ii.

REALIZATION OF INCOME

iii. RECOGNITION OF INCOME

iv. CASH METHOD OF ACCOUNTING VERSUS ACCRUAL METHOD OF

ACCOUNTING

b.2.3 TEST IN DETERMINING WHETHER INCOME IS EARNED FOR TAX PURPOSES

i. REALIZATION TEST

II. CLAIM OF RIGHT DOCTRINE/DOCTRINE OF OWNERSHIP, COMMAND AND

CONTROL

iii. ECONOMIC BENEFIT TEST, DOCTRINE OF PROPRIETARY INTEREST

iv. SEVERANCE TEST

v. ALL EVENTS TEST

b.2.4 CLASSIFICATION OF INCOME

b.2.5 SITUS OF INCOME TAXATION

b.3 GROSS INCOME

b.3.1 DEFENITION

b.3.2 CONCEPT OF INCOME FROM WHATEVER SOURCE DERIVED

b.3.3 GROSS INCOME VIS--VIS NET INCOME VIS--VIS TAXABLE INCOME

b.3.4 SOURCES OF INCOME SUBJECT TO TAX

b.3.5 CLASSIFICATION OF INCOME SUBJECT TO TAX

i. COMPENSATION INCOME

ii. FRINGE BENEFIT

iii. PROFESSIONAL INCOME

iv. INCOME FROM BUSINESS

v. INCOME FROM DEALING IN PROPERTY

vi. PASSIVE INVESTMENT INCOME

 vii. ANNUITIES, PROCEEDS FROM LIFE INSURANCE OR OTHER TYPES OF
INSURANCE

viii. PRIZES AND AWARDS

ix. PENSIONS, RETIREMENT BENEFIT OR SEPARATION PAY

x. INCOME FROM ANY SOURCE WHATEVER

b.3.6 EXCLUSIONS FROM GROSS INCOME

i. RATIONALE FOR THE EXCLUSIONS

ii. TAXPAYERS WHO MAY AVAIL OF THE EXCLUSIONS

iii. EXCLUSIONS DISTINGUISHED FROM DEDUCTIONS AND TAX CREDIT

iv. EXCLUSIONS UNDER THE CONSTITUTION

v. EXCLUSIONS UNDER THE TAX CODE

vi. EXCLUSIONS UNDER SPECIAL LAWS

ii. REALIZATION OF INCOME
Under the realization
principle, revenue is generally recognized
when both conditions are met: a) earning
process is complete or virtually complete
and b) an exchange has taken place
Income is received not only when it
is actually handed to a person but also
when it is merely constructively received by
him
When is income considered
realized? (2011 BAR)
iii. RECOGNITION OF INCOME
Recognition of income is when an
income is reflected on the books and is
based upon the method of accounting used.
iv. CASH METHOD OF ACCOUNTING
VERSUS ACCRUAL METHOD OF
ACCOUNTING
Cash method is a method of
accounting whereby all items of gross
income received during the year shall be
accounted for in such taxable year and that
only expenses actually paid shall be claimed
as deductions the year. Income is realized
upon actual or constructive receipt of cash
or its equivalent while expenses are
deductible only upon actual payment
thereof. (Mamalateo)
Accrual method is a method of
accounting for income in the period it is
earned, regardless whether it has been
received or not. On the other hand,
expenses are accounted for in the period
they are incurred and not the period they
are paid. (ibid.)
Cash method Distinguished from accrual
method:
In cash method, income is reported
in the year payments are received while
expenses are deducted in the year paid. On
the other hand, in accrual method, income
is reported in the year it is earned while
expenses are deducted in the year it is
incurred, regardless of receipt or
disbursement of cash. (ibid.)
The necessity of adopting an
accounting method is based upon the
express mandate of the law that the
method of accounting regularly employed
by the taxpayer in keeping his books must
clearly reflect his income for the year. (see
sec. 43 NIRC)
Taxpayer must choose only one
accounting method but if no such method
of accounting has been so employed, or if
the method employed does not clearly
reflect the income, the computation shall
be made in accordance with such method
as in the opinion of the Commissioner
clearly reflects the income. (see sec. 43
NIRC)
b.2.3 TEST IN DETERMINING WHETHER
INCOME IS EARNED FOR TAX PURPOSES
i. REALIZATION TEST
There is no taxable income until
there is a separation from capital of
something of exchangeable value, thereby
supplying the realization or transmutation
which would result in the receipt of income.
(Eisner v. Macomber 252 U.S. 189)
ii. CLAIM OF RIGHT DOCTRINE OR
DOCTRINE OF OWNERSHIP, COMMAND
AND CONTROL
Claim of right doctrine - A taxable
gain is conditioned upon the presence of a
claim of right to the alleged gain and the
absence of a definite unconditional
obligation to return or repay that which
would otherwise constitute a gain.
(Mamalateo)
Doctrine of command or control of
income. The power to dispose of income
is the equivalent of ownership of it. The
exercise of that power to procure the
payment of income to another is the
enjoyment; hence, the realization of the
income by him who exercises it. (ibid.)
iii. ECONOMIC BENEFIT TEST, DOCTRINE OF
PROPRIETARY INTEREST
Any economic benefit to the
employee that increases his networth,
whatever may have been the mode by
which it is effected, is taxable.
Total assets - total liabilities =
networth (ibid.)
iv. SEVERANCE TEST
Also referred to as Realization Test
v. ALL EVENTS TEST
Income is reportable when all the
events have occurred that fix the taxpayers
right to receive the income and the amount
can be determined with reasonable
