ANNEX D GROSS INCOME

Compensation

means all remunerations for services performed by an

employee for his employer under an employer-employee
relationship, unless specifically excluded by the code.
salaries,
wages,
emoluments and honoraria,
commissions,
allowances (transportation, representation, entertainment and
the like);
fees including
director's fee if the director is, at
the same time, an employee of the employer/corporation;
taxable bonuses and fringe benefit except those which are
subject to the fringe benefit tax under Sec 33 of the code
(final tax);
taxable pensions and retirement pay, and
other income of similar nature like proceeds from profitsharing, allowances for cost of living housing, children,
grocery, etc., overtime pay, emergent pay, hazards pay and
other benefits paid to an employee in cash or in kind.

Requisites for taxability

1. Personal services were actually rendered.
2. Payment was made for or such services
3. Payment was reasonable.
Form of Compensation and their Basis of Tax
1) Cash or money
- amount received
2) Property or in kind
- fair market value
3) Services rendered at stipulated price
- in the absence of evidence to the contrary, fair market value
4) Shares of stock
- fair market value
5) Notes/ evidence of indebtedness
- fair market value
6) Cancellation or forgiveness of debt
a) on account of debtors services amount of debt cancelled
b) if no services rendered by debtor no taxable income but
taxable gift
c) if creditor is a corporation and stockholder is the debtor
amount of debt cancelled is dividend income
7) Free living quarters or meals in addition to salary
a)if for convenience of the employer, not taxable
b) if it exceeds employees needs, ratable part thereof
employee himself would have spent is taxable

From Profession, Trade or

Business

Gains from Dealings in

Property
(ordinary assets)

Business defined - Any

activity that entails the time,
attention and effort of an
individual
or
group
of
individuals for purposes of
livelihood or profit.

Nature - these include all

income derived from the
disposition of property
(real, personal or mixed)
a. for money in case of
sale;
b. for property in case of
exchange; or
c. from a combination of
both
sale
and
exchange,
which
results
in
gain
because of the difference
between
the
taxpayer's
investment in what he
disposed of and the amount
or value of what he received.

Scope of business income Refers to income derived from

merchandising, manufacturing
and mining. It also includes,
that amount of profit derived
from farming operation.
Determination of "business
gross income".
1) In the case of merchandising,
manufacturing and mining:
Sales
P XXX
Less: Cost of Sales
XXX
Gross profit from
sales
XXX
Add: Other income
from investment or
from any incidental
or outside operation
or sources
XXX
Gross Income
P XXX

2) In the case of farming:

The term "farmer" includes
individual,
partnership
or
corporation, whose nature of
business is to operate or
manage farms for gain or profit.
Income of a farmer
(1)
C
ash received from sale of
produce raised in the farm
(2)
G
ross receipts from sale of
livestock and products
purchased from others.
(3)
G
a
ain from sale of work
animals
and
farm

equipment.
(4)
M
iscellaneous income such
as rent received on crop
shares,
proceeds
of
as
insurance on growing
crops, etc.

8) Facilities and privileges of relatively small value

- not subject to withholding if offered or furnished as a means of
promoting the health, goodwill of employees
9) Premiums paid by employer on life insurance whose family is
the beneficiary

3) Income from long-term

contract:
Nature of the income These are building, installation
or
construction
contracts
covering a period in excess of

101

Realization of gain (or

loss) - occurs only when,
as a result of the
transaction between the
owner
and
another
person, the property is
converted into another
property that
1) is essentially different'
from
the
property
disposed of,
2) has a market value.
- implies a change in
substance
and
not
merely a change in form.
- Hence, no gain or loss
results
in
"like-kind
exchanges"
which
includes "trade-in" even if
additional
cash
is
involved in the exchange.

Determination of
gain or loss
1) For property acquired by
purchase on or before March
1, 1913, the basis is the cost
2) For property acquired
through inheritance, the
basis is the fair market value
as of the date of acquisition
3) For property acquired as
gift, the basis is the same as
it would be in the hands of
the donor.
4) For property acquired for
less than the adequate
consideration, the basis is
the amount paid by the

- amount of premium paid is taxable

one year.
Methods of accounting:
10) Income tax paid by employer in consideration of the 1. Percentage of completion
employees service
basis - based on the
- amount of such tax paid
estimate of architect or
engineer.
11) Personal services performed partly within the Philippines
2. Completed contract basis Number of days
income is reported when
of Performance
project is finally completed.
in the Philippines X Compensation
Total number of
days of performance

transferee for the property.

Received

GROSS INCOME
Interest Income

Rental Income

Concept - Amount of compensation

paid for the use of money or
forbearance from such use.

Concept - Amount or compensation

paid for the use or enjoyment of a
thing or right. It implies a fix sum or
property amounting to a fix sum to be
paid at stated times for the use of
property.

