III.
GROSS INCOME AND EXCLUSIONS
A. Income from whatever source
• All income derived from whatever source:
o Compensation
o Annuities
o Rents
o Dividends
o Gains from dealings in Property
o Royalties
o Interests
o Gross income from Profession, Trade, or
Business
o Prizes and Winnings
o Pensions
o Partner’s share in the net income of the
GPP
• “Gross income from whatever source derived” –
all income not expressly exempted within the class of
taxable income under our laws
• Passive income not included in the
compensation of gross income subject to regular
income tax rates – since these passive incomes are
already subject to different tax rates and taxed finally
at source, they are no longer included in the
computation of gross income
a. Situs of Income
i. From Sources Within the
Philippines
ii. From Sources Without the
Philippines
iii. Partly Within/Without the
Philippines
B. Compensation income – All renumerations for
services performed by an employee for his employer
under an ER – EE relationship
• Test to determine whether Income is Compensation of not:
o WON such income is received by
virtue of an ER – EE relationship
o If performed by an independent
contractor – income from trade or
business
• Valuation of Amount of Compensation
o Cash – full amount received
o Other than cash - FMV
o Stipulated Price – such price shall be
presumed to be the FMV
o Promissory note – FMV of the note or
evidence of indebtedness
o Stocks – FMV of the stock at the time
the employee received it
o Living quarters furnished in addition to
salary – rental value of such quarters
• Compensation income includes:
o Wages – means all renumeration (other
than fees paid to a public official) for
services performed by an employee for
his employer
o Separation pay – taxable compensation
of the separated official or employee
when the cause of the separation is not
beyond the control of such official or
employee
o Retirement benefits – taxable
compensation to the retiring official or
employee if such benefits were received
by an employee who fails to meet the
minimum requirements of a reasonable
private benefit plan under RA 4917
(Retirement benefits of employees of
Private Firms) or RA 7641 (Retirement
pay to Qualified Private Sector
Employees in the Absence of any
Retirement Plan)
o Monetary Benefits – in excess of the
P82,000 threshold for exclusion
o Director’s fees – if the director is at the
same time an employee of the
employer/corporation
o Fringe benefits – granted to rank and
file employee
§ FB to RF may be included as
part of their exempt 13th
month pay and other benefits
up to P82,000 since RF are
not entitled to FB
________________________________________________
Fringe Benefits – 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
Valuation of FB:
• Money, or if directly paid by the employer – the value
is the amount granted or paid
• Property other than money and ownership is
transferred to the employee – FMV of the property
as determined in accordance with the authority of the
BIR to prescribe the real property values
• Property other than money but ownership is not
transferred to the employee – depreciation value of
the property
Tax Treatment of FB:
1. If given to managerial/supervisory EE – subject to FBT:
final withholding tax imposed on the grossed up
monetary value of the fringe benefit furnished,
granted, or paid by the employer to the employee,
except RF EE whether such employer is an
individual, professional partnership, or corporation
a. Tax is imposed on the employee an not the
employer but is paid by the employer – FBT
is collected from the employer even if the
employer is a tax – exempt corporation or
an instrumentality of the Philippine
government
2. If given to RF EE – not subject to FBT but shall be
considered as part of the compensation income of
such employee subject to applicable income tax rates
3. Exempt from IT, regardless if MS or RF:
a. Authorized as exempt
 b. Contributions of the employer for the
benefit of the employee to retirement,
insurance, and hospitalization benefit plans
Convenience of the Employer Rule – grants exemption to
the benefits, which are given for the exclusive benefit or
convenience of the employer
Fringe Benefit Tax Rates:
• RC, NRC, RA, NRA – ETB – 32%
• NRA – NETB – 25%
• RHQ, ROHQ, OBU – 15%
Tax Base: GMV (Grossed – Up Monetary Value)
• The whole amount of income realized by the
employee which includes the net amount of money
or the net monetary value of the property which has
been received
• The amount of FBT thereon otherwise due from the
employee but paid by the employer on behalf of the
employee
Determination of GMV – dividing the monetary value of the
fringe benefit by:
• 68% - RC, NRC, RA, NRA – ETB
• 75% - NRA - NETB
• 85% - RHQ, ROHQ, etc.