accuracy. (CIR v. Isabela Cultural Corp, G.R.
NO. 172231)
b.2.4 CLASSIFICATION OF INCOME
As to source:
a) Income from sources within the
Philippines
b) Income from sources without the
Philippines
c) Income from sources partly within
and partly without the Philippines.
d)
b.2.5 SITUS OF INCOME TAXATION
Except when otherwise provided in this
Code:
(A) A citizen of the Philippines residing
therein is taxable on all income derived
from sources within and without the
Philippines;
(B) A nonresident citizen is taxable only on
income derived from sources within the
Philippines;
(C) An individual citizen of the Philippines
who is working and deriving income from
abroad as an overseas contract worker is
taxable only on income derived from
sources within the Philippines:
Provided, That a seaman who is a citizen of
the Philippines and who receives
compensation for services rendered abroad
as a member of the complement of a vessel
engaged exclusively in international trade
shall be treated as an overseas contract
worker;
(D) An alien individual, whether a resident
or not of the Philippines, is taxable only on
income derived from sources within the
Philippines;
(E) A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
(F) A foreign corporation, whether engaged
or not in trade or business in the
Philippines, is taxable only on income
derived from sources within the Philippines.
(Sec. 23 NIRC)
Interests = Residence of the debtor or
Obligor
Dividends = Residence of the Corporation
paying dividend
Services = Place of performance of the
services. ( Non-resident alien taxed only on
her commission income for services
rendered in the Philippines)
International shipping line = Gross
Philippine billings. (Gross Philippine billing
means gross revenue whether for
passenger, cargo, or mail originating from
the Philippines up to final destination,
regardless of the place of sale or payments
of the passage or freight documents.)
International air carrier = Gross Philippine
billing. (GPB refers to gross revenue derived
from carriage of persons, excess baggage,
cargo or mail originating from the
Philippines in a continuous and
uninterrupted flight, irrespective of the
place of sale or payment of ticket.
Sale of real property = location of real
property.
Sale of personal property
a) Produced within and sold
without or produced without
and sold within = partly within
and partly without the
Philippines.
b) Purchased within and sold
without or purchased without
and sold within = Country where
sold.
c) Shares of stocks of DC = within
the Philippines.
(Mamalateo)
b.3 GROSS INCOME
b.3.1 DEFENITION
Gross income was defined by Tax
code by giving items included therein.
Except when otherwise provided, all
income derived from whatever source,
including, but not limited to, the following
items:
1. Compensation for services in whatever
form paid, including, but not limited to fees,
salaries, wages, commissions and similar
items;
2. Gross income derived from the conduct
of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions; and
11. Partners distributive share from the net
income of the GPP
(see Section 32(A), NIRC)
b.3.2 CONCEPT OF INCOME FROM
WHATEVER SOURCE DERIVED
Income from whatever sources
refers to all income not expressly excluded
or exempted from the class of taxable
income, irrespective of the voluntary or
involuntary action of the taxpayer in
producing the income (Gutierrez v. CIR, CTA
CASE NO. 65, AUGUST 31, 1965]
b.3.3 GROSS INCOME VIS--VIS NET
INCOME VIS--VIS TAXABLE INCOME
"Net income" means gross income
less statutory deductions and exemptions. (
sec. 36 rev. reg. nos. 2)
Taxable income means the
pertinent items of gross income specified in
this Code, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income by this
Code or other special laws. (sec. 31 NIRC)
What is taxable income (2000 BAR)
b.3.4 SOURCES OF INCOME SUBJECT TO
TAX
b.3.5 CLASSIFICATION OF INCOME SUBJECT
TO TAX
i. COMPENSATION INCOME
In general, the term "compensation"
means all remuneration for services
performed by an employee for his employer
under an employer-employee relationship,
Employee refers to any individual
who is the recipient of wages and includes
an officer, employee or elected official of
the government or any political subdivision,
agency or instrumentality thereof.
Officers and directors of a
Corporation is considered employee. (First
Lepanto v. CIR GR no. 197117)
Compensation income means all
remuneration performed by an individual
employee for his employer.
Statutory Minimum Wage
Compensation income falling within
the meaning of "statutory minimum wage"
shall be exempt from income tax and
withholding tax. (R.A. No. 9504)
Holiday pay, overtime pay, night
shift differential pay, and hazard pay earned
by Minimum Wage Earner (MWE) shall
likewise be covered by the above
exemption, (ibid.)

