Module 7

Module 7 – REGULAR INCOME TAX: GROSS INCOME
Regular Income Tax applies to all other items of gross income that are not subjected to final tax or
capital gains tax on certain passive income. Most of these items are derived in the regular conduct of
business, trade, profession or employment.
Features of the RIT:

1. General coverage
2. Net income tax
3. Annual tax that is paid in quarterly estimated payments
4. Advanced payment through creditable withholding taxes
Types of RIT
1. Progressive Income Tax – applicable to individuals, taxable estates and trusts
Tax Rates for Year 2018 to 2022

TAXABLE INCOME PER YEAR INCOME TAX RATE
P250,000 and below 0%
Above P250,000 to P400,000 20% of the excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000
2. Corporate Income Tax: 30% on taxable income – applicable to corporations, partnership and
joint venture
Taxable Income (TI) – pertinent items of gross income subject to regular tax less the deductions and/or
exemptions, if any, authorized for such types of income under the NIRC or other special laws.
Gross Income (GI) – gains, profits and income derived from whatever sources, whether legal or illegal
not covered by either final taxation or capital gains taxation.
EXCLUSIONS FROM GI:

1. Proceed of a life insurance policy – received whether in lump sum or otherwise, by the heirs or
beneficiary upon the death of the insured is tax exempt. However, if the proceeds are retained
by the insurer under an agreement to pay interest, the interest is included in GI.
2. Amount received by the insured as a return of premium under a life insurance, endowment or
annuity contracts paid during the term or at the maturity of the term mentioned in the contract
or upon surrender of the contract.
3. Gifts, Bequests and Devises or Descent – the value of property acquired by way of these are
taxable under Donor’s taxation. However, incomes from such property, as well as, gift, bequest,
devise, or descent of income from any property, in case of transfer of a dividend interest, are
included in GI.
4. Compensation for injuries and sickness – amounts received under Accident or Health Insurance
or under Workmen’s Compensation Acts, as compensation for personal injuries plus the amount
of damages received whether by suit or agreement on account of such injuries or sickness.
5. Income exempt under treaty – income of any kind to the extent required by any treaty
obligation binding upon the Government of the Philippines.
6. Retirement Benefits, Pensions, Gratuities, etc.
For employers with retirement plans (Retirement benefit under RA 4917), requisites for exemption:
a. The employer maintains a reasonable private benefit plan
b. The retiring official or employee has been in the service of the same employer for at least 10
years
c. The retiring employee is at least 50 years of age at the time of retirement
d. This is the 1st time availment of the exemption
Reasonable private benefit plan – a pension, gratuity, stock bonus or profit-sharing plan maintained
by the employer for the benefit of its employees covered (plan members), wherein contributions are
made by the employer, employees or both, for the purpose of distributing the corpus (principal) or
earnings thus accumulated to plan members; provided that in no time shall shall any part of the
corpus or income of the fund be used for, or diverted to, any purpose other than the exclusive
benefit of said plan members.
For employers without retirement plan: Retirement benefit under RA 7641

