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A. CONCEPT OF GROSS INCOME

Gross Income means total income of a taxpayer subject to tax. It includes

the gains, profits, and income derived from whatever source, whether
legal or illegal.
It does not include income excluded by law, which are exempt from
income tax.

B. TAXABLE INCOME B. TAXABLE INCOME

Taxable income means the pertinent items of gross income specified in the Tax Code, Requisites for Income to be Taxable:
less the deductions authorized for such types of income by the Tax Code or other
special laws.
1. There must be gain

It does not include income excluded by law, or which are exempt from income as
well as income subject to final taxes.
It pertains to all income subject to basic and creditable withholding taxes
2. The gain must be realized or received
 Doctrine of Constructive Receipt
• An amount is constructively received when it is set aside and made
available to taxpayer without substantial restrictions.
• It prevents a cash basis taxpayer from deliberately turning his back on
income and thereby selecting the year in which he reports it.

3. The gain must not be excluded by from taxation.

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C. INCOME TAX SYSTEMS C. INCOME TAX SYSTEMS

1. Schedular Tax System v. Global Tax System
Schedular
Tax Treatment Income tax rules vary and
made to depend on the
kind or category of taxable
income of the taxpayer
Classification Categorizes or classifies
income
Tax Rates Different tax treatments
and rates
Applicability Individual taxpayers
2. Gross income taxation v. Net Income
Gross Income Taxation Net Income Taxation
Global
Deductions and No deductions or exemptions Allows deductions/exemption
Uniform tax treatment or Exemptions allowed
rules
Tax Base Gross Income Taxable Income
Applicability NRA-NETB Individual taxpayers except NRA-
NRFC NETB
Does not “generally” Corporate taxpayers except
categorize or classify income NRFC
Imposes uniform tax Advantages Minimizes source of graft and Just, fair and reasonable
corruption due to minimization of Equitable relief
margin or discretion exercised by More revenue to the government
NRFC, NRA-NETB revenue district officers Minimizes tax evasion
Simplifies tax system

D. BASIC FEATURES OF PHILIPPINE INCOME D. BASIC FEATURES OF PHILIPPINE INCOME

TAXATION TAXATION
1. Comprehensive tax situs Rules in determining the situs of income
2. Mainly progressive in nature
3. More schedular than global features a. Interest – Residence of debtor
b. Income from services – Place or performance of the service rendered
• Source refers to the activity, or property, or labor that gave rise or produced the
income. If partly within and without:
• Situs means the place of taxation of the income or the country which has jurisdiction
to impose the tax No. of days of performance in PH multiply by Compensation
No. of days of performance worldwide received
• Factors affecting Situs of income
1. Residence or domicile c. Rental and Royalties – Location of property or place where the intangible is
2. Nationality used
3. Source of income

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D. BASIC FEATURES OF PHILIPPINE INCOME D. BASIC FEATURES OF PHILIPPINE INCOME

TAXATION TAXATION
Rules in determining the situs of income Rules in determining the situs of income
f. Dividend Income
d. Gain on sale of real property – Location of the real property Sources of Dividend Sources of Income
e. Gain on sale of personal property – Place of sale except sale of shares of
stocks of a domestic corporation (entirely within the PH regardless of where Domestic Corporation Income is purely from PH sources
the said shares are sold)
Foreign Corporation If Ratio is:
• Based on the ratio of the Gross Income • <50%: Income is treated as entirely derived
(GI) of the foreign corporation for the from sources outside of the Philippines
preceding 3 years prior to declaration of • > 50%: Income is derived partly from
dividends derived from PH sources. sources within and partly without the
Philippines
Ratio:
GI – PH x Dividend
GI - World

D. BASIC FEATURES OF PHILIPPINE INCOME

TAXATION
Rules in determining the situs of income
g. Mining – Place where mine is located
h. Farming – Place where farm is located
i. Manufacturing Business
Source of Income
Produced and sold within Within
Produced and sold without Without
Produced in whole/part within and Partly within and without
sold without
Produced in whole/part without and Partly within and without
sold without