Additional compensation not
included above not exempt (ibid.)
Backwages, Allowances, and
benefits awarded in labor dispute
Subject to withholding tax on wages
because they are still considered as
compensation and should be allocated over
the years corresponding to such amount.
Garnishees (such as bank) will be
considered as withholding agent equivalent
to 5% of the taxable backwages,
allowances and benefits. (RMC 32-2012)
Following remunerations are not
compensation:
(a) for agricultural labor paid
entirely in products of the farm
where the labor is performed
(b) for domestic service in a private
home;
(c) for casual labor not in the course
of the employer's trade or business;
(d) for services by a citizen or
resident of the Philippines for a
foreign government or an
international organization.
(sec. 78 NIRC)
13th month pay and other benefits are
excluded from compensation income (sec
32 (B) NIRC)
ii. FRINGE BENEFIT
Fringe Benefit defined. - For
purposes of this Section, the term "fringe
benefit" means any good, service or other
benefit furnished or granted in cash or in
kind by an employer to an individual
employee (except rank and file employees
as defined herein) such as, but not limited
to, the following:.
(1)Housing;
(2)Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid,
driver and others;
(5) Interest on loan at less than market rate
to the extent of the difference between the
market rate and actual rate granted;
(6) Membership fees, dues and other
expenses borne by the employer for the
employee in social and athletic clubs or
other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee
or his dependents; and
(10) Life or health insurance and other non-
life insurance premiums or similar amounts
in excess of what the law allows. (sec. 33
NIRC)
Fringe benefit tax
General Rule
A final tax of (32%) effective January
1, 2000 and thereafter, is hereby imposed
on the grossed-up monetary value of fringe
benefit (unless the
Exception
Fringe benefit is required by the
nature of, or necessary to the trade,
business or profession of the employer, or
when the fringe benefit is for the
convenience or advantage of the employer.
The grossed-up monetary value of
the fringe benefit shall be determined by
dividing the actual monetary value of the
fringe benefit by (68%) effective January 1,
2000 for Citizens, RA, and NRAETB; (75%)
for NRANEBT; (85%) alien employed by
RAHQ, ROHQ, OBU and foreign service
contractor engaged in petroleum.
Thereafter multiply the grossed-up
monetary value to the applicable fringe
benefit tax rate.
FBT tax rates:
Citizens, RA, NRAETB = 32 %
NRANETB = 25%
Alien employed by RAHQ, ROHQ,
OBU, or foreign petroleum service
contractors or subcontractors, or
any of their Filipino individual
employees who are employed and
occupying same positions as those
held by the alien employees = 15%
(see sec. 33 and 25 of NIRC)
Applies only to managerial and
supervisory employee.
Income recipient is the person liable
but the fringe benefit tax is mandated to be
assumed by the employer and allows the
latter to deduct such tax as business
expense. (NIRC)
Non taxable fringe benefit:
(1) fringe benefits which are authorized and
exempted from tax under special laws;
(2) Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file
employees, whether granted under a
collective bargaining agreement or not; and
(4) De minimis benefits as defined in the
rules and regulations to be promulgated by
the Secretary of Finance, upon
recommendation of the Commissioner.
(sec. 33 (C) NIRC)
De minimis benefits are limited to
facilities or privileges furnished or
offered by an employer to his
employees that are relatively small
value and are offered or furnished
by the employer merely as a means
of promoting the health, goodwill,
commitment or efficiency of his
employees. Following are
considered as such:
1. Monetized unused vacation leave
credits of private employees not exceeding
ten (10) days during the year;
2. Monetized value of vacation and
sick leave credits paid to government
officials and employees;
3. Medical cash allowance to
dependents of employees, not exceeding
P750 per employee per semester or P125
per month;
 4. Rice subsidy of P1,500 or one (1)
sack of 50 kg. rice per month amounting to
not more than P1,500;
5. Uniform and clothing allowance
not exceeding P5,000 per annum;
6. Actual medical assistance, e.g.
medical allowance to cover medical and
healthcare needs, annual medical check-up,
maternity assistance, and routine
consultations, not exceeding P10,000 per
annum;
7. Laundry allowance not exceeding
P300 per month;
8. Employees achievement awards,
e.g. for length of service or safety
achievement, with an annual monetary
value not exceeding P10,000;
9. Gifts given during Christmas and
major anniversary celebrations not
exceeding P5,000 per employee per
annum;48
10. Daily meal allowance for
overtime work and night/graveyard shift
not exceeding 25% of the basic minimum
wage per region basis. (RR 005-11 as
amended by RR 008-12)
Stock option plans (SOP):
Income derived from SOP which is
the difference of BV or FMV of shares
whichever is higher, at time stock option is
exercised, and price fixed on the shares on
the grant date that qualifies as fringe
benefit tax is subject to FBT (Mamalateo)
FBT arises whether shares is that of
