GROSS INCOME

Learning Objectives:

After studying this chapter, you should be able to:

1. Define gross income.

2. State the major sources of taxable income.
3. Describe the broad classificatin of gross compensation income.
4. Describe the concept of income from business and exercise of profession.
5. Compute accurately gross income.
6. List incomes that are exempt or excluded from gross income.

DEFINITION

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 item
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. Partner’s distributive share from the net income of a general professional partnership

COMPENSATION INCOME

The term compensation means all remuneration for services performed by an employee for his
employer under an employer-employee relationship, unless specifically excluded by the Code.

Forms of Compensation

Compensation does not always come in the form of money or is always termed as such. Compensation
has various forms as follows:

1. Compensation paid in kind. Compensation may be in some medium other than money, as for
example, stocks, bonds and otehr forms of property. In this case, the fair market value of the
think taken in payment is the amount to be included as compensation subject to withholding.
Where compensation is paid in property other than money, the employer shall make necessary
arrangements to ensure that the amount of the tax required to be withheld is available for
payment to the Bureau of Internal Revenue.
2. Living quarters and meals. If a person receives a salary as remuneration for services rendered,
and in addition thereto, living quarters and meals so furnished shall be added to the
remuneration paid for the purpose of determining the amount of compensation subject to
withholding. However, if living quarters or meals are furnished to an employee for the
convenience of the employer, the value thereof need not be included as part of compensation
income.
3. Facilities and privileges of a relatively small value. Ordinarily, facilities and privileges, otherwise
known as de minimis benefits, furnished or offered by an employer to his employees, are not
considered as compensation subject to income tax and consequently to withholding tax if such
facilities or privileges are of relatively small value are offered or furnished by the employer
merely as a means of promoting the health, goodwill, contentment, or efficiency of his
employees. The following shall be considered de minimis benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial and rank-
and-file employees:
a. Monetized unused vacation leave credits of private employees not exceeding ten days
during the year;
b. Monetized value of vacation and sick leave credits paid to government officials and
employees;
c. Medical cash allowance to dependents of employees not exceeding ₱750 per employee
per semester or ₱125 per month; Per TRAIN, the allowance is not to exceed ₱1,500 per
semester or ₱250 per month;
d. Rice subsidy of ₱1,500 or 1 sack of 50-kg. Rice per month amounting to not more than
₱1,500; Per TRAIN, the ceiling has been raised to ₱2,000;
e. Uniform and clothing allowance not exceeding ₱5,000 per annum; Per TRAIN, the cap is
increased to ₱6,000.
f. Actual medical assistance, not exceeding ₱10,000 per annum.
g. Laundry allowance not exceeding ₱300 per month.
h. Employees achievement awards, which must be in the form of a tangible personal
property other than cash or gift certificate with an annual monetary value not exceeding
₱10,000 received by the employee under an established written plan which does not
discriminate in favor of highly paid employees.
i. Gifts given during Christmas and major anniversary celebrations not exceeding ₱5,000
per employee per annum.
j. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of
the basic minimum wage on a per region basis; and
k. Benefits received by an employee by virtue of a collective bargaining agreement (CBA)
and productivity incentives schemes provided that the total annual monetary value
received from bothCBA and productivity incentive schemes combined do not exceed
₱10,000 per employee per taxable year.

All other benefits given by employers which are not included in the above enumeration shall
not be considered as de minimis benefits; hence, shall be subject to fringe benefits tax.

The amount of de minimis benefits conforming to the ceiling above prescribed shall not be
considered in determining the ₱82,000 ceiling of other benefits excluded from gross income
 under Section 32(b)(7)(e) of the Code. However, if the employer pays more than the ceiling
prescrived, the excess shall be considered as part of other benefits and shall be taxable to
the employee receiving the benefits only if such excess is beyond the ₱82,000 ceiling.

Note further that MWEs receiving other benefits exceeding ₱82,000 limit shall be taxable on
the excess benefits, as well as on his salaries, wages and allowance, just like an employee
receiving compensation icnoem beyond the SMW.

Any amount given by the employer as benefits to its employees, whether classified as de
minimis benefits or fringe benefits, shall constitute as deductible expense upon such
employer.

Revenue Regulations 3-2015 amended RR 2-1998 to implement the provisions of RA 10653

on the increase to ₱82,000 (from ₱30,000) of the total amount of exclusion from gross
income for 13th month pay and other benefits. Per TRAIN, from ₱82,000 is increased to
₱90,000.