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A. INCLUSIONS A. INCLUSIONS
Gross income means all income derived from whatever source, including (but not
limited to) the following items: (6) Gains derived from dealings in property;
(1) Compensation for services; (7) Interest income;
- Including pensions and retiring allowances (except those exempt by law) (8) Royalties;
(2) Gross income derived from the conduct of trade or business or the exercise of (9) Dividends;
a profession; (10) Prizes and winnings; and
(3) Partner’s distributive share from the net income of a general professional
partnership;
Note: The above enumeration is not exclusive. Gross income may also include other
(4) Rents; forms of income which are not even mentioned in the list above. An example of
(5) Annuities (excess over premium paid); this would be income from illegal sources.

B. ITEMS OF GROSS INCOME COMPENSATION FOR SERVICES

A) Compensation Income which may be in the following forms:

1. Compensation For Services
Compensation for service, of whatever kind and in whatever form paid, forms part of
gross income. 1. Cash
The name by which the remuneration for services is designated is immaterial. 2. Allowances
Thus, salaries, wages, emoluments, and honoraria, allowances, commissions (e.g. 3. Property – the FMV of the thing taken in payments is the amount of
transportation, representation, entertainment, and the like); fees, including director’s compensation.
fees, if the director is, at the same time, an employee of the employer/corporation; 4. Employer’s Stock - the FMV of the shares at the time the services were rendered.
taxable bonuses and fringe benefits, except those which are subject to the fringe
benefits tax under Section 33 of the Tax Code; taxable pensions and retirement pay; 5. Promissory Notes – the fair discounted value of the note as of the time of receipt.
and other income of a similar nature constitute compensation income. The employee shall also record additional income upon the recovery of the
discount.

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COMPENSATION FOR SERVICES
6. Forgiveness of debt for services rendered to a creditor
Note: Where the debtor is a stockholder of the corporation condoning the debt, the
condonation of the debt amounts to an indirect payment of dividend.
7. Income tax of the employee assumed or paid by the employer, in consideration of
the latter’s services.
8. Pensions ad retiring allowances – except those exempt by law
9. Stock options – the FMV of the stock option at the time the services were rendered
by the employee.
COMPENSATION FOR SERVICES
C. Fringe Benefits
Fringe benefits are classified under the following categories, namely:
Those subject ton the fringe benefits tax (“FBT”)
- Fringe benefits given to employees holding managerial or supervisory positions,
and which are listed in RR No. 3-98, as amended.
Those included in gross income in the ITR
- Fringe benefits given to rank and file employees
- Fringe benefits given to employees holding managerial or supervisory employees
and which are not listed in RR- No. 3-98, as amended
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COMPENSATION FOR SERVICES
B. Stock Options
• The amount of compensation shall be the FMV of the stock options at the time the
services were rendered.
• Upon exercise – Additional income
• Such additional income shall equal the higher of the book value or FMV of
shares, less the exercise price
• If RAF – Taxable compensation subject to withholding tax on compensation (WTC)
• If SOM – Fringe benefit subject to Fringe Benefit Tax (FBT)
COMPENSATION FOR SERVICES
Those which are not taxable
- Fringe benefits given to employees for the convenience of the employer, or if incurred by
the employees in the pursuit of the trade, business, or profession of the employer and is
liquidated and accounted for by the employee.
- “De minimis” fringe benefits
D. Salaries and Allowances During Leaves of Absence
E. Separation Pay NOT Due to a Cause Beyond the Control of the Employee
General Rule: Separation pay is included in gross income of separated employee.
Exception: If separation is caused by something not of the employee’s making. For
example, if separation is due to cessation of the business, or as a consequence of death,
sickness, other physical disability, or for any cause beyond his control, the separation pay
shall be exempt from tax.
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COMPENSATION FOR SERVICES COMPENSATION FOR SERVICES

F) Fees G) Dismissal Payment

Fees received by an employee for the performance of a service for the employer, Any payment made by an employer to an employee on account of dismissal, that is,
including director’s fees (including per diems and allowances), are regarded as involuntary separation from the service of the employer, constitutes wages,
compensation income. regardless of whether the employer is legally bound by contract, statute, or otherwise
to make such payment.