Includes:
a) interest arising from indebtedness
whether business, or non business
legal or illegal, usurious or not,
b) interest from bank deposits which
does not constitute passive income
(those earned from a source outside
the Philippines)
Excluded from gross income:
a)
Interest on savings deposit, time
deposits, and deposit substitutes
subject to the 20% final tax.
b)
Interest income from long-term
deposit or investment in the form of
savings, common, or individual trust
funds,
deposit
substitutes,
investment management accounts
and other investments evidenced by
certificates prescribed by BSP, if not
pre-terminated within 5 years or
more.
This is true for all kinds of
individual taxpayers except nonresident alien not engaged in
trade
or
business
in
the
Philippines

Scope - All amount or property

received from lease contract, whether
used in business or not.
Items considered as rental income 1) Agreed amount per month or per year.
2) Obligations of lessor to third parties
which the lessee undertakes to pay as
further consideration of the lease, such
as:
a) Real estate taxes on leased
premises paid by the lessee to the
government.
b) Insurance premiums paid by lessee
on policy covering leased property.
c) Dividends paid by lessee to
stockholders of lessor-corporation,
in lieu of rent.
d) Interest paid by lessee to holder of
bonds issued by lessor-corporation,
instead of rent.
If in the nature of prepaid rentals
(advance rental), the entire amount
thereof is taxable income to the lessor
in the year received, if so received
under a claim of right and without
restriction as to its use, and whether
the lessor is on the cash or accrual
method of accounting.
If in the nature of security deposit for
compliance by the lessee of the terms
of the contract, it is not income to the
lessor. Income will only be realized in
the event that the lessee violates any
provision of the contract. If in the
nature of a loan, no taxable income to
the lessor when received.
Value of permanent improvements

102

Royalties
Concept - Like rent, royalties are
payments for the use of property. I
involves not only the use of the
property but also its exhaustion. It
includes earnings from copyrights,
patents, trademarks, formulas and
natural resources under lease.
Includes:
Royalties derived from sources outside
the Philippines do not constitute passive
income; hence is included in the
computation of gross income.
Excluded from gross income:
a) Royalties on sources within the
Philippines as they are considered
passive income tax subject to 20%
final tax.
b) Royalties on books, as well as
literary
works
and
musical
composition from sources within
the Philippines subject to 10% final
tax in case of individual taxpayers.

See items included in Rentals and

Royalties under Section 42 A (4) of
the NIRC.

made by lessee on leased property

that will become the property of the
lessor upon the expiration of the
lease. The lessor shall report this
income under any of the following
methods:
a) At the time when such buildings
improvements are completed, the
fair
market
value
thereof,
(outright method), or
b) He may spread over the life (or
remaining period) of the lease,
the estimated depreciated value
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. (Spread-out
method)

GROSS INCOME
Dividends

Annuities

Concept - A corporate profit set aside,

declared and ordered by the directors
of a corporation to be paid to
stockholders on demand or at a fixed
time.
Under the tax code, it means any
distribution made by a corporation to its
stockholders, whether in money,
property, out of its earnings and profits
accrued since March 1, 1913.

Concept - These refer to annuity

policies sold by insurance companies,
which provide installment payments
f o r life, or for a guaranteed fixed
period of time whichever i s l o n g e r
or for life and guaranteed fixed period.
The portion of each annuity
payment that represents return of
premium is not taxable while that
portion that represents interest is
taxable.

Includes:
Dividends that do not constitute
passive income.
Only dividend issued by a foreign
corporation to an individual taxpayer
(citizen or alien) is included in the
computation of gross income.
Exclusions:
Dividends considered as passive
income and those exempt from tax.
1) Dividend received from a domestic
corporation by resident citizen, nonresident citizen and resident alien:
19986% Final tax
19998% Final tax
200010% Final tax
2) Dividend received from a domestic
corporation by a non-resident alien
engaged in business in the Philippines:
- Final tax of 20%
3) Dividend receive from a domestic
corporation
by
another
domestic
corporation
and
resident
foreign
corporation (Inter-corporate dividends):
- Income tax exempt
4) Dividend Received from a domestic
corporation by a non-resident foreign
corporation, under certain conditions:
- Final tax of 15%

Annuities which are not exempt from

tax are included in the computation of
gross income.
If an annuity is an exclusion, then it is
not to be included in the computation
of gross income. But if it fails to
comply with the requirements of a taxexempt annuity, then the same is
taxable
and
included
in
the
computation of gross income.

103

Prizes and Winnings

Concept Amount of money in cash
or in kind received by chance or
through luck and generally are
taxable
except
if
specifically
mentioned under exclusion from gross
income.
Such as prizes received by an
individual taxpayer (except nonresident alien not engaged in
business
in
the
Philippines)
amounting to Ten thousand pesos
(P10.000) or less.
Exclusions:
Those considered passive income
and exempt from income tax.

Pension
Concept - Amount of money received
in lump sum or on staggered basis in
consideration of services rendered.
These are being given after the
individual reaches that age of
retirement. It is taxable to the extent of
the amount received except if there is
an approved pension plan by the
Bureau of Internal Revenue.

Partners Share in the net income

Of a General Professional Partnership
Includes the share of a partner in
general professional partnership
A distinction must be drawn
between a general professional
partnership
and
an
ordinary
partnership.
See Discussion on Partnerships

Exclusions:
Retirement Benefits received under
R.A. 4917.

104

Income from other sources

embraces all income not expressly

exempted within the class of taxable
income under the law, irrespective of
the voluntary or involuntary action of
the taxpayer in producing the gains,
and whether derived from legal or
illegal sources, such as:
1. Gains arising from expropriation of
property which constitute income from
dealings in property;
2. Income derived from illegal sources,
such
as
gambling,
theft,
embezzlement, and smuggling;
3. Compensation for damages if it
represents payment for loss of
expected
profits;
(damages
to
compensate property are not taxable,
--treated as return of capital).
4. Bad debts previously charged-off but
afterwards recovered;
5. Contest awards and prizes for
commercial
or
non-commercial
contests; and
6. Taxes previously deducted as an
expense and subsequently refunded.