TAX 603 - Income Tax on Individuals P2
TAX 603 - Income Tax on Individuals P2
TAX 603 - Income Tax on Individuals P2
AGUSTIN
This publication is the intellectual property of ACCOUNTING CERTIFICATION AND TRAINING INSTITUTE, INC. (ACTI).
Any unlawful copying, reproduction, distribution, uploading, downloading, and storage of said material is strictly prohibited.
The student-user recognizes the right of ACTI, INC. to prosecute any and all actions in violation of its rights in accordance
with the law. Hence, the student-user agrees and undertakes to refrain from unlawful copying, reproduction, distribution,
uploading, downloading, and storage of said material without prior written consent of ACTI, INC.
Capital Assets are those not falling within the definition of an ordinary asset.
1. 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;
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
3. Property used in the trade or business, of a character which is subject to the allowance for depreciation;
4. Real property used in trade or business of the taxpayer.
Determination of gain or loss: the gain shall be the excess of the amount realized from the disposition of property over the basis or adjusted
basis for determining the gain; on the other hand, the loss is the excess of the basis or adjusted basis for determining loss over the amount
realized.
Amount realized: is the sum of the money plus the fair market value of the property received.
The above amounts are adjusted by amounts of improvements that materially add to the value of the property or appreciably prolong its life
less accumulated depreciation. (Revenue Regulations No. 6-08)
No gain or loss: generally, upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be
recognized. Except if the following instances where no gain or loss shall be recognized in pursuance of a plan of merger or consolidation:
a. A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party
to the merger or consolidation; or
b. A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another
corporation, also a party to the merger or consolidation; or
c. A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation,
solely for stock or securities in another corporation, a party to the merger or consolidation. (Sec. 40[C][2] of the Tax Code)
No gain or loss shall be recognized on a corporation or on its stock or securities if such corporation is a party to a reorganization and
exchanges property in pursuance of a plan of reorganization solely for stock or securities in another corporation that is a party to the
reorganization.
Reorganization includes:
a. A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party
to the merger or consolidation; or
b. The acquisition by 1 corporation, in exchange solely for all or a part of its voting stock, or in exchange solely for all or part of the
voting stock of a corporation which is in control of the acquiring corporation, of stock of another corporation if, immediately after
the acquisition, the acquiring corporation has control of such other corporation whether or not such acquiring corporation had
control immediately before the acquisition; or
c. The acquisition by 1 corporation, in exchange solely for all or a part of its voting stock or in exchange solely for all or part of the
voting stock of a corporation which is in control of the acquiring corporation, of substantially all the properties of another
corporation, in determining whether the exchange is solely for stock, the assumption by the acquiring corporation of a liability of the
other shall be disregarded; or
d. A recapitalization, which shall mean an arrangement whereby the stock and bonds of a corporation are readjusted as to amount or
value or priority or an agreement of all stockholders and creditors to change and adjust their respective interests by extending the
time of payment, substituting stock for debt, or other alterations in the rights of stockholders and creditors; or
e. A reincorporation, which shall mean the formation of the same corporate business with the same assets and the same stockholders
surviving under a new charter.
Transfer of property in exchange for shares and gains/maintains control: No gain or loss shall also be recognized if property is
transferred to a corporation by a person, alone or together with others, not exceeding 4 persons, in exchange for stock or unit of
participation in such a corporation of which as a result of such exchange the transferor or transferors, collectively, gains or maintains
control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.
Control defined: The term “control” shall mean ownership of stocks in a corporation after the transfer of property possessing at least fifty-
one percent (51%) of the total voting power of all classes of stocks entitled to vote: Provided, that the collective and not the individual
ownership of all classes of stocks entitled to vote of the transferor or transferors shall be used in determining the presence of control.
VAT Exemption: Sale or exchanges of property used for business or shares of stocks covered under this subsection shall not be subject to
Value-Added Tax (VAT). Note also, that transactions covered by Sec. 40(C)(2) are exempt from VAT under Sec. 109(X) under the Tax Code, as
amended by the TRAIN Law.