Formula:
Fringe Benefits Subject to FBT:
1. Housing
• Non – taxable Housing FB:
o House of Military officials of the AFP
consisting of officials of the Philippine
Army, Philippine Navy, and Philippine Air
Force
o Temporary housing for an employee who
stays in housing unit for 3 months or less
o Housing unit which is situated inside or
adjacent to the premises of a business of
factor
2. Expense Account – expenses incurred by the employee
which are paid by his employer and expenses paid for
by the employee which are reimbursed by the
employer
a. Exception – if such expenses are duly
receipted for and in the name of the
employer and the expenditures do not
partake the nature of a personal expense
attributable to the employee – not taxable
3. Vehicle of Any Kind
4. Household Expenses – expenses for employees which
are borne by the employer for household personnel,
such as salaries of household help, personal driver, or
other similar expenses
5. Interest on loan at less than market rate to the extent of the
difference between the market – rate and actual rate granted –
if the employer lends money to his employee free of
interest or at a rate lower than 12% - interest
foregone by the employer of the difference of the
interest assumed by the employee and the rate of
12% shall be treated as taxable fringe benefit
6. Membership fees, dues, and other expenses borne by the
employer for the employee in social and athletic clubs and
similar organizations
7. Holiday and vacation expenses
8. Expenses for foreign travel – travelling expenses of the
family members of the employee which are paid for
by the employer are subject to FBT
a. Exception – business expenses paid for by
the employer shall not be treated as taxable
fringe benefits if the following conditions
are met:
i. Expenses were reasonable
ii. Expenses were paid for the foreign
travel of employee for the purpose
of attending business meetings or
conventions
iii. Travel abroad was supported by
documentary evidence proving
actual occurrence of meetings
9. Educational assistance to the employee or his dependents
a. Exception - education or study is directly
connected with employer’s trade or business
and there is a written contract that employee
shall remain employed with the employer
b. Dependents – assistance provided through
competitive scheme under the scholarship
program of the company employer
10. Insurance Premium – the premiums paid for life or
health insurance and other non – life insurance borne
by the employer are taxable fringe benefits
a. Exceptions:
i. Cost of premiums borne by the
employer for the group insurance
of employees
ii. Contributions of the employer for
the benefits of the employee to
SSS, GSIS, etc.
Fringe Benefits given to RF EE – considered as part of
their compensation subject to applicable income tax rates
De Minimis benefits
1. Rice subsidy of P1,500 or 1 sack of 50 kg rice per
month amounting to not more than P1,500
2. Uniform and clothing allowance not exceeding
P5,000 per annum
3. Monetized unused VL credits of private employees
not exceeding 10 days – monetization of unused VL
credits exceeding 10 days and monetization of SL
even if not exceeding 10 days are not exempt
4. Monetized vale of vacation and sick leave credits paid
to government, officials, and employees (no limit as
to number of credits)
5. Medical cash allowance to dependents of employees
not exceeding P750 per employee per semester or
P125 per month
6. Actual yearly medical benefits not exceeding P10,000
per annum
7. Gift given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per
annum
8. Benefits received by an EE by virtue of a CBA and
productivity incentive schemes not exceeding
P10,000
9. Daily meal allowance for overtime work and
night/graveyard shift not exceeding 15% of the basic
minimum wage on a per region basis
10. Laundry allowance not exceeding P300 per month
11. Employee’s achievement awards, which must be in
the form of a tangible personal property other than
cash or gift certificate, with an annual monetary value
of not exceeding P10,000 received by the employee
under an established written plan which does not
discriminate in favor of highly paid employees
• List of benefits enumerated is exclusive
• The DMB enumerated are exempt from income
tax ONLY up to the extent of the ceiling
prescribed. Any amount in excess of the ceiling
provided shall be taxable to the employee ONLY
if such is beyond the P82,000 threshold
________________________________________________
a. Exclusions:
i. Compensation for Injuries of
Sickness
• This is just indemnification for the injuries or
damages suffered; the amount received is intended to
make the injured party as he was before the injury.
