligation binding upon the
Government of the Philippines shall be exempt.
• Based on the principle of reciprocity and amity among nations.
6. RETIREMENT BENEFITS, PENSIONS, GRATUITIES, ETC.

a. Retirement benefits
• RA 7641 – Retirement Pay Law for Private Sector Employees
• Retirement – the bilateral act of the parties; voluntary agreement
b/w the employer and employees whereby the latter, after reaching
a certain age, agrees and/or consents to severe his employment
with the former
• If no age specified in the agreement, can retire at the age of 60 but
not beyond 65 (compulsory retirement)
• REQUISITES FOR RETIREMENT BENEFITS TO BE EXCLUDED
i. must have a reasonable private benefit plan maintained by the
employer and approved by the BIR (In the absence of
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).
ii. at least ten years of service
iii. at least fifty (50) years of age at the time of his retirement; and
iv. should not have previously availed retirement benefits of the
same or another employee or that the benefits granted shall be
availed of by an official or employee only once.
• Retirement pay of government officials or employees
Page 25 of 40
- The money value of the accrued leave credits or terminal

leaves given to a retiring government official or employee is
not subject to income tax.
Illustration
Hades an employee of Riegosteel Company retired from the company in 2019 at
age 62 receiving a retirement pay of 300,000. He started working in the firm in
2005. The company maintains a private pension plan, is the retirement benefit
received by Hades taxable to him?
Answer:
No, because all the requisites for exemption from income tax are present 1) a
private plan is maintained by the employer; 2) he retired at the age of 62 which
is more than the required age of 50 years; 3) he worked with Riegosteel for more
than 10 years; and it’s his first time availing the retirement benefit.
b. Separation pay
• Received by an official or employee or by his heirs as a consequence
of separation from the service due to
i. Death, sickness, or other physical ability
ii. For any cause beyond the control of the official or employee
- Involuntariness on the part of the official or employee
- Separation from service must not be asked or initiated by
him
- The separation was not of his own making
- Shall be determined on the basis of prevailing facts and
circumstances
BEYOND THE CONTROL NOT BEYOND THE

CONTROL
✓ Termination due to ✓ Termination of
the installation of employment due to
labor-saving devices willful disobedience
✓ Redundancy ✓ Inefficiency
✓ Reenactment ✓ Dishonesty
✓ Closure or cessation ✓ Moral depravity
✓ Serious misconduct
Page 26 of 40
RETIREMENT BENEFIT SEPARATION PAY

Received because of severance from Received due to termination of
employment after reaching a certain age employment for causes other
or a specified number of years in service than age or length of service
• The amount received from involuntary separation remains exempt from
income tax even if the employee had rendered less than ten years of
service and/or below 50 years of age.
• The retirement benefit is not subject to income tax, although against

the will, is not involuntary because it is in accordance with a Collective
Bargaining Agreement (CBA)
Illustration
Kajik was dismissed from employment against his will due to retrenchment.
He received a separation pay of 180,000. Is this amount taxable to him?
Answer:
No, because separation pay is exempt from tax if the cause of separation
from service is death, sickness, physical disability, or any cause beyond the
control of the employee.
c. Social Security Benefits, etc.

• Social security benefits, retirement gratuities, pensions, and other
similar benefits received by residents or non-resident citizens or aliens
who permanently reside in the Philippines, from foreign government
agencies and other institutions, private or public, are exempt from
income tax.
d. 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
• Payments or benefits due to any person residing in the Philippines
administered by the United States Veterans Administration (USVA) are
not taxable
e. SSS and GSIS benefits

