CHAPTER 4 GENERAL CLASSIFICATION OF INCOME

1.

2.

Taxable Income
-subject to basic or normal tax 5% to 32% or to final tax
a. Compensation
b. Business Income
c. Gains from Property
d. Passive income
e. Other taxable income
Non-taxable Income
a. Life insurance proceeds
b. Return of premium
c. Gifts, bequest, devices
d. Compensation for injuries
e. Retirement benefit
f. Other non-taxable income

Taxable Income
1.
Compensation Income
-income earned thru employee-employer relationship
-employer, has the right to direct or control the employee
-employer has the right to dismiss the employee
-remuneration for services, even e-to-e relationship no longer exists at the time
a. Salary, Wage, Fee
*Salary- paid on regular interval
*Wage- per hour or day
*Fee
Tax exempt compensation:
i.
Compensation income of minimum wage earners in the private sector & others
ii.
CI of employees in the public sector with salary that does not exceed the statutory
minimum wage in the non-agricultural private sector
iii.
CI earned by minimum wage earner:
Holiday Pay
Overtime Pay
Nightshift differential Pay
Hazard Pay

Statutory Minimum Wage

-rate fixed by the Regional Tripartite Wage & Productivity Board (RTWPB), as directed by the
Bureau of Labor & Employment Statistics (BLES) of the Department of Labor & Employment
(DOLE)
-computation shall be the normal working time of 8 hours a day
i.

ii.

Do not work & not paid on Sat, Sun, RD

Equivalent Monthly Rate= Applicable Daily Rate x 261 days
12 mos
261=247 working days, 11 regular holiday, 3 special days
E-week rate= ADR x 261 days / 52 weeks
Do not work or not paid on sun & RD

ERM = ADR x 313 days

12 mos
313= 299 WD, 11 RH, 3 SD
iii.

Do not work but paid on RD, SD, RH

EMR= ADR x 365 days
12 mos

iv.

Works everyday
EMR = ADR x 392.5 days
12 mos
392.5= 299 WD, 22 RH, 67 RD (52 x 130%), 3.9 SD (3 x 130%)

b. Commission
-based on %
-taxable even the employee is a minimum wage earner
c. Honoraria
-earnings from services on particular field
-taxable regardless taxpayer is a minimum wage earner
d. Allowances
-either fixed or variable
i.
Cost of Living Allowance (COLA)- not taxable
ii.
Representation & Traveling Allowance (RATA)
If received regularly- taxable
Subject for reimbursement- not taxable
For liquidation- non-taxable
iii.
Personnel Economic Relief Allowance (PERA)
-non-taxable if received by government officials & employees
e. 13th month pay & other benefits
- less than 30k- not taxable
- any amount in excess of 30k is taxable
13th month pay= total basic salary during the year / 12 mos
f.

Holiday, OT, Night Shift Differential Pay, Hazard or Emergency Pay

-GR: taxable
-XPN: minimum wage earner paid on statutory minimum wage

g. Separation Pay
Taxable- if voluntary
Non-taxable- involuntary
i.
Sickness
ii.
Disability
iii.
Death
iv.
Reorganization of company
v.
Bankruptcy of company
h. Retirement Pay
GR: Taxable
XPN:

i.
ii.

RP from SSS or GSIS

RP from employer if the ff requirements are complied:
a) Retirement plan of company is approved by BIR
b) Retiree is connected to company for 10 years
c) Retiree should at least 50 years old
d) Retiree availed the retirement for the 1st time
e) RP is fair & equitable to all employee

i.

Sick leave & Vacation leave

Used- taxable
Unused- not taxable neither subject to creditable withholding tax

j.

Fringe Benefits
-granted in cash or in kind by employer to his employee in addition to basic salary
FB for supervisory or managerial position
-subject to final tax
FB for rank & file employee
- subject to basic tax for part of CI
i.
Living quarters or meals
o for exclusive benefits of the employer- not taxable
o within the business premises of the employer- taxable
o provided to military officials of the armed forces of the Phil- not taxable
ii.