The term injury includes death, even if there is no
injury. If the person dies, the compensation received
on account of his death is also excluded form the
gross income
• Includes amount received:
o Through accident or health insurance
o Workmen’s compensation
o Damages received whether by suit or
agreement on account of such injuries or
sickness
ii. 13th Month Pay and Other
Benefits
iii. Income Exempt Under Treaty
C. Pension/Retirement Benefits/Separation Pay
• Pension – amount of money received in lump sum
of on staggered basis in consideration of services
rendered given after an individual reaches a certain
age of retirement
a. Exclusions
• Retirees are most deserving of compassion and
should not be given a strict interpretation under the
law. Retirement laws aim to assist retirees in his old
age, not to punish him for having survived. It
includes:
o Received by officials and employees of
private employers in accordance with a
reasonable private benefit plan under RA
4917
o Those derived under RA7641 from private
firms without a BIR approved reasonable
retirement plan
o Separation pay due to death, sickness, o
other disability or any other cause beyond
the control of the employee or the official
(e.g. retrenchment)
o Social security benefits, retirement
guaranties, and other similar benefits
received by citizens or aliens who come to
reside permanently in the Philippines from
foreign government agencies, private or
public
o Benefits due residents under the laws of the
United States administered by the United
States Veterans Administration
o SSS benefits received in accordance with
RA 8282
o GSIS benefits received under RA 8291
• RA 4917 – Reasonable private plan:
o Must be reasonable
o The benefit plan must be approved by the
BIR
o The retiring official or employee must have
been in the service of the same employer for
at least 10 years and must be at least 50
years old at the time of retirement
o The retiring official or employee should not
have previously availed of the privilege
under the retirement benefit plane of the
same or another employer
• RA 7641 – In order to avail of the exemption of the
retirement benefits from private employers without a
BIR – approved reasonable retirement plan, the
following conditions must be met:
o Where the retirement benefits are received
under a CBA or other applicable
employment contract:
 § The employee must be retired
upon reaching the retirement age
established in the CBA or other
applicable employment contract
• If the CBA does not
provide a retirement age
– the minimum
requirement of 50 years
shall apply
§ The benefits under the CBA or
other agreements must not be less
than these provided in the 2nd
situation
o Where the retirement benefits are received
not under any agreement:
§ Given in the absence of agreement
providing for retirement benefits
of employees in the establishment
§ Retiring employee has served at
least 5 years in the said
establishment
§ He is not less than 60 years of age
but not more than 65, which is
declared as the compulsory
retirement age
§ He shall be entitled to retirement
pay equivalent to at least ½ month
salary for every year of service; a
fraction of at least 6 months being
considered as one new whole year
• Terminal Leave – applied for by an employee which
is no longer working – it is no longer compensation
for services rendered
o Includes monetized value of retiree’s
accumulated vacation leave and sick leave
subject to the following rules:
§ For compulsory retirement – 60
years for private entities; 65 years –
government employees; 70 –
judiciary – exempt
§ For optional retirement – SL is
taxable; VL up to 10 days is
exempt; and the excess is taxable
• Separation pay excluded from GI
o If due to death, sickness, or other physical
disability or for any cause beyond the
control of the employee
o Cause beyond control – involuntariness on the
part of the official or employee – the
separation from the services of the official
or employee must not be asked or initiated
by him
• GSIS benefits under RA 8291 – the retirement of
most government officers or employees under the
GSIS is made automatic and compulsory at the age of
65 years, after having served a certain number of
years of service. The law also grants such officer of
employee the option to retire:
o Upon completion o 30 years of total service
and attainment of age 57 years
o Rendering a total service of 30 years
regardless of age
o After having rendered a total of at least 20
years of service, the last 3 being continuous