Marriage fees, baptismal offerings, sums paid for saying masses for the dead, and
other contributions received by a clergyman, evangelist, or religious worker for (H) Tips and Gratuities
services rendered are considered compensation.
Tips or gratuities paid directly to an employee (by a customer of the employer) which
are not accounted for by the employee to the employer are considered taxable
Exception: Authorized fees paid to public officials, clerks of court, sheriffs, etc., for income, but not subject to withholding tax.
services rendered in the performance of their official duties, are not considered
wages.

B. ITEMS OF GROSS INCOME B. ITEMS OF GROSS INCOME

2. Gross Income From Business 3. Payments Made by a GPP to a Partner, and the Distributive Share of Partners in
the Net Income of a GPP
(1) In general, “gross income” means total sales less COGS, plus any income from investments
and from any incidental or outside operations or sources. 4. Rent or Lease Income
Formula: Reporting of Income by a Lessor
Gross sales P xxxxx
Rent paid by the lessee for the use or lease of property is taxable income to the
Less: Cost of goods sold xxxxx lessor.
Gross profit from sales P xxxxx
Rent income may be in the following forms:
Add: Other income:
(a) Income from investment P xxxxx (1) Cash, at the stipulated price:
(b) Income from incidental or outside (2) Obligations of the lessor to third persons paid or assumed by the lessee in
operations or sources xxxxx xxxx consideration of the contract of lease. An example is the real estate tax on the
Gross income P xxxxx property leased assumed by the lessee.

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RENT OR LEASE INCOME Income and Deduction from Leasehold Improvement

(a) Income of Lessor

(3) Advance payment which must be pre-paid rentals and not (a) a loan to the lessor, The lessor, in such a case, may, at his option, report income under any of the following methods:
or (b) option money for the property, or (c) security deposit for the faithful 1. Outright method – lessor reports as income the FMV of the improvement in the year of completion.
performance of the lessee’s obligations 2. Spread-out method – the lessor shall spread over the remaining term of the lease the estimated depreciated
(book) value of such buildings or improvements at the termination of the lease, and report as income for
However, a security deposit that is applied to rentals is taxable income to the lessor. each remaining term of the lease an aliquot thereof.
Formula:
Prepaid rent must be reported in full in the year of receipt, regardless of the
accounting method used by the lessor.
Cost of leasehold improvements P xxxxx
Less: Depreciation for remaining term of lease (xxxx)
(4) Leasehold improvement. Book value, end of lease P xxxxx

The contract of lease may provide that the lessee may make permanent
Book value end of lease P xxxxx
improvements on the leased property and said improvements will belong to the lessor = Income per year
Remaining term of lease
upon termination of the lease.

(b) Deduction of Lessee (Depreciation expense) (d) Loss of Lessor if Leasehold Improvement is Destroyed Before Termination of Lease
The lessee may claim depreciation of the improvements over the remaining term of If the building or other leasehold improvement is destroyed before the expiration of the
the lease or the life of the improvements, whichever is shorter. lease, the lessor is entitled to deduct as a loss for the year when such destruction takes
place, the amount previously reported as income because of the erection of the
improvement, less any salvage value, to the extent that such loss was not compensated
(c) Computation of Income from Leasehold Improvement Arising from the by insurance.
Pretermination of Lease Contract.
The lessor receives additional income for the year in which the lease is so terminated Income on leasehold improvement already reported P xxxxx
to the extent that the value of such building when he became entitled to such
possession exceeds the amount already reported as income on account of the Less: Salvage value (xxxx)
erection of such building. Total loss P xxxxx
Formula- Less: Compensation received:
FMV of Leasehold Improvement at termination of Lease P xxxxx (a) From insurance P xxxxx
Less: Amounts of income previously recognized (xxxx) (b) Others xxxxx (xxxx)
Additional income in year of termination P xxxxx Loss on destruction of leasehold improvement P xxxxx