• Benefits received from SSS – RA 8282 or GSIS- RA 8291, including
retirement gratuity received by government officials and employees,
shall be exempt from tax
Page 27 of 40
7. INTEREST ON GOVERNMENT SECURITIES

a. Income derived by the foreign government
• Income derived from investments in the Philippines in loans, stocks,
bonds, or other domestic securities, or interest on deposits in banks in
the Philippines by the following is exempted;
✓ Foreign government
✓ Financing institutions owned, controlled, or enjoying
refinancing from foreign governments; and
✓ International or regional financial institutions are established by
foreign governments.
b. 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 subdivisions thereof
• However, all government-owned controlled corporations (GOOCs) are
exempted to income tax, except; Social Security System (SSS),
Government Social Insurance System (GSIS), Philippine Health
Insurance Corporation (PHIC), Philippine Charity Sweepstakes Office
(PCSO), and Local Water Districts (RA 10026).
8. Prizes and awards
• Prizes and awards made primarily in recognition of religious,

charitable, scientific, educational, artistic, literary, or civic achievement
are excluded 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 of receiving the prize or award.
Illustration
Mr. A was selected as “Teacher of the Year” by the School Board. He received a
10,000 cash prize. The board selected the recipients based on the background of
each individual and educational achievement. Is the cash prize taxable to him?
Answer:
No, Mr. A was awarded without joining the contest and not required to render
substantial future services. Moreover, the prize given was in recognition of an
educational attainment.
9. Prizes and awards to athletes
Page 28 of 40
• Granted to athletes in local or international tournaments and competitions,

whether held in the Philippines or abroad and sanctioned by their National
Sports Associations, are not subject to tax
Illustration 7-8
Manny PacPac, a resident citizen, on which sanctioned by the National Sports
Association and won the championship trophy and receives 1,000,000 cash
prize from the association and 500,000 talent fee as an endorser of Funa Shoes.
Are those taxable or not?
Answer:
Only the 500,000 are taxable because he is a resident citizen (taxable within
and without the Philippines) but the 1,000,000 cash prize are not taxable
because the said event is sanctioned by the National Sports Association.
However, if it is not sanction by the said association, all income earned abroad
is taxable, although, he may avail the taxes he actually paid abroad as allowable
deduction in his income tax return or as a tax credit on which it can be deducted
in his tax payable (the said tax credit is lower between the actual tax payments
abroad and the computed tax payable as if those income are earned here in the
Philippines).
10.GSIS, SSS, Medicare, Union dues of individuals and other contributions
• The exemption is limited only to the maximum amount mandated by

law to be contributed by the employee.
11. 13th-month pay and other benefits
• Equivalent to the mandatory 1-month basic salary of officials and

employees of the government
• Other benefits like Christmas bonus, productivity incentive bonus,
loyalty award, cash gifts
• The total amount should not exceed 90,000
Fringe Benefits means any good, service, or other benefit furnished or granted by
an employer in cash or in kind, in addition to basic salaries, to an individual
employee (except rank and file employees).
• Taxable fringe benefits received by:

o Rank & file employees: subject to basic tax
o Supervisory or managerial: subject to fringe benefits tax (a
final tax)
• Tax exempt fringe benefits
o Exempt under the law
o If the grant is required by the nature of, or necessary to the
trade, business, or profession of the employer.
Page 29 of 40
o If the grant is for the convenience of the employer.

o De minimis benefits
▪ Conforming to the ceiling
• Tax exempt
• Not included in the P90,000 threshold
▪ In excess of the ceiling
• Subject to tax (basic) only on the excess over
P90,000
"Other Benefits" include:

• Christmas gift and major anniversary celebrations (in excess of the
P5,000 under de minimis benefits)
• Christmas Bonus (RR 2-98 as amended by RR 3-2015)
• Productivity Incentive bonus (RR 2-98 as amended by RR 3-2015)
• Productivity Incentives Scheme under Collective Negotiation
Agreement (CNA) or Collective Bargaining Agreement (CBA) (if not
more than P10,000 it is considered as de minimis benefits which
exempt from income tax; more than P10,000, the entire amount is
part of "other benefits" with a total ceiling of P90,000)
• Loyalty awards (RR 2-98 as amended by RR 3-2015)
• Additional Compensation Allowances (ACA)
• Gift in cash or in kind and other benefits of similar nature actually
received by officials and employees of both government and private
employees. (RR 2-98 as amended by RR 3-2015).
Further, RR 3-2015 emphasized that this exclusion from gross
income is not applicable to:
• Self-employed individuals & Income generated from business.
Page 30 of 40
Illustration 1
Pierre, a high rank employee of a private company receiving a monthly salary of 30,000, had the
following data:
Christmas bonus P25,000