regardless of age and employment status
• The retirement benefits of monthly GSIS pension
shall be exempt from income tax
D. Passive Income
a. Interest Income
i. Exclusions
b. Rentals/Leases – the amount paid for he
use or lease or enjoyment of a property,
whether real or personal property, to the
owner of the property
• Scope – all rentals derived from lease of property,
whether used in business or not, from real of
personal property, earnings from copyright,
trademarks, patents, and natural resources
o Agreed amount per month or per year
o Obligations of lessor to third parties which
the lessee undertakes to pay as further
consideration of the lease
§ Real estate taxes
§ Insurance premiums
§ Dividends
§ Interest
• Income from Leasehold Improvements – when the
lessee erected or built permanent improvements in
the leased property which will become the property
of the lessor upon the expiration of the lease, the
value of the improvements should be reported as
income of the lessor
• Methods of reporting Income from Leasehold
requirements:
o Outright method – recognized as income to
the lessor at the time when such buildings
or improvements are completed, at FMV
o Spread – out method – the lessor spread
over the life of the lease the estimated
depreciable vale of such buildings or
improvements at the termination of the
lease and report as income for each year of
the lease, an aliquot part thereof
c. Royalties – payments made for the use and
exhaustion of property such as earnings
from copyrights, patents, trademarks,
formulas, an natural resources under lease
i. Royalties included in the
computation of gross income and
not subject to final tax:
1. Royalties derived from
sources outside the
Philippines
2. Those which are not
passive income
d. Dividends – any distribution made by a
corporation to its shareholders out of the
unrestricted retained earnings payable to its
 shareholders, whether in money, property,
or stock
i. Cash and property dividends only
ii. It also does not cover liquidating
dividends – the capital gain or loss
derived therefrom shall be subject
to the regular income tax rates
iii. Dividends received from a
domestic corporation are either
exempt or subject to final tax
depending on the recipient.
Accordingly, only dividends
distributed by a foreign
corporation are included in gross
income
iv. Exclusions
1. Income Exempt Under
Tax Treaty
• Public policy recognizes the principles of reciprocity
and comity among nations
• International Convention or Tax Treaty – Double
Taxation Convention or Double Taxation Agreement
negotiated between the Philippines and the other
contracting States or jurisdictions for the avoidance
of double taxation and prevention of fiscal avoidance
• Income of any kind to the extent required by any
treaty obligation binding upon the Government of
the Philippines may be excluded – tax treaty must
take precedence over and above the provisions of the
local taxing statute
2. Passive Income of
Foreign Government
e. Annuities and Insurance Proceeds
• Annuities – annuity policies sold by insurance
companies, which provides installment payments for
life, or for a guaranteed fixed period of time,
whichever is longer. It is paid annually, monthly, or
periodically, computed upon the amount paid yearly,
but not necessarily for life
o The portion representing return of premium
is NOT taxable while the portion that
represents the excess over premium and
interest is taxable
o Ex: Life annuity costs 500,000 paid 120,000
per year. Life expectancy from the date of
purchase is 5 years so receive a total of
600,000 (120,00 x 5 per year). Out of the
600,000 to be received. 500,00 shall be
excluded from gross income (NOT
TAXABLE) – return of premiums. 100,000
will be taxable as the excess
i. Exclusions
1. Proceeds from Life
Insurance
• Proceeds of Life Insurance – indemnity or
compensation
o Must be paid to the heirs of beneficiaries by
reason of death of the insured whether in a
single sum or installment
• Instances when Life Insurance is included in GI:
o Payment for reasons other than death are
subject to tax to the extent of the excess of
the premiums paid
o Amounts are held by the insurer under an
agreement to pay interest
o Insured outlives the policy
o Life insurance policy is used to secure a
money obligations
o Life insurance policy was transferred for a
valuable consideration
o Recipient of the insurance proceeds was a
business partner
o Recipient of the insurance proceeds is a
partnership