No BIR Ruling required: In all of the foregoing instances of exchange of property, prior BIR confirmation or tax ruling shall not be
required for purposes of availing the tax exemption. (Sec. 40[C][2], as amended by the CREATE Law)
Treatment of Ordinary Gains: or those arising from the sale of ordinary assets will form part of the taxable income subject to the
graduated/basic [normal] income tax. Likewise, losses arising from such sale may be deducted in full amount without any limitation as to
amount, unlike in capital losses.
Treatment of Capital Gains: depending on the nature of the property, the gains derived from sale or disposition of capital assets may be
subject to:
1. sale of shares of stock of a domestic corporation NOT listed or traded through a local stock exchange held as capital assets; and
2. sale of real property located in the Philippines held as a capital asset.
NOTE:
• All other capital gains not mentioned above are subject to regular income tax.
• Sale of shares of stock of a domestic corporation listed or traded through a local stock exchange is subject to percentage tax
under Section 127 of the tax code (Stock Transaction Tax)
1. Sale of SHARES OF STOCK of a Domestic Corporation NOT listed and traded through a local stock exchange
Held as capital assets: means all stocks and securities held by taxpayers other than dealers in securities. (Sec. 2[a] of RR No. 6-
2008)
Not applicable: the Capital Gains Tax does not apply if the sale of shares of stock was made by:
a. A dealer in securities;
b. Investor in shares of stock in a mutual fund company; and
c. Other persons exempt under special law. (Sec. 4 of RR No. 6-2008)
Tax Base: is the net capital gain, which is the excess of the selling price/fair market value (less cost to sell) over the cost of the
shares.
Determination of fair market value: the value of the shares of stock at the time of sale shall be the fair market value. In
determining the value of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to
fair market values. The net of adjusted asset minus the liability value represents the value of the equity. The appraised value of the
real property at the time of sale shall be the highest of –
However, under RR No. 20-2020, the fair market value of shares of stock not listed or traded in a local stock exchange are now as
follows:
a) Common shares - book value based on the latest available statements, duly certified by an independent public accountant prior
to the date of sale, but not earlier than the immediately preceding taxable year.
b) Preferred shares - the liquidation value, which is equal to the redemption price of the preferred shares as of balance sheet date
nearest to the transaction date, including any premium and cumulative preferred dividends in arrears.
In case of both common and preferred shares: the book value per common share is computed by deducting the liquidation value
of the preferred shares from the total equity of the corporation by dividing the result by the number of outstanding common shares
as of balance sheet date nearest to the transaction date.
No more adjustment to fair market value: the book value of the common shares of stock or the liquidation value of the preferred
shares of stock, need not be adjusted to include any appraisal surplus from any property of the corporation not reflected or included
in the latest audited financial statements, in order to determine the fair market value of the shares of stock. The latest audited
financial statements shall be sufficient in determining the fair market value of the shares of stock subject of the sale, barter,
exchange, or other disposition.
ILLUSTRATION:
Assume that Mr. Yoso sold 150,000 shares in Tiktok Corporation on June 30, 2024. The corporation’s accounting period is on a
calendar-year basis. In this case, the book value as the fair market value of the shares of stock in Tiktok Corporation shall be
determined based on its audited financial statements for year ending December 31, 2023, since the audited financial statements for
taxable year 2024 is not yet available at the time of sale of shares.
Assume further that based on the audited financial statements as of December 31, 2023, the total assets of Tiktok Corporation are
Php250,000,000 while its liabilities are Php175,000,000, resulting in an equity of Php75,000,000. Its outstanding shares are
250,000. For this purpose, the net book value as the fair market value of each share shall be computed as follows:
In this case, the net book value of the shares of stock in Tiktok Corporation based on its latest audited financial services shall be
Php300 per share. As such, the fair market value of the shares of stocks in Tiktok Corporation shall be Php300 per share.
Shares listed or traded through the stock exchange: if the shares are disposed through the stock exchange, the same is not
subject to CGT but to the Stock Transaction Tax of 6/10 of 1% of the selling price (prior to the TRAIN, the rate was ½ of 1%), which is
a business tax (this is part of the discussion in Percentage Taxes). However, this tax constitutes the final tax on such sale since the
Tax Code provides that the same shall be exempt from income tax. Thus, any gain resulting from such a disposition will no longer be
included in the taxpayer’s gross income subject to regular income tax.
However, if the shares, although listed on the stock exchange, are sold over-the-counter, or directly to the buyer, and not
through such stock exchange, then it will still be subject to the CGT.