domestic or foreign corporation. (ibid.)
iii. PROFESSIONAL INCOME
Professional income refers to the
fees received by a professional from the
practice of his profession, provided that
there is no employer-employee relationship
between him and his clients. (ibid.)
Material factor is existence of
Employer-Employee relationship.
iv. INCOME FROM BUSINESS
There is no specific criterion as to
what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be
judged in the light of its peculiar
environmental circumstances.
(Commissioner vs. British Overseas Airways
Corp., G.R. L-65773)
"To engage" is to embark in a
business or to employ oneself therein. The
word "engage" connotes more than a single
act or a single transaction; it involves some
continuity of action (Imperial vs. Collector,
97 Phil. 992,1002).
Gross income from business In
the case of 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.
In determining the gross income,
subtractions should not be made for
depreciation, depletion, selling expenses or
losses, or for items not ordinarily used in
computing the cost of goods sold. (sec. 43
RR no. 2)
Long-term contracts means
building, installation, or construction
contracts covering a period in excess of one
year. Persons whose income is derived in
whole or in part from such contracts shall
report their income on the basis of
percentage of completion. (Mamalateo)
Sale of patents and copyrights
Income or loss is the difference between
the selling price and the cost increased or
decreased by depreciation. (ibid.)
Sale of goodwill income or loss is
determined by the difference of selling
price and the FMV as proven by the
taxpayer. (ibid.)
Forced sale of property through
expropriation income or loss is
determined by the difference between the
proceeds and the FMV of the property at
the time of acquisition. (ibid)
Lease of real property rental
income is likewise treated as business
income subject to tax in rate as provided by
law. (RC, NRC, NRAETB-graduated,
NRANETC-25%) (ibid)
v. INCOME FROM DEALING IN PROPERTY
Dealings with:
Capital Assets (CA) subject to capital
gains tax
General types of CA:
a) Shares of stocks including warrants
and options to purchase stocks and
units of participation in partnership.
Rules:
If seller is dealer in securities the
shares are ordinary asset (OA),
subject to graduated tax.
If seller not a dealer in securities
shares are CA
o If listed and traded in local
stock exchange subject to
of 1% stock transfer tax
based on gross selling price.
o If shares not listed, or if
listed but not traded in local
stock exchange subject to
capital gains tax of 5% for 1st
100,000 and 10 % for excess
of 100, 000 based on net
capital gains.
b) Real property
Rules:
If seller is real estate dealer the
property is OA and subjected to
graudated tax rates.
Seller not a real estate dealer
determine whether:
o The real property is a) used
in tax payers trade, business
or profession or b) treated as
a fixed asset used in his
trade, business or profession
-
ordinary asset subject to
graduated tax rates.
 o The real property is not
among abovementioned
capital asset subject to 6%
depositary bank may pay on savings and
capital gains tax based on
time deposits in accordance with rates
gross selling price or FMV of
authorized by Bangko Sentral ng Pilipinas.
the property at the time of
(RR12-80)
sale whichever is higher.
c) Other capital asset
Dealings with other capital assets,
except shares of stock of a domestic
corporation and real property located in the
Philippines, shall be subjected to graduated
tax rate.
Ordinary Assets Graduated tax rates
a) Stock in trade of the taxpayer or
other property of a kind which
would properly be included in
the inventory of the taxpayer if
on hand at the close of the
taxable year,
b) Property held by the taxpayer
primarily for sale to customers in
the ordinary course of his trade
or business,
c) Property used in the trade or
business, of a character which is
subject to the allowance for
depreciation provided in
Subsection (F) of Section 34; or
d) Real property used in trade or
business of the taxpayer (sec. 39
NIRC).
vi. PASSIVE INVESTMENT INCOME
a) Interest Income
Interest means the amount which a
Interest income from Philippines
currency deposits and deposit
substitutes subject to 20% final
withholding tax except NRANETB
which is subject to 25%
Deposit substitute means an
alternative form of obtaining funds
from the public other than deposits,
which may be through issuance,
endorsement, or acceptance of debt
instrument for the borrowers
account for the purpose of relending
or purchasing receivables and other
obligations, or financing their own
needs or that of their agent or
dealers. (Mamalateo)
o Interest from currency bank
deposits and yield or any
other monetary benefit from
deposit substitute, trust fund
and other similar
arrangement - 25% FWT for
NRANETB and the rest is 20%
20%.
o Interest from government
debt instrument and
securities - the debt
instrument is considered as
deposit substitute regardless
of number of investor and
 subjected to same FWT. o 3 years to less than 4 years 12%
(20% or 25%) o Less than 3 years 20%
o Interest from long term
(sec. 24 and 25 NIRC)
deposits or investment
maturity period exceeds 5 b) Dividend Income
years will be exempted.
o Interest from depositary Dividends comprise any distribution