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B. ITEMS OF GROSS INCOME B. ITEMS OF GROSS INCOME

5. Annuities and Life Insurance Policies 6. Gains Derived From Dealings in Property
(a) Annuities – Annuities paid under an annuity contract in excess of the • Separate discussion under Chapter 9
consideration paid are includible in gross income.
(b) Life Insurance Policy – Where insured outlives the term of the policy, amounts
received by an insured in excess of the premiums paid are included in gross
income.

B. ITEMS OF GROSS INCOME B. ITEMS OF GROSS INCOME

7. Interest Income 8. Royalties

Interest income, as a rule, is taxable income included in the ITR. Royalties derived from sources within the Philippines are subject to a final tax of 20%,
except royalties on books, other literary works, and musical compositions which shall be
EXC: (1) Interest income from bank deposits or deposit substitutes in the Philippines
subject to a final tax 10%.
subject to FT (passive income);
(2) Interest income which are exempt from tax:
Royalties received by resident citizens and domestic corporations from sources without the
(i) Interest income from long-term deposit or investment in the form
Philippines shall be included in the ITR.
of savings, trust funds, deposit substitutes, investment management
accounts.
(ii) Interest income earned from passive investments of foreign
governments, financing institutions owned by foreign governments,
and international financial institutions established by foreign
governments.

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B. ITEMS OF GROSS INCOME Liquidating dividend P xxxxx

Less: Cost of stock investment or other basis (xxxx)
9. Dividends Capital gain or (Capital loss) P xxxxx

Dividends subject to FT: Cash or property dividends received by individuals and NRFCs from
domestic corporations.
Dividends included in gross income in the ITR:
1.) Generally, cash and/or property dividends received by a resident citizen or domestic
corporation from a foreign corporation.
2.) Liquidating Dividend - in itself, does not constitute income
Liquidating dividends represent distribution of all the property or assets of a corporation in
complete liquidation or dissolution.
The difference between the cost or other basis of the stock and the amount received in
liquidation of the stock is a capital gain or a capital loss. Where property is distributed in
liquidation, the amount received is the fair market value of such property.
If the shareholder is a corporation, the capital gain is taxable in full.
If the shareholder is an individual and the stocks were held for more than 12 months, the
capital gain is taxable only to the extent of 50% thereof. (Sec. 39 (B), NIRC)
Dividends not subject to income tax
1) Intercorporate dividends from a domestic corporation to another domestic corporation
or a RFC.
2) Generally, stock dividends except if there is a change in ownership.

B. ITEMS OF GROSS INCOME B. ITEMS OF GROSS INCOME

10. Prizes and Winnings 11. Income From Other Sources
Subject to FT: (a) Prizes over P10,000 and winnings derived within the Philippines. (1) Recovery of damages representing compensation for loss of profits or income are
includible in gross income
(b) Prizes received by a NRANETB and by a NRFC within the Philippines
Note: Recoveries that are to compensate for damage to property, injury to person, or loss of
Included in the ITR:
life are not taxable.
1) Prizes amounting to P10,000 or less received by a citizen, resident alien, or NRAETB.
2) Prizes received by domestic corporations. Included in Gross Income Not Taxable
3) Prizes received by RFCs within the Philippines. 1) Damages for lost profits 1) Damages to compensate fro damage or injury to
the person or his property
4) Prizes and winnings received by resident citizens from sources without the Philippines. 2) Damages for lost income 2) Damages for lost capital

