INCOME TAXATION

Exclusion from Income Deductions from Income

What is Income Tax?



A tax on income whether gross, gross compensation or net depending on the class of taxpayer of the kind of income; A tax on the yearly profits arising from property, business pursuits, professions, trade, or offices. A tax on a persons income, wages, salary, commissions, emoluments, profits, and the like, or the excess thereof over a certain amount. An excise rather than a property tax.

Net Income
Net Income for purposes of income means:


In the case of an individual taxpayer now engaged in business and/or profession, gross income minus allowable deductions; In the case of corporate taxpayers, gross income minus allowable deductions.

Gross Income


Gross income means all income from whatever sources including but not limited to the following items: Compensation for services; Gains derived from dealing in property (real or personal); Income from the conduct of trade or business or the exercise of a profession; Interests; Rent and Royalties; Dividends; Annuities; Prices and winnings; and Income from whatever sources.

  

     

1. Compensation for Services



This item involved income received arising from an employer-employee relationship. It includes among others, salaries, wages, commissions, and similar items as compensation for services rendered.

2. Gains Derived from Dealing in Property (real or personal)



The dealings in property for money through sales, or for other property through exchange, or a combination of both, may result in a gain or loss. The rule is that the entire amount of the gain shall be taxable, and the entire amount of loss deductible, as the case may be.

3. Income from the Conduct of Trade or Business or the Exercise of a Profession



The income is derived from the use of capital in conducting a trade or business, while in the latter, income is derived from the privilege to practice ones profession. Interest refers to the compensation for the use of money or forbearance for its use arising from indebtedness. Interest may refer, also, to interest income from peso bank deposit which is subject to a final tax.

4. Interest


5. Rents and Royalties



A rent is a consideration for the use of property, real or personal, paid by a lessee to a lessor through a contract of lease by which the latter temporarily grants the enjoyment of certain property to the former who undertake to pay rent or a price certain therefore, and which contract to last for definite or indefinite period, but in no case to exceed 99 years. Royalties on the other hand, are payment for the use of property which included earnings from copy rights, trademarks, patents and natural resources under lease. Royalties are subject to final tax as follows: a) 10% for books, literary works, and musical compositions; and b) 20% for the use of other properties.

6. Dividends
Dividends is a corporate profit set aside, declared and ordered by the Board of Directors to be paid to the stockholders on demand or at fixed time. It may be classified into: Cash dividend it is paid to shareholders and taxable to the same. Property dividend it is paid in property of the corporation such as bonds, securities or stock investments. Stock dividend It is paid in stock of the corporation issuing the same and is taxable. Liquadating dividend It involves the distribution of assets by a corporation to its stockholders upon the dissolution and is taxable when gain is realized by the stockholders. Script dividend it is issued in the form of a promissory note and is taxable to the extent of its fair market value. Other dividends indirectly paid.

7. Annuities


Annuity refers to a fixed sum payable to a person at specified intervals for a specific period of time or for life. Life annuity provides for payment of income to annuitant only during his lifetime, even though death is premature. Examples of Life Annuity Maria gave Mario a piece of land subject to a condition that Mario will provide Maria an annual pension or income as long as the former lives. Maria is the giver/annuitant as well as the beneficiary. Ownership of the piece of land is immediately transferred to the latter with the burden of the pension.

8. Income from Whatever Source

The phrase disclose legislative intent to include all other gains, profits and income derived from legal or illegal source such as: Gains arising from expropriation of property; Winnings from gambling; Income/profit from illegal business; Income from embezzlement; Compensation for damage if it represents payment for a loss of expected profit; Bad debts previously charged-off but subsequently recovered; Taxes paid but later refunded; and Contest awards and prizes received.

    

 

Exclusions from Income Under the Tax Code



Exclusion, as used in income taxation, refers to items or receipts not included in the determination of the taxable income because the law or treaty provides that they except from income tax. The law specifically excludes certain items from gross income. Item excluded from gross income are generally non-taxable. They are not included in the income tax return unless information regarding them is specifically called for.

