Gifts distinguished from exchange

The transferor’s intention or motive must be evaluated in determining whether transfer is a gift or an
exchange. Gifts are characterized by pure liberality of disinterested generosity and are given without any
consideration. An exchange always involves a consideration.

Employment gratuities

Gratuities given under an employer-employee relationship are normally treated exchange for services
rendered by employees. Hence, they are subject to income tax. The transfer of properties by the
employer to managerial; or supervisory employees generally subject to fringe benefit tax. Christmas or
major anniversary gifts granted the employer to employees is de minimis benefit subject to income tax.

D. Compensation for injuries and sickness- amounts received through accident or health insurance or
under Workmen’s Compensation Acts in compensation for personal injuries or sickness, plus the
amounts of any damage received, whether by suit or agreement, on account of such injuries or sickness.

E. Income exempt under treaty

Income items that are excluded by international agreement to which the Philippine Government is a
signatory are excluded from income tax. It must recalled the treaty agreements override provisions of
our revenue tax laws case of conflict under the exemption doctrine of international comity

F. Retirement Benefits, pensions, gratuities and other benefits

I. retirement benefit under RA 7641 and those received by officials and employees of private firms in
accordance with a reasonable private benefit plan maintained by the employer

Requisites of exemption: (Pneumonics: 1-10-50-RPBP)

a) This is the first time availment of retirement benefit exemption.

b) The retiring official or employee has been in the services of the same employer for at least ten
years

c) The retiring employee is at least fifty years of age at the time of retirement
d) The employer maintains a reasonable private benefit plan

A reasonable private benefit plan means a pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit some or all of his officials or employees, wherein
contributions are made by such employer for the officials or employees, or both for the purposes of
distributing to such officials and employees the earnings and principal of the fund thus accumulated,
and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund
be used for, or be diverted to any purpose other than for the exclusive benefit of the said officials and
employees.

To be exempt, the retirement benefit plan must be “trusteed” plan where the fund is held under the
management of a trustee free from both employer and employee control.

The 10-year service period requirement pertains to cumulative years of employment with same
employer. It does not need to be continuous years of employment. A requirement for continuous
employment would be prejudicial to working women.

2. Separation or Termination

Requisites of exemption:

1. The separation or termination must be due to job-threatening sickness, deaths, or other

2. The same must be due to any cause beyond the control of the employee official such as:

a) Redundancy

b) Retrenchment

c) Closure of employer’s business

d) Employee lay-off

e) Downsizing of employer’s business

f) Sickness or death of the employee

The phrase “beyond the control of the employee” connotes involuntariness on the part of the
employee. In other words, the separation must not be of his own making.
Abandonment of office such as the registration and subsequent appointment another office is
considered as a voluntary separation and does not fall within the purview of the phrase “for any cause
beyond the control of such official employee”. (BIR Ruling 054- 2001)

The exemption of termination or separation benefits does not extend to :

1. Back wages or illegal deductions repaid by the employer upon termination (BIR Ruling 003-2004)

2. Terminal leave pay or the commutation of accumulated unused leave credit (BIR Ruling No. 199-2011)

To avail of the tax exemption, the employee or his heirs shall request for a ruling or certificate of
exemption (CTE) from the BIR. The request for a CTE and other required document shall be files at RDO
where the employe4r is registered.

3. Social Security benefits retirement Gratuities and other similar benefits from foreign government
agencies and the other institutions, private or public, received by resident or non-resident citizens or
aliens who come to settle permanently in the Philippines.

4. United States Veterans Administration (USVA)- administered benefits under the laws of the United
States received by any person residing in the Philippines.

5. Social Security System (SSS) benefits under RA8282

6. GSIS benefits under RA 8291 including retirement gratuity received government officials and
employees.

G. Miscellaneous Items

1. Income derived on investments in the Philippines in loans, stocks, bonds or other domestic securities
or from interest on deposits in banks in the Philippines by:

a) Foreign governments
b) Financing institutions owned, controlled, or enjoying refinancing from foreign government

c) International or regional financial institutions established by foreign governments.

