Definition of Income Taba 2022)

-Gross Income means all income from whatever source derived within or outside the Philippines,
whether legal or illegal.
-Income means all wealth that flows into the taxpayer, other than the return of capital.
-On the other hand, "capital" constitutes the investment that is the source of income. Therefore,
capital is the fund, while income is the flow.
Capital is wealth, while Income is the service of wealth.

Forms of Income
 Income may be realized in any form, whether in money, property, services, or indirect
economic benefit.
 Items indirectly benefitting taxpayers are excluded from gross income.
 Income specifically described as gains derived from the sale or other disposition of
capital.
 It also refers to the amount of money coming to a person or corporation within a specified
time, whether as payment of services, interest, or profits from investment.

Valuation of Income
The amount of income recognized is generally the value received or which the taxpayer has a
right to receive.

Taxable Income (Tabag, 2022)

-Section 31 of the Tax Code provides that "taxable income" means the pertinent items of gross
income.
-All income is subject to basic and creditable withholding taxes. It includes gains, profits, and
income derived from whatever source, whether legal or illegal.

Requisites for Income to be Taxable.

1. There must be gain. The gain need not be in cash derived from the sale of assets. It may occur
through the exchange of property, payment, assumption, reduction, or cancellation of the taxpayer's
indebtedness (except gifts) or other profit realized from the completion of a transaction.
2. The gain must be realized or received. A mere increase in property value without actual
realization, either through sale or other disposition, is not taxable. The realization of income need not
take the form of an actual receipt or property by the taxpayer, as it may occur where there is a
constructive receipt of the income.
The doctrine of constructive receipt complements the doctrine of actual receipt as a test of the
realization of income.

3. The gain must not be excluded by law from taxation. Incomes exempt from tax by law or treaty
are not considered in determining gross income. Income is recognized in the year it is actually or
constructively received in cash or cash equivalent.

Characteristics of Philippine Income Tax (Tabag, 2022)

1. National tax. It is imposed and collected by the National Government throughout the country.
2. General tax. It is levied without a specific or predetermined purpose. Hence, the revenue from
income tax may be appropriated for general purposes.
3. Excise tax. It is imposed on the right or privilege of a person to receive or earn an income.
4. Direct tax. It is payable by the person upon whom it is directly imposed by law. It cannot be
shifter or passed on to others.
5. Progressive tax. It is based on one's ability to pay. The rate of income tax increases as the tax base
increases.

Income Tax Systems (Tabag, 2022)

-Under a "Schedular System," the various types/items of income (e.g., compensation, business
professional income) are classified accordingly.
-All income receive by a taxpayer under the "Global Tax System" is grouped without any distinction
as to the type or nature of the income. After deducting from expenses and other allowable
deductions, they are subject to a fixed rate tax.

Basic Features of Philippine Income Taxation (Tabag, 2022)

1. It has adopted a comprehensive tax situs using nationality, residence, and source rules. It makes
citizens and resident aliens taxable on their income derived from all sources, while non-resident
aliens are taxed only on their income derived from within the Philippines.
(Domestic corporations are taxed on universal income, while foreign corporations are taxed
only on income from within the Philippines. )
2. The individual income tax system is mainly progressive in providing a graduated income tax rate.
Generally, corporations are taxed at a flat rate of either 20% or 25% under the CREATE Act.
3. It has retained more schedular than global features concerning individual taxpayers but has
maintained a more global treatment of corporations.
Compensation Income (Tabag, 2022)

-Compensation income arises out of an employer-employee relationship.

-It includes all remuneration for services performed by an employee, whether paid in cash or in kind.
-Remuneration for services constitutes compensation income even if the relationship between
employer and employee no longer exists when payment is made.
Classification of Compensation Income
1. Regular compensation. It includes a basic salary, fixed allowances for representation,
transportation, etc., paid to an employee per payroll period (RR 10-2008).

2. Supplemental compensation. It includes payments apart from the regular compensation, including
overtime pay, commission, profit sharing, monetized vacation and sick leave, fringe benefits of rank-
and-file employees, hazard pay, taxable 13 deg month pay, and other benefits.

Fringe Benefits
A fringe benefit is any goods, service, or other benefit furnished or granted by an employer in cash or
kind,
Fixed or Variable Allowances
Received by a public officer or employee of a private entity (in addition to the regular compensation)
are subject to income tax and, consequently, creditable withholding tax on compensation Income
(Section 2.78.1 (A) of RR2-98 as amended by RR10-2008).
(Examples of fixed or variable allowances are transportation allowance, representation allowance,
communication allowance, living away from home allowance (LAFHA), etc.)