2. A 6% CGT is imposed on the presumed gain from the sale of real property, based on the gross selling price or the fair market
value, whichever is higher.
Fair Market Value: shall be the higher between: a. Zonal Value as determined by the BIR; b. Fair Market Value per local assessor.
Note: for individuals, real property subject to CGT consists of ALL real properties (classified as capital assets); whereas for
domestic corporations, the only real property subject to capital gains tax are LANDS and BUILDINGS. Sale of machinery, even though
classified as a capital asset, shall be subject to the regular corporate income tax.
The sale of real property to government or any of its political subdivisions or agencies or GOCCs may be treated as subject to capital
gains tax or ordinary income tax, at the option of the taxpayer. (Sec. 22[D] of the Tax Code)
Sale of principal residence of natural persons, the proceeds of which are fully utilized in acquiring or constructing a new principal
residence within 18 calendar months from the date of sale or disposition is not subject to the 6% CGT. Subject to the following
requirements:
a. The historical cost or adjusted basis of real property sold or disposed is carried over to the new principal residence;
b. The exemption can only be availed once every 10 years; and
c. The BIR is notified by the taxpayer within 30 days from the date of sale or disposition of his intention to avail of the tax
exemption.
If there is no full utilization of the proceeds, the portion of the gain presumed to have been realized from the sale or disposition
shall be subject to the 6% CGT, as follows:
*CGT base is the higher between the FMV and the Selling Price.
ILLUSTRATION:
Mr. Pogi sold his principal residence which he acquired for 3,500,000 for ₱5,000,000. At the time of sale, the fair market value is
₱4,800,000. After 1 year, Mr. Pogi bought a house and lot for ₱5,500,000.
Assuming all other requisites are present, how much is the CGT due on the sale?
Answer: ₱0. The proceeds of ₱5,000,000 was fully utilized to acquire a new principal residence.
If, however, the new principal residence was acquired for only ₱4,000,000, how much is the CGT?
1. Unutilized Portion is 1,000,000 (5,000,000 selling price less the utilized portion of 4,000,000)
2. CGT Base is ₱5,000,000 (the higher between the selling price and fair market value)
3. Taxable Amount is ₱1,000,000, the ratio of unutilized portion over the selling price multiplied by the CGT base.
4. CGT, therefore, is ₱60,000, 6% of the taxable amount.
If, however, fair market value of the principal residence was ₱5,300,000, how much is the CGT?
1. Unutilized Portion is ₱1,000,000 (5,000,000 selling price less the utilized portion of 4,000,000)
2. CGT Base is ₱5,300,000 (the higher between the selling price and fair market value)
3. Taxable Amount is ₱1,060,000, the ratio of the unutilized portion (₱1,000,000) over the selling price (₱5,000,000). Note that
the denominator is ALWAYS the selling price and not the fair market value because this is the total amount which can possibly be
utilized for the acquisition or construction of a new principal residence, considering that this will be the total amount of
proceeds that will be collected from the buyer.
4. CGT, therefore, is ₱63,600, 6% of the taxable amount.
Real Property located abroad: is not subject to CGT. Note that what is subject to the 6% CGT is sale of real property LOCATED IN
THE PHILIPPINES. Thus, if the property is located abroad, gain from such disposal, if taxable in the Philippines (if sold by a resident
citizen or domestic corporation), is subject to regular income tax.
Forced Sale of Real Property: the fact that the sale is involuntary, e.g., from a court order of foreclosure sale, does not affect the
classification of the property in the hands of the seller, either as capital asset or ordinary asset, and are thus subject to the rules
applied therefor.
Capital Gains not subject to CGT; subject to regular income tax: Note that the CGT applies only to two disposals of two classes of
assets, i.e., real property and shares of stock of a domestic corporation not listed or traded in the local stock exchange. Thus, if a
capital asset, not among the said two classes, resulted in a gain, they are considered “capital gains” but still subject to regular
income tax.
1. Retirement of bonds - amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or
other evidence of indebtedness issued by a corporation with interest coupons or in registered form, shall be considered as
amounts received in exchange therefor.
2. Short sales of property - gains or losses from short sales of property shall be considered as gains or losses from exchanges
of capital assets.