12. Productivity bonus 5,500
Loyalty award 25,000
Cash gift 10,000
Anniversary gift 8,000
13th month pay 30,000
Clothing allowance 5,000
Monthly rice allowance 3,000
How much is taxable compensation income?
Answer: 380,500
Salary (30,000 x 12) 360,000

Add: Other benefits
Christmas bonus 25,000
Productivity bonus 5,500
Cash gift 10,000
Anniversary gift (8,000-5,000) 3,000
Clothing allowance (5,000-6,000) -
Monthly rice allowance{(3,000-2,000)*12} 12,000
Total 110,500
Less: Exempt benefits (90,000) 20,500
Illustration
Taxable 2
compensation income 380,500
Pierre, a high rank employee of a private company receiving a monthly salary of 30,000, had the
following data:

Cash gift 10,000
Monthly rice allowance 3,000
How much is gross compensation income?
Answer: 339,500
Salary (30,000 x 12) 360,000

Add: Total Other benefits:
Christmas bonus 25,000
Cash gift 10,000
Monthly rice allowance{(3,000)*12} 36,000 144,500
Gross compensation income P504,500
Sales of bonds, debentures, and other certificates of indebtedness
• Gains from the sale, exchange, or retirement of bonds, debentures, or

other certificates of indebtedness with a maturity value of more than
five years.
13. Redemption of shares in a mutual fund
• Gains realized by the investor upon redemption of shares of stock in a

mutual fund company.
Page 31 of 40
14. Minimum Wage Earner
• Minimum Wage Earner (MWE) – a worker in the private sector paid the
Statutory Minimum Wage
• Statutory Minimum Wage – the fixed rate by the Regional Tripartite
Wage and Productivity Board (RTWPB)
• Holiday pay, overtime pay, night shift differential pay and hazard pay
are covered by the exemption.
• If an employee receives other benefits exceeds 90,000, excess is
taxable.
• MWE with other income is subject to income tax on the non-
compensation income.
• Cost of Living Allowance (COLA) for MWEs
COLA of minimum wage earners is exempt from income tax. The
COLA forms part of the new wage rates or statutory minimum wage.
Hence, it is covered by the income tax exemption of MWEs under
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, and hazard pay.
Illustration
Andres, a MWE and a security guard of a business establishment, received from his
employer the following compensation income:
Basic salary 15,000
Overtime Pay 10,000
Hazard Pay 10,000
How much is taxable to Andres?
Answer: Andres’ total compensation income, including the overtime pay and hazard
pay are exempted to income tax because he is a Minimum Wage Earner (MWE).
Salary (15,000 x 12) P180,000

Add: Benefits
Overtime Pay 10,000
Hazard Pay 10,000 20,000
Gross compensation income 200,000
Taxable compensation income -exempt-
15. OTHER EXCLUSION FROM GROSS INCOME

a. The Intercorporate dividend is dividends are declared by a domestic
corporation and received by domestic or resident foreign corporations.
b. In the convenience-of-the-employer rule, allowances (free meals and
lodging) are furnished by the employer for his own convenience.
c. The de minimis benefits are fringe benefits given by the employer, which are
of relatively small value.
Page 32 of 40
d. In the long-term deposit and investments, the income received by individuals

