TAXATION I (for July 23, 2011) SEC. 32. Gross Income. (A) General Definition.

- Except when otherwise provided in this Title, gross income 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 items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests - The charge for the privilege of borrowing money, typically expressed as an annual percentage rate. It is most commonly the price paid for the use of borrowed money, or, money earned by deposited funds. It is treated as income by the lender and expense by the borrower. [DM] a. Interest on bank deposit/deposit substitutes/ trust fund and similar arrangement b. Interest from lending/interest income from bonds c. Interest on foreign/government bonds d. Interest on treasury bills e. Interest earned from deposits maintained under the FCDU system f. Interest income of pawnshop operators (5) Rents (Taxation of Leases see RR No. 19-86) - payment made for the temporary use of a good, service or property owned by another [DM] a. Operating Lease a contract under which the asset is not wholly amortized during the primary period of the lease wan where the lessor does not rely solely on the rentals during the primary period for his profits but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or the re-lease of the returned assets at the end of the primary lease period b. Finance Lease also called the full payout lease, a contract involving payment over an obligatory period (also called the primary or basic period) of specific rental amounts for the use of a lessors property sufficient in total to amortize the capital outlay of the lessor and to provide for the lessors borrowing costs and profits. Obligatory period is primary non-cancellable period of the lease which in no case shall be less than 730 days. Lessee exercises choice over the asset. (6) Royalties - defined as the sums paid to a creator or a participant in an artistic work, based on individual sales of the work. In order to receive royalties, the work must generally receive a copyright or patent. As well, often the amount of royalties received is negotiated by contract

(7) Dividends - any distribution made by a corporation to its shareholders out of its earnings on profits and payable to it shareholders, whether in money or in property Kinds: Stock dividends, property dividends, liquidating dividends (8) Annuities - A stream of equal payments to an individual, such as to a retiree, that occur at predetermined intervals (that is, monthly or annually). The payments may continue for a fixed period or for a contingent period, such as for the recipient's lifetime. Although annuities are most often associated with insurance companies and retirement programs, the payment of interest to a bondholder is also an example of an annuity [DM] (9) Prizes and winnings - Prizes may involve the exertion of service or not (if prizes require rendering of service then it now fall under no. 1); Winnings purely without rendering of service [note: based on Atty Tius notes] (10) Pensions - is an arrangement to provide people with an income when they are no longer earning a regular income from employment [DM] (11) Partner's distributive share from the net income of the general professional partnership - SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. *The enumeration is not exclusive Special treatment: a. Forgiveness of indebtedness subject to donors tax not income tax (however if forgiveness of debt is due to the performance of service, then it now becomes subject to income tax it now fall under no. 1 above) b. Recovery of amounts previously written off Revenues Less: Cost Gross Income Less: Expenses Taxable Income Tax rate xx (xx) xx (xx) xx %

Tax due

xx

Based on Vitug Book: Taxable income may be grouped into 3 categories namely: a. Passive investment income subject to final tax (final tax means it does not form part of your gross income; it has its own separate rates and not lumped with other income before tax is computed) b. Compensation income for individuals, basis is gross income (where personal and additional exemptions are availed) c. Non-compensation income for individuals, basis is net income. I.e. Rent, interest, dividend For corporations: income tax treatment for both compensation income is the same, basis is net income compensation and non-

XI. Basic Types / Characters of Income; Filing of ITRs and Payment of Tax 1. Compensation Income (or Wages) i. Meaning Sec. 78 (A) Wages the term wages means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid: (1) For agricultural labor paid entirely in products of the farm where labor is performed, (or) (2) For domestic service in a private home, or (3) For casual labor not in the course of the employers trade or business, or (4) For services by a citizen or resident of the Philippines for a foreign government or an international organization * Means all remuneration for services performed by an employee for his employer under an EER (Sec. 2.78.3 RR No. 2-98, as amended) unless specifically excluded by the Tax Code *Means all remuneration for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than case. There are various types of taxable compensation income such as salaries, wages, bonuses, remuneration, honorarium, benefits and allowances including representation and transportation allowance (RATA), personal emergency relief allowance (PERA), longevity pay, subsistence allowance, hazard pay, annuities, pensions, etc. Additional Compensation Allowance (ACA) given to govt employees pursuant to EO 219 shall not be subject to withholding tax pending formal integration into the basic pay. While its nature shall continue to be that of compensation, it shall be treated as part of the other benefits which are excluded from compensation income, provided that the total amount does not exceed P30,000 (BIR Ruling No. 034-2002, Aug. 16, 2002 modified BIR Ruling No. 179-99 Nov. 22, 1999) *Requisites for taxability