3) Moral damages

4) Exemplary damages

5) Punitive damages

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(2) Recovery of Bad Debt Previously Deducted
The “Tax Benefit Rule” is the doctrine observed in the Philippines in bad debt
recoveries.
Rules on Bad Debt Recovery:
(a) Taxable – If the deduction of the bad debt in prior year resulted in an income tax
benefit to the taxpayer, the bad debt recovered is taxable income in the year of
recovery.
(b) Not Taxable – If the deduction of the bad debt did not result in an income tax
benefit to the taxpayer (i.e., where the result of the business operation was a net
loss even without the bad debt deduction), the bad debt recovered is not taxable
income but is treated as a mere recovery or return of capital.
(c) Income from Bad Debt Recovery – The recovered amount of the previously
deducted bad debt which resulted in an income tax benefit.
(4) Tournament Prizes
Included in the ITR: Cash prizes won by local players/participants in tournaments are
not passive income inasmuch as participating in such tournaments is their
profession and/or occupation.
Subject to FT: Cash prizes of foreign players/participant, shall be subject to a final tax
of 25%.
Exempt from income tax: Prizes and awards 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.
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(3) Refund of Deductible Tax
The tax benefit doctrine also applies with respect to refund or credit of taxes which
were claimed and deducted in a previous year.
Rules on Refund of Taxes Previously Deducted:
(a) Taxable – If the tax paid is a deductible tax. Tax refund or credit thereof is taxable
in the year of receipt.
(b) Not Taxable – If the tax paid is not a deductible tax. The refund or credit thereof is
not taxable.
(c) Income from Tax Refund – The refunded amount of the tax which was previously
deducted and which resulted to an income tax benefit.
Examples of deductible taxes are: OPT except the stock transaction tax under Sec.
127 of the Tax Code, excise taxes, occupation or professional taxes, real property
taxes, FBT.
Examples of non-deductible taxes are income tax, donor’s tax, estate tax, VAT, stock
transaction tax under Section 127n of the Tax Code.
(5) Forgiveness of Indebtedness
Included in ITR: When a creditor cancels a debt as part of a business transaction, or
in consideration of personal services of the debtor, the condoned debt is taxable
income to the debtor.
Taxed as a dividend: But where the debtor is a stockholder of the corporation which
condoned the debt, the condonation is considered an indirect payment of
dividend.
Subject to donor’s tax: If a creditor merely desires to benefit a debtor, and without any
consideration therefor cancels the debt, the amount of the debt is a gift from the
creditor to the debtor.
(6) Income from Illegal Sources
All unlawful gains are taxable and includible in the ITR. However, actual repayment of
such illegal gains will give rise to a deduction. (James vs. United States, 366 us
213).
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(7) Unutilized/Excess Campaign Funds
Unutilized/excess campaign funds, that is, campaign contributions net of the
candidate’s campaign expenditures, shall be considered as subject to income
tax. As such, the same must be included in the candidate’s gross income as
stated in his Income Tax Return (“ITR”) for the subject taxable year.
Any candidate who fails to file with the COMELEC the appropriate Statement of
Expenditures required under the Omnibus Election Code, shall be automatically
precluded from claiming such expenditures as deductions from his campaign
contributions. As such, the entire amount of his campaign contributions shall be
considered as directly subject to income tax.
Exclusions Under the Tax Code
The following items shall not be included in gross income and shall be exempt
from income tax:
(1) Proceeds of Life Insurance Upon Death of the Insured
The proceeds of life insurance policies paid to the heirs or beneficiaries upon death of
the insured shall be exempt from income tax. The proceeds of life insurance are
treated more as an indemnity for the life lost instead of as gain, profit, or income.
Note: Interest payments made by the insurer constitutes income to the recipient.
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C. EXCLUSIONS
Exclusions are income or receipts which are excluded from gross income, i.e.
there are not included in the determination of a taxpayer’s gross income.
Hence, these incomes or receipts are not subject to income tax. However, despite
their non-inclusion from gross income, such income items may be subject to taxes
other than the income tax.
(2) Amount Received by Insured as Return of Premium
The amount received by the insured, as a return of premiums paid by him under
life insurance; endowment, or annuity contracts, either during the term, or at the
maturity of the term mentioned in the contract, or upon surrender of the contract.
Notes:
a) The excess of proceeds received over the premiums paid is included in gross
income.
b) Participating dividends distributed to life insurance policy holders are actually a
return overpaid premiums. They are therefore excluded from gross income of the
insured.
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(3) Gifts, Bequests, and Devices

