TAXATION – EXCLUSIONS TO GROSS INCOME

EXCLUSIONS

- Refer to flow of wealth to the taxpayer which are not considered part of gross income due to
the following:
o Exemption by fundamental law or statute
o It does not come within definition of income

EXCLUSIONS VS. DEDUCTIONS

Exclusions are not taken into account in determining gross income, however, Deductions are subtracted
from the gross income.

NATURE OF EXEMPTIONS FROM TAXATION

Exemptions is a grant of immunity to particular persons or corporations or to persons or corporations of

a particular class from a tax which generally within the same jurisdiction are obliged to pay. It is an
immunity or a mere “privilege” which may be revoked by the government unless the exemption is
founded in a contract which is protected from impairment. Exemptions are not favored strictly against
the taxpayer and liberally in favor of the government.

GROUNDS FOR GRANTING TAX EXEMPTIONS

1. Based on contract, law or treaty.

EXAMPLES:
a. Based on Law
i. Tax exemptions to cooperatives under Cooperative Development Authority
ii. Travel tax exemption by P.D. 1183
b. Based on Treaty – based on the Principle of International Comity
i. Salaries of Officials of United Nations assigned in the Philippines
ii. US Citizens working in Philippine Consular Offices in the Philippines exempt in
payment of all taxes.
2. Based on some ground of public policy such as to encourage direct foreign investments.,
encourage new industries or foster charitable institutions, and the like.
EXAMPLES:
i. Tax holidays granted by Bureau of Investments to foreign investors.
ii. Tax exemptions granted to companies incurring heavy losses due to legitimate
business reverses such as exemption from MCIT.
3. Based on grounds of reciprocity or to lessen the rigors of international double or multiple
taxation.
EXAMPLES:
i. Exemptions granted to nonresident aliens engaged in trade and business. (NRA-
ETB)
TAX TREATY under RMO no. 1-2000

1. The availment of a tax treaty provision must be preceded by an application for a tax treaty
relief with its International Tax Affairs Division (ITAD) to prevent any erroneous interpretation
and/or application of treaty provisions with which the Philippines is a signatory to.
2. The application must be filed at least 15 days before the transaction accompanied by
supporting documents justifying the relief.
3. If a ruling for treaty relief was not secured, audit offices of BIR should notify ITAD of treaty relief
availment by taxpayers which are not covered by an application within 15 days from discovery.

TAX EXEMPTIONS VS. TAX AMNESTY VS. TAX CONDONATION

Tax Exemptions is a grant of immunity to particular persons or corporations or to persons or

corporations of a particular class from a tax which generally within the same jurisdiction are obliged to
pay.

Tax Amnesty is a general pardon or intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an
absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it
and, prejudicial thereto, particularly to tax evaders who wish to relent and are willing to reform are
given a chance to do so and therefore become a part of the society with a clean slate.

Like tax exemptions, tax amnesty is also never favored or presumed in law, and is granted by statute.
Its terms is also must be strictly construed against the taxpayer and liberally in favor of the government.

Unlike tax exemptions, however, a tax amnesty has limited applicability as to cover a particular taxing
period or transaction only.

Tax Condonations or remission exists when the State desists or refrains from exacting, inflicting or
enforcing something as well as to restore what has already been taken. Tax condonation is equivalent
to and is in the nature of a tax exemption. Thus, it should be sustained only when expressed in the law.

NATURE OF POWER TO GRANT TAX EXEMPTION

National Government

It is inherent in the exercise of the power to tax that the sovereign state be free to select the subjects of
taxation that the sovereign state be free to select the subjects of taxation and to grant exemptions
therefrom. Unless restricted by the Constitution, the legislative power to exempt is as broad as its
power to tax.
Local Government

Municipal corporations has no inherent power to tax or grant exemptions. But the moment the power
to impose a particular tax is granted, they also have the power to grant exemptions unless forbidden by
some provision of the Constitution or the law. The legislature may delegate its power to grant
exemptions to the same extent that it may exercise the power to exempt.

ITEMS OF INCOME OR PROCEEDS EXCLUDED FROM THE GROSS INCOME

PROCEEDS OF LIFE INSURANCE

REQUISITES TO BE EXCLUDED:

a. Paid to the heirs or beneficiaries.

b. Death of the insured.