bank under expanded foreign whether in cash or other property in the
currency deposit system ordinary course of business.(Mamalateo)
7.5% FWT- if interest
Dividend is defined as a corporate
received by residents
profit set aside, declared, and ordered by
Exempt if interest is
the directors to be paid to stockholders on
received by non-residents
demand or at a fixed time. (Fisher v.
50% exempt 50% 7.5 joint
Collector)
account of a resident and
non-resident. Distinction between Cash dividend and
Interest income on foreign currency Stock dividend
deposit
The former is disbursement to the
o 7.5% FWT - gross interest
stockholder of the accumulated
income from foreign
earnings, and the corporation parts
currency deposit with OBU,
irrevocably with all interest therein
FCDU.
while the latter is dividend payable
o 10% FWT - interest income
in reserve or increase of additional
from foreign currency
stock of the corporation.
transactions of a bank.
The former unlike the latter involves
Interest income from traditional
disbursement.
loans by local banks and other
The former unlike when declared
creditors subject to graduated tax
and paid cannot be reached by
rates except:
corporations creditors unlike the
o NRANETB 25% Final tax.
latter being in essence still the
o NRFC 20% Final tax.
property of corporation can be
Discounts are treated in the same
reached by the creditors.
manner as interest income
Interest income from long term b.a) Stock dividends
deposits or investments of
individuals is exempt Generally exempt from tax except if it gives
o Exceeding 5 years exempt shareholder an interest different from that
o 4 years to less than 5 years - 5% which his former stockholdings represent.
 Subsequent cancellation or
redemption of stock dividend is
essentially equivalent to the
declaration of a cash dividend.
(Mamalateo)
Rules on taxation of cash or property
dividends
Recipient is Citizen or RA- 10% FWT
Recipient is NRAETB 20% FWT
Recipient is NRANETB 25% FWT
Recipient is DC and RFC
o From DC exempt because
doing otherwise will subject
the dividend to tax twice.
First from corporate level the
dividend being part of its
taxable income and second
on the shareholder level
being a dividend income
which will ultimately result in
extra or double taxation.
Recipient is NRFC
o From DC 15% FWT
provided that the NRFC
domicile allows a tax credit
due from NRFC which is
deemed to have been paid in
the Philippines.
Tax sparing rule is a credit granted
by the residence country for foreign taxes
that for some reasons were not actually
paid to the source country but that would
have been paid under the countrys normal
tax rules. (ibid.)
c) Royalty Income
Royalty is a valuable property that
can be developed and sold on a regular
basis for consideration - it is an active
business subject to normal corporate
income tax. (ibid)
Where a person pays royalty to
another for use of intellectual property it
is a passive income and subject to 20% FWT
(ibid.)
Rules:
Royalty paid by DC
o Recipient is a citizen, RA ,
NRAETB, DC, or RFC 20 %
FWT
o Recipient is NRANETB 25 %
FWT
o Recipient is NRFC 30%
FWT.
Royalty paid by FC
o Recipient is RC and DC
subject to graduated rates.
o Recipient is NRC , alien, and
FC not taxable because
they are liable only from
sources within the
Philippines.
d) Rental Income
Rules
Lease of personal property located
in Philippines but paid to a non-
resident:
 o Vessel 4.5% for non-
resident corporation and
25% for NRA
o Aircraft, machineries and
other equipment 7.5 % for
non-resident corporation
and 25% for NRA.
vii. ANNUITIES, PROCEEDS FROM LIFE
INSURANCE OR OTHER TYPES OF
INSURANCE
(see discussion on exclusion)
viii. PRIZES AND AWARDS
Rules:
General Rule:
Prizes and winnings within the
Philippines 20% FWT
If the recipient is a NRANETB 25 %
FWT.
Exception:
Graduated rate if:
o Prizes amounts to 10000 or
less
o PCSO and lotto winnings
Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary, or
civic achievement are excluded from gross
income if: a) recipient was selected without
action on his part and b) recipient not
required to render substantial future
services as a condition. (sec. 32 NIRC)
Prizes and awards in local or
international sports competition whether
held in the Philippines or not is also
excluded from gross income. (sec. 32 NIRC)
Grand prize in Philippine Centennial
Commemorative is subject to 20 % FWT
though government sponsored project.(BIR
Ruling No. 005-2001)
ix. PENSIONS, RETIREMENT BENEFIT OR
SEPARATION PAY
Separation pay is included in gross
income only when the cause of separation
is within the control of the employee.
(Mamalateo)
Retirement benefit and pensions are
generally excluded from gross except if the
retirement of employee does not meet
requirements laid by RA 4917 and RA 7641.
(ibid)
(See discussion on exclusion)
x. INCOME FROM ANY SOURCE WHATEVER
This words disclose the legislative
policy to include all income not expressly
exempted within the taxable income under
our laws, irrespective of the voluntary or
involuntary action of the taxpayer in
producing the gain (Blas Gutierrez v.
Collector)
The principle underlying the
taxability of an increase in the net worth of
a taxpayer rests on the theory that such an
increase in net worth, if unreported and not
explained by the taxpayer, comes from the
income derived from a taxable source.