The value of property acquired by gift, bequest, devise or descent are exempt from
income taxation.
(5) Income Exempt Under Treaties
Note: The income from the lease, sale, exchange, investment, or other disposition of
such property shall be subject to income tax. Income of any kind, to the extent required by any treaty obligation or international
agreement to be exempt from taxation by the Republic of the Philippines.

(4) Compensation for Injury or Sickness

a.) Amounts received, through accident or health insurance, or under Workmen’s (6) Retirement Benefits, Pensions, Gratuities, Separation Pay which are Exempt from
Compensation Acts, as compensation for personal injuries or sickness; plus Income Tax
b.) The amounts of any damages received, whether by suit or agreement, on account of As a general rule, retirement benefits, pensions, separation pay are all taxable.
such injuries or sickness.
As exceptions, the following benefits and payments are EXEMPT from income tax:
c.) Damages representing compensation for personal injuries arising from libel,
defamation, slander, breach of promise to marry, or alienation of affection.
- includes moral damages. Moral damages include physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation, and similar injury.
- includes exemplary or corrective damages. These are imposed by way of
example or correction for the public good.

(a) Retirement benefits and/or pensions which are exempt from income tax:
Under R.A. No. 7641 (Retirement Pay Law). In the
absence of a retirement plan for employees,
employers are required to pay a retirement benefit
equal to at least ½ month salary for every year of
service.
Requisites for exemption:
i) The employee has reached the age of 60 or
more, but not beyond 65; and
ii) The employee has served for at least 5 years in
the same establishment
(b) Separation Pay Due to a Cause Beyond the Control of the Employee
Under the Tax Code, retirement benefits an/or pension amounts
received by officials and employees of private firms, whether
individual or corporate, shall be exempt from income tax when
the requisites for exemption in the Tax Code are complied with.
Requisites for exemption:
(1) There must be a reasonable private benefit plan
maintained by the employer;
(2) The retiring official or employee has been in the service of
the same employer for at least 10 years;
(3) The retiring official or employee is not less than 50 years of
age at the time of his retirement;
(4) The benefits of exemption granted shall be availed of by an
official or employee only once.
Any amount received by an official or employee, or by his heirs, from the employer
as a consequence of separation of such official or employee from the service of
the employer due to:
(a) Death;
(b) Sickness;
(c) Other physical disability; or
(d) For any cause beyond the control of the said official or employee.
Note: Separation pay due to the abovementioned causes are exempt from
income tax regardless of age or length of service of the employee.
The exemption does not cover salaries, 13th month pay and other benefits
in excess of P90,000, and other payments which are properly taxable to
the employee.

