Chapter 4: GROSS INCOME Gross Income incomes referred to in Section 32(A) of the Tax Code; it includes all income

e from whatever source (catch-all clause-includes non-enumerative items which can be properly defined as income) including, but not limited to, the following items: 1. Compensation for services in whatever form paid including fees, salaries and wages, commissions and similar items; 2. Gross income derived from the conduct or trade or business or the exercise of a profession; 3. Gains from dealing in property; 4. Interests; 5. Rents; 6. Dividends; 7. Annuities; 8. Prizes and winnings; 9. Pensions; and 10. Partners distributive share from the NI of general professional partnership *Damages- non-taxable, return of capital Gross Compensation Income any remuneration for rendering of personal services; obtained from an employeremployee relationship; basis upon which remuneration is paid is immaterial-piecework, percentage of profits, hourly, daily, weekly, monthly, annually *No determination of compensation until service is rendered Employee-Employer Relationship 1. Direct control-order the individual to work 2. Supervision-reports to a person of higher position in the company 3. Hire & Fire Classification of Gross Compensation Income 1. Basic Salary or Wage Salaries-earnings received periodically for a regular work other than manual labor Wages-earnings received usually according to specified intervals of work; hourly, daily, weekly 2. Honoraria payments given for recognition for services performed for which established practice discourages charging a fixed fee. Honorarium of a guest lecturer is an example. 3. Fixed or Variable Allowances *Allowances are generally part of the compensation income Does the allowance arise from an employee-employer relationship? o If No- not part o If Yes Paid to account- not part (w/ reimbursement) Not paid to account- part (w/o reimbursement) *The employee is required to account/liquidate for the expenses in accordance with specific requirements of substantiation for each category of expenses pursuant to Section 34 of the Tax Code. 4. Commission % of total sales or on certain quota of sales volume attained 5. Fees received by an employee (directors fee); paid to public officials; paid to clergymen, evangelists ore religious worker 6. Tips and gratuities paid directly to the employees (by a customer), considered taxable income but bot subject to withholding tax 7. Hazard or emergency pay additional pay due to employees exposure to danger or harm while working. Added to basic salary along with overtime pay and Night differential pay to arrive at gross salary 8. Retirement pay received by an employee who has served a company for a considerable period of time and has decided to withdraw from work into privacy *Retirement pay is taxable in general except: a. SSS or GSIS retirement pays b. Retirement pay due to old age provided that the ff. requisites are met: i. Retirement program approved by the BIR ii. Reasonable benefit plan-fair and equitable for the benefit of all employees (president to laborer) iii. Retiree should have been employed for 10 years in the company iv. Retiree should have been 50 years old at the time of old retirement; and v. It should have been availed of for the first time.

9. Separation pay taxable in voluntarily availed of. It shall not be taxable if involuntary; ex. Death, sickness,
disability, reorganization/merger, company in the brink of bankruptcy- (settlement order: BIR, Employee, Creditors) 10. Pension stated allowance paid regularly to a person on his retirement of to his death, in consideration of past services, meritorious work, age, loss or injury. *Pension pay is taxable unless a. The law stated otherwise; or b. BIR approves the pension planif actuarially sound 11. Vacation and sick leave a. If paid or availed of as salarytaxable compensation income b. Leave creditsnot subject to income tax & withholding tax (10 days or less on private employees; no limit on govt employees) c. Terminal leave-money value of accumulated leave payments are not taxable in case of government or private employees 12. Thirteenth month pay and other benefits non-taxable up to the extent of 30,000 13. Overtime pay premium payment received for working beyond regular hours of work; included in the computation of gross salary of employee; back pay and overtime pay constitute compensation 14. Profit sharing proportionate share in the profits of the business received by an employee in addition to his wages. 15. Awards for special services prevention of theft or robbery; Awards for past services and like are also compensations. 16. Beneficial payments where the employer pays the income tax owed by an employee are additional compensation income 17. Other forms of compensation paid in kind; insurance for the benefit of the employee Shares of Stock Received as Compensation as if corporation sold stock at its market value and paid the employee in cash (FMV=basis for compensation income) Employee Stock Option granted to some key employees of a corporation to avail of the said corporations share of stock in the future for a certain price As Compensation Income if market price is greater than the option (strike) price, the difference is a compensation income at the date of grant As Capital Gain when stocks are sold, the excess of the market price at the date of sale over the market price at the date of grant (passive income) Cancellation of Debt may amount to payment of a payment of income, gift or capital transaction, depending upon the circumstances If a creditor merely desires to benefit a debtor and w/o any consideration cancels the debt, the amount of the canceled debt is a gift, not an income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend. If, however, a debtor performs services for a creditor, who, in consideration thereof cancels the debt, the debtor realizes income for his services to the extent of the amount of debt cancelled. Insurance premiums as Compensation premiums paid by the employer on life insurance coverage of the employee wherein the beneficiary is the employees family, taxable income on the basis of the amount of premium paid Taxability and Deductibility of Insurance Premiums Beneficiary Employee Employer Taxable compensation of the employee? Yes No Deductible operating expense of the employer? Yes No Income Tax Paid as Compensation Income for income tax paid by the employer in favor of the employee, the basis of tax is the amount of tax paid. Convenience of the Employers Rule tax rule provides that allowances in kind furnished to the employee for and as a necessary incident to the performance of his duties are NOT taxable; food and lodging benefit by a household maid, driver, etc. Living Quarters and Meals