The exclusion from gross compensation icnome of the amount of ₱82,000 shall apply only to
the 13th month pay and other benefits paid or accrued beginning Jan. 1, 2015, shall in no
case apply to other compensation received by an employee under an employer-employee
relationship, such as basic salary and other allowances. This exclusion from gross income is
not applicabe to self-employed individuals and income generated from business.

4. Tips and gratuities. Tips and gratuities paid directly to an employee by a customer of the
employer which are not accounted for by the employee to the employer are considred as
taxable income but not subject to withholding.
5. Pensions, retirement and separation pay. Pensions, retirement and separation pay constitute
compensation subject to withholding, except those provided.
6. Fixed or variable transportation, representation and other allowances.
a. In general, fixed or variable transportation, representation and other allowances which
are recieved by a public office or employee of a private entity, in addition to the regular
compensation fixed for his position or office, is compensation subject to withholding.
Representation and transportation allowance (RATA) granted to pucblic officers and
employees under the General Appropriations Act and the Personnel Economic Relief
Allowance (PERA) which essentially constitute reimbursement for expenses incurred in
the performance of government personnel’s official duties shall not be subject to
income tax and consequently to withholding tax.
b. Any amount paid specifically, either as advances or reimbursement for traveling,
representation and other bona fide ordinary and necessary expenses incurred or
reasonably expected to be incurred by the employee in the performance of his duties
are not compensation subject to withholding, if the following conditions are satisfied:
i. It is for ordinart and necessary travaling and representation or entertainment
expenses paid or incurred by the employee in the pursuit of the trade, business
or profession; and
ii. The employee is required to account/liquidate for the foregoing expenses in
accordance with the specific requirements of substantiation for each category
of expenses pursuant to Section 34 of the Code. The excess of actual expenses
 over advances made shall constitute taxable income if such amount is not
returned to the employer. Reasonable amounts of reimbursements/advances
for traveling and entertainment expenses which are pre-computed on a daily
basis and are paid to an employee while he is on an assignment or duty need
not be subject to the requirements of substantiation and to withholding.
7. Vacation and sick leave allowances. Amounts of vacation allowances or sick leave credits which
are paid to an employee constitute compensation. Thus, the salaries of an employee on vacation
or on sick leave, which are paid notwithstandng his absence from work, constitute
compensation. However, the monetized unused vacation leave credits of private employees not
exceeding ten days during the year and monetized value of vacation and sick leave credits paid
to government officials and employees are not subject to income tax and to the withholding tax.
8. Deductions made by employer from compensation of employee. Any amoutn which is required
by law to be deducted by the employer from the compensation of an employee including the
withheld tax is considered as part of the employee’s compensation and is deemed to be paid to
the employee as compensation at the time the deduction is made.
9. Remuneration for services as employee of a nonresident alien individual or foreign entity. The
term compensation includes remuneration for services performed by an employee of a
nonresident aline individual, foreign partnership or foreign corporation, whether or not such
alien individual or foreign entity is engaged in trade or business within the Philippines. Any
person paying compensation on behalf of a nonresident alien individual, foreign partnership, or
foreign corporation which is not engaged in trade or business within the philippines is subject to
all provision of law and regulations applicable to an employer.
10. Compensation for services performed outside the Philippines. Remuneration for services
performed outside the Philippiens by a resident citizen for a domestic or a resident foreign
corporation or partnership, or for a non-resident corporation or partnership, or for a non-
resident individual not engaged in trade or business in the Philippines shall be treated as
compensation which is subject to tax.

BUSINESS INCOME

Manufacturing, Merchandising or Mining

In the case of a manufacturing, merchandising, or mining business, gross income means total sales, less
cost of goods sold plus any income from investments and from incidental or outside operations or
sources.

Gross Sales xxx

Less: Cost of Goods Sold xxx
Gross Profit from Sales xxx
Add: Other Income xxx
Gross Income xxx
In determining the gross income, substractions are not allowed for depreciation, depletion, selling
expenses or lsoses, or for items not ordinarily used in computing the cost of goods sold.

Farming
Gross income from farming includes gain or profit derived from the operations of farms, such as stock,
dairy, poultry, fruits and truck farms; plantations; ranches; etc. Income of farmers may be reported
using either the cash basis, accrual basis or crop year basis.

Cash Basis

Cash sales (or value of merchandise or other property xxx

received) of livestock and farm products raised in the farm
Sales of livestock and other items purchased xxx
Less: Cost of sales xxx
Gross profit xxx
Miscellaneous income xxx
Gross income xxx

Accrual Basis. Beginning and ending inventories of livestock and farm products raised and
purchased are considered to arrive at the gross income.