NOTES:

- The designation of beneficiary (revocable or irrevocable) is ONLY TAKEN CONSIDERATION when

determining TAXABLE ESTATE and not INCOME TAXATION.
- If such amounts are held by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in gross income.

RETURN OF PREMIUM UNDER LIFE INSURANCE, ENDOWMENT OR ANNUITY CONTRACTS (LEA)

CONCEPT:

RETURN OF PREMIUM PAID OR CAPITAL – EXCLUDED FROM GROSS INCOME

RETURN ON PREMIUM PAID OR CAPITAL (AMOUNTS IN EXCESS OF PREMIUM PAYMENTS) –

INCLUDED TO GROSS INCOME, SUBJECT TO TAX.

CASE A: Life Insurance – Return of Premium or Capital

Proceed of Life Insurance Pxx

Premium Payments ( xx)

Taxable Income Pxx

CASE B: Annuity Contracts

Aggregate Proceeds for n years Pxx

Cost of Policy (Premium Paid) (xx)

Excess – Taxable Income Pxx

ASSIGNMENT OF LIFE INSURANCE, ENDOWMENT AND ANNUITY CONTRACTS

EXCLUDED FROM GROSS INCOME:

1. Actual value of consideration given in exchange of the proceeds of life insurance, endowments
and annuity contracts assigned.
2. Premiums subsequently paid by transferee or assignee.

NOTES:

- Any EXCESS of the total proceeds assigned over the consideration given and premiums paid is
INCLUDED in the Gross Income.

GIFTS, BEQUESTS, DEVISES AND DESCENTS

EXCLUDED IN THE GROSS INCOME – Value of Property acquired as gift, bequest, devises, and descents.

INCLUDED IN THE GROSS INCOME – Income DERIVED from the properties acquired as gift, bequest,
devises and descents.

COMPENSATION FOR DAMAGES

Damages may be defined as the pecuniary compensation, recompense or satisfaction for an injury
sustained, or as otherwise expressed, the pecuniary consequences which the law imposes for the breach
of some duty or violation of some right.

EXEMPT FROM TAX – Compensation for injuries or sickness, received through Accident or Health
Insurance or under Workmen’s Compensation Acts, plus the amounts of any damages received,
whether by suit or agreement, on account of such injuries or sickness.

EXCLUDED IN THE GROSS INCOME: (NON-TAXABLE DAMAGES)

a. Recoveries of damages, representing compensation for personal injuries arising from libel,
defamation, slander, breach of promise to marry, alienation of affection.
b. Damages representing recovery of lost capital
c. Actual damages for injuries suffered
d. Moral damages for grief, anxiety, etc.
e. Exemplary damages
f. Damages for loss of earning capacity.
g. Damages for loss of goods and other belongings

INCLUDED IN THE GROSS INCOME: (TAXABLE DAMAGES)

a. Damages representing recovery of lost income

b. Compensation for unrealized earnings
c. Interest ON non-taxable damages
d. Interest FOR non-taxable damages
RETIREMENT BENEFITS, PENSIONS, GRATUITIES, ETC.

RETIREMENT PAY

GENERAL RULE: TAXABLE

EXCEPTION: Retirement pay received by officials and employees of private firms, whether individual or
corporate, under a reasonable private plan maintained by the employer which meets the following
requirements (RA 7641):

1. The retirement plan must be approved by the Bureau of Internal Revenue;

2. The retiring official/employee must have rendered service to the employer at least ten (10)
years and not less than fifty (50) years old at the time of retirement.
3. The retiring official/employee have NOT PREVIOUSLY AVAILED of the privilege under the
retirement benefit plan of the same or another employer.

NOTES:

“REASONABLE PRIVATE PLAN”

3. As a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the
benefit of some or all of his officials or employees, wherein contributions are made by such
employer for the officials and employees, or both, for the purpose of distributing to such
officials and employees the earnings and principal of the fund thus accumulated, and wherein it
is provided in said plan that at no time shall any part of the corpus or income of the fund be
used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials
and employees.