(Hermanos v. Commisioner and CTA)
b.3.6 EXCLUSIONS FROM GROSS INCOME
i. RATIONALE FOR THE EXCLUSIONS
Exclusions are items not included in
determination of gross income because
they are either expressly exempted by the
Constitution, Tax Code, tax treaties, or
special laws; they are mere return of
capital; or they are subject to another kind
of tax.
ii. TAXPAYERS WHO MAY AVAIL OF THE
EXCLUSIONS
All taxpayers may avail of the
exclusions
iii. EXCLUSIONS DISTINGUISHED FROM
DEDUCTIONS AND TAX CREDIT
Exclusions v. Deductions
Former is the flow of wealth to the taxpayer
which is not treated as part of gross income
because it is exempted or it does not come
within the definition of income while the
latter is the amounts which the law allows
to be subtracted from gross income in order
to arrive at net income
Former pertain to the computation of gross
income while latter pertains to computation
of taxable income.
Former is something received or earned by
the taxpayer but which do not form part of
gross income while the latter are something
spent or paid in earning gross income
Exclusions v. Tax Credits
Former are amounts that are not included
in gross income while latter are amounts
subtracted from the computed tax in order
to arrive at taxes payable
Former are not income while the latter are
taxes that are not collected. (Atty. PM
Reyes Bar Reviewer)
iv. EXCLUSIONS UNDER THE
CONSTITUTION
All revenues and assets of non-
stock, non-profit educational institutions
used actually, directly, and exclusively for
educational purposes shall be exempt from
taxes and duties. (sec. 4(3) Art. XIV
Constitution)
v. EXCLUSIONS UNDER THE TAX CODE
Section 32 of the Tax Code enumerates the
excluded items from gross income
a) Life Insurance proceeds
Proceeds of life insurance paid by
reason of the death of an insured to any
beneficiary (individual, partnership, or
corporation, but not a transferee for a
valuable consideration), directly or in trust,
are excluded from the gross income of the
beneficiary.
REASON: they are mere compensation
for the loss of the recipient.
 Immaterial whether proceeds are
received in a single sum or in installments.
However, if proceeds are held by the
insurer under an agreement to pay interest
thereon, the interest payments must be
included in income.
b) Amount Received by Insured as
Return of Premium
The amount received by the insured, as
a return of premiums paid by him under
life insurance, endowment, or annuity
contracts, either during the term or at the
maturity of the term mentioned in the
contract or upon surrender of the contract.
REASON: Proceeds of life insurance,
payable upon the death of the insured,
are considered as indemnity rather than
income to the heirs or beneficiaries who
could be corporations or individuals (El
Oriente Fabrica de Tabacos vs. Posadas,
G.R. No. 34774).
Amounts received (other than amounts
paid by reason of the death of the insured
and interest payments on such amounts)
under a life insurance, endowment, or
annuity contract are excluded from gross
income but if such amounts (when added to
amounts already received before the
taxable year under such contract) exceed
the aggregate premiums or considerations
paid (whether or not paid during the
taxable year), then the excess shall be
included in gross income.
However, in the case of a transfer for a
valuable consideration, by assignment or
otherwise, of a life insurance, endowment,
or annuity contract, or any interest therein,
only the actual value of such consideration
and the amount of the premiums and other
sums subsequently paid by the transferee
are exempt from taxation. (RR 02-40 sec.62)
c) Gifts, Bequests, and Devises. -
Gifts, bequests and devises (which are
subject to estate or gift taxes) are excluded,
but not the income from such property. If
the amount received is on account of
services rendered, whether constituting a
demandable debt or not, or the use or
opportunity to use of capital, the receipt is
income (Pirovano vs. Commissioner, 14
SCRA 832).
d) Compensation for Injuries or
Sickness
Amounts received through accident or
health insurance or under workmen's
compensation acts, as compensation for
personal injuries or sickness, plus the
amounts of any damages received, whether
by suit or agreement, on account of such
injuries or sickness are excluded from gross
income.
Compensations for damages to personal
or family rights, damages for slander and
libel, award for loss of life, damages for
injuries to the goodwill of a taxpayer's
business are not taxable. Unless they
exceeded its cost in which case excess is
taxable.
Damages received for patent
infringement, breach of contract or
fiduciary duty and recoveries under the
Clayton Act for antitrust violations are
excluded from gross income to the extent
that the losses to which the damages relate
did not give rise to a tax benefit either in
the recovery year or earlier tax years.
However, "insider profits" recovered by
a corporation from the insider (major
stockholder or director) under the
Securities Exchange Act of 1934 or the
Investment Company Act of 1940 are taxed
to the corporation.
Moral damages are also excluded in
gross income because it is in the category of
an award designed to compensate the
claimant for actual injury suffered and not
to impose a penalty on the wrongdoer