Short sale: is a transaction in which the speculator sells securities which he does not own (he merely borrows the stock
certificate through or from a reasonably short period of time buys or covers the stock to complete the transaction.
3. Option gains and losses - an option is a contract granting a person the exclusive privilege to buy or not to buy certain objects
at any time within the agreed period at a fixed price. It is a contract different from the contract which the parties may enter
into; it is one supported by a consideration (called option money) which is distinct from the purchase price.
The law considers the option or the privilege as the capital asset itself.
Thus, if B wanted to buy the cellphone of S, and gave ₱150 as option money to decide within 2 days, but forfeits the same, the
₱150 is considered capital loss of B and S likewise recognizes a capital gain of ₱150.
4. Securities becoming worthless - loss from shares of stock, held as capital asset, which have become worthless during the
taxable year shall be treated as capital loss at the end of the year. However, this loss is not deductible against the capital gains
realized from the sale, barter or exchange or other forms of disposition of shares of stock during the taxable year but must be
claimed against other capital gains to the extent of capital gains. (RR No. 6-2008) Note that in order to be subject to 5% and
10% CGT (now 15% CGT), there must be actual disposition of the shares of stock.
5. Liquidating Dividends - Upon surrender by the investor of the shares in exchange for cash and property distributed by the
issuing corporation upon its dissolution and liquidation of all assets and liabilities, the investor shall recognize either capital
gain or capital loss upon such liquidation. The process computed by comparing the cash and fair market value of property
received against the cost of the investment in shares.
The difference between the sum of the cash and the fair market value of property received and the cost of the investment in
shares shall represent capital gain or capital loss from the investment, whichever is applicable. (Sec. 8, RR No. 6-08)
In case the distribution is in instalments: the first payments are applied against the cost. The gain is returnable only when he
has completely recovered. The loss can be taken only upon the distribution of the final liquidating dividend.
6. Retirement or Redemption for Cancellation of Preferred Shares - when preferred shares are redeemed at a time when the
issuing corporation is still in its “going-concern” and is not contemplating in dissolving or liquidating its assets and liabilities,
capital gain or capital loss upon redemption shall be recognized on the basis of the difference between the amount/value
received at the time of redemption and the cost of the preferred shares.
This, however, does not apply if a corporation acquires its own shares and books them as treasury shares. (Sec. 9, RR No. 6-08)
1. Percentage taken into account (holding period rule): The following percentages of the gain or loss recognized upon the sale
or exchange of capital assets shall be taken into account in computing net capital gain, loss or net income:
Percentage Applicability
100% If the capital asset has been held for NOT more than 12 months
50% If the capital asset has been held for MORE than 12 months
(Sec. 39[B] of the Tax Code)
This rule is not applicable to corporations and is not applicable to the net capital loss carry-over (under 3 below).
2. Limitation on Capital Losses: The capital losses realized during the taxable year are deductible only to the extent of capital
gains from the same type of transaction during the same period. This rule likewise applies to sales of shares of stock subject to
15% CGT.
Exception: banks and trust companies whose business is the receipt of deposits, sells any bond, debenture, note or certificate or
other evidence of indebtedness. Any loss resulting from such sale shall not be subject to the foregoing limitation and not
included in determining the applicability of such limitation to other losses. (Sec. 39[C] of the Tax Code)
3. Net Capital Loss Carry-Over: If the individual sustains in any taxable year a net capital loss, such loss, in an amount not to
exceed the net income of such year, shall be treated in the succeeding taxable year as a loss from the sale or exchange of asset
held for not more than 12 months. (Sec. 39[D] of the Tax Code)
4. Sale of shares of stock subject to 15% CGT: For sale, barter, exchange or other forms of disposition of shares of stock
subject to the 15% capital gains tax, if the transferor of the capital asset is an individual, the rule on holding period and capital
loss carry-over will not apply.
FRINGE BENEFITS
Fringe Benefit means any good, service or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries,
to an individual (Sec. 33[B]).
Fringe benefits given to non-rank-and-file employees are generally subject to fringe benefits tax; while fringe benefits received by
rank-and-file employees are subject to withholding tax on compensation.