Traveling and Entertainment Expenses (Advances and Reimbursements)

Reasonable reimbursements/advances for travel and entertainment expenses (pre- computed daily
and paid to an employee while he is on an assignment or duty) need not be subject to the requirement
of substantiation and withholding.
 It is for ordinary and necessary travel and representation, or entertainment expenses paid or
incurred by the employee in the pursuit of the trade, business, or profession; and
 The employee must account/liquidate for the preceding expenses per the specific
requirements of substantiation for each category of expenses under Sec. 34 of the Tax Code.
Premiums on Life Insurance
Premiums on life insurance paid by the employer are taxable income to the employee. The insured
employee, directly or indirectly, is the beneficiary under the policy.

Deductible Expense of the Employer

Any amount given by the employer as benefits to its employees, whether classified as de minimis
(benefits of small value) or fringe benefits, shall constitute a deductible expense upon the employer.

Retirement Benefits, Separation Pay. Pension, etc.

Employees receive retirement benefits, separation pay, pension, cost of living allowances, and other
tax-exempt income from employers.

TIPS AND GRATITUDES

Paid directly to an employee by a customer are considered taxable income subject to basic tax
Vacation and Sick Leave Allowances
Vacation and sick leave are "vacation allowances or sick leave credits" paid to an employee
treated as compensation income. Thus, an employee's salary on vacation or sick leave constitutes
compensation, notwithstanding his absence from work.

Representation & Transportation Allowances (RATA)

Granted under Section 34 of the General Appropriations Act to certain officials and employees of
the government are considered reimbursements for the expenses incurred in performing one's
duties rather than as additional compensation. However, the excess of RATA, if not returned to
the employer, constitutes taxable compensation income of the employee.

Stipends of Resident Physicians

The stipends received by resident physicians during their intensive training in the residency
program of a hospital are subject to creditable withholding tax (CWT). The amount subject to
CWT shall include fees, per diems, allowances, and any other form of income payments not
subject to withholding tax on compensation (BIR Ruling No. DA [C-004]024-2010, February 4,
2010).

Cost of Living Allowance (COLA)

COLA of minimum wage earners is exempt from income tax.
(new wage rates or statutory minimum wage)
(inclusive of COLA under NCR Wage Order No. NCR-16), including holiday pay, overtime pay,
night shift differential pay, and hazard pay.

Income or Gain from Stock Option Plans

The BIR ruled under BIR Ruling 119-2012 dated February 22, 2012, that any income or gain
derived by an employee from the exercise of a stock option is considered additional
compensation subject to income tax and, consequently, withholding tax on compensation (WTC).

Business Income (Tabag, 2022)

 Gross income derived from a trade, or the exercise of a profession is known as business
income.
 It may arise from the sale of products or services. (Business income is taxed)
 In the case of manufacturing, merchandising, or mining business, "gross income" means
total sales, less the cost of goods sold, plus any income from investments and incidental
or outside operations or sources.
For example, fees received by a professional person are considered business income. Rents
received by a person in real estate are business income.
Bad Debt
This rule is known as the "Tax Benefit Rule."

In that case, the subsequent recovery shall not be treated as the receipt of realized taxable income
but as a mere recovery or return of capital that is not taxable.

Cancellation or Condonation of Debts

Income can come in many forms,
The following tax rules shall be observed concerning the cancellation/condonation of debts:
Applicable Tax and Reason for the cancellation
Subject to basic income tax
If services were rendered by the debtor, in consideration of which the creditor canceled the
indebtedness.
Subject to Donor's Tax
If the creditor, without receiving any consideration from the debtor and purely as an act of
liberality, cancels the indebtedness.’
Subject to 10% final tax
If the debtor is a corporation shareholder that cancels the indebtedness, such cancellation
constitutes an indirect dividend.

Tax Refund The "Tax Benefit Rule" also applies to refunds or tax credits.
Tax refunds are taxable if the tax, when paid, was deducted from gross income
The following tax refunds are NOT taxable:
1. Income Tax (except fringe benefits tax)
2. Estate Tax
3. Donor's Tax
4. Special assessment
5. Stock Transaction Tax
6. Income tax is paid to a foreign country if the taxpayer claimed credit for such tax in the same
year.

Gains Derived from Dealings in Property (Tabag, 2022)

Gross income derived from dealings (sale, barter, or exchange) in property includes all income
derived from the disposition of property (real or personal, for sale or in exchange for other
property, or both), which results in gain or loss.