Ending inventory xxx

Cash sales (or value of merchandise or other property received) of livestock and xxx
farm products raised in the farm
Sales of livestock and other items purchased xxx
Miscellaneous income xxx
Total xxx
Less: Beginning inventory xxx
Cost of livestock and other items purchased xxx xxx
Gross income xxx

Crop Basis. This basis is used by farmers whose crop take more than one year from planting up
to harvesting and disposing. The entire cost of prodcution is deducted from the gross income in
the year it was realized.

GAINS DERIVED FROM DEALINGS IN PROPERTY

Gross income derived from dealings in property includes all income derived from the disposition of
property – real, personal, or mixed – for money (sale) or for other property (exchange) or for a
combination of both, which results in gain (or loss) because of the difference between the taxpayer’s
investment in what he disposed of and the value in what he received. The general rule is that, the entire
amount of the gain (or loss, as the case may be) arising therefrom is a taxable gain (or a deductible loss).

INTERESTS

Gross income derived from interest is only such interest as arising from indebtedness, that is,
compensation for the loan or forbearance of money, goods, or credits. Unless exempted by law, interest
received by a taxpayer is taxable. Interest includes those arising from indebtedness, whether business or
non-business, legal or illegal.
To recapitulate, interests from deposits and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements are subject to 20% final tax for resident and
non-resident citizens, resident aliens, domestic corporations and resident foreign corporations.

Non-resident foreign corporations are subject to the normal tax rates (Section 28(B)(1)) while non-
resident-alien not engaged in trade or business in the Philippines is taxed at 25% final tax.

For individuals, except non-resident aliens not engaged in trade or business in the Philippines, interest
income from long-term deposit or investmentin the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments evidenced by certificates
in such form prescrived by the Bangko Sentral ng Pilipas (BSP) with a maturity period of not less than
five (5) years and in denominations of ₱10,000 or other denominatios as may be approved by the BSP
issued by banks shall be exempt from income tax.

However, should the holder of the certificate pre-terminate the deposit or investment before the fifth
year, a tax shall be imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate based on the remaining
maturity thereof, as follows:

Four years to less than five years Final tax of 5%

Three years to less than four years Final tax of 12%
Less than three years Final tax of 20%

The interest subject to final tax shall not form part of the gross income for purposes of computing the
income tax liability of the taxpayer under Sections 24, 27 and 28.

Inter-company Advances

Intercompany advances more properly pertain to transactions between affiliated companies and
between parent and subsidiaries. These are not limited to financially distress situations. Common
financing is resorted to even among corporations that are fianncially sound.

RENTS

Rent is the amount paid for the use or enjoyment of a thing or right. Gross income derived from rent
comes not only from real estate but also from the use of personal property. For income arisign from
rentals of property, a taxpayer must report as part of gross income advance rentals received during the
taxable year, including rentals actually earned but uncollected as of the end of such period. Normally, a
lease contract is executed between the lessor and the lessee specifically providing for the term and
consideration of the lease. This consideration is taxable to the lessor in the form of rent income. Other
considerations which the lessee may pay to third parties are likewise taxable to the lessor.

Advance rental when there is no restriction as to its disposal by the lessor is taxable income to the lessor
in the year received regardlyess of the accounting method employed. But if it is a security deposit so
that the terms of the lease contract are complied with, it is not taxable to the lessor unless the lessee
violates a term thus forfeiting the deposit in favor of the lessor. If it is in the nature of a loan there is not
taxable income to the lessor when received.
Improvements on the property or leasehold improvements made by the lessee where both parties agree
that these shall belong to the lessor must be recognized by the lessor using either of the two methods –
inocme over the term of lease basis (spread-out) and income in the year of completion basis (outright).

ROYALTIES

Gross income derived from royalties includes earnings from copyrights, trademarks, patents, and natural
resources under lease. It involves not only the ise of the property but also its exhaustion. Royalties for
properties which produce coal, gas, oil, copper, timber or other similar product shall form part of gross
income for purposes of computing the income tax liability of the taxpayer under Sections 24(A), 27 and
28.