These are exempt under the extension doctrine of international comity

2. Income derived by government and its political; subdivisions from:

a) Any [public utility

b) Exercise of essential government function

Government agencies and instrumentalities

The general rule with government agencies and instrumentalities is exempt because of their public
service nature. However, taxation applies when they engaged in income –producing activities which are
proprietary or commercial in nature

This exemption does not extend to government-owned and controlled corporations. GOCCs are
generally taxable as regular corporations because their operations are proprietary in nature.

3. Prizes and Awards made primarily in recognition of religious chartable, scientific, educational, artistic,
literary or civic achievements but only if:

a) The recipient was selected without any action on his part to enter the contract or proceeding
and

b) The recipient is not required to render substantia; future services as condition to receiving the
prize or award.

Prizes of this kind partake the nature of unilateral transfer and hence, exempt from income tax. These
transfers are also exempt by law from transfer tax. If the recipient exerted effort for the grant of the
prize such as joining a contest or is required to render service for its grant, the prize would e construed
as received in an exchange; hence taxable as income

Examples of exempt prizes:

1. Nobel prize award

3. CNN hero of the year

4. Most outstanding citizen

4. Prizes and Awards in Sports Competitions granted to athletes:

a) In local or international competitions and tournaments

b) Whether held in the Philipines or abroad and

c) Sanctioned by their national sports associations

5. Contributions for GSIS, SSS, PhilHealth, Pag-Ibig and Union dues of individuals

These pertain to the employee share in the premium contributions to GSIS, SSS, Phil Health, pagibig and
Union dues. The portion of the salary thus contributed is exempt from income tax.

Under RMC No. 21-2011, the exclusion pertains only to the mandatory or compulsory monthly
contributions. Voluntary contributions to Pag-ibig II, GSIS or SSS in excess of the mandatory monthly
contribution are taxable. Note that Pag-Ibig is now called the Home development Mutual Fund or
HDMF.

6. Contributions to Personal equity Retirement Account (PERA)

PERA is a contributor’s voluntary retirement account established from qualifications contributions of the
contributor and or his employer for the sole purpose of being invested in qualified PERA investment
products
Each OFW is allowed to contribute up to P200,000 per year to PERA account. Non-OFW are allowed
P100,000 contributions per year. Husband and wife can each contribute up to the maximum allowable
contribution.

Contributions to PERA accounts are exclusions in gross income. This is an additional exclusion and is
separate with the exclusion for contributions to SSS and GSIS. Moreover, PERA contributors are allowed
to claim 5% of their PERA contributions as tax credit against any internal revenue taxes.

7. PERA investment income and PERA distributions

PERA investment income is exempt from taxes (such as final tax, capital gains tax and regular income
tax). The PERA account assets will be distributed back to the contributor either in lump sum, life pension
or in installment upon reaching the age o 55 oe to his heirs or beneficiaries upon his or her death. PERA
distributions are likewise exclusions in gross income of the contributor or his heirs and beneficiaries as
the case may be.

8. 13th Month Pay and Other benefits received by officials and employees of public or private entities
not exceeding P90,000.

9. Gains from sale of bonds, debentures, or other certificate of indebtedness with a maturity of more
than 5 years

This exemption is grounded upon the same assumption that long-term indebtedness is diverted to the
financing of long-term projects which is viewed as beneficial to the development of the country.

The term “gain” however, does not include “interest”.

10. gains realized from redemption of shares in a mutual fund company by the investor

The term mutual fund company shall mean an open end and close end Investment Company as defined
under the Investment company act

Mutual funds pool the money invested by different investor and invest the money to earn investment
income which shall add up to the net assets of the fund. A participating investor must purchase
participation shares, the investor gains or losses by his proportionate share in the increase or decrease
in the Net Asset value of the Fund.

OTHER EXEMPT INCOME UNDER THE NIRC AN SPECIAL LAW

1. Minimum wage and certain benefits of Minimum wage earners

2. Income of Barangay Micro-business enterprise act (RA 9178)

3. Income of cooperatives (RA 9520)

4. Income of non-stock, non-profits entities

5. Income of qualified employee trust funds

6. Business or professional income of self-employed and or professionals opted to the 8% income