The gain from the transaction shall be taxable, and the loss shall be deductible if incurred in
trade, profession, or business.
Gross income derived from interest should only refer to such interest as arising from
indebtedness (whether business or non-business, legal or illegal), that is, compensation for the
loan of forbearance of money, goods, or credits.
Interest derived from lending money, goods, or credits from one person to another or interest
earned in the normal conduct of trade or business are subject to basic tax.

Interest income on deposits made in banking institutions and interest income on deposit
substitutes are passive income subject to a 20% final withholding tax.

Rent Income (Tabag, 2022)

Section 32(A)(5) of the Tax Code provides that "rent" paid by the lessee for the use or lease of
property is taxable income to the lessor.
Rent is the amount paid for the use or enjoyment of a thing (real or personal) or right.
1. Cash at a stipulated price.
2. Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the
lease contract,such as real property taxes assumed by the lessee on the property being leased,
insurance, or other fixed charges.
3. Advance payment, which may be:
• Prepaid rent shall be reported as income in full in the year of receipt, regardless of the
accounting method used by the lessor.
• A security deposit applied to rental is a taxable income of the lessor.

Non-Taxable Rent
Advance rentals representing option money for the property and security deposits to ensure
faithful performance of certain obligations of the lessee are not considered as the lessor's income.
Leasehold Improvement
 A leasehold improvement is an improvement made to a leased asset.
On the other hand, the lessee may claim depreciation of the improvements as a deduction from
the lessee's gross income over the remaining lease term or the life of the improvements,
whichever is shorter.
The lessor has the option to report as income the fair market value of such buildings or
improvements (outright method) or to spread over the life of the lease the estimated depreciation
value of such buildings or modifications at the termination of the lease and report as income for
each year the lease an equal part thereof (spread-out method).

Dividend Income (Tabag, 2022)

Dividends are payments made by a corporation to its shareholder members.

A direct dividend is one where the paying corporation acknowledges the distribution of
dividends through a resolution of the Board of Directors declaring such distribution as the
distribution of dividends.
An indirect dividend is a distribution of profits disguised as payment of services, properties, etc.
Direct and indirect dividends are subject to tax.
Dividends may be subject to basic tax, final tax, or exempt from taxation, summarized as
follows:
Types of Dividends
 Cash dividends. Dividends are paid out of currency and are usually taxable to the
recipient in the year they are paid. It is the most common method of sharing corporate
profits with the company's shareholders.
 Property dividends. Dividends are paid out in the form of a non-cash asset from the
issuing corporation or another corporation, such as a subsidiary corporation. Property
dividends are also known as dividends in kind.
 Liquidating dividends. A liquidating dividend, generally, is not a dividend income. The
transaction is considered a sale or exchange of property between the corporation and the
shareholder. When a corporation distributes all of its assets in complete liquidation or
dissolution, the gain realized or loss sustained by the shareholder, whether individual or
corporation, is a taxable income or deductible loss of the latter, as the case may be.
 Stock dividends. A stock dividend reflects the corporation transferring an amount from
"surplus" (retained earnings) to "capital stock" (paid-up capital).

Prizes and Winnings (Tabag, 2022)

A prize is an award given to a person or group to recognize and reward actions or achievements.
Prizes are also given to publicize noteworthy or exemplary behavior and to provide incentives
for improved outcomes and competitive efforts.

Pensions and Partnership (Tabag, 2022)

Pensions Pensions, in general, are subject to income tax, except pensions and retirement benefits
exempt under the law. RR-298 (as amended) provides that retirement pay, as a rule, is taxable,
except:
1. Retirement benefits received under Republic Act No. 7641; and
2. Those received by officials and employees of private firms, whether individual or corporate,
following a reasonable private benefit plan maintained by the employer which meets the
following requirements:
a. There must be a duly registered retirement plan. As contemplated under Revenue Regulation
29-2020, a Certificate of Qualification as a Reasonable Employees' Retirement Benefit Plan
should be issued to the company.
b. The retiring official or employee has been in the service of the same employer for at least 10
years.
c. The official or employee must not be under 50 years of age at the time of his retirement. d.
The retiring official or employee shall not have previously availed of the privilege under the
retirement benefit plan of the same or another employer.
Partner's Share in the Net Income of a General Professional Partnership (GPP)
EXCLUSIONS TO GROSS INCOME
Nature of Exemption from Taxation (Tabag, 2022) Sec. 32(B) of the Tax Code states that
exclusions from the gross income refer to the flow of wealth to the taxpayers which are not
considered part of gross income for purposes of computing the taxpayer'staxable income due to
the following:
1. It is exempted by the fundamental law or by statute.
2. It does not come within the definition of income.
Income exclusion should not be confused with reducing gross income by applying allowable
deductions. Exclusions are not considered in determining gross income. However, deductions are
subtracted from the gross income.