from sources within on long-term deposit or investment in banks with a maturity
of five (5) years or more.
Evaluation:
Please write your answers and solutions on a blank sheet of paper. The deadline will be
on September 30, 2020 and you can submit it in our google classroom or LMS or
messenger. Thank you, and God bless.
Problem for item no. 1-3.
In 2020, Daet received from Labo a promissory note with the face value of
P3,000,000 for services rendered. The note will mature after two years. At the time
of receipt in 2020 the note was sold to a bank at a discount of 18%. Labo paid the
note upon maturity in 2022. Moreover, 50% of the face value of the note is payable
in 2021 while the remaining 50% is payable in 2022.
1. How much income is subject to tax in 2020?
Problem for item no. 4-5
Mr. A after eating in a restaurant, he decided to give P2,000 a tip directly to Mr. B,
a waiter in the restaurant.
4. How much will be included in the taxable gross income of Mr. B?
5. How much will be included in the taxable gross income and subject to withholding
tax of Mr. B, if the said tip is included in the bill paid by Mr. A?

Mr. C has the following allowances given by his employer to wit;
Transportation allowance P10,000
Representation allowance 50,000
Communication allowance 30,000
Living away from home allowance (LAFHA) 20,000
Total Allowances P110,000
6. How much are the total allowances that are included in the taxable gross income?
7. If all of the allowances are taxable, is it subject to withholding tax? Why?
8. What if the said allowances are business related allowances that are required to be
liquidated, how much will be included in the taxable gross income of Mr. C?
9. Follow up question for no. 8, what if the all of the said allowances are not liquidated
or not returned to his employer, how much will be taxable?
Page 33 of 40
Mr. A is working in a private company. He decided to monetize his thirty-five days

unutilized vacation leave credits, and his salary per day is P 1,000.
10. How much will be non-taxable and taxable?

11. If, in the given problem, Mr. A decided to change his mind, he will monetize the
unutilized sick leave credits (25 days), not the vacation leave credits. How much will be
non-taxable and taxable?
12. How much will be non-taxable and taxable if he is a government employee, and if he
will monetize the 15 days vacation leave credits and 10 days sick leave credits?
Mr. F, an architect, owes Mr. M, businessman P30,000. The latter engaged the sevices
of the former to remodel his house. The value of the services rendered amounted to
P30,000; subsequently, Mr. M cancelled the debt of Mr. F.
13. Is the P30,000 value of services taxable to Mr. F? And why or why not?
14. Suppose Mr. M condoned the debt of Mr. F without requiring the latter to render any
service. Is the P30,000 subject to income tax? And why or why not?
A saved the life of B, who met an accident. The latter, in a display of gratitude, gave
him cash of P500,000.
15. Is the P500,000 a taxable income? And why or why not?

16. Suppose without doing anything, and A received P500,000 from B due purely to
the liberally of the latter. Is the P500,000 a taxable income? And why or why not?
Indicate the amount of taxable income or deductible loss in each of the

following independent cases.
2017 Case 1 Case 2 Case 3

Income/ loss before write off ₱60,000 ₱ (30,000) ₱60,000
Less: Bad debt written off 70,000 10,000 100,000
Net Income/ loss after bad debt (10,000) (40,000) (40,000)
2018
Bad debt recovered ₱70,000 ₱ 10,000 ₱100,000
17. How much will be the taxable income or deductible loss in Case 1? And why?
Page 34 of 40

Eugene has the following data in 2017:
Taxable income before deduction of taxes ₱150,000
Taxes paid:
Income tax 12,000
Common carrier's tax 15,000
Local business tax 10,000
Donor's tax 6,000
Estate tax 3,000
Special assessment 4,000
Income tax paid abroad, claimed as a tax credit 5,000
These taxes paid were refunded to her in 2018.
20. How much taxes were refunded are taxable and included in the gross income?
21. How much taxes were refunded are not subject to income tax?
22. How much is the taxable income in 2018 if income before tax refund is
₱200,000?