Fringe Benefits Tax is 35% effective January 1, 2018 (32% from Jan. 31, 2000, to December 31, 2017). Fringe benefits tax is paid by the
employer and is considered a final tax. Accordingly, the fringe benefits received by the employee are no longer included in his taxable income
subject to income tax.
Rank and File Employees are those who are not holding managerial or supervisory positions.
Managerial Employees are those who are vested with powers or prerogatives to lay down and execute management policies and/or to hire,
transfer, suspend, lay-off, recall, discharge, assign or discipline employees.
Supervisory Employees are those who, in the interest of the employer, 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.
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 the actual rate granted (12%
benchmark rate);
6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs and similar
organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents;
10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
1. Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law;
2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;
3. Benefits given to rank and file, whether granted under a collective bargaining agreement or not;
4. De minimis benefits;
5. Benefits granted to employee which are required by the nature of, or necessary to the trade, business or profession of the
employer; or
6. Benefits granted for the convenience or advantage of the employer.
a. If there is NO transfer of ownership, the monetary value of the benefit is 50% of the value of the benefit.
b. If there is transfer of ownership, the monetary value shall be the same as the value of the benefit, or 100% thereof.
In case of other fringe benefits, the monetary value shall be the same as the value of the benefit.
*5% is used in the computation to equate depreciation, on the presumption of the regulations that the economic useful life of a house is 20
years.
ILLUSTRATIONS:
a. If an employer rents a house for an employee for ₱10,000 a month, the ₱10,000 is the value of the benefit. For purposes of computing
the FBT, ₱5,000 would be the monetary value, or 50% of the value of the benefit, since there is no transfer of ownership.
b. If an employer owns the house with a FMV of ₱1,000,000 and allows the employee to use the same as residence, the value of the benefit
would be ₱50,000 (5% of ₱1,000,000) and the monetary value for FBT would be ₱25,000 (50% of the value of the benefit, since there
is no transfer of ownership).
c. If an employer purchased a house for ₱1,200,000 on an installment basis where ₱200,000 is for the interest throughout the installment
period, and allows the employee to use the same, the value of the benefit would be ₱1,000,000*5% (without the interest) or ₱50,000.
For FBT, the monetary value would be ₱25,000, or 50% of the value since there is no transfer of ownership.
d. If an employer purchased a house for ₱1,000,000 with a FMV of ₱800,000, and transfers the same to the employee, the value of the
benefit would be ₱1,000,000 (Higher acquisition cost) and the monetary value for FBT would be the same, or 100% of the value of the
benefit as there was transfer of ownership.
e. If in (d) above, the employee is required to pay half of the purchase price (₱500,000), the value of the benefit would only be ₱300,000
which is the difference between the FMV (₱800,000) and the amount paid by the employee (₱500,000), the monetary value would be
₱300,000 as there was transfer of ownership.
Exempt housing privileges: Living quarters or meals (Sec. 2.78.1(A)(2) of RR No. 2-98), subject to the following conditions:
a. The lodging and meals are furnished within the business premises of the employer;
Business premises of the employer means the place where the employee performs a significant portion of his duties or where the
employer conducts a significant portion of his business. In case of doubt, the criteria to be used shall be
b. The employee is required to accept the lodging as a condition of his employment; and
c. The meals are furnished for the convenience of the employer. (RAMO No. 1-87; BIR Ruling [DA-197-97])
Note:
a. Treatment of the above for FBT purposes is similar to that of the housing privilege except that the presumptive economic useful life
of the vehicles is 5 years (20 years for housing privileges).
b. The same rule applies, the monetary value is 50% of the benefit if there is no transfer of ownership.
c. The vehicles owned by the company used for business purposes although provided to a managerial or supervisory employee is not
subject to FBT.
d. Use of an aircraft and helicopters owned and maintained by the employer is treated as business expense and is not subject to FBT.
3. FORGONE INTEREST:
For loans with no or less interest than that of the market rate (12%), the monetary value would be the difference between the market interest and the
interest paid, if any.
ILLUSTRATION: If the employer extends a loan to an employee with a 5% interest rate in the amount of ₱150,000, the annual monetary value
would be 7% (12%-5%) of ₱150,000 or ₱10,500 for FBT purposes.
Starting 2013, however, the Bangko Sentral ng Pilipinas has already lowered the market rate of interest to 6%. However, no Revenue
Regulation has been issued by the BIR to implement such change in the market rate.