Nature of Exemptions from Taxation

Exemptions from taxation is a grant of immunity to persons or corporations of a particular class
from a tax they are obliged to pay. It is an immunity or privilege that the Government may
revoke unless the exemption is founded on a contract protected from impairment. It is freedom
from a financial charge or burden to which others are subjected. Exemptions are not favored and
are construed strictly against the taxpayer and liberally in favor of the Government.
The fundamental theory is that all taxable property should bear its share in the cost and expense
of the Government. Consequently, the person who claims exemption must be able to justify his
claim or right by a grant expressed in terms "too plain to be mistaken and too categorical to be
misinterpreted." If not expressly mentioned in the law, it must be at least within its purview by
clear legislative intent.

Grounds for Granting Tax Exemptions (Tabag, 2022) The following are the grounds for
granting tax exemptions:
1. Based on Contract, Law, or Tax Treaty.
Based on Law
Some countries with tax treaties with the Philippines are as follows: Australia Austria
Bahrain Brazil Canada China France Netherlands Italy Korea Denmark Malaysia Finland
Germany Hungary Norway Czech Republic Spain India Indonesia United Kingdom United
States Thailand Poland Vietnam Japan Belgium Tax Exemption, Tax Amnesty, and Condonations
(Tabag, 2022) Tax exemption refers to a grant of immunity to persons or corporations of a
particular class from a tax that persons and corporations generally within the same State or
taxing district are obliged to pay. A tax amnesty is a general pardon by the State on persons
guilty of evasion or violation of a revenue or tax law. It is absolute forgiveness or waiver by the
Government of its right to collect to tax evaders who wish to relent and are willing to reform are
given a chance to do so and therefore become part of the society with a clean slate (Republic V.
Intermediate Appellate Court, 196 SCRA 335). Like a tax exemption, a tax amnesty is never
favored nor presumed in law and is granted by statute. The terms of the amnesty must be strictly
construed against the taxpayer and liberally in favor of the Government. Unlike a tax exemption,
however, a tax amnesty has limited applicability to cover a particular taxing period or transaction
only. On the other hand, there is tax condonation or remission when the State desists or refrains
from exacting, inflicting, or enforcing something to restore what has already been taken. The
condonation of tax liability is equivalent to a tax exemption. Thus, it should be sustained only
when expressed in the law. Nature of Power to Grant Tax Exemption (Tabag, 2022) The nature of
power to grant tax exemption: 1. National Government. It is inherent in the exercise of the power
to tax that the sovereign State is free to select the subjects of taxation and to grant exemptions.
Unless restricted by the Constitution, the legislative authority to exempt is as broad as its power
to tax. 2. Local Governments. Municipal corporations have no inherent power to tax or grant tax
exemptions. But the moment the power to impose a particular tax is given, they can grant
exemption unless forbidden by some Constitution or law provision. The legislature may delegate
its power to give tax exemptions to the same extent that it may exercise the power to exempt.
Items Excluded from the Gross Income (Tabag, 2022) The following are exclusions from the
gross income as provided under Section 32(B) of the Tax Code, as amended by RR 10963
(TRAIN Law; RR 8-2018): 1. Life Insurance General Rule: Exempt from tax since it is a mere
reimbursement for the loss of life. Exception: The following shall be taxable: a. The beneficiary
was chosen for valuable consideration. BM2216 05 Handout 1 *Property of STI 
[email protected] Page 3 of 4 b. The interest earned on the insurance policy. 2. Return of
Premium The amount received by the insured as a return of premiums, endowment, or annuity
contracts, either during the term or at the maturity of the life insurance contract or upon
surrender of the contract. Return of Premium Exempt Excess Income 3. Gifts, Bequests, and
Devises The value of property acquired by gift, bequest, devise, or descent, provided that income
from such property shall be included in gross income in cases of transfer of divided interest.
Property inherited or received as a gift Exempt Income of the above properties Taxable 4.
Compensation for Injuries or Sickness Amounts received, through accident or health insurance or
under the Workmen's Compensation Act, as compensation for personal injuries or sickness, plus
the amounts of any damages received, whether by suit or agreement, on account of such injuries
or sickness. 5. Income exempt under Tax Treaty Income of any kind, to the extent required by
any treaty obligation binding upon the Government of the Philippines, shall be exempt. Only the
amount received as compensation for lost income is taxable. 6. Retirement Benefits, Pensions,