Exclusions from Income Under the Tax Code

The following items are expressly excluded from gross compensation income and gross income under the Tax code, to wit: Proceeds of life insurance; Amount received by the insured as return of premium; Gifts, bequests and devices; Compensation for injuries or sickness; Income exempt under treaty; Retirement benefits, pensions, gratuities; Income and gains subject to final tax; and Miscellaneous items such as:

 

     

Miscellaneous items such as:  Income of: 1. foreign governments; 2. financing institutions owned or controlled or enjoying refinanciang from foreign governments; and. 3. International or regional financial institutions established by governments, received from their investments in the Philippines;  Prizes and awards  13th month pay and other benefits.  GSIS, SSS, Medical and other contributions;  Gains from sale of bonds, debentures and other certificates of indebtedness; and  Gains from redemption of shares in mutual funds.

Tax Exemption of Statutory Minimum Wage Earner (MWE)



Statutory Minimum Wage (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) and the Department of Labor and Employment (DOLE). The RTWPB of each region shall determine the wage rates in the different regions based on the established criteria and shall be the basis of exemption from the income tax. Under the new RA 9504, the compensation income of MWEs who work in the private sector or public sector and being paid the Statutory Minimum Wage (SMW) as fixed by RTWPB/National Wages and Productivity Commission (NWPC), applicable to the place where he/she assigned is exempt from income and not be subject to withholding tax. Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWEs shall be covered by income tax exemption. However, an employee who receives additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000 taxable allowances and taxable income other than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay shall enjoy the privilege of being a MWE and, therefore, his/her entire earnings are no longer exempt from income tax.

Illustrations:


Mr Joseph Tayo (single) is a factory worker receiving a minimum wage of P382.00 a day in the National Capital Region (NCR). During the month, he received P9,932 minimum wage, P1,000 hazard pay, P5,000.00 overtime pay and P2,000.00 night shift differential. How much is the amount of non-taxable income and taxable income of Mr. Tayo during the month (before personal exemption)? \
The non-taxable and taxable income of Mr. Tayo during the month would be: Non-Taxable P9,932.00 5,000.00 2,000.00 1,000.00 P 17,932.00 Taxable P0 -0 - 0- 0P -0-

Minimum wage Overtime Pay Night Shift Differential Hazard Pay Net Income Before Personal Exemption

Note: Since Mr. Tayo is a MWE and has no other income, other than those subjects to final tax, all of his income earned is non-taxable and consequently not subject to withholding tax.

Illustration: MWE with Taxable Additional Compensation



Miss Josephine Tayo (single) is sales worker receiving a minimum wage of P382.00 a day in the National Capital Region (NCR). During the month, he received P9,932 minimum wage, P5,000.00 overtime pay, P2,000.00, P2,000.00 transportation allowance and P6,000.00 sales commission. How much is the amount of non-taxable income and taxable income of Miss Tayo during the month (before personal exemption)?
Non- Taxable P-0-0-0-0P 0Taxable Income P 9,932.00 6,000.00 5,000.00 2,000.00 P 22,932.00

Minimum wage Sales Commission Overtime Pay Transportation Allowance Compensation Income Before Personal Exemption

Note: The entire earnings of Miss Tayo shall no longer enjoy tax exemption because she received additional compensation other than the SMW, hazard pay, night differential pay, overtime pay and holiday pay.

RATIONALE FOR THE EXCLUSIONS



Proceeds of Life Insurance

Reasons: Such proceeds are considered more as indemnity rather than as gain and profits. The contract of insurance is a contract of indemnity which is a contract between two parties whereby the one undertakes and agrees to protect/indemnify the other against loss or damage arising from some contemplated act on the part of indemnitor, or from some responsibility assumed by the indemnitee, or from the claim or demand of a third person, that is, to make good to him such pecuniary damages as he may suffer.

Amounts Received by Insured as Return of Premium.