Payment of Income Taxes

-Income tax of employee paid by employer
o Rank & File- taxable
o Supervisory or Managerial- subject to fringe benefit tax

iii.

Payment of Insurance Premium

-premium paid by employer to cover life insurance of an employee
o If beneficiary is the company- not taxable
o If beneficiary is a family member of rank & file employee- taxable
o If beneficiary is a family member of supervisory or managerial positionsubject to fringe benefit tax

iv.

Share in Companys Profit

-taxable

v.

Bonus and awards for exemplary performance

-taxable

Valuation of Gross Compensation Income

a. Cash- basis of tax shall be the face value of the cash received
b. Non-cash
i.
Property- basis of tax is the FMV of the property at the time of payment
ii.
Services-basis of tax is the fair value of the service rendered
iii.
Debt cancellation
o With consideration-basis of tax is the amount of debt canceled
o Without any consideration- considered as gift or donation & is subject to
donors tax

iv.
v.

2.

Issuance of shares of stock- basis of tax if the fair value of the stock at the time
the services are rendered by employee
Issuance of notes-basis is the FMV of the notes
o Interest bearing- MV is equal to its face value
In the year the note is received, taxable amount is = face value
At the time of collection, taxable amount is = to maturity value less
face value
Maturity value face value = interest income
*interest income- not treated as CI, but rather classified as other
income
o Non-interest bearing
-basis of tax shall be its value at the time it is received
-value of the note shall be discounted to its present value
At maturity period, taxable income is = to face value less PV
Face value Present Value = interest income
*Interest income- not treated as CI, but rather classified as other
income

Business or Professional Income

*Business Income- gain or profit derived from investment of money, goods, services or its equivalent
*Professional Income- earnings of individuals who exercise their profession to the public
*Accounting methods of reporting business income
a. Accrual Basis
b. Cash Basis
c. Hybrid Method
- combination of Accrual & Cash Basis
-reporting income on cash basis & recording expense on accrual basis, or the other way around or
the other way around
d. Crop-year Basis
-used by farmers when gestation period is more than 1 year
-all operating & production expenses incurred are deducted when income is earned
Gestation Period- span of time from planting to harvesting
e. Installment Method
Personal property are sold on installment basis; SP exceeds 1k, initial payment do not
exceed 25% of SP
Real Property sold on installment basis, initial payment do not exceed 25% of SP
f.

Deferred Payment Method

-variation of installment method
-property are sold on installment basis, initial payment exceeds 25% of SP

g. Percentage of Completion Method & Completed Contract Method

Percentage of Completion Method- reports income based on the progress of work

Completed Contract Method- reports income only upon the completion of the work

h. Spread out & Outright Method

-used to report income earned from leasehold improvements and have become the property of the
lessor at the end of the lease term

3.

Gains from dealings in Property

-arise from sale or exchange of property

4.

Passive Income
-gain or profit earned without effort or labor exerted
-ordinarily, subject to final tax
Types of Income
a) Interest Income
In the Phil
Yields or any other monetary
benefits from deposits substitutes,
trust funds, & similar arrangement
In the Phil

Interest Income from long term

deposits as evidenced by certificates
prescribed by the BSP with maturity
of 5 years or more

II.

20%

Exempted

If long-term deposit is pre-terminated

Before the 5th year, the final tax shall be
4 years- less than 5 years
5%
3 years- less than 4 years
12%
Less than 3 years
20%

Interest Income under the Expanded

Foreign Currency Deposit System

c) Prizes

I.

20%

b) Royalty Income
In general
On books, literary works, musical
Works in the Phil

5.

RC, NRC, RA, NRAETB

& Winnings
In general
Prize less than P10,000
From PCSO & Lotto

7.5%
NRC & NRA - exempted
20%
10%

20%
Subject to basic tax
Exempted

Other Taxable Income

Interest Income
Bank deposit in Phil- subject to final tax of 20%
Bank deposit outside the Phil- subject to basic tax
Rent Income

III.

