Gross Income

Gross income

As defined in the Tax Code means 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 from 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
11. Partners distributive share from the net income of a general
professional partnership

Terms
Payroll Period means the period of services for which a payment of
compensation is ordinarily made to an employee by his employer
Employee - individual performing services under an employer-employee
relationship
Employer means any person for whom an individual performs or performed
any service, of whatever nature, under an employer-employee relationship.
Statutory Minimum Wage refers to the rate fixed by the Regional Tripartite
Wage and Productivity Board
Minimum Wage Earner (MWE) refers to a worker in the private sector paid
the statutory minimum wage, or to an employee in the public sector
receiving compensation income of not more than the statutory minimum
wage.

Elements of employer and employee

relationship under case law
1. Selection and engagement of employees
2. Payment of wages
3. Power of dismissal
4. Power of control
* An arrangement which do no manifest all the elements is not an employer
employee relationship but an independent contract for provision of
services.

Types of Employees as to function

1. Managerial employees those who are given powers or prerogatives to
lay down and execute managerial policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or discipline employees.
2. Supervisory employees those who effectively recommend such
managerial actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of independent
judgment.
3. Rank and file employees those who hold neither managerial nor
supervisory functions.

Types of Employees as to Taxability

1. Minimum wage earners an employee who is a recipient of minimum
wage and is exempt from taxation
2. Special employees special aliens subject to the 15% final income tax
on compensation income.
3. Regular employees an employee subject to the regular progressive
income tax.

Special alien refers to aliens holding managerial or technical position in a

1. Regional or area headquarters (RHQ) or Regional operating
headquarters of multinational companies.
2. Offshore banking units
3. Petroleum service contractors/subcontractors

Optional final income tax to Filipino employees*

Filipinos who are occupying the same positions as those held by special
aliens may opt to be taxed at the 15% final income tax on gross income or
the regular income tax. Hence, the term special alien includes qualifying
Filipino employees who opted to be taxed at 15% of gross income

Problem (1)
Mr. Kuonoman is a non-resident Japanese expert hired as technical
employee of FilDrill, a petroleum service contractor developing the
Malampaya Service Contract No 32.

Problem (2)
Mr. Camacho, a resident Filipino, is hired as operations manager of the
offshore banking unit of Eurobank in the Philippines. Mr. Camacho opted to
the 15% preferential income tax.

Problem (3)
Mr. Escala, a resident Filipino, occupies a managerial position in the ROHQ
of Cosmetics International. He derived an annual income of P1,100,000
inclusive of P300,000 annual part-time income from outside employment.

The Tax Model on

Compensation Income
Gross Compensation Income
Less: Non Taxable Compensation
Gross taxable Compensation Income

P xxx
xxx
P xxx

Non-Taxable or Exempt Compensation

A. Benefits excluded and/or exempted under the NIRC and special laws.
B. Benefits exempt under treaty or international agreements
C. Benefits necessary to the trade, business or conduct of profession of the
employer
D. Benefits for the convenience or advantage of the employer.

A. EXEMPT BENEFITS Under the NIRC,

As Amended, and Special Laws
1. Renumerations received as incidents of employments
a. Exempt retirement benefits under RA 7641, including exempt retirement
gratuities to government officials and employees
b. Exempt termination benefits
c. Benefits from the US Veterans Administration
d. SSS, retirement, gratuities, pensions and similar benefits from foreign
government agencies and other institutions, private or public
e. Benefits from SSS, under the SSS Act of 1954, as amended
f. Benefits from GSIS under the GSIS Act of 1937, as amended

2. Employee mandatory contributions to GSIS, Philhealth, HDMF and Union

dues.
3. Certain benefits of minimum wage earners
4. De minimis benefits
5. 13th month pay and other benefits not exceeding P82,000.

Exempt benefits of
minimum wage earners
1. Basic minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential pay
5. Hazard pay

De minimis benefits*
De minimis benefits are facilities or privileges such as entertainment,
medical services, or courtesy discount on purchases that are relatively
sall value and are furnished by the employer merely as a means of
promoting the health, goodwill, contentment or efficiency of his
employees.
De minimis benefits are petty fringe benefits exempt from income tax.
1. Monetized unused vacation leave credits of private employees not
exceeding 10 days during the year**
2. Monetized unused 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 P1,500 or 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 medical allowance to cover medical and
healthcare needs, annual medical/executive check-up, maternity assistance
and routine consultation not exceeding P10,000 per annum
7. Laundry allowance not exceeding P300 per month.
8. Employee achievement award. e.g. For length of service or safety
achievement which must be in the form of tangible property other than
cash or gift certificates, with an annual monetary value not exceeding
P10,000 received by the employee under an established written plan which
does not discriminate in favor of highly paid employees.
9. Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum (i.e. Christmas gift and
anniversary gifts)

9. Daily meal allowance for overtime work and night or graveyard shift not
exceeding 25% of the basic minimum wage on a per region basis.
10. Benefits received by an employee by virtue of a collective bargaining
agreement (CBA) and productivity incentive schemes provided that the
total annual monetary value received from both CBA and productivity
incentive schemes combined do not exceed P10,000 per employee per
taxable year.