Mr. B leased land to Mr. J for a period of 11 years starting January 1, 2012 at an
annual rental of P12,000. Observing the provisions of the contract, Mr. J constructed
a building which shall become the property of Mr. B at the expiration of the lease.
The construction was completed on January 1, 2015 at the 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 government the P1,500
annual real property tax on the land starting in 2012.
23. Assuming that on January 1, 2012, Mr. J paid P24,000 to Mr. B covering the
lease contract for two years, how much income is to be reported by Mr. B in 2012?
A. P12,000 B. P13,500 C. P24,000 D. P25,500
24. How much income is to be reported by Mr. B in 2015 under the outright method?
A. P13,500 B. 1,500 C. P1,013,500 D. 1,000,000
25. How much income is to be reported by Mr. B in 2015 under the spread-out
method?
A. P13,500 B. 1,500 C. 1,013,500 D. 88,500
26. How much is the deductible expense of the lessee in 2015?
A. P138,500 B. 63,500 C. 125,000 D. 13,500
27. In number 25 above, assuming that due to the fault of the lessee, the lease
contract was terminated on January 1, 2017, how much income is to be reported by
the lessor in 2017?
A. P763,500 B. 750,000 C. 88,500 D. 1,013,500
Page 35 of 40

The following data pertains to B:
Beginning inventory:
Livestock 250,000
Ending inventory
Farm products 200,000
Livestock 340,000
Sale of products raised in the farm 4,500,000
Gain on sale of farm equipment 400,000
Rent income of farm equipment 70,000
How much is the gross income of B if he is using:
28. Cash method
29. Accrual method
A Corporation is a non-resident foreign corporation. In 2020, the said corporation

received a P600,000 dividend income from B, a non-resident foreign corporation.
And the total Business Expense for 2020;
Business Expense, Abroad, 2020 P 400,000

Business Expense, Philippines, 2020 P200,000
Total P600,000
The following are the gross income of A Corporation from 2017 to 2020;
Gross 2017 2018 2019 2020

Income
from:
Abroad P 100,000 P200,000 P300,000 P300,000
Philippines P300,000 P300,000 P300,000 P400,000
Total P400,000 P500,000 P600,000 P700,000
30. What is the ratio of gross income – Philippines from gross income – World?
31. For tax purposes, how much will be the dividend income that is derived partly
from sources within and partly without the Philippines?
32. For tax purposes, how much will be the dividend income that is entirely derived
from sources outside of the Philippines?
33. How much is the taxable dividend income?
34. How much is the tax payable for 2020?
Page 36 of 40
A, B, C, D, and E are the stockholders of ABCDE Corp. Each of them owns

60,000 shares of stock. During the year, the total corporation declared 20% common
stock dividend to all stockholders.
35. Are the stock dividends taxable to the shareholders? And why or why not?
36. How about if the corporation gave the stockholders an option to choose between
property dividends and stock dividends and A, C, and E chose to be paid in property
dividends?
ABCD Corp, a domestic corporation received cash dividends from the following
Corporation;
A Corp., a domestic corporation P20,000
B Corp., a non-resident foreign corporation P30,000
C. Corp., a resident foreign corporation P10,000
D. Corp., a non-resident corporation, with tax sparing credit P5,000
37. How much is taxable dividend income by ABCD Corp if it is a domestic

corporation?
38. How much is the non-taxable dividend income by ABCD Corp if it is a domestic
corporation?
39. For the above problem, assuming ABCD Corp. is a resident foreign corporation,
how much is the taxable dividend income?
40. For the above problem, assuming ABCD Corp. is a resident foreign corporation,
how much is the non-taxable dividend income?
41. For the above problem, assuming ABCD Corp. is a non-resident foreign
corporation, how much is the taxable dividend income?
42. For the above problem, assuming ABCD Corp. is a non-resident foreign
corporation, how much is the non-taxable dividend income?
Page 37 of 40