4. EXPENSE ACCOUNTS
a. Transportation, Representation and Other Allowances (Sec. 2.78.1 (A)(6) of RR No. 2-98, as amended)
b. Advances/Reimbursements
In general, fixed or variable transportation, representation and other allowances which are received by an employee in addition to his/her
regular is compensation subject to withholding. (Section 2.78.1(A)(6)(a) of RR No. 2-98, as amended)
To be considered as tax-exempt, all of the following conditions shall be met based on the rulings/opinions issued by the BIR, as follows:
Advances in excess of actual expense, if not returned to the employer constitute taxable compensation/benefit.
Personal Expenses: which are personal to the employee (such as groceries for personal consumption) are subject to FBT based on the
amount reimbursed to the employee.
Per Diem Allowances: 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 liquidated and not subject to
withholding.
5. EDUCATIONAL ASSISTANCE
a. Provided to employee
i. If the study is directly related with the trade or business or profession and
ii. There is a “bond” where the employee is required to stay in the employ of the employer for some period after
finishing.
b. Provided to a dependent of an employee if awarded through a competitive scheme under a scholarship program.
6. INSURANCE PREMIUMS
In General: Paid by the employer for the employee is generally subject to FBT.
Exception: Those exempt under the law (SSS, GSIS, etc.) and those which are for the group insurance of the employer.
(Note: the BIR is of the position that Special Aliens and their Filipino counterparts are now subject to the regular rates, thus, the FBT
as to them should be computed based on the 65%/35% rate, following the veto of the President which provides that there is no
longer a 15% preferential tax rate)
4. The FBT is imposed on the benefit received by the managerial or supervisory employee but the liability of paying FBT is on the
employer. This is the reason why the amount received by the employee is grossed up for the imposition of FBT, so that the tax base
would be the total amount actually given, and the amount received by the employee is already NET of the FBT.
5. The Fringe Benefit and the related FBT are both allowable deductions for the EMPLOYER's taxable income computation.
Exception: The benefit cannot be claimed as FRINGE BENEFIT EXPENSE for computation of the taxable income of the employer if the
house/vehicle and its cost is already subjected to depreciation and such is claimed as a deduction already.
a. Retirement benefits received under Republic Act (RA) No. 7641 AND those received by officials and employees of private firms,
whether individual or corporate, under a reasonable private benefit plan.
i. Those received under a reasonable private benefit plan: is exempt subject to the following requisites:
a. Plan is reasonable;
b. Plan is approved by the BIR;
c. Retiring employee must have been in the service of the same employer for at least 10 years;
d. Retiring employee is 50 years old or older at the time of retirement; and
e. Retiring employee has not previously availed of the privilege under the retirement benefit plan of the same or
another employer.
ii. Retirement benefits under R.A. 7641 (amendment to the Labor Code granting retirement pay under Art. 287
thereof) where:
a. No private retirement plan or retirement plan under the CBA/employment contract.
b. Must have served the company for at least 5 years.
c. Retiree at least 60 years old but not more than 65 years of age at the time of retirement.
(1) there is no CBA or other applicable employment contract providing for retirement benefits of an employee; or
(2) there is a CBA or other applicable contract providing for retirement benefits for an employee, but it is below the
requirements set by law. (Oxales vs. Abbot Laboratories, Inc., GR No. 152991 dated July 21, 2008)
• If the CBA or other employee contract providing retirement benefits to employees provides for a less or equal benefit
provided under RA No. 7641, provided the requirements under RA No. 7641 are met. (under No. (2) above) (BIR Ruling
No. DA-151-04 dated March 31, 2004)
• If it provides more benefits than those under RA No. 7641, must comply with the requirements of Sec. 32(B)(6)(a) of
the Tax Code or RA No. 4917 (under letter a above). (Oxales, BIR Ruling No. DA-151-04 dated March 31, 2004 and BIR
Ruling No. 068-14 dated February 25, 2014)
b. Any amount received by an employee or by his heirs from the employer due to death, sickness, or other physical disability or for the
cause beyond the control of the said employee such as retrenchment, redundancy, or cessation of business.