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(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 in the Philippines, from foreign agencies and other institutions
private or public.
(d) Payment of benefits due or to become due to any person residing in the
Philippines under the laws of United States administered by gthe United States
Veteran Administration.
(e) Benefits received from or enjoyed under the Social Security System (SSS) in
accordance with the provisions of Republic Act 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement
gratuity received by government officials and employees.
(g) Maternity benefits advanced by the employer to the employee are excluded from
gross income, and are therefore exempt from withholding tax.
(d) Prizes and awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports association.
(e) 13th Month Pay and Other Benefits received by officials and employees of
public and private entities as “13th month pay and other benefits” which shall
include:
(1) The 13thmonth pay, and other incentives such as productivity
incentives and Christmas bonus; and
(2) The excess of the “de minimis” fringe benefits over their respective
ceilings.
Provided, however, that the total exclusion shall not exceed Ninety Thousand
Pesos (P90,000).
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(7) Miscellaneous Items
(a) Income derived by foreign governments, financing institutions owned or
controlled by foreign governments, and international or regional financial
institutions established by foreign governments from investments or deposits in
the Philippines.
(b) Income derived by the Philippine Government or its Political Subdivisions from
the exercise of any governmental function.
(c) Prizes and awards primarily in recognition of recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:
(1) The recipient was selected without any action on his part to enter the
contest or proceeding; and
(2) The recipient is not required to render substantial future services as a
condition to receiving the prize or award.
(f) Compulsory or mandatory contributions of employees to GSIS, SSS, Medicare
(PHIC), and PAGIBIG, and union dues of individuals.
Note: Contributions in excess of the mandatory contributions are not deductible
from gross income.
Moreover, GSIS Educational Plan, GSIS Optional Insurance, GSIS Unlimited
Optional Insurance, and GSIS Memorial Plan premiums shall not be
deductible.
(g) Gains from the sale, exchange or retirement of bonds, debentures, or other
certificate of indebtedness with a maturity of more than 5 years.
(h) Gains from Redemption of Shares in Mutual Fund
(i) Income of non-residents from transactions with Domestic Depository Banks
and OBUs Under the Expanded Foreign Currency Deposit System.
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(j) Personal Equity and Retirement Account (“PERA”)
PERA refers to the voluntary retirement account of an individual (called a
“Contributor”) established from his own Qualified PERA Contributions and/or
Qualified Employer Contributions, for the purpose of being invested solely in
qualified or eligible PERA investment products.
1.) The Qualified Employer’s Contribution shall be excluded from the
employee’s taxable gross income.
2.) Investment income of a Contributor earned from the investments of his
PERA Assets shall be exempt from income taxes, provided:
(a) that each specific investment product is approved by the concerned
regulatory authority; and
(b) that non-income taxes, if applicable, relating to the investment
income, shall be imposed. Such taxes shall include (a) percentage
taxes; (b) VAT; (c) stock transaction tax under Section 127 (A) and (B)
of the Tax Code; and (d) documentary stamp tax.
(k) Representation and transportation allowances (“RATA”) granted under Section
34 of the General Appropriation Act to certain officials and employees of the
government from the rank of Department Secretaries to Division Chiefs are not
subject to income tax and to the withholding tax.
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3.) Qualified PERA Distributions shall be excluded from gross income if:
(a) After the Contributor and/or his employer has made the Qualified
PERA Contributions an/or Qualified Employer’s Contributions for at
least five (5) years (which need not be consecutively made), and after
the Contributor reaches the age of fifty-five (55);] or
(b) Upon death of the Contributor, irrespectively of the Contributor’s age
or the number of yearly contributions made at the time of his death.
4.) Early Withdrawals in the following circumstances shall be excluded
from gross income:
(a) Withdrawal of PERA Assets from the Administrator by reason of the
suspension or revocation of the accreditation of the Administrator,
provided that the entire PERA Assets are transferred to another
Administrator within two (2) working days from receipt of the
Contributor’s advice on the chosen Administrator;
(b) For payment of accident or illness-relayed hospitalization in excess
of thirty (30) days; or
(c) For payment to a Contributor who has been subsequently rendered
permanently and totally disabled as defined under the Employees
Compensation Law or Social Security System Law.
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BASIS ADJUSTED BASIS

a) If property was acquired by purchase, the basis of the property is the cost to the - After a property is acquired, its basis can be increased by improvements that
buyer. materially add to its value or life, and is decreased by accumulated depreciation.
b) If property was acquired by inheritance , the basis of the property is the FMV of
the property at the time of death of the decedent (step-up in basis).
Formula:
c) If the property was acquired by gift, the basis of the property is the basis in the
Basis of property xxxx
hands of the donor. Except that if such basis is greater than the FMV of the
property at the time of the gift, then the basis shall be such FMV for the purpose Plus: Improvements xxxx
of determining the loss. Less: Accumulated Depreciation (xxx)
d) If property was acquired for less than an adequate consideration, the basis of the Adjusted Basis xxxx
property is the amount paid.
e) If property was acquired in a previous tax-free exchange where gain or loss is not
recognized under Section 40(C)(2), the basis is the substituted basis.