Requisites of exemption:
1. Retiring employee is at least 60 years old
2. He must have serve the company for at least 5 years
7. Separation or Termination
Requisite of exemption:
a. Due to sickness, death or other physical disability
b. Any cause beyond the control of the employee or official
8. Retirement Gratuities, Social Security Benefits and other similar benefits from foreign
government agencies and other institutions, private or public, by resident or non-resident
citizens or aliens who come to settle permanently in the Philippines
9. United States Veterans Administrations – administered benefits under the laws of the US
received by any person residing in the Philippines.
10. SSS benefits under RA 8282 received or enjoyed
11. GSIS benefits under RA 8291 and including retirement gratuity received by government officials
and employees
12. Investment Income 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
13. Income of the government and its political subdivisions from
a. Any public utility or
b. Exercise of essential government function
14. Prizes and Awards in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievements but only if:
a. The recipient was selected without any action on his part to enter the contest or
proceeding; and
b. The recipient is not required to render substantial future services as a condition to receiving
the prize or award
15. Prizes and Awards in Sports Competitions granted to athletes:
a. In local or international competitions and tournaments
b. Whether held in the Philippines or abroad; and
c. Sanctioned by their national sports associations
16. 13th Month Pay and Other Benefits – provided not to exceed the P82,000 ceiling. Any amount in
excess is included in GI. This was adjusted to P90,000 effective 1/1/2018
17. Contributions to GSIS, SSS, Philhealth, HDMF and Union Dues – these are deducted from the
relevant income to which they relate; for example, from compensation income of employees
18. Gains from sale of bonds, debentures or other certificate of indebtedness with maturity of
more than 5 years
19. Gains realized from redemption of shares in mutual fund by the investor
20. Certain benefits of minimum wage earners
21. Income exempt under special laws or subject to special tax rules
SOURCES OF GI:
A. Compensation for services in whatever form paid
- If received in PN, the taxable portion at the time of receipt is the FV of the note (discounted
value); the interest portion will be recognized as income over the period
- Fringe benefits are not compensation
B. Trade, Business or exercise of Profession, except self-employed or professionals opting to the
8% commuted tax under TRAIN law
C. Gains derived from dealing in property
D. Interests – other than those subject to final tax, except:
- Interest income under the land reform earned by the landowner to which the tenant-
purchaser pays him
- Imputed interest
E. Rents
Special considerations:
1. Obligations of the lessor that are assumed by the lessee is additional rental consideration
2. Advance rentals:
a. If unrestricted, entire amount is income at the time of receipt
b. If it constitutes a loan – not rent income
c. As security deposit to guarantee payment of rent – income only when the event or
condition which makes it the property of the lessor occurs (default)
d. Improvements made by the lessee on the property – to be recognized as income by the
lessor in 2 ways:
- Outright method – FV of the property that will remain and be turn-over to the lessor upon
termination of the lease (the real BV of the property at termination, i.e. not the lessee’s BV)
is recognized as income at the point of completion of the improvement NOT the FMV of the
improvement upon completion.
- Spread-out method – recognize the BV of the property at the termination of the lease as
income over the period of the related lease
F. Royalties
G. Dividends – subject to regular income when it is declared by foreign corporations. Dividends can
either be:
 Cash dividend
 Property dividend – at FMV of the property received as dividend; includes stock of
another corporation declared by the distributing corporation.
 Stock dividend – generally not taxable except when the declaration confers to the
recipient a different interest or right after the declaration. When taxable, the measure
of taxable amount is the FMV of the stock dividend received
 Liquidating dividend – this is considered an exchange or sale of property. Gains or loss is
fully taxable or deductible
 Dividends received from resident corporations are subject to the Dominance Test
H. Annuities
I. Prizes and Winnings
J. Pensions
K. Partner’s distributable share in the net income of the GPP and exempt JV
OTHER SOURCES OF GI:

A. Farming – taxation of farming gross income requires classification of the following:
1. Livestock and farm products raised and sold – the selling price of the livestock or farm
products is considered GI
2. Livestock and farm products purchased and sold – only the accounting GI (sales less cost of
sales) is included in GI
Taxation rules:
1. Taxpayer may follow accrual or cash basis in accounting for inventories
2. Expenses in raising the livestock and farm products are deductions from the computed GI
3. The proceeds of crop insurance or livestock insurance constitute GI because it represents
recovery of lost profits rather than lost capital
B. Tax Benefits – when a taxpayer gains an advantage by an income deduction claimed in the past
but were subsequently recovered, the tax benefit should be included in income in the year
recovered as item of GI.
Examples:
1. Bad debt recovery
General rule: the recovery of bad debts previously written off constitute a receipt of taxable
income (TI)
2. Tax refund
General rule: refund of taxes that entered the determination of TI should be reverted back
to gross income (GI). Hence refunds of the following taxes that will not enter the
determination of TI will not be included in GI:
a. Estate or donor’s tax
b. Stock transaction tax
c. Income tax paid or incurred to a foreign country, if the taxpayer claimed a credit for
such tax in the year it was paid or incurred
d. Philippine income tax, except the fringe benefit tax (FBT)
e. Special assessment
3. Unamortized cost of property abandoned and written off but was subsequently re-entered
into use
General rule: the cost previously expensed should be reverted back into GI in the year
extraction operation is resumed
Requisites in the taxability of expense recoveries:
1. The expense is claimed as deduction against GI in previous year/s
2. The expense resulted in tax benefit to the taxpayer
C. Cancellation of indebtedness
a. In consideration of service – treated as compensation income (CI)
b. With no consideration – not an income but a gift taxable under donor’s taxation
c. By a corporation in favor of a shareholder – treated as declaration of dividend subject to
final tax (FT)
d. As capital transaction such as forfeiting the right to receive dividend in exchange of the debt
– treated as dividends and is subject to dividend taxation rules
D. Damage recovery
a. Compensatory damages – this constitute return of capital and hence, not taxable. Example:
moral damages from personal action such as libel, slander and breach of promise to marry
b. Recovered damages = this constitutes TI since they are recoveries of lost profit. Example:
damages recovered from patent infringement suit

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Module 7 – REGULAR INCOME TAX: GROSS INCOME

Features of the RIT:

Tax Rates for Year 2018 to 2022

EXCLUSIONS FROM GI:

For employers without retirement plan: Retirement benefit under RA 7641

OTHER SOURCES OF GI:

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