1. The cause of separation by the employee from the service was beyond his control.
2. Amounts received by involuntary separation remain exempt from income tax even if the employee, at the time of separation, had
rendered less than 10 years of service and/or is below 50 years old;
However, any payment made by an employer to an employee on account of dismissal constitutes compensation regardless
of legal contract, statute, or otherwise to make such payment - thus not exempted.
c. Social security benefits, retirement gratuities, pensions and other similar benefits received by resident and non-resident
citizens of the Philippines or aliens who reside permanently in the Philippines from foreign entities whether private or public.
d. Payments of benefits due or to become due to any person residing in the Philippines under the law of the US administered by the
US Veterans Administration.
e. Payments of benefits made under the Social Security System Act of 1954, as amended.
f. Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received by government officials and
employees.
2) Compensation for services by a citizen or resident of the Philippines performed for a foreign government or international
organization. (Sec. 2.78.1 (B)(5) of RR No. 2-98)
a. Includes remuneration paid for services performed by ambassadors, ministers, and other diplomatic officers and employees.
b. Includes remuneration paid for services performed as consular or other employee of a foreign government or a non-diplomatic
representative of such government.
3) Damages
Actual, moral, exemplary and nominal damages received by an employee or his heirs pursuant to a final judgment or compromise agreement.
(Sec. 2.78.1 (B)(6) of RR No. 2-98):
The nature of the award for damages shall dictate its taxability. If what is awarded is compensatory for something which would have been
taxable, then the damages may also be taxable, such as for lost profits and backwages, and even interest on non-taxable damages.
Proceeds of life insurance policies paid to heirs or beneficiaries upon death of the insured, whether single sum or otherwise are exempt;
Provided that interest payments agreed under the policy for the amounts which are held by the insurer shall be included in gross income.
(Sec. 2.78.1 (B)(7) of RR No. 2-98)
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. (Sec. 2.78.1 (B)(8) of RR No. 2-98)
Amounts received through Accident or Health Insurance or Workmen's Compensation Act, as compensation for personal injuries or sickness. It
likewise includes the amount of any damages received whether by suit or agreement on account of injuries or sickness. (Sec. 2.78.1 (B)(9) of
RR No. 2-98)
Income required by any treaty obligation binding on the Government of the Philippines. (Sec. 2.78.1 (B)(10) of RR No. 2-98)
13th-month pay and other benefits such as Christmas bonus, loyalty awards, gifts in cash or in kind, and other benefits of similar nature;
Provided that the total amount shall not exceed ₱90,000 (as amended by RR No. 11-18, previously ₱82,000). (Sec. 2.78.1 (B)(11) of RR No. 2-98;
RR No. 3-2015)
GSIS, SSS, Medicare, Pag-IBIG contributions and union dues of individual employees. For purposes of computing taxable income subject to
Income Tax and Withholding Tax on Compensation, the said contributions are deducted to arrive at taxable income. However, for employees,
the amount considered taxable shall only pertain to the maximum required by law. Any amount in excess of the mandatory amounts voluntarily
given as a contribution by the employee shall be taxable. (Sec. 2.78.1 (B)(12) of RR No. 2-98)
10) Facilities and privileges of relatively small value or "de minimis" benefits
Facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by
the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employees (Sec. 2.78 (A)(3)(c) of RR No. 2-
98, as amended by RR No. 10-2008, as further amended by RR No. 5-2011).
Note:
a. Only Medical Assistance/Allowance to the employee is required to be actually spent for the purpose. All other benefits need no proof
that they have actually been spent for, say, rice purchase, laundry, or uniform, etc.
b. Only Employee Achievement Awards are required to be in tangible personal property and given NOT in cash or gift certificates. All
other de minimis benefits may be given, or are given, in cash.
c. Christmas Bonuses may fall under gifts given during Christmas and the excess thereof may form part of Other Benefits exempt up to
₱90,000.
d. Productivity Bonuses may fall under benefits received by virtue of a productivity incentive scheme.
De minimis Benefit Treatment: De Minimis benefits are considered non-taxable and are not included in the computation of taxable income
and withholding tax on compensation, as well as fringe benefits tax.