USE OF BASIS CLASSIFICATION OF PROPERTIES FOR TAX PURPOSES

Ordinary Assets Capital Assets
a) Stock included in inventory; Asset which is not an ordinary asset:
Basis is used to determine: b) Property primarily held for sale; (1) personal or non-business property or
a) Gain or loss in transactions involving ordinary assets. c) Property used in business which (2) asset held merely for investment, or
is capitalized; (3) property not used in business
b) Gain or loss involving capital assets which are not subject to the CGT.
d) Real property used in the trade,
c) Gain or loss in the sale of domestic shares not traded in the stock exchange. business, or profession of the taxpayer
d) Gain or loss in forced sale of an individual taxpayer of real property to government
in the exercise of the latter’s power of eminent domain; and How taxed? How taxed?
Gain is 100% included Sale of (a) domestic shares Sale of capital assets
e) Gain or loss in the sale of real property classified as capital asset of an RFC or
Loss is 100% deducted held as capital assets; (b) other than domestic
NRFC.
in the ITR if taxpayer itemizes real properties in the shares held as capital
deductions. Philippines classified as assets, or RPCA.
capital assets (RPCA)

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CLASSIFICATION OF PROPERTIES FOR TAX PURPOSES
Subject to FTs:
1. Capital gains tax on sale
of domestic shares;
2. Capital gains tax on sale
of real property located
in the PH classified
assets
CLASSIFICATION OF PROPERTIES FOR TAX PURPOSES
Gain/Loss (“G/L”) is Other Rules:
recognized, but only Net
Capital Gain is included in the 3. Capital losses are allowed
ITR: only against capital gains
1. If taxpayer is an
individual: 4. Any net capital loss (net
• Short-Term G/L = capital loss carry-over) of an
100% recognized individual taxpayer can be
• Long-Term G/L = carried over to the next
50% recognized succeeding year as a ST NCL,
but not to exceed the net
2. If taxpayer is a income for the year in which
corporation: the capital loss was incurred.
• 100% recognized
whether ST or LT Corporations are not allowed
any net capital loss carry-over.

CAPITAL GAINS SUBJECT TO PERCENTAGE TAX CAPITAL GAINS SUBJECT TO PERCENTAGE TAX
• Beginning January 1, 2018, a “Percentage Tax” of 6/10 of 1% of the gross selling • The stock broker who effected the sale shall collect the tax from the seller and
price or gross value in money of shares of stock sold, bartered, or exchanged remit the same to the collecting bank within five (5) banking days from the date of
through the local stock exchange (Listed Shares) also known as Stock collection thereof.
Transaction Tax. • Percentage tax on sale of shares of stock sold or exchanged through initial public
• The following sellers or transferors of stock are liable to this tax: offering (IPO) based on the gross selling price or gross value in money of the
a)Individual taxpayer, whether citizen or alien shares of stock sold in accordance with the proportion of the shares of stock sold
b)Corporate taxpayer, whether domestic or foreign to the total outstanding shares of stock after listing in the local stock exchange.
The percentage tax shall be:
c)Other taxpayers not falling under (a) and (b) above, such as estate, trust, trust
funds, and pension funds, among others. Ratio/Proportion Percentage Tax
Up to 25% 4%
Note: The seller should not be a dealer in securities, otherwise, the sale is
subject to basic income tax as well as value added tax. Over 25% but not over 33 1/3% 2%
Over 33 1/3 1%

RATIO is computed as:

Shares sold, bartered, exchanged / Total Outstanding Shares

= Proportion of Disposed shares to Outstanding Shares

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