a. There must be services rendered under an Employer-employee relationship b. Payment must be for that services rendered c. The compensation for services rendered must be reasonable *Doctrine of Cash Equivalent - any economic benefit to the employer whatever may have been the mode by which it is effected, is subject to tax ii. Filing of ITRs and Payment of Tax 1. Filing of ITRs - The State requires the employer to WITHHOLD the tax upon payment of the compensation income, such that the end of the calendar year, the employer needs only to file a tax return and no tax is paid because his total withholding tax during the year is equal to his income tax liability. Beginning 2002, qualified employees need not file a substituted return for its employees. 2. Individuals exempt from filing Income Tax Returns Sec. 51(A)(2), NIRC: (2) The following individuals shall not be required to file an income tax return; (a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross income; (b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return: Provided, further, That an individual whose compensation income derived from sources within the Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return; (c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and (d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. Those who do NOT fall under Sec. 51(A)(2) shall observe the following:

a. WHERE to file: (B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in

which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner. (Sec. 51 (B) NIRC) b. WHEN to file: (1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year. (Sec. 51 (C) NIRC) iii. REQUISITES for TAXABILITY 1. There must be SERVICES rendered under an employer-employee relationship 2. Payment must be for services rendered 3. The compensation for services rendered must be reasonable iv. FORMS of Compensation Income Form 1. Property Basis

Fair market value (FMV) of the property *If there is a price stipulated, it is the price stipulated that will be followed in the absence of contrary evidence 2.Promissory Note or other evidence of a. If discounted, it is the fair discounted indebtedness value of the promissory note. b. If not discounted, it is the face value of the promissory note 3. Stocks Fair market value (FMV) of the shares of stock 4.Cancellation of indebtedness in favor Value of the debt of services rendered 5.Tax liability of the Employee paid by Amount of tax liability the employer in consideration of services rendered Premiums paid by the employer of the life insurance of the employee It is TAXABLE Compensation income if the beneficiaries designated are the heirs of the employee or his family It is NOT a TAXABLE Compensation income if the beneficiary designated is the employer FRINGE BENEFITS (B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: (HEVHIMEHEL) (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 actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. EXEMPT FRINGE BENEFITS Sec. 33 (C) NIRC (1) Fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. From Atty Bathans notes (5) Fringe benefits that is required by the nature of, or necessary to, the trade, business or profession of the employer; and (6) Fringe benefit that is for the convenience or advantage of the employer - Convenience of the Employer Rule - Requisites 1. They must be furnished within the premises of the employer 2. The employee is required to accept the same as a condition of employment *De Minimis benefits limited to facilities or privileges furnished or offered by the employer to his employees merely as a means of promoting health, goodwill, contentment or efficiency of employees. *The following are considered as De Minimis Benefits (RR No. 5-2011): a) Monetized unused vacation leave credits of private employees not exceeding 10 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 P750 per employee per semester of P125 per month; d) Rice subsidy of P1,500 or 1 sack of 50-kg rice per month amounting to not more than P1,500; e) Uniforms and clothing allowance not exceeding P4,000 per annum;

f) Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000 per annum; g) Laundry allowance not exceeding P300 per month; h) Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 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 celebration not exceeding P5,000 per employee per annum; and j) Daily meal allowance for overtime work and night graveyard shift not exceeding 25 percent of the basic minimum wage. The most compelling development in RR No. 5-2011 is the introduction of a phrase that limits the scope of de minimis benefits exclusively to those benefits which are included in the enumeration. Thus, benefits granted to employees which are not in the list, although of relatively of small value, cannot qualify as de minimis benefits, and hence, shall be subject to income tax, and consequently, to withholding tax on compensation income. [Again, the importance of de minimis benefits is that it is not considered taxable fringe benefit. You should know the limits because amounts in excess of the limits are taxable while those within the limits are not] *Terminal leave The Court has already ruled that the terminal leave pay received by a government official or employee is not subject to withholding [income] tax. In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al., G. R. No. 96032, 31 July 1991, the Court explained the rationale behind the employee's entitlement to an exemption from withholding [income] tax on his terminal leave pay as follows: Commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. [Manual on Leave Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17]. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. In fine, not being part of the gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income tax. (CIR v. CA, G. R. No. 96016) *Representation and Transportation allowance