o Recipient of the insurance proceeds is a
corporation in which the insured was an
employee/officer
2. Return of Premium paid
• The amounts returned are not income but capital –
they represent the earnings which were previously
taxed
• The amounts must be received as a return of
premiums paid by him under life insurance,
endowment of annuity contracts
• When the total premium returns exceed the aggregate
premiums paid, the excess shall be included in the GI
• In case of a transfer for a valuable consideration of a
life insurance contract – only the actual value of such
consideration and the amount of the premiums and
other sums subsequently paid by the transferee are
exempt
3. Compensation for
Sickness or Injuries
f. Prizes and Winnings/Awards/Rewards
• Only prizes and winnings that are not subject to final
tax are properly included in the computation of gross
income:
o Prizes which do not exceed P10,000
o Prizes derived from sources outside the
Philippines
o Prizes and winnings of corporations
whether domestic or foreign
i. Exclusions
1. PCSO and Lotto
Winnings
2. Sports Competition
Prizes
g. Other types of Passive Income
i. Found Treasure
ii. Tax Refund
iii. Recovery of Bad Debt
iv. Damages
E. Gains Derived from Dealings in Property
a. Exclusions
i. Shares of Stocks Classified as
Capital Asset and Traded in PSE
F. Business Income/Income from Exercise of
Profession
 • Self – employment income – earnings derived by an
individual from the practice of profession, or conduct
of trade or business carried on by him as a sole
proprietor, or a partnership of which he is a member
• Professional income – practice of profession –
provided that there is no EE – ER relationship
• Business Income – income derived from
merchandising, mining, manufacturing, farming, and
other similar operations
a. Exclusions
i. Income Exempt Under a Treaty
ii. Income Derived by
Government/Political
Subdivision from Exercise of
Essential Government Function
G. Partner’s Distributive Share of the Gross Income
of GPP – GPP shall not be subject to income tax
since it is the individual partners who shall be subject
to income tax in their separate and individual
capacities
H. Exclusions under Special Laws
________________________________________________
Exclusions – income received or earned but is not included in
the determination of gross income and thus not taxable
because
• They are not income, gain, or profit
• They represent return of capital
• They are subject to another kind of internal revenue
tax
• They are income, gain, or profits which are expressly
exempt from income tax under the Constitution, tax
treaty, or the NIRC
o Financing institutions owned, controlled,
enjoying refinancing from foreign
government
o International or regional institutions
established by foreign government
• Prizes and Awards:
o Received in recognition of charitable,
artistic, religious, civic, educational, literary,
or scientific achievement
o Selected without any action on his part
o Not required to render substantial future
services
• Prizes and Awards granted to athletes in sports
competitions locally or abroad and sanctioned by
their national sports association
o National Sports Association – duly
accredited by the Philippine Olympic
Committee
• Income derived by the Philippine government
and its political subdivisions from:
o Any public utility
o The exercise of any essential government
function
• GSIS, SSS, Medicare (PhilHealth) and PAG –
IBIG contributions and union dues of
individuals
o Only mandatory contributions are
considered as exclusions
• Gains derived from sale or exchange of bonds,
debentures, or other certificate of indebtedness
with a maturity of more than 5 years
• Gains from redemption of shares in mutual fund

1. Life Insurance
2. Amount received by insurance as return of premium
3. Gifts, bequests, and devises
• They are neither products of capital or industry, thus
there is no income
o Only donated property is excluded from
gross income. However, income from such
property in cases of transfers or dividend
interest shall be included in GI
• Gift Tax Test:
o If there is no legally demandable obligation
to give the gift – NOT TAXABLE
4. Compensation for injuries and sickness
5. Retirement benefits, pensions, gratuities
6. Income exempt under treaty
1. Miscellaneous items

• 13th month pay and other benefits up to P82,000 –

excluded from gross income to the extent of P82,000
– any excess will be included as gross compensation
income

• Passive Income by:

o Foreign governments