CUBA, Elijah Mae P.

BSA II-C

CHAPTER 9 -Regular Income Tax: Inclusion in Gross Income

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX 10. Pensions
Gross income includes, but is not limited, to the ff items: pertains to pensions and retirement benefits that fail to
1. Compensation for services in whatever form paid meet the exclusion criteria
“Compensation income” pertains to the types of
11. Partner’s distributive share from the net income of
employee benefits that are subject to regular tax.
general professional partnership
2. Gross income from the conduct of trade, business or – Partner’s share in the net income of the GPP but shall
exercise of a profession not include income from items subjected to capital gains
Business income: tax and final tax
1. exempt from income tax – Applies to other pass-through entities: exempt joint
a. BMBE under RA 9178 ventures, and exempt co-ownership
b. enterprises enjoying tax holiday incentives, EO 226 – If business partnership and taxable joint venture
2. subject to special tax regime or co-ownership are organized or constituted abroad,
a. PEZA-registered enterprises (5% gross income tax) the share from their profit is subject to regular income
b. TIEZA-registered enterprises (5%) tax taxable on global income
3. subject to final tax
a. subcontractors of petroleum service (8% final tax) GENERAL CRITERIA ON GROSS INCOME
b. FCDUs and OBUs from Philippines residents (10%) Under the NIRC, the regular income tax has a catch-all provision
3. Gains derived from dealings in properties for all income derived from whatever sources that are:
– Gains or losses in dealing in ordinary assets 1. Not subject to final tax, capital gains tax and special tax
– Dealings in capital assets other than domestic stocks regime
and real properties 2. Not excluded or exempted by law, treaty or contract
from taxation
– Net capital gain (other capital assets) less Capital losses
4. Interest OTHER SOURCES OF GROSS INCOME SUBJECT TO
A taxable interest income must have been actually paid REGULAR INCOME TAX
out of an agreement to pay interest.
1. Income distributions from taxable estates or trusts
Ex: Interest income from: lending activities, bonds and
– any income distribution received by an heir or
promissory notes, and bank deposits abroad
beneficiary (such income must not have been subjected
Exempt: interest income earned by landowners, and imputed
to final tax or capital gains tax)
interest income
2. Share from the net income of other pass-through
5. Rents
entities:
Rent income arises from leasing properties of any kind.
a. Exempt joint venture
Special considerations:
b. Exempt co-ownership
1. Obligations of the lessor assumed by the lessee
2. Advance rentals are: 3. Farming income
a. item of gross income upon receipt if: 1. Raise and sell operation – proceeds on the sales of
i. unrestricted livestock or farm products
ii. restricted to be applied in future years or upon 2. Purchase and sell operation – gross profit from the
the termination of the lease sale
b. not an item if: – Crop year basis for long-term crops
i. constitutes a loan – Proceeds of crop or livestock insurance (recovery of lost
ii. a security deposit profits)
3. Leasehold improvements made by the lessee
4. Recovery of past deduction
6. Royalties Past deductions that created tax benefit to the taxpayer
– Active royalty income and royalties earned within and must be reverted back to gross income in the year of
outside the Philippines recovery.
– Royalties earned by RFC Examples:
1. Recovery of previously claimed bad debt expense
7. Dividends 2. Refund of local tax expense
– Dividends (cash, property and script) declared by 3. Refund of foreign tax previously claimed as deduction
foreign corporations 4. Re-commissioning of abandoned petroleum service
– includes stock dividend if subsequently redeemed such contracts or mining properties
that it amounts to payment of cash dividend 5. Release of reserve funds of insurance companies
8. Annuities
– excess of annuity payments received over premium paid Refund of non-deductible expenses – never create tax
benefit to the taxpayer, hence, the refund of the ff non-
9. Prizes and winnings deductible items is not taxable:
Earned from sources 1. Philippines income tax
Prizes: Within Abroad 2. Estate or donor’s tax
P10,000 and below Regular tax Regular tax 3. Income tax paid or incurred to a foreign country, if the
More than P10,000 Final tax Regular tax taxpayer claimed a credit for such tax
Winnings Final tax Regular tax
 4. Stock transaction tax in disposing stocks through the
Philippines Stock Exchange
5. Special assessment
5. Reimbursement of past deduction
Expenses of the taxpayer that are reimbursed or paid by
the customer or client constitute additional income to the
taxpayer
6. Cancellation of indebtedness for a consideration
may amount to gratuity or payment of income
a. In consideration of service or goods – treated as income
b. As an act of gratuity – treated as gift; not as income
c. As capital transactions such as forfeiting the right to
receive dividend in exchange of the debt – treated as
dividend income
SPECIAL CONSIDERATIONS IN REPORTING OF GROSS
INCOME
1. Accounting methods
Cash basis – report gross receipts or collection
Accrual basis – report revenue consisting collected and
uncollected income
Regardless of these methods, advanced income must be
included in gross income of the period received.
2. Situs rules
Resident citizen and Domestic Corporation – items of gross
income subject to regular tax from sources w/in and w/o the
Philippines
Other taxpayers – taxable only on Philippines income
(sources w/in)
3. Creditable withholding tax
CWTs are tax credits that are deductible against the
annual income tax due of the taxpayer. They should be
added back to the reportable amount of gross income.
4. Power of the CIR to redistribute income and
expenses
– to limit unfair pricing and to properly reflect the income
of associated enterprises (or related parties) such as:
1. Parent corporation and its subsidiary corporation
2. Sister companies or businesses owned by the same
parent corporation
3. All corporations controlled under the same holding
company
4. Businesses owned by the same person
The transaction is valued in reference to the amount
charged in a comparable uncontrolled transaction in
comparable circumstances.
2. Resale price method (RPM)
The transaction is valued based on the functions
performed by the reselling party to the product. This is used
when products purchased from a related party is resold to
an independent party.
3. Cost plus method (CPM)
The transaction is measured by valuing the function
performed by the supplier of the property or services.
4. Profit split method (PSM)
The profit or loss on the transaction is split based on the
division of profits or losses that independent enterprises
would have expected to realize from engaging in the
transaction is determined.
a. Residual profit split approach – profit is first allocated to
provide a basic return, the residual profit after such
allocation is allocated among the parties
b. Contribution profit split approach – the combined profits
from controlled transactions are divided in a single
stage based upon the parties’ relative contribution or
functions performed
5. Transactional net margin method (TNMM)
Similar to the CPM and RPM in the sense that it uses the
margin approach by reference to the operating profit earned
in comparable uncontrolled transaction.
PERIOD IN WHICH ITEMS OF GROSS INCOME ARE
INCLUDED
The amount of all items of gross income shall be
included in the gross income for the taxable year in which
received by the taxpayer, unless, under methods of accounting
permitted, any such amounts are to be properly accounted for as
of a different period.

The arm’s length principle

An uncontrolled pricing method determined by free
market forces, arm’s length pricing ids preferred.
This principle shall be applied to:
1. Cross-border transaction between associated enterprises
2. Domestic transaction between associated enterprises
Advanced pricing agreement
– (cross-border operations may enter) a pricing rate is
pre-agreed to apply for a period of time
– not a mandatory requirement but may serve as a safety
net to avoid the risk of transfer pricing examination and
adjustment and its inconvenience

Transfer pricing methods

1. Comparable uncontrolled price (CUP) method