DIVIDENDS

Forms of Dividends and Income Tax Treatment

1. Cash Dividend. It is paid to shareholders or members in cash and is taxable at 6%, 8% and 10%
final tax, beginning Jan. 1, 1998, 1999 and 2000, respectively.
2. Property Dividend. It is paid in property of the corproation such as bonds, securities or stock
investments held by the corporation paying the dividend and is taxable at the same rate as cash
dividend.
3. Stock Dividend. It is paid in stock and is not taxable unless it represents a distribution of earnings
or profits.
4. Scrip Dividend. It is issued in the form of a promissory note and is taxable at the same rate as
cash dividend.
5. Liquidating Dividend. It does not constitute income. But when a corporation distributes all its
assets in compelete liquidation or dissolution, the transactio is deemed a sale or exchange
between the corporation and the stockholder. As such, the difference between the amount
received from the corporation and the cost of the shares surrendered by the stockholder is a
taxable capital gain or deductible capital loss to the extent of the capital gain.
6. Indirect Dividend. These are other payments or rights received by the taxpayer which in reality,
are dividends. Thus, if a corporation to which the stockholder is indebted forgives his debt, the
transaction has the effect of payment of cash dividend.

Tax Rates in Dividend Distribution

If a domestic corporation distributes dividends to:

a. Resident citizen, non-resident citizen and resident alien –

1998 - 6% final tax
1999 - 8% final tax
2000 - 10% final tax

b. Non-resident alien engaged in business in the Philippines – 20% final tax.

c. Non-resident aline not engaged in business in the Philippines – 25% final tax.
d. Domestic corporatio and resident foreign corporation – income tax exempt.
e. Non-resident foreign corporation, under certain conditions – 15% final tax.
Taxable and Non-Taxable Stock Dividend

1. A non-taxable stock dividend does not constitute income if the new certificates plus the old
ones do not change the proportionate interest of the stockholder in the net assets of the
corporation.
2. A taxable stock dividend constitutes income if it gives the shareholder a greater proportionate
interest in the corporation after its distribution. If a stockholder recieves a taxable stock
dividend, the measure of incoem in his part is the fair market value of the shares on the date the
stockholder received the shares.

ANNUITIES

These refer to annuity policies sold by insurance companies, which provide installment payments for
life, or for a guaranteed fixed period of time whichever is longer 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.

PRIZES AND WINNINGS

If the amount of prize is ₱10,000 or less, it is taxable under Section 24(A) (Pre-TRAIN). If it is above
₱10,000, a final tax of 20% applies. Before TRAIN Law, Philippine Charity Sweepstakes Office (PCSO)
and lotto winnings are tax exempt. Per TRAIN, PCSO and lotto winnings up to ₱10,000 are tax
exempt but above ₱10,000 are subject to 20% final tax.

Prizes and awards receied in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievement are not taxable if:

a. The recipient was selected without any action on his part to enter the contest or proceedings;
and
b. The recipient is not required to render substantial future services as a condition to receiving the
prize or award.

Prizes and awards granted to athletes in local and international sports competitions and
tournaments held in the Philippines or abroad and sanctioned by their national sports associations
are exempt from income tax. Prizes and awards in the nature of gifts are not taxable.

PENSIONS

Amount of money received in lump sum or on staggered basis in consideration of services rendered.
Pensions are being given after the individual reaches the 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.

INCOME FROM WHATEVER SOURCE

These include all other incomes not expressly exempt under the laws.

Examples:

1. Income derived from illegal sources, such as gambling, extortion, theft, bribes, embezzlement,
and smuggling are taxable.
 2. Compensation from damages if it represents paymen for loss of expected profits. Compensatory
damages constituting returns of capital are not taxable.
3. The amount of debt of a stockholder to a corporation when forgiven. This is in effect a payment
of dividend. If the debt is cancelled in exchange for personal services by the debtor, it shall
amount to compensation income. If for no consideration at all, the debt is cancelled, it may be
considered as a gift. If this is the case, the amount is not to be included as income.
4. Bad debts previously charged off but later recovered.
5. Taxes paid and subsequently refunded.
6. Tax informer’s reward to persons instrumental in the discovery of violations of the National
Internal Revenue Code and the discovery and seizure of smuggled goods.

SOURCES OF INCOME

1. Within the Philippines

2. Without the Philippines
3. Partly within and partly without

Determination of Source of Income

Income Source of Income

1. Compensation income Place of performance of service
2. Merchandising business Place of business
3. Manufacturing business
a. If produced in whole and sold within Purely within
b. If produced in whole and sold Purely without
without
c. If produced in whole or in part within Partly within and partly without
and sold without
d. If produced in whole or in part Partly within and partly without
without and sold within
4. Mining Place where mine is located
5. Farming Place where farm is located
6. Interest income Location of property
7. Rent income Location of property
8. Royalties Place where intangible is used
9. Dividend from
a. Domestic corporation Within
b. Foreign corporation
If for a three-year period before the declaration of such dividend, the ratio of such
corporation’s Philippine income to the world income was:
1. Less than 50% Entirely foreign sources
2. 50% to 85% *Proportionate
3. More than 85% Entirely Philippine sources

*(Phil. Gross income/Entire Gross Income) x Dividend received = Income from within

10. Gain on sale of real property Location of property

 11. Gain on sale of personal property Place of sale
purchased in one country and sold in
another
12. Gain on sale of domestic shares of stock Within

EXCLUSION FROM GROSS INCOME

The following items shall not be included in the computation of gross income and shall be exempt from
income taxation.

1. Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or otherwise, but if such amounts are held b the
insurer under an agreement to pay interest thereon, the interest payments shall be included in
gross income. Also excludible is 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.
2. Gifts, bequests and devises. The value of property acquired by gift, bequest, devise, or descent.
Provided, however, that income from such property, as well as gift, bequest, devise, or descent
of income from any property, in cases of transfers of divided interest, shall be included in gross
income.
3. Compensation for injuries or sickness. Amounts received, through accident or health insurance
or under Workmen’s Compensation Acts, as comepnsation for personal injuries or sickness, plus
the amounts of amy damages received, whether by suit or agreement, on account of such
injuries or sickness.
4. Income Exempt Under Treaty. Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines.
5. Retirement Benefits, Pensions and Gratuities, etc.
a. Retirement benefits received under RA 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with a
reasonable private benefit plan maintained by the employer. Provided, that the retiring
official or employee has been in the service of the same employer for at least 10 years
and is not less than 50 years of age at the time of his retirement. Provided further, that
the benefits granted under this subparagraph shall be availed of by an official or
employee only once.
b. 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 from the service of the
employer because of death, sickness or other physical disability or for any cause beyond
the control of the said official or employee.
c. The provisions of any existing law to the contrary notwithstanding, social security
benefits, retirement gratuities, pensions and other similar benefits received by residet
or non-resident citizens of the Philippines or aliens who come to reside permanently in
the Philippines from foreign government agencies and other institutions, private or
public.
 d. Payments of benefits due or to become due to any person residing in the Philippines
under the laws of the United States administered by the United States Veterans
Administration.
e. Benefits received from or enjoyed under the Social Security System in accordance with
the provisions of RA 8282.
f. Benefits received from the GSIS under RA 8291, including retirement gratuity received
by government officials and employees.
g. Investment income of the contributor consisting of all icnome earned from the
investments and reinvestments of personal equity and retirement account (PERA) assets
in the maximum amount is exempt under RA 9505 and Revenue Regulations 17-2011.
6. Miscellaneous Items
a. Income derived by Foreign Government. Income derived from investments in the
Philippines in loans, stocks, bonds, or other domestic securities, or from interest on
deposits in banks in the Philippines by
i. Foreign governments
ii. Financing institutions owned, controlled, or enjoying refinancing from foreign
governments
iii. International or regional financial institutions established by foreign
governments.
b. Income derived by the Government or its Political Subdivisions. Income derived from
any public utility or from the exercise of any essential governmental functions accruing
to the Government of the Philippines or to any political subdivision thereof.
c. Prizes and awards. Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:
i. The recipient was selected without any action on his part to enter the contest ir
proceeding; and
ii. The recipient is not required to render substantial future services as a condition
to receiving the prize or award.
d. 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 association.
e. 13th Month Pay and Other Benefits. Gross benefits received by officials and employees
of public and private entities. Provided, however, that the total exclusion under this
subparagraph shall not exceed ₱82,000 (per TRAIN, ₱90,000) which shall cover:
i. Benefits received by officials and employees of the national and local
government pursuant to RA 6686;
ii. Benefits received by employees pursuant to Presidential Decree 851, as
amended by Memorandum Order 28, dated Aug. 3, 1986;
iii. Benefits received by officials and employees not covered by Presidential Decree
851, as amended by Memorandum Order 28, dated Aug. 13, 1986; and
iv. Other benefits such as productivity incentives and Christmas bonus.
f. GSIS, SSS, Medicare, Pag-ibig and Other Contributions. GSIS, SSS, Medicare and Pag-ibig
contributions, and union dues of individuals. These items are not included in the Gross
Taxable Compensation Income.
g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. Gains
realized from the sale or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five years.
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.
i. Holiday pay, overtime pay, night shift differential pay and hazard pay received by
minimum wages earners.
j. Campaign contributions, as a rule, are not included in the taxable income if the
candidate to whom they were given because such contributions were given, not for the
personal expenditure/enrichment of the candidate concerned, but for the purpose of
utilizing such contributions for the campaign. Thus, to be exempted from income tax,
these campaign contributions must have been utilized to cover a candidate’s
expenditures for the electoral campaign.