Amounts in excess of the above-mentioned ceiling will form part of OTHER BENEFITS, which is non-taxable only up to ₱90,000 together with
other benefits received by the employee including 13th month pay and other bonuses, etc. (BIR Ruling No. 030-2013, Q&A No. 5, RMC No. 50-
2018)
HOWEVER, benefits received by virtue of a CBA or a productivity incentive scheme (no. 11 above) is considered de minimis ONLY if the total
amount received for the year does not exceed ₱10,000. If the amount is more than ₱10,000 the ENTIRE amount is considered part of the
₱90,000 exempt other benefits. (BIR Ruling No. 293-2015 dated August 27, 2015)
11) COMPENSATION INCOME OF MINIMUM WAGE EARNERS (MWEs) who work in the private sector and being paid the Statutory
Minimum Wage (SMW) (Sec. 2.78.1 (B)(13) of RR No. 2-98, as amended)
Coverage: No income tax and consequently, withholding of tax, shall be required on:
a. The SMW
b. Holiday pay
c. Overtime pay
d. Night shift differential; and
e. Hazard pay
Other Income earned by MWEs: Additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount up to ₱90,000, taxable allowances and other taxable income given to an MWE by the same employer other
than those which are expressly exempt above shall be subject to income tax and consequently, withholding tax on compensation.
Likewise, MWEs receiving other income from other sources in addition to compensation income, such as income from other concurrent
employers, from the conduct of trade, business, or practice of profession except income subject to final tax, are subject to income tax
only to the extent of income other than SMW, holiday pay, overtime pay, night shift differential pay, and hazard pay earned during the
taxable year.
The same shall still not be subject to income tax if it does not exceed ₱250,000 (not considering those which are exempt as enumerated
above).
ILLUSTRATION: Mr. Sanji is employed by 7-Evelyn Corporation. He received the SMW for 2023 in the total amount of ₱100,000 and 13th
month pay and other bonuses amounting to ₱90,000. In the same year, he also received overtime pay of ₱40,000 and night shift
differential of ₱25,000. He also received commission income from the same employer of ₱15,000, thus, total income received amounted
to ₱270,000. How much is his income tax due, if any?
Computation Amount
Total Income Received ₱270,000
Less: Income Exempt
SMW ₱100,000
13th month pay (not exceeding ₱90,000) ₱90,000
Night shift differential ₱25,000
Overtime pay ₱40,000 ₱255,000
Taxable Income – Commission ₱15,000
Income Tax Due (not in excess of ₱250,000) ₱0
1. Mr. Sanji’s SMW, overtime pay, and night shift differential are exempt from income tax.
2. Likewise, the 13th month pay not in excess of ₱90,000 is also exempt from income tax.
3. The taxable income is only ₱15,000, representing the commission received. However, since it did not exceed the ₱250,000, it is not
subject to any income tax.
Tips and gratuities (Sec. 2.78.1 (A)(4) of RR No. 2-98): Tips or gratuities paid directly to an employee, by a customer of the employer,
which are not accounted for by the employee to the employer are considered as taxable income but not subject to withholding tax on
compensation. This should then be included by the recipient in his gross income subject to regular income tax.
The deadline for either is April 15 of the succeeding year. Note: In practice, taxpayers should observe the weekends, holidays, and
extensions given by the BIR regarding the extended deadline of income tax return filing.
Employers fill out BIR Form No. 2316 for employees covered by this rule in triplicate: a copy to the employee; one copy to the BIR; and
one for their file. The BIR Form No. 2316 constitutes the income tax return of the covered employee.
The substituted filing of income tax return rule is now embodied under Sec. 52(A) of the Tax Code, as amended by the TRAIN.
2. Quarterly Income Tax Return (BIR Form No. 1701Q) – applicable only to individuals who earn business income or income from the
practice of profession, the deadline of which are as follows:
1. Shares of stock – 30 days after each transaction using BIR Form No. 1707; the consolidated return shall be filed on or before April
15 of the following year.
2. Real Property – 30 days following each sale or other disposition using BIR Form No. 1706.
Real Property subject to regular income tax: If the sale of real property is subject to regular income tax, the same shall likewise be
subject to CREDITABLE WITHHOLDING TAX, and such withholding tax shall be remitted on the 10th day following the month of transaction
using BIR Form No. 1606.
C. MANNER OF FILING
The returns can be filed:
a. manually;
b. through the use of eBIR Forms; or
c. through electronic filing and payment system (EFPS).
~ Nothing Follows ~