(Kierulf v. CA GR No. 142029)
e) Income Exempt under Treaty
Business profits of a foreign corporation
organized under the laws of a treaty
country from sources within the Philippines
are not subject to Philippines income tax,
unless such profits are attributable to a
permanent establishment of the foreign
corporation created or deemed created in
the Philippines
Capital gains from sale of shares of stock
of a domestic corporation, which is always
presumed by law to have situs in the
Philippines, are generally not subject to
Philippine income tax, if there exist no real
property interest.
f) Retirement Benefits, Pensions,
Gratuities, etc.
1) Retirement benefits under RA.. Nos.
4917 and 7641, and under Section
60(B) of Tax Code.
Retirement benefits received under
R.A. No. 7641 and those received by
officials and employees of private firms,
in accordance with a reasonable private
benefit plan maintained by the
employer (under R.A. No. 4917),
Provided that the retiring official or
employee:
o Have been in service for at
least 10 years
o Not less than 50 years of age
at the time of his retirement,
o Benefit shall be availed of by
an official or employee only
once.
Separation pay for causes beyond
the control of employee.
The phrase "for any cause beyond
the control of the said official or
employee" means that the
separation of the employee must be
involuntary and not initiated by him
such as:
Retrenchment, installation of labor
saving devices dissolution of company
Terminal leave pay
Any amount received by an official
or employee or by his heirs from the
employer as a consequence of
separation of such official or employee Philippines Investment income in
from the service of the employer due to loans, stocks, bonds or other
death, sickness, or other physical domestic securities, or interest on
disability or for any cause beyond the Philippines bank deposits of:
control of said official or employee is o Foreign governments,
excluded, the tax exemption applies to o Financing institutions owned,
salary or cash equivalent of controlled or enjoying
accumulated vacation and sick leaves refinancing from the foreign
such as the terminal leave pays of governments, and
retiring government employees, which o International or regional
are considered not part of the gross financial institutions established
salary. (Commissioner v. Castaneda 203 by foreign government.
SCRA 72)
Income Derived by the Government
Social security benefits, retirement
or its Political Subdivisions. - Income
gratuities, pensions and other
derived from any public utility or
similar benefits received by resident
from the exercise of any essential
or nonresident citizens of the
governmental function accruing to
Philippines or aliens who come to
the Government of the Philippines
reside permanently in the
or to any political subdivision
Philippines from foreign government
thereof.
agencies and other institutions,
private or public.
Prizes and Awards - Prizes and
Payments of benefits to any person
awards made primarily in
residing in the Philippines under the
recognition of religious, charitable,
laws of the United States
scientific, educational, artistic,
administered by the United States
literary, or civic achievement but
Veterans Administration.
only if:
Benefits received from SSS in
o The recipient was selected
Republic Act No. 8282.
without any action on his part to
Benefits received from the GSIS
enter the contest or proceeding;
under Republic Act No. 8291,
and
including
o The recipient is not required to
Retirement gratuity received by render substantial future
government officials and employees. services as a condition to
receiving the prize or award.
g) Miscellaneous items
 Prizes and Awards in Sports
Competition. - All prizes and awards
granted to athletes in local and
international sports competitions
and tournaments whether held in
the Philippines or abroad and
sanctioned by their national sports
associations.
To be eligible for exemption, the
national sports association referred
to in the law that should sanction
said sport activity is the Philippine
Olympic Committee (BIR Ruling No.
026-2000, June 13, 2000).
13th Month Pay and Other Benefits.
- certificates
Exclusion shall not exceed 82,000.
(NIRC as amended by RA no. 10653)
The ceiling covers:
o Benefits received by officials and
employees of the national and
local government pursuant to
Republic Act No. 6686;
o Benefits received by employees
pursuant to Presidential Decree
No. 851, as amended by
Memorandum Order No. 28,
dated August 13, 1986;
o Benefits received by officials
and employees not covered by
Presidential decree No. 851, as
amended by Memorandum
Order No. 28, dated August 13,
1986; and
o Other benefits such as
productivity incentives and
Christmas bonus: Provided,
GSIS, SSS, Medicare and Other
Contributions. - GSIS, SSS, Medicare
and Pag-ibig contributions, and
union dues of individuals.
Gains from the Sale of Bonds,
Debentures or other Certificate of
Indebtedness. - Gains realized from
the same or exchange or retirement
of bonds, debentures or other
certificate of indebtedness with a
maturity of more than five (5) years.
Gains cannot include interest, since
it clearly refers to gains from the
sale of bonds, debentures and other
of indebtedness.
Whereas, the term gains includes
interest in its general sense, this rule