Because of the documents submitted by Mr. J to the BIR, the government was able
to seize and confiscate smuggled goods from a taxpayer. A compromise was reached
and the taxpayer paid a penalty P100,000,000.
43. How much reward will Mr. J receive from the government?
44. How much is the tax on the reward?
Elijah is the beneficiary of a 300,000 insurance policy on the life of his father, Eli.
45. Assuming upon his father's death, she choose to receive 125,000 per year for 3 years
instead of the lump sum. How much taxable income must Elijah report?
46. Assuming upon his father's death, he received the P300,000. How much taxable
income must Elijah report?
47. Assuming Mr. Eli, his father outlives the policy, and he received P450,000. How much
is the taxable income of Mr. Eli and if he already paid P100,000 of his total premiums?
Lala inherited an estate from his mother who died in 2020 worth P500,000. During the
year, the properties earned an income of P 100,000, and Raoul, the only heir, received
P200,000 from the income of the estate.
48. How much is the estate income subject to tax?
49. How much must Lala include in his gross income in 2019?

While crossing along Labo Bridge with a DVD player in his right hand, Mr. M was
bumped by a passenger jeepney. He was hospitalized for five days at Labo District
Hospital. Mr. M recovered damages from the jeepney operator consisting of the items
enumerated below. Indicate whether they are taxable or not.
50. P30,000 – hospital bills and medicines

51. 22,500 – loss of income during the period of treatment & recuperation
52. 3,000 – periodic check-up of fractured elbow with Dr. S.
53. 2,500 – cost of DVD player which was totally damaged

54. 20,000 – moral damages
55. 10,000 – attorney’s fees
Mr. A received P1,200,000 retirement pay from C industries. Indicate whether his
income is subject to tax or not based on the following independent cases:
Page 38 of 40
CASE Private Benefit Years in Retired at aged ANSWER

Plan Service of
56 Yes 9 60
57 None 15 65
58 Yes 11 55

In view of the heavy losses being suffered by B Corp., W and A were advised by
the manager to resign (as they would be retrenched) to make it appear that they
voluntarily resigned instead of having been involuntarily separated as the latter would
have implications of inefficiency on their part.
59. Suppose W resigned and received P150,000 separation pay. Is the P150,000 taxable
to him?
60. Due to refusal of A to resign, the corporation was forced to terminate him and was
paid P200,000. Is this amount taxable to him?
Problem for item no. 61

61. The book authored by B was chosen and awarded as the best seller for the year 2015
without his knowledge. He was just surprised when he received an invitation from the
sponsoring non-government organization to attend the awarding ceremony and to receive
a plaque and a cash prize of P50,000. Is the P50,000 taxable to B?

D, an amateur boxer represented the Philippines in a world boxing competition. He
won the championship trophy and received the following:
P100,000 – cash prize from the sponsoring association
500,000 – cash gift given by Globe Philippines
400,000 – talent fee as model of Mikee Shoes and shirts
1,000,000 – royalty paid by a film producer, Carlos for portraying his life
62. How much is taxable?
63. How much are not subject to income tax?

Eugene is a CPA. He is teaching accounting subjects at Camarines Norte State College
on a part-time basis and considered as MWE. He is also engaged in the practice of his
accounting profession.
The following are his data during the year:
Compensation Income:
Basic Salary (part-time teacher) P60,000
Holiday pay 1,500
Overtime pay 3,000
Total P 64,500
Page 39 of 40
Professional Income:
Income from profession P 120,000
Less: Expenses from profession 45,000
Total P 75,000
64. How much income subject to tax?

65. how much is the compensation income subject to tax?
Problem for item no. 66-70 (5 points)