When living quarters are furnished in addition to cash salary, the rental value of such quarters should be reported as income However, if living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need NOT to be included as part of compensation income *Unless provided for the exclusive benefit of the employer, the rental value of living quarters is compensation income to the employee to the extent of his reasonable need, and the excess shall be considered as expenses of the corporation. Exclusion for meals is allowed only when: They are furnished for the employers business premises. The exclusion of for lodging is allowed only when it is furnished within the business premises of the employer; and The employee accepts the lodging as a condition of the employment in order to perform his duties properly *Unless the above conditions are met, the value of any board and lodging furnished by an employer is ordinarily taxable to the employee. Remuneration for Casual Labor occasional, accidental, irregular Remuneration for casual labor NOT in the course of an employers trade or business is NOT considered compensation Any remuneration paid for casual labor is considered compensation; and Any remuneration paid for casual labor performed for a corporation is considered as compensation Chapter 5: EXCLUSION FROM GROSS INCOME Exclusion items or receipts not included in the determination of the taxable income because the law or treaty provides that they are exempt from income tax; generally nontaxable; not included in the ITR unless specifically called for Classifications 1. According to law a. exclusion under sec. 32 of the NIRC b. exclusion under special laws 2. According to nature of receipts a. nontaxable compensation b. nontaxable other receipts Nontaxable Compensation Income (CI) 1. CI (including holiday, overtime, night shift differential, and hazard pay) earned by a minimum wage earner who has no other reportable income and who does not receive additional compensation in excess of P30,000 2. CI earned outside the country by an FOCW, NRC, RA and foreign corporation 3. 13th month pay, bonuses and other benefits (including excess amount of the ceiling on de minimis benefits) not exceeding P30,000 4. CI received under Employers Convenience Benefit Rule 5. Proceeds of life insurance policies paid to the heirs upon death of the insured 6. Receipts through accident or health insurance or under Workmens Compensation Act as compensation for personal injuries or sickness and for damages on account of them 7. Retirement benefits under RA 7641 and those received by officials and employees of private firms, in accordance with a private plan maintained by the employer; conditions: a. service of at least 10 years b. at least 50 y/o at retirement c. has not availed of similar benefits in the past 8. Any amount received from employer as a consequence of separation from service for any cause beyond the employees control (not including dismissal) 9. Social security benefits, retirement gratuities, pensions, etc received by citizens, or aliens who came to reside permanently in the country, from foreign government agencies and other institutions 10. Benefits from SSS, including maternity benefits under RA8282 11. Benefits from GSIS, including retirement gratuity received by government officials and employees 12. GSIS, SSS, Phil-health and Pag-ibig contributions, and union dues 13. De minimis benefits within ceiling 14. Salaries and stipends in dollars received by non-Filipino citizens serving as staff of the IRRI and Ford Foundation 15. Tax exemption of allowances paid to military personnel 16. Casual employment not connected in the conduct of business of employer

Statutory Minimum Wage (SMW) rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB) as defined by the Bureau of Labor and Employment Statistics (BLES) of the DOLE; per region; RA9504 SMW tax-exempt Proceeds of life insurance paid to heirs/beneficiaries upon death of insured: nontaxable; reimbursement for loss of life; if with interest, interest payments: taxable Proceeds received by injured person proceeds in excess of premium paid: taxable Gifts, Bequests, Devises Gift any property legally and validly transferred for free Bequest personal property transferred by will Devise real property transferred by will a. transfer tax, unless with consideration/compensation b. value: exempt; income derived from such: taxable c. allowance based on separation agreement: not taxable d. principal paid under marriage settlement: not taxable e. amount received by virtue of settlement of will litigation: not taxable Compensation or Damages a. physical, exemplary and moral damages; damages for loss of earning capacity, goods and other belongings; actual liquidated damages: not taxable b. damages for loss of profit in property and unrealized profits; interest for nontaxable damages; damages recovered in intangible assets infringement suits; compensatory liquidated damages: taxable Tax Exempt: a. United States Veteran Administration b. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement: recipient was selected without any action on his part to enter the contest, and not required to render substantial future services as a condition to receive the prize or award c. Prizes and awards granted to athletes in local and international sports competitions and tournaments, except those granted by associations not accredited by Philippine Olympic Sport Committee (POSC) d. Qualified senior citizen, provided his annual taxable income is at most P60000/per year, except interest income e. Inventors and Inventions (RA7459: The Inventors and Inventions Act of 1991) for 10-year period starting from date of 1st commercial sale; prizes awarded subject to 20% final tax f. Cooperative income g. Employees trust h. Government and nonstock nonprofit educational institutions Chapter 6: FRINGE BENEFITS TAX Fringe Benefit (FB) 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 Rationale 1. incentive to encourage employees productivity and loyalty 2. FBs may be lowered or discontinued during financial difficulties 3. additional remunerations for OT and separation pay do not include FBs Fringe Benefit Tax (FBT) a monetary burden imposed on any good, service, or other benefit furnished or granted by an employer in addition to basic salaries to an individual employee other than a rank and file employee; it is a final tax on the employees income to be withheld by the employer; withholding and remittance: quarterly; income tax on income earned by employee FBT Base and Rate Tax Base: Grossed-up Monetary Value (GMV) of FB GMV: divide monetary value of FB by 68%; represents the whole amount of income realized by the employee and the amount of FBT withheld and paid by the employer in behalf of his employee; benefit expense of the employer; income of employee Tax Rate: 32% effective Jan. 1, 2000 Taxable amount GMV