- fixed representation and transportation allowances that are part of the monthly compensation income of employees are not taxable under FBT, since they fall under the compensation income tax - Representation and Transportation Allowance (RATA) granted to public 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 personnels official duties shall not be subject to income tax and consequently to withholding tax. *Personal Emergency relief Allowance *Additional Compensation Allowance Taxability -After a thorough study of BIR Ruling No. 144-99, this Office holds that the "other benefits" contemplated under Section 32(B)(7) of the 1997 Tax Code, shall include, the 13th month pay, productivity incentive bonus, Christmas bonus, loyalty awards, gifts in cash or in kind and other benefits of similar nature paid to an employee. Apparently, ACA is not of similar nature with the above-enumerated benefits paid to an employee. The term "additional compensation allowance" as its name connotes, is indeed "compensation" embraced within the term "taxable compensation income" which is being defined as "all remuneration for services performed by an employee for his employer" under Sections 31 and 78 in relation to Section 32, both of the Tax Code, unless specifically excepted under Section 32(B) of the same Tax Code. The reason therefore, for the non-withholding of the said P500 additional compensation allowance was clearly provided for under said Administrative Order No. 53, i.e., it is not yet subject to withholding tax pending its formal integration into the basic pay of government personnel. Thus, it does not necessarily mean that the additional compensation allowance is not at all subject to income tax or that it is exempt from income tax. Considering therefore, that it is a taxable compensation, the same should be included in W-2 Form as part of the gross compensation income subject to schedular rate of tax under Section 24(A) of the 1997 Tax Code [then Sec. 21(a) of the Tax Code, as amended.]. This ruling is being issued in lieu of BIR Ruling No. 144-99 dated September 14, 1999, which is hereinafter considered revoked. (BIR Ruling No. 179-99 dated November 22, 1999) Additional Notes: a. Advances or reimbursements for actual representation or travelling expenses incurred or reasonably expected to be incurred in the ordinary course or business of the employer should not be treated as income on the part of the employee. b. Compensation made by the husband to the wife is not subject to income tax on the part of the wife nor deductible as expense on the part of the husband since for income tax purposes, the spouses are treated in theory as a single entity. c. Corporate income taxpayers are not subject to the gross compensation income tax scheme. Fringe Benefit Tax

1. Nature - Fringe benefit tax is a final income tax imposed on the managerial or supervisory employee and withheld by the employer who files the return and remits the tax withheld to the BIR within 25 days from the close of each calendar quarter The FBT is a final withholding tax on the grossed-up monetary value of the fringe benefit granted by the employer to an employee who holds a managerial or supervisory position. This is tax is effective regardless of whether the employer is an individual, professional partnership or a corporation (regardless of whether the corporation is taxable or not). Who is covered by the FBT tax? The FBT Tax Regulations cover only those fringe benefits given or furnished to managerial or supervisory employee. The Regulations do not cover those benefits which are part of compensation income, because these are subject to withholding tax on compensation in accordance with RR No.2-98. 2. Computation A. Get the Grossed-Up monetary value (GUMV) which is (Monetary value/68%) - Determine the GUMV a. If ownership of property is transferred to the employee, the net monetary value is the FMV of the property (as determined by the BIR Commissioner [zonal] or as determined by the Local Assessor, whichever is higher) b. If ownership of the property is not transferred to the employee, the net monetary value is the depreciation value of the property. What is the Grossed-up Monetary Value and how is it determined? The grossed-up monetary value of the fringe benefit is simply a figure meant to represent the entire income earned by the employee. This includes the net amount of money received, the net monetary value of any property received, and the amount of FBT received by the employee from the employer. B. Get the fringe benefit tax which is (GUMV x 32%) When is the FBT paid? As a final withholding tax on the employee, the FBT is withheld and paid by the employer on a calendar quarterly basis. b. Gross Income from Business, Trade and Profession i. Trade/Business Income Manufacturing Concern Merchandising Services

ii. Professional Income

Refers to the fees received by a professional from the practice of his profession, provided that there is no employer-employee relationship between him and his clients. o If ER-EE is present, it becomes compensation income. As a consequence, there shall be no allowable deductions except for personal exemptions.

iii. Filing of ITRs and Payment of Tax See Compensation Income (same ra)