AGE AND LENGTH OFSERVICE REQUIREMENTS

4. The requirements imposed are deemed by the BIR as MINIMUM REQUIREMENTS for retirement
benefits under a reasonable private plan to qualify for tax exemption.
5. If the retirement plan requires HIGHER age and length of service, the said requirements SHALL
PREVAIL OVER the requirements imposed by the Tax Code in case of conflict.
6. The higher age and length of service requirement may also be required based on a COLLECTIVE
BARGAINING AGREEMENT (CBA). In the absence of any retirement plan, the employee may still
receive tax-exempt retirement benefits under a CBA or other applicable employment contract
covered by RA 7641 and Section 32 (B)(6)(a) of the Tax Code (NIRC).
SEPARATION PAY DUE TO DEATH, ILLNESS OR ANY CAUSE BEYOND THE CONTROL OF THE EMPLOYEE

NOTES:

- EXEMPT from income tax and withholding taxes regardless of age and length of service.
- “FOR ANY CAUSE BEYOND THE CONTROL OF THE SAID OFFICIAL OR EMPLOYEE” shall mean
that there is involuntariness on the part of the official or employee. The separation from the
service must not be of his own making.
- Prevailing facts and circumstances will determine whether or not the separation is beyond the
control of the said employee.
- SEPARATION PAY DUE TO RETRENCHMENT. Any amount received as a consequence of their
separation shall be EXCLUDED to gross income.
However, the exemption does not cover the payment of employee’s salaries and the payment
of 13th month pay and other benefits IN EXCESS of the threshold.
As regards to MONETIZATION OF SICK AND VACATION LEAVE CREDITS OF SEPARATED
EMPLOYEES DUE TO RETRENCHMENT,
o EXEMPT – Cash equivalent of vacation leaves not exceeding 10 days.
o SUBJECT TO TAX – ALL monetized SICK LEAVE credits.

RETIREMENT BENEFITS. TERMINAL LEAVE PAY OF GOVERNMENT EMPLOYEES

- NOT SUBJECT TO WITTHOLDING INCOME TAX

- NOT SUBJECT TO INCOME TAX

PENSION RECEIVED BY ALIENS FROM FOREIGN GOVERNMENTS

- Social security benefits, retirement gratuities pension and other similar benefits received from
foreign governments or institutions, private or public, by RCs, NRCs, or ALIENS shall be excluded
in the gross income and therefore not subject to income tax.
- REQUISITES FOR EXEMPTION:
o The individual receiving the foreign benefits shall be PERMANENTLY RESIDING in the
Philippines.
o ONLY “intention to reside to live longer or for the foreseeable future in the
Philippines” is NOT SUFFICIENT to avail the exemption.

13TH MONTH PAY AND OTHER BENEFITS

- Starting 2015 taxable year, the total exclusion shall cover:

o Benefits received by officials and employees of the National and Local Government
pursuant to R.A. 6686.
o Benefits received by employees pursuant to PD 851 dated August 13, 1986.
o Benefits received by officials and employees not covered by PD 851 as amended by
Memorandum Order no. 28
o Other Benefits such as productivity incentives and Christmas Bonus.
COST OF LIVING ALLOWANCE

EXEMPT – COLA of Minimum Wage Earners under RA 9504.

VOLUNTARY CONTRIBUTIONS OF EMPLOYEES TO SSS, GSIS, PHILHEALTH AND PAG-IBIG

EXCLUDED TO GROSS INCOME – MANDATORY/ COMPULSORY CONTRIBTIONS

INCLUDED TO GROSS INCOME - VOLUNTARY CONTRIBUTIONS OR EXCESS OF AMOUNT CONSIDERED

COMPULSORY.

INCOME AND GAINS SUBJECT TO FINAL TAXES

Items are already subject to income taxes, thus shall not be part or subject of income tax.

MISCELLANEOUS ITEMS

- Income Derived by a Foreign Government

- Income Derived by the Philippine Government or its Political Subdivisions
- Payments or benefits due or to become due under United States Veterans Administration.
- Benefits received from or enjoyed under the Social Security System.
- Benefits received from GSIS including retirement gratuity received by government officials
and employees.
- The provisions of any existing law to the contrary notwithstanding, social security benefits,
retirement gratuities, pensions and other similar benefits received from foreign government
agencies and other institutions, private or public by resident or nonresident citizen of the
Philippines or aliens who come to PERMANENTLY RESIDE IN THE PHILIPPINES.
- GSIS, SSS, Medicare, Pag-ibig Contributions
- Prizes and Awards
- Gain from the sale of bonds, debentures and other certificate of indebtedness with a maturity
of MORE THAN FIVE YEARS.
- Gains from the REDEMPTION OF SHARES in mutual fund as defined under Section 22 of the
Tax Code.