Reasons: The return of premiums is equivalent to a return of capital. Example: K. Cabansag got a life insurance policy for P150,000 from Standard Insurance Corporation. Under the policy, Standard Insurance will pay K. Cabansag the amount of P150,000 after the tenth year of the policy and, in case she dies before, said date, her beneficiaries shall receive the same. K. Cabansag outlived the tenth year and received P150,000 from Standard Insurance Corp. The total premiums paid were only P130,000. The amount of P20,000 out of the P150,000 received is taxable, while the P130,000 paid is not becauuse it only represents a return of premiums paid.

|Gifts, Bequests, and Devises



The value of property acquired by gift, bequest, devise or descent shall be excluded from gross income, provided that income from such property shall be included in gross income.
Gifts refers to any property legally and validly transferred from one person to another for free. Bequest refers to personal property transferred from one person to another by will. Devise is a real property transferred from one person to another by will.

The following rules are applicable in determining the taxability of gist, bequest and devise:
They are subject to transfer tax if received without any consideration or compensation

given; otherwise, they are subject to income tax. The value of the property acquired through donation or legal succession is exempt from income taxation, but the income derived from such property is included for income tax purposes. Allowance received based on a separation agreement is not taxable income for it represents support of family. Amount of the principal paid under a marriage settlement is not taxable income. Amount received by virtue of settlement of will litigation is not taxable income.

Gifts, bequests and devises

Such transfer of gifts, bequests and devises is subject to donors or estate tax.

Reasons:

Exception: Gift, bequests and devises or descent of income from any property, in case of transfer of divided interest are included in gross income. Illustration: G. Dacumos, inherited a house and lot valued at P800,000. See rented the house and leases a portion of his lot deriving a yearly income of P100,000. The P800,000 is not subject to income tax, while annual income of P100,000 from rental and lease forms or is included in his gross income subject to income tax. Kris received P1,000,000.00 as a gift from Mayor Tsong Go. Since there is an increase in her wealth, she contemplates to include the P1,000,000.00 as part of her gross income subject to tax. Is Kris correct?
No, Kris should not include the P1,000,000.00 as part of her gross income for income tax purposes. The P1,000,000.00 is a gift, and therefore exempt from income tax. However, the P1,000,000.00 is subject to donors tax to be paid by Mayor Tsong Go.

13th Month Pay, Bonuses, and Other Benefits



13th Month pay, bonuses and other benefits not exceeding P30,000.00 are tax exempt. Illustration:
Mr. Roy Mondia, a mechanical engineer, receives a basic salary of P25,000.00 per month. He received the following during the year:
Basic Salary P P300,000.00 13th Month Pay Productivity Bonus Clothing Allowance de minimis The gross income of Mondia can be shown as follows: Non-Taxable Basic Salary 13th Month Pay & Other Benefits Taxable Productivity Bonus Clothing Allowance - de minimis ceiling Clothing Allowance excess amount TOTAL P 30,000.00 5,000.00 4,000.00 P 34,000.00 1,000.00 P 306,000.00 Taxable P 300,000.00 25,000.00 10,000.00 5,000.00

Note: 1. Only P5,000.00 of the productivity bonus is allowed to be part of nontaxable other benefits to meet the P30,000.00 nontaxable ceiling of 13th month pay and other benefits. 2. The clothing allowance classified as de minimis is not taxable to the extent of P4,000.00. Any excess amount can be used as nontaxable other benefits if the 13th month pay and other benefits do not yet reach the P30,000.00 ceiling; otherwise, the excess becomes taxable.

Compensation for Injuries or Sickness

Reason: Amounts Received are in the nature of compensation, being payment for injuries sustained or sickness incurred, and which add nothing to the individual. Income Exempt under Treaty Reason: Such exclusion proceeds from international comity which implies recognition that one sovereignty allow within its territory to the legislative, executive or judicial acts of an other sovereignty, having due regard to right of its own citizens as well as to international duty and convenience. In relation to taxation, comity implies the grant of privilege to officials and employees doing diplomatic and consular services within the Philippines and whose incomes are exempt from taxation out of defense, good will and mutual respect among nations.


Retirement Benefit, Pensions, Gratuitous and Other Similar Benefits

Reason: These benefits are bounty given by employer in consideration or in recognition, appreciation of and gratuitousness for exemplary services of the retiree and pensioner.


Income Derived by Government or Its Political Subdivisions

Reason: The exclusion is based in the principle that the government does not ordinarily tax itself. Exception: Section 27C of the National Internal Revenue Code requires all government-owned and controlled corporations, agencies or instrumentalities except the GSIS, SSS, Philippine Health Insurance Corporation, PCSO and PAGCOR to pay their income taxes.