cannot be applied to (this section) in
specific sense. Tax Code defines
gross income and it is clear that
there is distinction between gains
derived from dealings in property
and interest. Gains realized from the
sale or exchange or retirement of
bonds, debentures and other
certificate of indebtedness would
fall under the category of gains
derived from dealings in property.
(Nippon Life Insurance v. CIR Case
no. 6142)
(h) Gains from Redemption of
Shares in Mutual Fund. - Gains
realized by the investor upon
redemption of shares of stock in a
 mutual fund company as defined in
Section 22 (BB) of this Code.
vi. EXCLUSIONS UNDER SPECIAL LAWS
R.A. No. 7916 (Philippine Export Zone
Authority Law)
PEZA-registered enterprises are given
income tax holidays of six or four years
from the date of commercial operation and
after such, 5% final tax on their gross
income.
R.A. No. 6657 (Comprehensive Agrarian
Reform Package Law)
Gain from transfer of agricultural property
covered under the law shall be exempt
from capital gains tax for ten (10) years.
R.A. No. 7653 (New Central Bank Act)
Bangko Sentral ng Pilipinas is exempt from
all taxes for (5) years.
R.A. No. 7279 (Urban Development Housing
Act of 1992)
National Housing Authority is
exempt from all fees and charges of
any kind such as income tax; realty
taxes; and documentary stamp tax
on sales transactions executed by
and in favor of the NHA in
connection with socialized housing
projects.
Private Sector Participating In
Socialized Housing:
Exempt from the payment of the
following national internal revenue
taxes
1) Project-related corporate or
individual income taxes on a per
project basis on income directly
realized from the development
of socialized housing sites:
Provided, that the sale or any
disposition of lot and/or house
and lot packages beyond the
maximum amount of P400,000
(or later amount determined by
the HLURB) shall be subject to
the corresponding income taxes;
2) Capital gains tax on sale of raw
lands for use in socialized
housing project;
3) Value added tax for the project
contractor/developer/ seller or
owner of socialized housing
project;
4) Donor's tax for lands certified by
the proper LGU to have been
donated for socialized housing
purposes.
R.A. No. 8502 (Jewelry Industry
Development Act of 1998)
Incentives available to Qualified Jewelry
Enterprises:
1) (0%) duty on imported raw
materials,
2) Exemption from excise tax on all
goods commonly or
commercially known as jewelry
3) Deduction from taxable income
of (50%) of expenses incurred in
training schemes approved by
 the appropriate agency.
deductible during the financial
year the expenses were
incurred.
4) Gold and silver sales by BSP
under minimal margins;
R.A. No. 8525 (Adopt-a-School Act of 1998)
Following tax incentives are granted to a
prequalified adopting private entity, which
enters into an Agreement with a public
school:
1) Deduction from the gross
income of the amount of
contribution/
donation that were actually,
directly and exclusively incurred
for the Program, subject to sect.
34(H) of the Tax Code plus
(50%) of such contribution/
donation subject to the following
conditions:
a) deduction shall be availed of
in the taxable year in which
the expenses have been paid
or incurred
b) taxpayer can substantiate
the following with sufficient
evidence:
b.1 the expenses claimed as
deduction,
b.2 relation of the expenses
to the adopting private
entity's participation in the
Adopt-a-School Program,
b.3 Proof of receipt of the
contributed/donated
property by the recipient
public school
c) Application with approved
Agreement endorsed by the
National Secretariat, shall be
filed with the (RDO) having
jurisdiction over the place of
business of the
donor/adopting private
entity,
2) Exemption of the Assistance
made by the donor from
payment of donor's tax pursuant
to Section 101(A)(2) and (B)(1) of
the Tax Code of 1997.
R.A. No. 7277, as amended by R.A. No.
9442, (Magna Carta for Persons with
Disability)
Persons with disability shall be entitled to
claim at least 20% discount from hotels and
restaurants, sports and recreation centers,
all drugstores regarding purchase of
medicines.
VAT computed after such deduction.
R.A. No. 9504 (July 6,2008),
"Statutory minimum wage" (SMW) paid to
SMW earners shall be exempt from income
tax.
R.A. No. 9576 (April 9, 2009)
PDIC will be exempt from income tax, final
withholding tax, VAT on assessment
collections as well as local taxes.
Tax obligations of Philippine Deposit
Insurance Corporation (PDIC) will be
charged against the Tax Expenditure
Fund. Starting on the sixth year.
R.A. No. 6938 (Cooperative Code of the
Philippines)

Agricultural multi-purpose cooperative

registered with the CDA is exempt from
ordinary income tax on transactions with
members and non-members for 10 years
from registration. Thereafter exemption
applies only to transaction with members
only.

R.A. No. 9178 (Barangay Micro Business Act

of 2002)

Barangay Micro Business Enterprises BMBE

are exempt from income tax from income
arising from operation of the enterprise.

BMBE are those entities engaged in

production, processing or manufacturing of
products, whose total assets including those
arising from loans but exclusive of the land
where their office, plant or equipment are
situated, does not exceed 3 million.