Classification 1. FB to Rank and File Employees lumped with compensation income; normal tax rate; except de minimis benefits and benefits provided for convenience of employer 2. FB to Managerial Employees 32% FBT; except de minimis benefits and benefits provided for convenience of employer 3. Allowances fixed in amount and regularly received as part of monthly compensation income lumped with compensation income Valuation 1. CASH: amount granted or paid for 2. IN KIND a. with transfer of ownership: FMV in accordance with Sec. 3 of the Code b. without transfer of ownership: depreciated value Nontaxable Housing Fringe Benefit 1. AFP officials 2. Housing unit inside or adjacent to the premises of a business or factory (no more than 50 m. away from the perimeter) 3. Temporary housing (no more than 3 months) Taxable Fringe Benefits 1. Expenses incurred by employee but paid by employer 2. Expenses incurred by employee but reimbursed by employer, except for those duly accounted for and in the name of the employer which are not personal 3. Personal expenses of the employee paid for or reimbursed by employer, including those duly accounted for and in the name of the employer RATA that are fixed in amount and regularly received as part of monthly compensation income: lumped with compensation income Interest on Loan at Lesser than MV Rate the amount of interest under the benchmark 12%, effective Jan. 1, 1998 (divide difference by 68% to get GMV) Expenses for Foreign Travel 1. Not subject to FBT: a. Inland travel expenses (except hotel cost) amounting to no more than an average of $300/day, supported by documents b. Cost of economy and business class airplane ticket; 70% of the cost of first class airplane ticket No documentary evidence: all expenses taxable as fringe benefits Educational Assistance taxable in general as FB, except: a. scholarship grant to employee: education/study directly connected with employers trade/business; written contract that employee is under obligation to remain with the employer for the agreed upon period b. assistance to employees dependent: provided through a competitive scheme under the companys scholarship program Insurance Benefits taxable in general, except: a. contributions under law (SSS, GSIS, etc.) b. cost of premiums borne by employer for group insurance of employees Fringe Benefits not Subject to FBT: 1. authorized and exempted from income tax under the Code or any special law 2. contributions of employer for employee for retirement, insurance and hospitalization benefit plans 3. rank and file 4. if grant required by nature of the employers trade/business/profession 5. convenience of employer 6. de minimis De Minimis exempt from FBT; in general, limited to facilities or privileges that are of relatively small value; merely as a means of promoting health, goodwill, contentment and efficiency; Revenue Regulations 10-2008: a. Monetized unused vacation leave credits no more than 10 days during the year, and those paid to government officials and employees

b. c. d. e. f. g.

Medical cash allowance to dependents of employees no more than P750/employee/semester or P125/month Rice subsidy of P1500 or 1 sack of 50 kg. rice per month not amounting to more than P1500 Uniform and clothing allowance no more than P4000 per year Actual yearly medical benefits no more than P10000 per year Laundry allowance no more than P300 per month Employees achievement awards in the form of tangible personal property no more than P10000 under an established written plan which does not discriminate h. Gifts during Xmas and major anniversary celebrations no more than P5000 i. Flowers, fruits, books, etc under special circumstances j. Daily meal allowance no more than 5% of basic minimum wage Final Withholding Taxes 8%: oil exploration service contractors/sub-contractors 10%: cash/property dividend (domestic corporation to citizen and resident aliens); distributive share of individual partner in general commercial partnership; tax informers cash reward; royalties on books, literary works and musical composition 15%: Foreign Petroleum Service Contractors/Sub-Contractors, Offshore Banking Units and Regional/Area Headquarters, and MNC Regional operating Headquarters occupying executive, managerial and technical positions 20%: share of NRA in distributable income of general commercial partnership; royalties except on books and cinematographic films; prizes more than P10000 and other winnings 25%: royalties to NRA on cinematographic films; payments to nonresident individual/foreign corporate cinematographic film owners/lessors/distributors; payments to NRA not ETB except on sale of shares of stock and real property 30%: final tax on interest or other payments upon tax-free covenant bonds, mortgages, deeds of trust, or other obligations under Sec. 57C of NIRC 10000 5% Over 70000-140000 8500+20% Over 500000 125000+32% Over 10000-30000 500+10% Over 140000-250000 22500+25% Over 30000-70000 2500+15% Over 250000-500000 50000+30% 10-20-40-70(40+20+10) 110(70+40)-250(sum of all)