Other Exclusions from Income Under Special Laws

The following items are excluded from income under special laws, to wit:  Income of Cooperative marketing associations under Act No. 3425  Prizes received by winners in horse race, charity sweepstakes from the PCSO under RA No. 1169.  Backpay benefits under R.A. No. 314  Supplemental allowance per diem benefits and the like received by officers and employees from Foreign Service in consideration of their service, except their basic salaries under R.A. No. 708.

Salaries and stipends in dollars received by the nonFilipino citizens serving on the technical staff of the International Rice research Institute and Ford Foundation grants by reason of service given in the institution under R.A. No. 2702 and R.A. No. 3528. Salaries and stipends in dollars received by non-Filipino citizens rendering service in the Agriculture Department of the Southeast Asian Fisheries Development Center in the Philippines under Presidential Decree No. 292, and also those in service in the Population Council of New York under Presidential Decree No. 246. Income from bonds and the other instruments for sale in the international market under Presidential Decree No. 81;

Income from bonds and the other instruments of indebtedness which the Export Processing Zone Authority (EPZA) is authorized to issue under Presidential Decree No. 66; and Income derived from the installment sales of houses to low income group in housing projects of domestic corporations, partnership or landowners or income derived from rentals thereof under P.D. No. 745 as amended by P.D. No. 1217; and Income of Senior Citizen not exceeding P60,000 is except from tax under R.A. 7482

The Sources of Income

They are as follows:  Income from within the Philippine such as: a. Interest on bonds/notes b. Dividends c. Compensation for Labor or Services d. Rentals and Royalties from Property e. Gains, profits and income from sale of real property as well as from personal property.  Income from without (outside) the Philippines such as: a. Interest b. Dividends c. Compensation for labor or services; d. Rentals or Royalties e. Gains, profits and income from sale of personal as well as real property.

Income from sources partly within and party from without of the Philippines, such as: a. Gains, Profits, and Income from 1. Transportation or other service rendered partly within and partly outside. 2. The sale of personal property produced within and sold outside, or vice versa

Deductions from Income

Deductions are items or amounts allowed by law to be deducted from gross income of an individual or juridical person in order to arrive at a taxable income. Deductions are classified into:  Deductions from compensation income of individual taxpayers;  Deductions from business and/or professional of income of individual taxpayers;  Deductions from Corporate Income; and  Special deductions


A. Deductions from Compensation Income includes:



 

Personal Exemptions: a. P50,000 for single person including a married person judicially decreed as legally separated from his or her spouse with no qualified dependents; b. P50,000 for each married person; and c. P50,000 for head of family Additional Exemptions: a. P25,000 for each child not to exceed four Premium payments if applicable; or Optional Standard Deductions (OSD) of 10%.

Personal Exception


Are arbitrary amounts allowed as deductions from gross income of the individual taxpayer from compensation, business (selfemployment) or practice of profession. Personal exemptions in a sense represent the personal, living or family expenses of the taxpayer. Basic Personal Exemption. This exemption is Exemption. allowed on account of the civil status of the taxpayer. taxpayer. Additional Exemption. This exemption is further Exemption. allowed to the taxpayer by reason of his qualified dependent children. children.

Kinds of Personal Exemption

1.

2.

Basic Personal Exemption



For purposes of determining the tax in accordance with the graduated tax schedule for individuals in Section 24A, there shall be allowed a basic personal exemption as follows:
For single individual or married individual judicially decreed as legally separated with no qualified dependent - P50,000.00 For Head of Family P50,000.00

For each married individual P 50, 000.00

B.

Deductions from Business and/or Professional Income which include:

  

Personal and Additional Exemptions; Itemized deductions; or The Optional Standard Deductions (OSD) of 10% of his gross income.

C. Deductions from Corporate Income which include:



The itemized deductions enumerated in Sec. 34 of the Tax Code;

D. Special Deductions in Addition to the Itemized deductions allowable to corporations, and which may be availed of by:
  

Insurance Companies Estates and Trusts Private educational institutions