C, single, an accountant of a government agency, received the following from the
government in December, 2019:
Monthly Basic Salary, net of contributions P28,000
Monthly mandatory contribution to GSIS, Philhealth and Pag-ibig P3,000
Mandatory Union dues contributions P500
GSIS loan payment withheld by the employer P3,000
13th month pay P25,000
Monthly Additional Compensation Allowance (ACA) P2,500
Monthly Personnel Economic Relief Allowance (PERA) P2,000
Christmas gift P5,000
Cash received for loyalty award P20,000
Representation allowances and Transportation Allowances (RATA)
under General Appropriations Act (50% are already liquidated and the
rest is will never be returned by C) P10,000
Clothing Allowance P7,000
Monthly rice subsidy P1,800
Monetized unused vacation leave credits (20 days) P20,000
66-70. How much is the taxable compensation income of C?
References:
Ampongan, CPA, Omar Erasmo G. (2020), Income Taxation
Banggawan, CPA, MBA, Rex B. (2019) Income Taxation, Laws, Principles and
Applications
Tabag, Enrico D. & Garcia Earl Jimson R. (2020), Income taxation
Valencia, E. & Roxas, G. (2007). Income Taxation. Baguio City: Valencia Educational
Supply.
Prepared by: Reviewed & Approved by:
EUGENE O. BALINDAN, CPA___ LUVY S. ASIS, CPA, MBA_______

Instructor 1, Accountancy Department Chairperson, Accountancy Department
Page 40 of 40

Amended Bsa Handout For Gross Income Part 1

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HANDOUT 2: The Gross Income: Its Items

Concepts and Exclusions

Name of Faculty: Eugene O. Balindan, CPA / Instructor 1

Schedule for Instruction:

Course, Year & Section Schedule Time

Lesson/Topic: The Gross Income: Its Items, Concepts and Exclusions

A. ITEMS AND CONCEPT OF INCOME

Income, Taxable Income, and Income Tax defined

For tax purposes, income is defined as the amount of money coming to a

Classification of income tax

In the Philippines, our income tax is classified as:

Classification of income taxpayers

Income taxpayers may be classified into:

A. Individual. A natural person, whether Filipino citizens or not and whether

B. Corporation. Includes partnership no matter how created or organized, joint-

D. Trust. An arrangement created by will or an agreement under which property is

A taxable trust is an irrevocable trust both as to corpus and income.

A. from dealing with property

D. Royalties Compensation from services in whatever form paid, including, but

I. Prizes and winnings

Self- help income

A carpenter might agree to repair a painter’s house in exchange for the

Compensation paid in kind

Compensation may be paid in some medium other than money. Withholding

B. If services are rendered at a stipulated price, in the absence of evidence to

Other taxable compensation income

A. Compensation paid in promissory note (taxable income) — refers to a

a. How much income is subject to tax in 2017?

Face value P1,000,000

b. How much income is subject to tax in 2018?

Face value P1,000,000

B. Tips and gratuities (employee's taxable income but not subject to

C. Fixed or Variable Allowances — In general, fixed or variable allowances

However, any amount that is reasonably expected to be incurred by an employee

NOTE: Any unreturned excess of advances is taxable income to the employee.

• Pre-computed business allowances

• Stipends of Resident Physicians

D. Vacation and sick leave allowances (taxable compensation income) —

However, the monetized value of unutilized vacation leave credits of ten

Mr. A is working in a private company. He decided to monetize his twenty-five days

A. How much will be non-taxable and taxable?

Sick leave credits to be monetized 25

• Maternity Leave Pay

A. On account of the debtor's services to the creditor, the same is taxable

C. If the creditor is the corporation and the debtor is a stockholder, the

D. If the creditor is a stockholder, and the debtor is the corporation, the

a. Is the P500,000 a taxable income? Yes, this is a case of a remuneratory

Recovery of bad debts previously deducted

Recovery of bad debts previously allowed as a deduction in the preceding years

Interest on the amount recovered is a taxable income and is not covered by a

Income/ loss before write off ₱60,000 ₱ (30,000) ₱60,000

A tax refund is taxable if the tax was previously deducted as an expense in

Eugene has the following data in 2017:

Taxable income before tax refund ₱200,000

Add: Common carrier's tax ₱15,000

Local business taxes 10,000 25,000

Taxable income ₱225,000

Refund of indirect tax

B company purchased from Solane Gasoline Shop 1,000,000 liters of fuel