Taxable de minimis benefits

1. Excess de minimis over their limits
2. Other benefits of relatively small value that are not included in the list of
de minimis benefits

Treatment of taxable
de minimis benefits
a. For rank and file employees treated as other compensation income
under the category 13th month pay and other benefits
b. For managerial and supervisory employees fringe benefits subject to
final fringe benefit tax

Problem (4) De minimis limits

Alexander, a private employee who is paid a P600 daily rate, receives the
following benefits during the year 2015:
Monetized unused vacation leave credits
Monetized unused sick leave credits
Medical assistance
Rice subsidy (P2,000 per month)

9 days
9 days
7,000
24,000

Clothing allowance

8,000

Laundry allowance

6,000

Required: Determine the taxable amount of de-minimis benefits.

Problem (5)
Gioavanni, a government rank and file employee, received the following
benefits
Monetized unused vacation leave credits (10 days)

6,000

Monetized unused sick leave credits (15 days)

9,000

Uniform allowance

5,000

Laundry allowance

4,800

Required: Determine the amount to be included in other benefits

Problem (6)
Professor Radvic was one of the Hall of Fame awardee of Youbee University.
He was granted P25,000 cash as loyalty award for his 30 years of service.
He was also given P10,000 Christmas gift and an additional P10,000 gift
during the institution Founding Day Anniversary. Besides, he was also given
free lunch meals with a total value of P15,000 during the same year.
Required: Compute the total taxable de-minimis benefits as other benefits.

B. EXEMPT BENEFITS UNDER TREATY

OR INTERNATIONAL AGREEMENTS
Employee benefits of non-Filipino nationals or nonpermanent residents of the Philippines from foreign
government, embassies or diplomatic missions and
international organizations in the Philippines are exempt
from income tax.

Filipino employees of foreign governments, international missions and

organizations are taxable as a rule, except only to employees of the
following organizations:
1. United Nations (UN)
2. Specialized Agencies of the United Nations
3. Australian Agency for International Development (AUSAID)
4. Food and Agriculture Organization (FAO)
5. World Health Organization (WHO)
6. United Nations Development Programme (UNDP)
7. International Organization for Migration (IOM)
8. International Seabed Authority (ISA)

Confirmation of Tax Exemptions

The exemption is not automatic.

Filipinos claiming exemptions under the terms of international

agreements or under provisions of special laws granting privileges to
international organizations shall file an application for confirmation of
tax exemption with the BIRs International Tax Affairs Division. The
confirmation shall serve proof as exemption. Without the confirmation
certificate, the employee is taxable.

c. BENEFITS REQUIRED BY THE NATURE OF, OR

NECESSARY TO THE TRADE, BUSINESS CONDUCT OF
PROFESSION OF THE EMPLOYER.

Benefits or allowances furnished by the employer to the employee

to enable them to appropriately and effectively execute their duties
as required by the employment are exempt from income tax. This is
referred to as necessity of the employer rule.

c. BENEFITS FOR THE CONVENIENCE

OR ADVANTAGE, OF THE EMPLOYER
Benefits or allowances which are intended for the
furtherance of the interest of the employers business or
to ensure its smooth operations are like exempt from
income tax. This is referred to as convenience of the
employer rule.

GROSS TAXABLE
COMPENSATION INCOME
Classification of gross taxable compensation income
1. Regular compensation the fixed renumerations received by the
employee every payroll period
2. Supplemental compensation other performance-based pays to
employees with or without regard to the payroll period.
3. 13th month pay and other benefit a residual category which generally
includes incentive pays and all other taxable employee benefits.*

Problem (7)
An employee received P400,000 regular compensation, P100,000
supplemental compensation and P90,000 13th month pay and other
benefits.
How much is the gross taxable compensation income.

Deadline of Filing and Remittance of

Withholding Tax on Compensation
Employers shall file 1601-C Monthly Remittance Return of Income
Taxes Withheld on compensation on or before the 10th day of the
following month the withheld for December which shall be filed on
or before January 15 of the succeeding year.
Employers are also required to file BIR Form 1604-CF on or before
January 31 of the following calendar year in which the
compensation income payments and passive income payments
were made.

Treatment of Withholding Tax on

Compensation

To the employee the withholding tax on compensation is a tax credit

which is deductible against his consolidated or annual income tax due.