Gratuities, etc. a. Retirement benefits received under Republic Act. No. 7641 and those received
by officials and employees of private firms, whether individual or corporate, by a reasonable
private benefit plan maintained by the employer, provided: • That the retiring official or
employee has been in the service of the same employer for at least 10 years; • At least 50 years
of age at the time of his retirement; and • The benefits granted shall be availed by an official or
employee only once. b. Any amount received by an official or employee as a consequence of the
separation from the service because of: • Death • Sickness • Other physical disability or for any
cause beyond the control of the said official or employee c. Social security benefits, retirement
gratuities, pensions, and other similar benefits received by resident or non-resident citizens of the
Philippines or aliens who come to reside permanently in the Philippines from foreign
government agencies and other institutions, private or public. d. Payments of benefits due or to
become due to any person residing in the Philippines under the laws of the United States
administered by the United States Veterans Administration. e. Benefits received from or enjoyed
under the Social Security System under the provisions of Republic Act No. 8282. f. Benefits
from the GSIS under Republic Act No. 8291, including retirement gratuity received by
government officials and employees. 7. Miscellaneous Items a. Income derived from investments
in the Philippines in loans, stocks, bonds, or other domestic securities or interest on deposits in
banks in the Philippines by: • Foreign governments BM2216 05 Handout 1 *Property of STI 
[email protected] Page 4 of 4 • Financing institutions owned, controlled, or enjoying
refinancing from foreign governments • International or regional financial institutions
established by foreign governments b. Income derived from any public utility or the exercise of
any essential governmental function accruing to the Government of the Philippines or any
political subdivision thereof. c. Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if: • The
recipient was selected without any action on his part to enter the contest or proceeding. • The
recipient is not required to render substantial future services as a condition for receiving the prize
or award. d. All prizes and awards are granted to athletes in local and international sports
competitions and tournaments, whether held in the Philippines or abroad, and sanctioned by their
national sports associations. e. Gross benefits from 13th -month pay and other benefits received
by officials and employees of public and private entities up to the extent of P90,000. f. GSIS,
SSS, Medicare, Pag-Ibig contributions, and union dues of individuals. g. Gains realized from the
sale or exchange, or retirement of bonds, debentures, or other certificates of indebtedness with a
maturity of more than five (5) years. h. Gains realized by the investor upon redemption of shares
of stock in a mutual fund company. 8. Tax Exempt Income under RA 11494, Bayanihan to
Recover as One Act, also known as Bayanihan Act II a. Retirement benefits received by officials
and employees of private firms, individual or corporate, from June 5, 2020, to December 31,
2020. b. COVID-19 Special Risk Allowance is given to public and private health workers. It is
an allowance paid to private and public health workers directly catering to or in contact with
COVID-19 patients every month they serve during the State of National Emergency Due to
COVID-19, as Declared by the President. c. Actual Hazard Duty Pay given to Human Resources
for Health (HRH). It is compensation given to HRH serving in the front line during the State of
emergency due to COVID-19. d. Compensation paid to private and public health workers who
have contracted COVID-19 in the line of duty or died while fighting COVID-19, amounting to: •
One (1) million pesos (P1,000,000) in case of death; or • One (1) hundred thousand pesos
(P100,000) in case of severe or critical sickness; or • Fifteen thousand pesos (P15,000) in case of
mild or moderate disease. Provided that such an amount was given during the State of national
emergency due to COVID19, from February 1, 2020. Further, the compensation herein shall be
given to the beneficiaries no later than three (3) months after the date of confinement or death.
Finally, the required supporting documents are submitted. For compensation in case of death, the
said amount shall not be included as part of the decedent's gross estate subject to estate tax.
References: Bureau of Internal Revenue (BIR). (2022). Corporate Recovery and Tax Incentives
for Enterprises Act (CREATE). https://www.bir.gov.ph/index.php/create.html Bureau of Internal
Revenue (BIR). (2022). Tax Reform for Acceleration and Inclusion (TRAIN).
https://www.bir.gov.ph/index.php/train.html Tabag, E. (2022). CPA reviewer in taxation. EDT
Books Publishing. Tabag, E. (2022). Income taxation. EDT Books Publishing.