Dividend Income
i.
Dividend received from a domestic corporation; and the recipient is:
Domestic or resident corp- dividend is tax exempt
Resident foreign corp- tax exemp
Non-resident foreign corp
GR: subject to final tax of 30%
XPN: rule of reciprocity, subject to final tax of 15%
RC, NRC, RA- subject to 10% final tax
NRAETB- subject to 20% final tax
NRA not ETB- subject to 25% final tax
ii.

Dividend earned from a resident foreign corporation

Received by individual taxpayer
- dividend is subject to scheduler income tax rate
Received by corporate entity
- included in computing gross taxable income subject to 30% tax rate effective January
1, 2009
In case the gross income derived from 3 year period preceding declaration of
dividend is:
a) Less than 50% of gross income(within & without)
-dividend is deemed earned outside the phil
-dividend shall not be included as part of gross taxable income
b) More than 50% but not more than 85% of GI(within & without)
-dividend is deemed earned partly within or partly outside
-dividend within shall be included in computing gross taxable income
c) more than 85% of GI (within & without)
-dividend is deemed earned within the phil
-dividend is included in the computation if gross taxable income
If silent, dividend income is deemed 100% earned within phil
Dividend income within= (GI-Phil 3 yr period / Contract income- world 3 yr period) x
dividend income from RFC

iii.

Dividend earned from a non-resident foreign corporation

Recipient is individual
-dividend shall be included in computing gross taxable income
-subject to scheduler income tax rate
Recipient is domestic corporate entity
-inter- corporate dividend shall be included in the computation if GTI]
-subject to 30% income tax rate effective January 1, 2009

Forms of Dividends
a) Cash dividend
o Received by individual & NRFC- subject to final tax
o Received by Domestic & RFC- tax exempt
b) Property dividend
o Received by individual or NRFC
-subject to final tax based on FMV of property at the time of dividend
declaration
o Received by Domestic & RFC- tax exempt

c) Tax dividend
-basic rule, not taxable
o Pure Stock Dividend- tax exempt
o Stock dividend representing distribution of earnings- taxable
d) Liquidating dividend
-represents return of capital & is not taxable
-if amount returned exceeded cost of investment, excess is subject to capital gains
tax
e) Scrip dividend
-issuance of a promissory note
-subject to final tax based on FMV of the note
IV.

Annuities
-installment amount paid for life insurance coverage returned by an insurance company
annuity received that represents interest- taxable
amount represents return of premium- not taxable

V.

Prizes , Winnings & Awards

Included in computation of gross taxable income, hence taxable if:
a) Amount is P10k or less & received by individual from Phil
b) Received by individual from foreign sources
c) Received by corporations from phil or foreign sources
Received by Individual from Phil sources
-subject to 20% final tax
The following are tax exempt whether received by individual or corp:
a) Winnings from PCSO or Lotto
b) Prizes or awards to athletes in national & international sports competition held in phil
or abroad
c) Prizes and awards in recognition of religious, charitable, educational, scientific,
artistic or literary performance, provided the recipient was selected without action on
his part, & he is not required to render substantial future service in view of the award.

VI.

Recovery of accounts written off

taxable amount is = to actual amount recovered x tax rate at the time of deduction of
worthless debts

VII.

Tax refund
-tax paid and later on refunded due to overpayment or erroneous computation
-basic rule: taxable
If tax paid is treated as deductible expense, tax refund is considered income, hence taxable
If tax paid cannot be deducted or classified as allowable deduction from gross income, tax
refund is not taxable
The following tax refunds are not taxable:
a) Philippine income tax, except fringe benefits tax
b) Estate or donors tax
c) Stock transaction tax
d) Income tax paid on foreign country where the taxpayer claimed it as a tax credit
e) Income tax deficiency & special assessment

Allocation of Unidentified Gross Income

Income within= [Identified GI (phil) / identified GI (world)] x Unidentified GI