If the employee has other items of income that are subject to regular
income tax, he must file a consolidated income tax return. The
withholding tax on compensation is credited against the total tax due in
the consolidated income tax return.

If an employee has no other sources of income subject to regular tax

aside from his compensation, he may apply for a substituted filing of tax
return.

Substituted Filing of Return

Under the substituted filing system, the employer files
the income tax return of the employee. If the amount
of tax is correctly withheld by the employer, the
employee no longer needs to file an annual income
tax return.

REGULAR
INCOME TAXATION :
INDIVIDUALS

Individual Income Taxation

Subject to:
Final tax
Capital gains tax
Regular income tax

Coverage of Progressive Income Tax

The regular income tax of individuals is referred to as the progressive

income tax.

Covers all individual taxpayers, including taxable estates and trusts,

except the following taxpayers which are subject to final tax:

a. Non resident alien not engaged in trade or business

b. Special Alien

Regular Tax Model for Individuals

Gross Compensation Income
Less : Personal Exemptions

Pxx
xx

Taxable Compensation Income

Pxx

Gross income from business/profession

Pxx

Deductions

xx

Net Income

Pxx

Taxable Income

Pxx

Progressive Tax Table

Income tax due of Individual Taxpayer is determined based on the following
scheduler tax rates
OVER

BUT NOT OVER

10,000.00

10,000.00

30,000.00

30,000.00

70,000.00

70,000.00

PLUS
-

OF EXCESS OVER
5%

10%

10,000.00

2,500.00

15%

30,000.00

140,000.00

8,500.00

20%

70,000.00

140,000.00

250,000.00

22,500.00

25%

140,000.00

250,000.00

500,000.00

50,000.00

30%

250,000.00

125,000.00

32%

500,000.00

500,000.00

500.00

Personal Exemptions

Personal exemptions are the theoretical, personal. Living and family

expenses of an individual allowed to be deducted from the gross or net
income of an individual taxpayer.

These are the arbitrary amounts which have been calculated by our
lawmakers to be roughly equivalent to the minimum subsistence, taking
into consideration the personal status and qualified dependents of the
taxpayers.

Who can claim personal exemption?

Individual taxpayers subject to progressive tax can claim personal
exemptions. Individuals who are not subject to progressive tax such as the
following cannot claim personal exemption
a. Non resident alien not engaged in trade or business
b. Special Alien

Types of personal exemptions

1. Basic personal exemption
2. Additional personal exemption
3. Premium for health and hospitalization insurance

Basic Personal Exemption

RA 9504
(net)

RA 8424
(old)

Single, including separated spouse

Without a dependent, widow or widower

50,000

20,000

Head of the family

50,000

25,000

Married

50,000

32,000

Taxable estates or trust

20,000

20,000

25,000

8,000

Additional personal exemptions

For every dependents, not exceeding four

Requisites of Claimable Dependents

1. A legitimate, legally adopted, recognized natural or
illegitimate child, including a foster child;
2. Living with the taxpayer and dependent upon him for
chief support;
3. Not more than 21 years old, unmarried and not
gainfully employed;
4. Regardless of age, if incapable of self-support because
of physical or mental defect.

Who is the claimant of additional

exemption?
The proper claimant of additional exemption is the
husband unless he waived his right in favor of the wife.

Problem (1)
Ms. Lovely Landy is single with five dependent children.

Problem (2)
Mr. and Mrs, Aparri are both employed and have the following dependent
children:
Jazmine

27 years old, married and unemployed

Ramon

25 years old, mentally retarded

John

23 years old, unmarried and unemployed

Rhad Vic

21 years old, married and unemployed

Rodolfo

18 years old, unmarried and employed

Czarina

16 years old, college student with boyfriend

Ramsay

14 years old, high school student

Problem (3)
Mr. Masipag supports the following dependents :
Kareen

12 years old foster child, not related by blood

Rennie

15 years old, mentally retarded godson

Mark

21 years old, boyfriend

Mamang

70 years old, sole surviving parent of Ms. Masipag

Romeo

45 years old cousin, a disabled person

Tony

64 years old, uncle.

Problem (4)
Mr. Wong, a Chinese national, is employed as a manager in the ROHQ of a
multinational company established in the Philippines. He has 3 minor
dependent children.

Rule of Change of Status

1. If the taxpayer should have additional dependents during the year, the
taxpayer may claim the corresponding additional exemption in full for
such year.
2. If the taxpayer dies during the year, his estate may still claim the
personal additional exemption for himself and his dependents as if he
died at the close of such year.
3. If any of the dependent dies, marries, becomes 21 years old or became
gainfully employed during the taxable year, the taxpayer may still claim
the same exemption as if the event occurred at the end of the year.